1. The economy grew rapidly over the past decade but the surge in
capital inflows post-EU accession generated significant risks that
have now materialized. Between 1998 and 2008, real per capita
incomes rose from about 40 percent to two-thirds of the EU average
reflecting the rebound from the 1998 crisis and rapidly rising
productivity (Figure 1). However, the capital inflows that followed
EU accession were mostly channeled to the non-tradable sector,
stoking an asset and consumption boom that had its counterpart in
growing external indebtedness (Figure 2). Rapid wage growth began
to erode competitiveness while loose fiscal policy added to demand
pressures (Figure 3).
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