WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

By Vasily Astrov and Mario Holzner
photo: iStock.com/PeterHermesFurian

• The Visegrád economies have been hit hard by the COVID-19 pandemic, especially its second wave. In response, macroeconomic policies have been markedly relaxed, with fiscal stimulus packages reaching up to 14% of GDP in Poland and Czechia.
• The projected recovery of the Visegrád economies from 2021 onwards should be significantly helped by the massive inflow of EU transfers, particularly from the newly established Next Generation EU recovery fund.
• The cumulative boost to the Austrian economy in 2021-2022 from EU transfers to the Visegrád countries is estimated at least at 0.12% of GDP, thus partly offsetting the net contributions paid by Austria to the EU budget.
• Given strong cross-border spill-overs of fiscal policy measures and historically low interest rates, the governments of the Visegrád countries and Austria (and Germany) should be interested in a more expansionary fiscal policy at EU level for the benefit of the less-developed EU member states.
• Greater co-ordination of national policies among the above-mentioned countries would be advisable in the planning and implementation of COVID-19 restrictions, as well as in the resolution of mass insolvencies that are likely to follow the withdrawal of large-scale fiscal stimulus measures.

The Visegrád countries – Czechia, Hungary, Poland and Slovakia – withstood the first wave of the coronavirus pandemic relatively well, and better than most countries in Western Europe. This was partly because of their swift policy response at the early stages of the pandemic: strict lockdowns were introduced early (in mid-March 2020), before the virus had time to spread. As a result, the incidence of new infections and deaths was generally low during the first wave of the pandemic, with Slovakia in particular ranking among the best-performing countries in the world.

However, the second wave of coronavirus infections, which started in September 2020, turned out to be much stronger, and the Visegrád countries have been among the worst-affected in Europe. Admittedly, the high number of new infections detected has been partly a consequence of increased testing, implying that many more asymptomatic cases have been uncovered than during the first wave. However, the number of hospitalisations and COVID-related deaths has gone up dramatically as well. This has dealt a further negative blow to economic activity over the winter months.

The recovery starts here

In the coming two years, the economies of the Visegrád region are projected to return to growth. Under wiiw’s baseline scenario, which assumes that the pandemic will be successfully contained without resort to new lengthy lockdowns, economic growth in 2021 is expected to range between 3% in Hungary and 4.1% in Slovakia (wiiw, 2020). However, this will not be enough fully to offset the losses incurred in 2020. It is not until 2022 that the level of economic activity will reach pre-crisis levels. The risks to the baseline forecast are primarily on the downside, given uncertainties associated with the effectiveness of the COVID-19 vaccines and the further spread of the pandemic.

In response to the coronavirus crisis, the Visegrád countries have adopted a wide range of measures. On the monetary side, policy interest rates were lowered substantially, while Slovakia – being a member of the euro area – benefited from the upgraded quantitative easing policies of the European Central Bank (ECB), and other Visegrád countries benefited from it indirectly. However, monetary policy relaxation has not translated into increased credit expansion, given the high perceived risks and uncertain earnings prospects.

EU funds to the rescue

The projected recovery of the Visegrád economies in 2021-2022 will be helped by the expected large inflows of EU transfers. The cornerstone of these transfers will be the newly established Next Generation EU (NGEU) recovery fund, which was approved by the European Council on 10 December 2020 and is the core building block of the fiscal policy response to the coronavirus crisis at the EU level. The NGEU fund, totalling EUR 750bn to be distributed in 2021-2023 in the form of grants (EUR 390bn) and loans (EUR 360bn), is aimed at facilitating economic recovery and fostering structural reforms, especially in such areas as digitalisation and climate change.

In Poland and Hungary, direct payments to agriculture will be quite important, owing to the large size of their agricultural sectors. Other channels of EU transfers, such as REACT-EU and EAFRD funds, will be less important in value terms. Overall, Poland will be by far the biggest recipient of EU transfers in the region (EUR 29.6bn over the two-year period), followed by Czechia (EUR 8.6bn), Hungary (EUR 6.4bn) and Slovakia (EUR 6.3bn). However, in relative terms, Slovakia will record the highest inflows of EU transfers (6.7% of 2019 GDP), followed by Hungary (6%), Poland (5.6%) and Czechia (2.9%).

The cumulative boost to the Austrian economy over the 2021-2022 period from EU transfers to the Visegrád countries is estimated at 0.12%, which is not a negligible amount. By comparison, Austria’s operating budgetary balance with the EU (i.e. EU net transfers) stood at -0.31% of GNI in 2019. Thus, a large amount of EU funds transferred to the Visegrád economies can be expected to return to neighbouring net contributor countries, such as Austria. Moreover, intra-EU budget flows are only one part of a much more complex story. Trade and investment flows show strong benefits for Austria resulting from economic integration with the EU-CEE countries, especially the Visegrád group.

More ambitious plans to boost the recovery

In this respect, it is interesting to note that the French economy and finance minister, Bruno Le Maire, mentioned in his keynote speech at the GLOBSEC 2020 Tatra Summit on 9 October 2020 that the Visegrád countries had helped to bridge the gap between the supporters and opponents of issuing common debt for the Next Generation EU Recovery Fund. Given the historically low long-run interest rates and the strong indirect profitability of EU transfers to the Visegrád region for neighbouring net contributing countries, such as Austria and Germany, these governments should be interested in a more expansionary fiscal policy at the EU level for the benefit of the less-developed EU member states. Certainly, this should not come at the cost of the rule-of-law regulations. Also, joint support for common EU debt and tax financing should be complemented by a clear vision of joint EU projects with a European value added on the expenditure side. This could include a number of genuinely European projects relevant for an ecological post-COVID-19 recovery, such as for instance a European Ultra-Rapid-Train network.

Moreover, apart from greater co-ordination of EU-level fiscal policy, the Visegrád economies and their net contributor neighbouring countries should also aim at co-ordinating national COVID-19 policies, both fiscal as well as other pandemic-related measures. This will be useful for the longer run, but even more so in the short and medium term, while European countries are still experiencing successive waves of coronavirus infections. At present, these policies are not synchronised and hence enable constant reinfections across borders. Joint planning and co-ordination of social-distancing measures, movement restrictions, public health measures, social and economic measures, and lockdowns could be key for a bigger strategy to control the pandemic at last.

Ultimately, Europe will have to face a wave of insolvencies once liquidity measures are cut back after the immediate COVID-19 health crisis recedes in spring. Given the interwoven character of the German, Austrian and Visegrád economies in terms of investment and related production capacities, and in particular the Austrian banks’ dominance in the Visegrád financial sectors, a joint handling of mass insolvencies would be in the interest of all the involved economies in Central Europe. Co-ordination of insolvency management could go all the way from defining common rules, particularly with regard to firms active across borders, to a joint trust that could provide convertible loans, which would either be repaid or, in the worst case, converted into equity at a future date. However, the current owners of these companies have an interest in averting the latter scenario, given the resulting stock dilution. In any case, it might be also advisable to establish joint Central European working groups in order to analyse possible scenarios of the economic situation in the post-COVID-19 world.