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European Labor Risks in the Year Ahead

Posted by Kirsten, Michael at Monday, 12/17/2012 8:15 am
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The Eurozone crisis remains a source of economic turmoil across the continent—and beyond. Yet, even outside those countries directly impacted by high unemployment and budget cuts, economic resilience is being tested.

Government austerity budgets leave little room for stimulus, and even Sweden, which has managed to maintain trade and current account surpluses throughout the crisis, is facing some tougher economic decisions going forward.

The Czech Republic has been in recession for four consecutive quarters (longer than in 2009), registering a drop of 1.2% in GDP. And the forecast for 2013 is only marginally positive with 0.5% growth. In Bulgaria, the outlook is still clouded by lack of growth in the country’s main export markets— Germany and Italy. The economy has grown only slightly in the past two quarters, at a rate of 0.5%, nowhere near pre-crisis levels. Up until 2008, Bulgaria grew at annual rates exceeding 6%. Romania’s prospects are similarly affected by slow growth in the main export markets, though GDP is now rising (by 0.5% in the second quarter) after two quarters of contraction.

In central and eastern Europe, the bright spot may be the Baltics. Latvia is the fastest growing country, but the entire region has recovered and is expected to grow by an average of 2.1% in 2012 and 3.6% in 2013. Latvia and Estonia started to report budget surpluses in the second quarter.

Economic and political developments are also having an impact on labor policies across the region. Under pressure from the markets (and in the case of the Eurozone’s peripheral economies, also from the creditor countries), the emphasis is on enhancing the efficiency of the labor market.

In Spain, for instance, the government’s strategy includes the implementation of a new professional training scheme that will include apprenticeships in an effort to emulate Germany’s dual education system. Other measures include a plan to improve public-private co-operation in the area of employment orientation services and an evaluation of active labor market policies. Also, by the end of the year, the center-right government is likely to launch reforms that restrict early retirement and improve the sustainability of the pension system.

In Poland, the reform agenda for 2013 is likely to emphasize deregulation, labor market flexibility, and the reorganization of the health and education systems to cut waste and labor costs.

And in Serbia, despite calls by the IMF, the The Party of United Pensioners of Serbia (a member of the ruling coalition) will oppose any meaningful pension reform in the near term. Fundamental labor reforms are likely to be sidelined too. In Lithuania, the parliament is considering labor code liberalization to increase labor market flexibility. But the proposed changes are relatively modest, focusing on shortening the notice period, broadening the use of fixed labor contracts, and loosening regulation of working hours.

At the same time, labor relations in Estonia’s public sector are coming under strain. For instance, medical personnel went on strike in early October after demands for higher salaries were not met.

Russia’s unprecedented low unemployment rate suggests very tight labor markets, in part because of sustained, albeit weakening, economic growth. The government has reportedly set aside more than $40 billion in the event of a major economic shock, and the country has more than $500 billion in hard currency reserves.

Across the region, the labor, economic and political outlook is varied and fluid, yet clear trends are emerging. A stronger economic outlook in the emerging markets and greater focus on labor market reforms in established markets seem set to continue throughout 2013.

For more detail on the trends shaping the European and Eurasian economies in 2013, read the complete Quarter Four update of the Global Market Brief & Labor Risk Index or Europe and Eurasia here.

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