Nicolaie Alexandru-Chidesciuc, CFA, PhD

Transcription

1 , CFA, PhD Associate professor Romanian-American University Vice-president AAFBR Board member CFA Romania Bucharest, April

2 Summary I. Some background II. Euro area imbalances III. Lessons IV. Conclusions for Romania 2

3 Optimum currency area Mundell (1961): Homogeneity of countries in the union Flexibility of wages and prices Labour force mobility (language issue) Responsiveness of fiscal transfers 3

4 Issues are deeper than the current crisis Feldstein (1997): EMU was a political decision, not an economic one Economic development and convergence process would prove highly asymmetrical The greatest adjustment pressure is on the weaker economies (also Underhill 2002) Reforms left to national governments, coordinated loosely by the Lisbon Strategy 4

5 How does it work? Real interest rates Aggregate demand Automatically with own currency Economic growth Unemployment Independent monetary policy Real exchange rate Homogeneity would allow adjustment Or full flexibility of wages and prices! 5

6 Were the rules obeyed? Deficits and debt discipline was essentially absent From 2000 to 2007, Greece violated the 3% rule in eight out of eight years Others also did it (Italy, Portugal, Germany, France) 6

7 I. Some background II. Euro area imbalances III. Lessons IV. Conclusions for Romania 7

8 Cumulative excess inflation vs Germany Source: Eurostat Uniform policy rate produces real interest rate differential that prompts divergent trends 8

9 Banks balance sheets in the core nations became stuffed with peripheral debt (public and/or private) Interconnectivity 10 C/A balance (% of GDP) Source: OECD Austria Belgium Finland France Germany Greece Iceland Ireland Italy Netherlands Portugal Spain 9

10 House price boom 190 Real house prices, 2000= Finland France Germany Ireland Italy Spain Source: OECD database 10

11 Competitiveness problems? 140 Real effective exchange rates, 1999= Germany Ireland Greece Spain France Italy Portugal Finland Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 Source: Eurostat 11

12 Competitiveness in CEE Real effective exchange rates, 1999=100 Euro area Bulgaria Czech Republic Estonia Lithuania Hungary Poland Romania Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 Source: Eurostat 12

13 Structural budget deficit (% of GDP) Germany Ireland Greece Spain France Italy Portugal Finland Source: EC - DGECFIN -30.2% 13

14 Who s suffering in CEE? 4 Structural budget balance (% din GDP) Source: EC - DGECFIN Bulgaria Cehia Ungaria Polonia Romania 14

15 I. Some background II. Euro area imbalances III. Lessons IV. Conclusions for Romania 15

16 What does euro mean? (1) The threat of (suddenly) low interest rates (Greece, Ireland, Spain) Excessive borrowing Ireland is a good example as low rates meant a huge monetary shock against a backdrop of significant economic growth Euro adoption was a big asymmetric shock: the risk of investing in periphery was ignored Iceland is a caveat 16

17 What does euro mean? (2) The independent monetary policy is lost It is impossible to depreciate your currency Reliance on domestic fiscal policy as adjustment mechanism No exit possibility (designed to be permanent) Bailout: Stop the bush fire from spreading into the forest (Oli Rehn) 17

18 A monetary union without a fiscal union is problematic! Governments tempted to run unsustainable debt and Push the ECB to inflate it away and Force bailout 18

19 Impact on potential output Long-lasting impact on the potential growth rate of EA Financial crises weaken investment opportunities High cost of borrowing Reduced credit supply Furceri and Mourougane (2009) Country-panel regression Potential output loss in the range of 1.3 to 3.8pps (cumulative, up to ten years) European Commission estimates Potential output loss in the range of 2 to 4pps (cumulative) Economic development and convergence process would suffer 19

20 I. Some background II. Euro area imbalances III. Lessons IV. Conclusions for Romania 20

21 What does this mean for Romania? (1) The decision to join Euro area should be based solely on economic reasoning Might make sense for Romania given huge FX debt Real convergence is a must before joining euro Fiscal discipline is essential External financing to remain elevated and needs to be carefully watched 21

22 What does this mean for Romania? (2) There will be a slowdown in the convergence process (when it resumes) Too much inflation erodes competitiveness and could lead to larger c/a imbalance Difficult to meet Maastricht criteria on inflation and exchange rate Real appreciation and real wage growth should not exceed productivity gains 22

23 THANK YOU! 23