21/7/15: Central Europe's Lesson: Fixed Euro or Floating Exchange Rates?

The EU report on economic convergence of the Accession States of the Central and Eastern Europe (CEE10) makes for some interesting reading. Having covered two aspects of convergence: real economic performance and financialisation, lets take a look at the exchange rate regime impact on convergence.

This is an interesting aspect of the CEE10 performance because it allows us to consider medium-term impact of euro on CEE10. 

Basically there were two regimes operating in the CEE10 vis-a-vis the euro: fixed regime (with national currency pegged to the euro) or floating regime (with national currency allowed to float against the euro).

First, recall, that "out of the five CEE10 countries which have adopted the euro by 2015, four (i.e. Estonia, Latvia, Lithuania and Slovenia) already operated under fixed exchange rate regimes in 2004. In their case, euro adoption did not represent an essential regime change with respect to the role of nominal exchange rate flexibility in the convergence process vis-à-vis the EA12." 

Now, EU Commission would be slightly cheeky in making this statement, since while in the first order effect this is true, in the second order effect (expectations), this is not true - a peg to the euro could have been abandoned in a severe crisis, albeit less easily under the regime of ongoing financialisation of the CEE10 economies via foreign banks lending; however, once euro is adopted, no devaluation is possible even in theory. And this is not a trivial consideration, since policymakers know that should they mess up in the longer run, there will be a risk of peg abandonment, resulting in direct, transparent exposure of their policies-generated imbalances for all to see and in serious embarrassment vis-a-vis their European counterparts. In other words, the threat of devaluation as a feasible option could have actually acted, in part, to make peg regimes more stable.

But let us allow EU Commission their assumption (undefined as such) and chug on...

From EU own analysis: "Based on the GDP per capita in PPS data, there was no significant difference in the speed of real income convergence to the EA12 between fixers and floaters over the past decade, but there was a large degree of heterogeneity within both groups. Rather than the type of exchange rate regime, a more important relationship existed between the speed of catching-up and the initial income level, with less developed countries in general converging at a faster pace. Accordingly, the fastest growing economies were, among the fixers, the three Baltic countries and, among the floaters, Poland and Romania. In addition, Slovakia, which recorded one of the best catching-up performances, floated its currency until euro adoption in 2009 and the bulk of its real convergence over the past decade actually materialised before 2009." 

What does this mean? That nature of growth during the period was similar for floating and fixed regimes: both were driven by catching-up of economies, most notably via capital investment. Being fixed to the euro or not, it appears, had no effect on rates of convergence.

But, remember, euro is about stability, not growth. So the key test, really, is in volatility of convergence path, not the path itself. Per EU Commission: "The real convergence path of floaters was in general smoother than that of fixers. This was mainly due to the more pronounced economic overheating in the latter group prior to 2008, which then also led to a larger set back during the financial crisis." Oops… so staying closer to euro hurts. Having fixed rates, hurts. Bubbles got worse in countries with pegged rates. That is not exactly an endorsement of the euro-led regimes.

There's a caveat: "Nevertheless, fixers were able to again largely close their GDP-gap to floaters by 2012, as they enjoyed an export-led recovery, supported by internal price adjustment, structural reforms and favourable export market developments." Yep, that's right: austerity and re-shifting of economy toward external sectors, rather than domestic demand is the miracle that allowed for the fixed rates regimes convergence. That, plus unmentioned, monetary policy activism. 

Still, the view of boom-to-bust euro-driven economy for the fixed rates regime remains. Not that the EU Commission will acknowledge as much.

"The extent of price level convergence over the last decade mainly reflected differences in the speed of catching-up. That said, the average household consumption price level of fixers remained close to that of floaters until 2008, but it became significantly higher in the post-crisis period, as comparative prices of floaters fell." In normal English: deflation hit fixers, while floaters avoided it. 

Core conclusion (despite numerous caveats): "Floaters appear to have been in general able to benefit from their monetary autonomy to achieve a higher degree of price stability. In the pre-crisis period, faster growth and related overheating gradually drove up inflation in fixers significantly above the average inflation rate of floaters. Subsequently, larger output drops and the inability to depreciate against the euro implied that fixers generally also experienced more pronounced disinflation. From late-2010, inflation in the two groups developed quite similarly on average, but the variance was higher among floaters."

So final note on interest rates. Remember - convergence of rates irrespective of risk is one of the poor outcomes of the euro introduction in the EA12, fuelling massive asset bubbles in Spain and Ireland, fiscal imbalances in Greece and so on. In CEE10: "Over the past decade the benchmark long-term interest rate on government bonds was higher on average for floaters than for fixers, both nominally and in real terms. This is partly a consequence of the higher average public debt level among the floaters, but to some extent it is arguably also related to more exchange rate uncertainty inherent in floating." 

EU Commission grumbling acceptance of reality is almost entertaining: "Generally, it takes longer to regain cost competitiveness via internal price adjustment [something that fixed rates economies are forced to do] than via nominal exchange rate depreciation [something that flexible rate economies have access to] and the initial shock to the real economy is more severe. However, the internal adjustment is more permanent as it requires a structural solution to the underlying problems, whereas the temporary boost generated by nominal exchange rate depreciation can actually postpone the reforms necessary for further sustained catching-up." You'd think that flexible exchange rate economies just can't ever compete with fixed rates economies. In which case we obviously have a paradox: Denmark and Switzerland vs Italy and Spain (or for that matter Belgium and France).

So the core conclusion is simply this: things are complex, but having a peg to the euro looks more dangerous in crises and in bubbles build up stages, than running flexible exchange rates regime. Who would have guessed?..

21/7/15: Eastern Europe's post-2004 Convergence with EU: Financialisation

In the previous post, I covered the EU's latest report on real economic convergence in Central & Eastern European (CEE10) Accession states. As promised, here is a look at the last remaining core driver of this 'fabled' convergence: the financial services sector (which drove the largest contribution to growth in pre-crisis period 2004-2008 and remained significant since).

In summary: debt is the currency of CEE10 convergence.

Let's start with Public Debt.

As the above shows, CEE10 debt rose during the crisis despite GDP uptick. Rate of growth in debt was slower in CEE10 than in the original euro area states (EA12), which was consistent with stronger CEE10 performance in terms of fiscal balances and lower incidence / impact of banking crises.

Scary bit: "The negative impact of the 2008/09 global financial crisis as well as the following euro-area sovereign debt crisis on financial conditions in the CEE10 revealed that, despite relatively lower general government debt levels (compared to the EA12 average), some CEE10 countries might still encounter problems to (re-)finance their public sector borrowing needs during periods of heightened financial market tensions as their domestic bond markets are in general smaller and less liquid".

And that is despite a major decline in long-term interest rates experienced across the region:

In addition, Gross External Debt has been rising in all CEE10 economies between 2004 and 2014, peaking in 2009:

Which brings us to private sector financialisation. Per EU: "CEE10 countries entered the EU with relatively underdeveloped financial sectors, at least in terms of their relative size compared to the EA12. This was the case for both market-based and banking-sector-intermediated sources of funding. In 2004, the outstanding stocks of quoted shares and debt securities amounted on average to just about 20% and 30% of CEE10 GDP, compared to around 50% and 120% of GDP in the EA12. Similarly, bank lending to non-financial sectors accounted for just some 35% of CEE10 GDP whereas it reached almost 100% of GDP in the EA12."

It is worth, thus, noting that equity and direct debt financialisation relative to bank debt financialisation, at the start of 'convergence' was healthier in the CEE10 than in the euro area EA12.

Predictably, this changed. "As the government sector accounted for the majority of debt security issuance in the CEE10, bank credit represented the main external funding source for the non-financial private sector."

"The CEE10 banking sectors have generally been characterised by a relatively high share of
foreign ownership as well as high levels of concentration. The share of foreign-owned banks and the market share of the five largest banks (CR5) in CEE10 countries remained relatively stable over the last 10 years, on average exceeding 60%. There was however some cross-country divergence as Slovenia stood out with a relatively low share of foreign-owned banks, which only increased to above 30% in 2013. At the same time, the Estonian and Lithuanian banking sectors exhibited the highest levels of concentration, with their respective CR5 averaging 94% and 82% over 2004-14. On the other hand, the role played by foreign-owned banks is rather limited in most EA12 countries while their banking sectors are in general also somewhat less concentrated, with their CR5 averaging around 55% over the last 10 years."

Which, basically, means that the lending boom pre-crisis is accounted for, substantially, by the carry trades via foreign banks: the EA12 banks had another property & construction boom of their own in CEE10 as they did in the likes of Ireland and Spain.

"The 2008/09 global financial crisis …proved to be a structural break in the overall evolution of bank lending to the non-financial private sector in the CEE10. As the pace of credit growth in the pre-crisis period was clearly excessive and unsustainable, a post-crisis correction was natural and unavoidable. However, credit to the NFPS increased by "only" some 13% between May 2009 and May 2014, with bank lending to the nonfinancial corporate sector basically stagnating while lending to the household sector expanded by
about 25%."

Shares of Non-Performing Loans rose quite dramatically, exceeding the already significant rate of growth in these in EA12 across 6 out of 10 CEE10 states.

The following chart shows two periods of financialisation: period prior to crisis, when financial activity vastly exceeded real economic performance dynamics; and post-crisis period where financial activity is acting as a small drag on real economic performance. This is try for both the CEE10 and EA12 economies, but is more pronounced for the former than for the latter:

In summary, therefore, a large share of 'real convergence' in the CEE10 economies over 2004-2014 period can be explained by increased financialisation of their economies, especially via bank lending channel. As the result, much of pre-crisis convergence is directly linked to unsustainable boom cycle in investment (including construction) funded by a combination of bank debt (carry trades from Euro area and Swiss Franc) plus EU subsidies. These sources of growth are currently suppressed by long-term issues, such as high NPLs and structural rebalancing in the banking sector.

The tale of 'convergence' is of little substance and a hell of a lot of froth… 

21/7/15: Eastern Europe's post-2004 Convergence with EU: Unimpressive to-date

EU Commission latest report on real economic convergence in the EU10 Accession states of Eastern and Central Europe (CEE10) sounds like a cheerful reading on successes of the EU and the Euro. The report overall claims significant gains in real economic convergence between the group of less developed economies post-joining the EU and the more advanced economies of the EU.

However, there are some seriously pesky issues arising in the data covered.

Firstly, consider the sources of convergence (growth) over the period 2004-2014.

As chart above shows, in 2004-2008 pre-crisis period, Private Consumption posted significant contributions to growth in all EU10 economies )Central and Eastern European economies of EU12 group). This contribution became negative in 6 out of 10 economies in the period 2009-2014. It fell to zero in 2 out of 10 and was negligibly small in another one. Poland was the only CEE10 economy where over 2009-2014 contribution of personal consumption was positive and significant, albeit it shrunk in magnitude to about 40% of the pre-crisis contribution.

Likewise, Gross Fixed Capital Formation (aka investment) contribution to growth also fell over the 2009-2014 period. In 2004-2008, investment made positive and significant contribution to growth in all CEE10 economies. Over 2009-2014, Investment contribution was negative for 7 out of 10 economies and it was negligible (near zero) for the remaining 3 economies.

Thus, about the only significant factor driving growth in 2009-2014 period was net exports - the factor that does not appear to be associated with investment growth.

As the result, overall growth rates have fallen precipitously across the region in 2009-2014 period compared to 2004-2008 period.

Gross value added across all main sectors of the economy literally collapsed over the 2009-2014 period across all CEE10 economies, with only Poland posting somewhat decent performance in that period compared to 2004-2008.

One thing to note here is that even during the robust growth period of 2004-2008, Agriculture - a significant sector for a number of CEE10 economies was largely insignificant as a driver for gross value added in all but one economy - Hungary, where agricultural activity strength in overall economic activity traces back to the socialist times (1970s reforms).

Market services activity registered robust growth in 2004-2008 across the region predominantly on foot of major expansion of financial services.

Adding farce of a comment to the real injury of the above data, per EU Commission report: "As a result of relatively higher GDP growth rates, CEE10 countries achieved significant real convergence vis-à-vis the EA12 between 2004 and 2014. The CEE10 average GDP per capita level in purchasing power standards (PPS) increased from about 50% of the EA12 level in 2004 to above 58% in 2008. After having declined somewhat in 2009, it increased gradually to some 64% of the EA12 level in 2014." Much of this convergence is really due to the decline in GDP in the rest of the EU, rather than to growth in GDP in the CEE10. Not that the EU Commsision would note as much.

"However, there was a considerable cross-country variation with the pace of convergence in general inversely related to initial income levels. Considering the three most developed CEE10 economies in 2004, Slovenia has not enjoyed any real convergence, while the catch-up was also relatively limited in the Czech Republic and Hungary (as also pointed out by e.g.
Dabrowski (2014)). On the other hand, relative GDP per capita levels in PPS increased by about 20 percentage points in Baltic countries, Poland, Romania and Slovakia. Nevertheless, Bulgaria, which started with the second lowest GDP per capital level in 2004, also only achieved a below-average pace of convergence of some 11 percentage points."

In simple terms, the above means that the core drivers for any convergence would have been down to reputational and capital markets effects of accession, rather than to real investment in future capacity, skills and knowledge. Building roads, using Structural Funds, and getting Western Banks to lend for mortgages seems to be more important in the 'convergence' story than creating new enterprises and investing in real jobs.

As the EU notes: "The rapid pace of economic convergence in the pre-crisis period partly reflected an investment boom. The average share of gross fixed capital formation (GFCF) in the CEE10 increased from below 25% of GDP in 2004 to above 29% of GDP in 2007 and 2008 while it remained below 24% of GDP in the EA12. This investment boom was stimulated by optimistic growth expectations and supported by external funding availability. …Although on average roughly half of GFCF consisted of construction both in the CEE10 and the EA12, housing accounted for only about fourth of construction activity in the CEE10, compared to more than 50% in the EA12. This could be interpreted as overall indicating a more productive investment mix in the CEE10 in the run-up to the 2008/09 global financial crisis." Or it can be interpreted as heavier reliance on EU Structural Funds and Convergence Programmes that pumped money into roads and public infrastructure construction. Which may be productive or may be irrelevant to future capacity, as all of us can see driving on shining new roundabouts in the middle of nowhere, Ireland.

Nonetheless, "The contribution of investment activity to real convergence was not sustained in the post-crisis period. The average share of GFCF in the CEE10 declined to about 22% of GDP in 2010 and then remained broadly stable up to 2014 (while it declined to below 19% of GDP in 2013-14 in the EA12) as growth prospects were reassessed and private funding availability tightened but investment activity in the region was still supported by substantial inflows of EU funds. ...On the other hand, the decline was overall broadbased
across all main asset types in the CEE10 while it was largely driven by a drop in housing
construction in the EA12."

On External Balance side, current account balances turned positive for the CEE10 only in 2013-2014, much of this due to contraction in domestic demand:

Meanwhile, FDI collapsed across all countries, ex-Slovenia (where FDI figure for 2009-2014 is distorted to the upside by banking sector flows). As EU notes: "Although net FDI inflows remained positive in all CEE10 countries they on average amounted to some 2% of GDP in 2009-14 (after having exceeded 5% of GDP in 2004-08)."

All together, the picture of economic convergence is there, but it is more characterised by convergence via financialisation and transfers (both public and private) than by organic growth. This conclusion is equally pronounced before and during the crisis period. Much of the 2004-2008 period convergence was driven by private debt accumulation and 2009-2014 period convergence was primarily driven by adverse growth environment in the rest of the EU, plus public debt accumulation. 

Note: I will be blogging on debt issues in the next post, so stay tuned.

You can access full report here: http://ec.europa.eu/economy_finance/publications/eedp/pdf/dp001_en.pdf.

11/10/2011: Central Europe: a Catalyst for empowering the EU

On September 9th, GE and Malopolska Regional Development Authority sponsored on of the three plenary sessions at the Krynica Economic Forum 2011, that I chaired, on the future development of the CEE region: "EU 2020 for CEE: a Catalyst to empower the CEE Region?"

This is the edited transcript of the session proceedings.

The objective of the session was to continue building on previous Economic Fora dialogues concerning the long-term development agenda for the CEE region, and how it fits into the EU frameworks and the EU perspective in terms of development and investment, structural funds, and core policy platforms.

The plenary session, chaired by Dr. Constantin Gurdgiev (Head of Research with St Columbanus AG and Adjunct Lecturer in Finance, Trinity College, Dublin), consisted of:
Mr. Ivan Miklos, deputy PM and the Minister for Finance in Slovakia
Mr. Zoltan Csafalvay, the Minister of State for National Economy of Hungary
Mr. Johannes Hahn, the EU Commissioner for Regional Policy
Mr. Ferdinando Beccalli-Falco, the President and CEO of GE Europe and North Asia
Mr. Stephen Gomersall, the Chairman of Hitachi Europe and
Mr. Pedro Pereira da Silva, CEO of the Jeronimo Martins Group.

Economic development, competitiveness and regional experience

Minister of State for National Economy of Hungary, Mr. Zoltan Csafalvay opened the discussion about the CEE regional development in the context of broader EU economic and social development. Minister Csafalvay stressed that although we perceive the traditional divide across Europe to be along the East-West axis, the current crisis shows that this divide is superficial. Instead, "...if we look at the competitiveness gap between Northern and Southern part of Europe, you can see this in productivity, level of flexibility, innovation, and even in economic freedom there is a gap between Northern and Southern part of Europe."

CEE countries are also performing very well during this crisis. For example, the ongoing fiscal consolidation in Hungary in 2011 also coincides with "a very strong pro-business agenda, including cutting taxes, introducing flat tax, reducing red tape, increasing the flexibility of the labour market and reforming the public sector."

Deputy Prime Minister of Slovakia, Mr Ivan Miklos further developed the theme that the lesson from the CEE region past experiences is that coming out of the current crises, "the EU states need to provide fiscal consolidation... [and] deep structural reforms. These are the main pre-conditions for increasing competitiveness." There are two approaches for dealing with the crises currently on the table. The first one is via a political and fiscal union with euro bonds, "which mean to have stronger and stronger coordination and centralization. The other approach is to have more strict and enforced rules, based on competition. I'm strongly convinced that the second approach is a much better approach, because ...in current conditions, a political union will, in my opinion, be politically unsustainable. Economically this kind of policy is not creating a good environment for necessary fiscal consolidation and structural reforms. ...I'm convinced, and the story of the reforms in CEE countries is a strong evidence, that what we need in Europe, is more competition, because we need deeper and more comprehensive structural reforms."

These points were echoed by Minister Csefalvay who stressed the need to increase competitiveness of Europe as a whole, while retaining competition between countries and regions within Europe. The main challenge is "to find a point where we can increase the competitiveness of Europe's single market is certainly a core point, and energy, transport and R&D focus are important. But, if we want Europe to be competitive on the global stage, we should maintain tax competition between member states, competition between different social and economic models, between what different business environments can offer."

EU Commissioner for Regional Policy, Mr Hahn touched upon the issue of policy cohesion and the regional leadership within the context of the need for accelerating economic recovery. "The question we are asking ourselves today is how we should use this investment to transform Europe's economy, so we can recover from the crisis... The answer to that lies in the Europe 2020 strategic framework. There is a need to continue working on removing the obstacles to a competitive economy and this means investing in better transport, energy, water, wastewater treatment, etc." In addition, Europe's success will depend on the capacity to invest in education, research and development, fostering innovation, supporting clusters and information technology developments. "Europe needs to identify paths of smart specialization. Countries of the CEE region have to see that investing in people and in better products and technology is not a luxury..."

Technological innovation is the driving force for the future of CEE economies and for Europe at large and EU regional and cohesion policies are here to help. "For instance for 2007-2013 cohesion policy will spend more than 86 billion euro on R&D and innovation, in particular for small and medium size enterprises. There are significant differences across the regions. Germany for instance invest 28% of it's total cohesion policy allocations in R&D, Poland and Hungary invest 15% and Slovakia only 10%. This is something we have to change... Don't forget that Europe has a negative technological trade balance of  38%. So we import more patents from outside Europe than we export ...[because] we are yet to bridge the gap between basic research" and business innovation. This is where the regional cohesion policy will move in the next years.

 From R&D focus to innovation-supporting services and technologies

There is significant role to be played by the core infrastructure systems development in facilitating human capital-intensive innovation-based economy that the policy frameworks like Europe 2020 envision. This infrastructure - bridging existent gaps in energy, water, wastewater, transport, education and healthcare - can serve as both the source of competitive advantage and the originator of innovation.
To deliver such supports, the economies of scale from regional cohesion and integration in infrastructure development and investment should be used as a significant point of strength, as stressed by Mr. Ferdinando Beccalli-Falco, the President and CEO of GE Europe and North Asia. These economies of scale reach beyond physical investment, to the heart of institutional competitiveness and the potential of the common market.

The need for transforming the current policies and institutional frameworks is exemplified by the CEE region. "There is a huge potential in this area. GE organized a seminar in Budapest where we were discussing the unification of the energy system of CEE in order to gain the economies of scale and create competitiveness. This was in 2007. What happened? Nothing. We repeated in 2008. What happened? Nothing." The core obstacle is not availability of funding, but the lack of common regional framework and the lack of will to invest in newest technology, not just catching-up but leading in technological capital. "...When we use these funds, let's try to use them to create the newest, most up-to-date technology, to make sure that we are not just buying technology which quickly becomes obsolete."

This is a part of addressing the European and CEE regional competitiveness challenges. "Competitiveness in Europe nowadays is represented by high level of education and by the creation of new technology, not the cost of manufacturing. When GE bought Tungsram in the late 1980s the differential in cost between Western Europe, or the United States, and Hungary was huge. Today, the reason why Tungsram can survive is because we are introducing the latest technology. Cost is not the name of the game anymore." To enhance this potential at the regional level requires re-prioritization of EU policy agenda. "The European budget today consumes a considerable percent in agricultural subsidies, which support a sector that accounts for just 3 percent of the total GDP. The new budget should be dedicated more to technology and education development." This will also benefit the CEE region, which has strong base of human capital.

The stress, placed by Mr Ferdinando Beccalli-Falco on harnessing CEE region potential in human capital, R&D and technological innovation, within the broader EU policy frameworks and budgetary supports, was complementary to the focus on institutional and 'soft' innovation (policy and business process development) raised by other speakers. These points were further expanded by Mr. Pedro Pereira da Silva the CEO of Jeronimo Martins Group who focused in his contribution on the need to see CEE region as the source of talent, creative workforce and business innovation.

"Over the last two decades we've been a part of the process of transformation in our industry and we have seen a remarkable transfer of know-how in the CEE region, massive investments and economic modernization. As an example: it took 15 years in Poland to open 350 hypermarkets; the same takes 25 years in Spain. So everything happens much faster, more dynamically, with more competition in the CEE region than in the other parts of Europe."

"As we see from the euro area experience, today we have much more risk, more uncertainty, we also are seeing slowdown in investment. You can see this as a challenge or as an opportunity." Until now, CEE countries have been focused on internal development but "the next stage will be regional consolidation in production and distribution sectors." This represents yet another, but related, regional opportunity as CEE economies become more closely integrated within the region.

Mr. Stephen Gomersall, the Chairman of Hitachi Europe took a more specific approach to the issue of regional integration - the perspective of the foreign direct investors in the region, building on the contributions by Minister Csafalvay  and Deputy Prime Minister Ivan Miklos concerning the importance of interconnecting public policies with private sector competitiveness. "...From our point of view those are key factors for bringing more investment into Europe."

Firstly, according to Mr Gomersall, although CEE countries do have a deficit in infrastructure, "they have strong macro-economic frameworks, and young and vibrant workforce. The region also has the advantage of investing in infrastructure at a time when much more sophisticated and efficient solutions are available. So you can get a much bigger effect from the investment."

Secondly, alongside the contributions from Mr. Beccalli-Falco and Mr. da Silva, Mr Gomersall said that, "from an investment perspective, growth comes from empowering the private sector. Governments play a vital role in providing the framework for national development, for regional development, and as sponsors of innovation, but there are four key factors I would mention for growth and for business. The first is a stable economic environment, the availability of credit, stable currency and a climate conducive to foreign investment. The second is a secure and stable energy supply... [with] the right mix of energy sources... The third factor - good intercity and regional transport links, ...and an efficient IT environment." In at least two of those areas, according to Mr Gommersall, policy framework and IT deployment, "Poland is already a very strong player and becoming a leader in Europe in implementing, for example, e-government technologies".

Thirdly, "new infrastructure development will require very large investments. The EU programs and structural funds are of enormous importance, but there is also the need for private finance, so projects need to be not political or social projects, but based on solid economic returns and optimal efficiency." CEE region needs "innovative methods for blending public and private finance ...to deliver public services, for example in energy and transport. ...Many of these projects are trans-national: cross-border. For example, Lithuanian's nuclear power project involves investment from four nations and a unified or at least interconnected grid. Without regional cooperation, it will be much more difficult to make this investment efficiently. So, the coordination of policies and projects at the regional level makes enormous sense."

Regional policy and investment platforms

Overall, the panel was in consensus on the need for developing more competitive economic models, including regional models, especially in the areas of human capital and services. The question that remained is whether the CEE can act as a functional regional platform for competitiveness and innovation-supporting technologies and best practices.

Mr Gomersall referred to the specific example of Poland that shows the intrinsic resources available within the CEE region that can be used to drive both the policy dimension of stimulating competitiveness and for merging investment and technology platforms to deliver on regional objectives. "It's well known that the level of scientific education in Poland is high, and therefore the propensity in Poland to adopt new technology solutions is also high. We've been working with a number of government and private partners here in Poland for the development of biometric technologies. These are means of ...ensuring the security of business transactions, and transactions between the government and citizens online. Poland has actually proven to be the most fertile ground for the development of these technologies EU-wide." Mr. Ferdinando Beccalli-Falco added that from GE experience, "the human capital is  already here, [in the CEE region, and] the tradition for the development of technology is here."

Mr. Zoltan Csefalvay pointed out that despite the demand for the latest technological investments in the area of infrastructure in the CEE region, little funding is available in these areas. "If you look at the future financing period 2014 to 2020, there is an EU-wide investment facility for infrastructure development and transport development. Of 49 transportation projects identified under this, only two are related to Hungary." The lack of prioritization of CEE regional investments by the EU implies the need, according to Mr Csefalvay, "to place Central and Eastern Europe in the centre of the European debate."

The central issue is how can CEE translate the points of national excellence to a regional framework? Can focusing on the more specific areas for investment such as, for example, energy or infrastructure or healthcare reshape the regional framework for development and avoid the differentiation between local competition and regional competition and global competition. According to Mr Beccalli-Falco, "the initiative to create a unified regional energy system" is a strong positive. "Where we find a roadblock is in the political will to do it. I am afraid there is not enough vision to understand the advantages that such a system could bring."

Mr Pedro Pereira da Silva focused on the three key concepts that, in his view, will drive regional growth within the CEE and indeed across Europe. "Innovation, efficiency and competition for me are the three key words we need to focus on in the EU". For CEE states "a key point, is that extra effort is needed on the education side to support talent capital, which really makes a difference."

Mr. Gomersall echoed these views while focusing more on specific example of large scale regional infrastructure integration in transportation systems: "Obviously EU funds and national development funds are limited and therefore it's important to ensure that they are used in the most efficient manner for the future development ...and not just for social stabilisation. ...[However] the volume of new capital coming in from the private sector, particularly from the United States, Japan, China, South Korea, etc, is far in excess of the funds from the European Union. So, the key point is really to create a climate which will continue to attract that investment and make it profitable, and that includes, obviously, taking further steps on the single market and deregulation."

Mr. Beccalli-Falco concluded the panel discussion with a comment summing up the core areas for investment and policy development at the regional levels, mentioned by other speakers: "I'd like to say that my three concepts, are: continue to focus on education, full utilisation of the European funds, and support foreign direct investments, which, as was said by others, are much bigger than what is contributed by Europe. If we can combine these three things together, I think that Central and Eastern Europe is going to become a highly productive, highly competitive area in the world."