OBSERVATORY ON THE NEW EUROZONE Improving European Integration and Competitiveness

Transcription

1 PRESENTATION BY VLADIMÍR DLOUHÝ AT THE FORUM: OBSERVATORY ON THE NEW EUZONE Improving European Integration and Competitiveness Sofitel Hotel, Budapest June 16, 21 Reproduced by The European House-Ambrosetti for internal use only.

2 Budapest, June 16, 21 OBSERVATORY ON THE NEW EUZONE Improving European Competitiveness and Integration THE EU ADOPTION IN THE PRESENT SCENARIO: ASSESSING COSTS AND BENEFITS Vladimír Dlouhý 21 The European House-Ambrosetti S.p.A. - ALL RIGHTS RESERVED. This document was prepared by The European House-Ambrosetti S.p.A. for the use of the client to whom it is addressed. No part of it may be copied or made available in any way to third parties or used by them without The European House-Ambrosetti S.p.A. s prior written consent. This document supported a presentation and should not, therefore, be considered without the accompanying oral comments. Agenda CEE economic development 2-28 The crisis: Where are we today? Short- and medium-term forecast, Euro convergence Expected costs and benefits of adopting the Euro Conclusion 2

3 I. Years Fast economic growth Splendid times Closing the gap in economic level and in living standard vis-à-vis EU average Strong inflow of FDIs and foreign capital in general Adjustment towards Maastricht criteria Stabilized banking sector after privatizations during 199s Well performing central banks, inflation, currencies and current accounts generally under control Exceptions 4

4 Reliance on external financing but hidden risks Deficits and debts (of households, corporations and governments) financed from external resources Loans in foreign currencies (not CZ, PL, SK), both households and corporate sector Banks: no securitized instruments, but large share of NPLs Distortion of industrial structure (mainly CZ, SK), large share of automotive industry Reforms of pension and healthcare systems long overdue mandatory budget expenditures problematic demographic trends 5 Euro? Different countries - different economic and political preferences (see table of Maastricht criteria bellow) SVK and SLO decided to adopt Euro Baltics seemed so close CZ and PL - more a matter of political decision Expected entry period: Only Hungary believed to join later 6

5 Real GDP growth, %, yoy BG CZ EST LAT LTU H PL SLO SVK EU27 HU SVK B GPL SLO LTU CZ LAT EU27 EST 7 GDP per capita, PPS, EU= SLO CZ SVK H EST PL LAT LTU BG BG CZ EST LAT LTU H PL SLO SVK 8

6 Inflation: HICP, %, yoy LAT BG LTU EST 5 HPL SVK SLO CZ BG CZ EST LAT LTU H PL SLO SVK 9 Public Finance Balance, % GDP 4 2 EST BG CZ SLO LIT PL LAT -8-1 SVK H BG CZ EST LAT LIT H PL SLO SVK 1

7 Price convergence x productivity (PPP/ExR)/(productivity/person) PPP/ExR Price convergence BG CZ EST LAT LTU H PL SLO SVK Productivity/person BG CZ EST LAT LTU H PL SLO SVK BG CZ EST LAT LTU H PL SLO SVK 11 Real Effective ExR, 1999= CZ SK LAT H EST LTU BG PL SO SLO BG CZ EST LAT LTU H SLO SK PL 12

8 Maastricht criteria, 28 ERMII LTIntR CPI GovDf GovDb % %yoy %GDP %GDP III/ ref.value 6,5 3,4-3, 6, BG no 4,7 5,9 3,2 1,8 CZ no 4,5 2,7-1,1 27,2 EST since VI/4 na 5,1 -,7 3,5 LAT since V/5 5,4 8,5-2,1 11,2 LTU since VI/4 4,6 7,2-1,5 16,8 H no 6,9 3,7-3,6 65,7 PL no 5,7 3,4-2,6 44,1 no 7,1 4,8-3,7 14,9 Source: Eurostat 13 Agenda CEE economic development 2-28 The crisis: Where are we today? Short- and medium-term forecast, Euro convergence Expected costs and benefits of adopting the Euro Conclusion 14

9 Crisis: two basic facts 1 1. External shock slow-down of economic growth Fall of demand for exports Lower profits, lower wages decline of consumption General consequences of global financial crisis uncertainty investment decline (including sharp decline in FDIs) collapse of equity markets banking sector problems, almost credit crunch unemployment, social consequences, etc. 15 Crisis: two basic facts 2 2. Macroeconomic destabilization Lack of confidence, danger of sudden stop of external financing sustainability of (even short-term) debt Non Performing Loans (NPL) share in domestic banks has dramatically increased (with notable exception of some countries, namely CZ) impact on large, Euro zone based banks Dramatic decline of capital inflow in general In some countries an outflow simultaneously Global markets in February-March/9: unified view on the region not distinguishing enough among the countries general view influenced by the worst performing country ( contagion danger) 16

10 Spring 29: main facts October 8 - March 9: speculation on destabilization of some CEE economies + unnecessary media hysteria with quite unfortunate consequences Depreciation of all floated currencies in the region Real economy adjustment more pronounced for economies with pegged currencies Problems of some short-term sovereign bonds issues, increase of spreads All this at quite low inflation - Slow pass-through into prices + decrease of commodity prices 17 Economic policy difficulties Contradictory requirements on economic policy General impact of the crisis: Monetary easing (including so called non-traditional steps) - Region's Central Banks could have - at the beginning - decreased interest rates disregarding the depreciations (on the contrary, some positive effects on exports) - Fiscal policy pressure (higher social expenditures, automatic stabilizators, calls for fiscal incentives) Generally: anti-cyclical policies required Short-term destabilization: Very restricted space for increase of deficits, but even - at least within some period - for monetary easing as well 18

11 CEE: GDP growth, % qoq 8, 6, 4, 2,, -2, -4, -6, -8, -1, -12, -14, 26q4 27q1 27q2 27q3 27q4 28q1 28q2 28q3 28q4 29q1 29q2 29q3 LV LT SK SI CZ PL HU EE Czech Republic Estonia Latvia Lithuania Hungary Poland Rom ania Slovenia Slovakia Source: Eurostat Source: re-elaboration on Eurostat data, Other relevant data 1 CPI, %, yoy 2 Spreads max EM CEE AE UKR /HU/EST 8 LAT 4 LIT Eurozone PL SK CZ Jun-8 24-Sep-8 16-Jan-9 1-May-9 1-Sep-9 CZ HU PL SK EST LAT LIT UKR Source: IMF, WEO, update July AE Eurozone EM CEE Nominal exchange rates = 1 3-May-8 5-Sep-8 12-Dec-8 2-Mar-9 26-Jun-9 HUF/EUR CZK/EUR PLN/EUR N/EUR PLN N HUF CZK 2 Unemployment rate, % LAT LTU EST H SK PL BG CZ SLO

12 I I July-December/29 Stabilization ti sui generis Huge contraction of economic activity Some countries - support from international institutions Currencies and debt financing under control 21 Europe 29 Real GDP, % growth Public finance deficit, % GDP Euro Source: Eurostat NL UK D F CZ PL SVK SLO IRL GR E P H BG EST LAT LTU Unemployment, % (March 21) Euro D Public debt, % GDP F NL UK CZ PL SVK SLO IRL GR E P H BG EST LAT LTU

13 GDP growth, QI, 21, % 6, 4 4, 2,, -2, -4, -6, BG CZ EST LAT LTU H PL SLO SVK Euro EU Source: Eurostat, BG, SVK not seasonally adjusted 23 Start of 21 CEE is not a consistent group of Countries CEE Countries show better basic macro-parameters than many Euro zone Countries (with important exceptions - Baltics) Different countries suffer with different level of economic vulnerability Baltics: extremely deep real economy adjustment Did Euro help Slovenia and Slovakia? Did peggs/currency boars help Baltics or Bulgaria? It is too early to formulate clear-cut hypothesis and provide robust answers - but evidence so far suggests that floaters did better in the shortterm - fixing the rate: only one adjustment channel - a real economy 24

14 Forecasts Euro convergence Growth: Central and Eastern Europe %yoy SVK BG EST PL CZ H SLO LTU BG CZ EST LAT LTU H PL SLO SVK LAT Source: Eurostat (2-8), Consensus Forecast (29-21) 26

15 4, 2,, Public finance deficit %GDP Source: Consensus Forecast, Eurostat BG -2, -4, -6, -8, SK EE HU SI PL CZ LT LV -1, -12, Bulgaria Czech Republic Estonia Latvia Lithuania Hungary Poland Romania Slovenia Slovakia Source: Consensus Forecast; Eurostat, Public Debt %GDP 9, 8, Source: Consensus Forecast, Eurostat HU 7, 6, 5, LV PL LT 4, 3, SK SI CZ 2, BG 1, EE, Bulgaria Czech Republic Estonia Latvia Lithuania Hungary Poland Romania Slovenia Slovakia Source: Consensus Forecast; Eurostat, 21 28

16 Maastricht criteria, 29 & 211 ERMII LTIntR CPI GenGovBudB GenDebt % %yoy %GDP %GDP XI/ ref.value 6,2 1,6 2,5 3, 3, 6, 6, BG no 7,3 2,8 3,1-1, -,5 1,8 15,7 CZ no 4,9 1, 2,3-6,6-4,9 27,2 43,7 EST since VI/4 na -,1 1,6-2,6-2,3 3,5 13,2 LAT since V/5 12, 3,5,6-9, -5,7 11,2 6,4 LTU since VI/4 14, 4,2 1,1-8,9-6,3 16,8 49,3 H no 9,2 4,2 3, -3,8-3,9 65,7 84,1 PL no 6,1 3,3 2,6-6,4-5,4 44,1 59, no 8,2 5,6 3,6-7,3-5,9 14,9 31,3 Source: Consensus Forecast Romania: GenGovBalB - 29 and 21, business-review.ro, Source: Consensus Forecast; GenGovBaIB 29 and 21, business-review.ro, Near term risks Continued recession, severely worsening the demand for CEE s exports once again Default (or near default) of some countries in the region Combined effects above, with impact on deeper than expected GDP contraction, with subsequent larger deficits and debts All these cases: risk of capital account volatility and - maybe - asymmetric risks Need for more policy flexibility in the short-run 3

17 Medium term (1/2) Debt sustainability vs. slow growth and demographic trends Unfinished reforms! Need for reforms of healthcare and social securities Larger individual participation to healthcare Flexicurity approach to labor market deregulation Long term growth factors Infrastructure, education 31 Medium term (2/2) In medium-term, all CEEs will be able to adopt Euro Given the reality today, Maastricht criteria will not be fulfilled before 215 But how will Eurozone look like in 215? Nominal vs. real convergence 32

18 Strategies and policies (1/2) Order of the day flexibility! Taming the deficits Desired/structural deficits well below 3% Is fast taming indeed desirable? - The only short term solution: expenditure restrain - Long term solution: growth Controlling inflation and stabilizing Exchange Rate Actual criterion: ECB s 2% - do we need exactly that? Exit strategy from recent monetary policy and appreciation pressure on nominal exchange rates Given the recession and outlook ahead, are policies above feasible? 33 Strategies and policies (2/2) Multiple objectives of monetary policy Controlling inflation Competitive Exchange Rate Exchange Rate stability criterion Empirical evidence from the past Soft pegs or tightly managed floats more prone to currency crisis (pre-1999 period) Recent past: hard pegs (Baltics) generated overly optimistic expectations Floating and inflationary targeting will reasonably widen bands - the best survival No need to enter into the Eurozone till

19 Agenda CEE economic development 2-28 The crisis: Where are we today? Short- and medium-term forecast, Euro convergence Expected costs and benefits of adopting the Euro Conclusion 35 Euro adoption: short-term benefits Elimination of foreign exchange rate risk and volatility Removal of trade barriers Lower transaction and information i costs Greater competition Higher transparency and stability of prices Facilitating business in non-european markets Closer integration with the euro area (for new entrants) Leaving behind emerging market risks (for new entrants) 36

20 Euro adoption: long-term benefits Trade growth Increase of FDI Lower inflation i rates and inflation i expectations Faster growth / increase of living standards / progress in real convergence More favourable environment for growth and employment Economies of scale and more efficient allocation of production factors The euro provides a platform to stand with the Americans, Chinese, Japanese, and now other rising economic powers in international negotiations 37 Euro adoption: costs Technical costs of currency changeover Loss of national monetary sovereignty (independent monetary policy), an instrument for stabilization of economy Susceptibility to asymmetric shocks economic shocks that affect one or more members differently from the rest of the currency area Arising micro-and-macroeconomic imbalances (lending booms, current account deficits or increasing inflation pressure) if interest rates are lower than the natural rate of the new member (for new entrants) A lack of convergence and flexibility could affect the credibility of EMU 38

21 Agenda CEE economic development 2-28 The crisis: Where are we today? Short- and medium-term forecast, Euro convergence Expected costs and benefits of adopting the Euro Conclusion 39 Conclusions Mild growth through next 5 years muddling through Countries will be able to control deficits it and debts Euro adoption: (earliest date) Another discussion - political economy of EMU Political struggle for the reforms 4