Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies www.wiiw.ac.at The European Financial and Competitiveness Crisis: the Central-Eastern and Southeastern European (CESEE) situation Michael A Landesmann SEE Management Forum and ELC Conference, Bled, May 30-31 2013
2 The impact of the crisis CESEE: assessment and prospects What we have learnt so far? International financial markets integration can strongly accentuate the possibility of external and internal imbalances; exchange rate regimes/monetary integration very important in this context Catching-up processes can be seriously derailed due to the buildup of imbalances Impact on distorting economic structures (domestic savings behaviour, capital allocations across tradable/non-tradable sectors, asset prices, competitiveness, etc.) Future of European convergence model unresolved
3 The European integration model of catching-up targeted at deep integration with the EU/Euro area associated with very far-reaching internal and external liberalization (trade, capital transactions, financial market integration, labour mobility) benefits: downhill capital inflows, trade integration, technology transfer; institutional convergence the model worked - convergence process but emergence of severe structural imbalances in important groups of European EMEs; heterogeneity of pre- and post-crisis experience of European EMEs
4 Convergence record: Growth of GDP Average annual growth rates, 1995-2002 and 2002-2008, in % 10 8 6 4 2 0 10 8 6 4 2 0 1995-2002 EU-15 EU-27 EU-15 EU-27 Austria Belgium Denmark Finland France Germany Ireland Luxembourg Netherlands Sweden UnitedKingd 2002-2008 Austria Belgium Denmark Finland France Germany Ireland Luxembourg Netherlands Sweden UnitedKingdom Greece Italy Portugal Spain Greece Italy Portugal Spain Bulgaria Cyprus Czech Rep. Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia Bulgaria Cyprus Czech Rep. Estonia Hungary Latvia Lithuania Malta Poland Romania Slovakia Slovenia Croatia Macedonia Turkey Croatia Macedonia Turkey Albania Bosnia&Herzeg Montenegro Serbia Ukraine Russia Ukraine Russia Source: wiiw Annual Database incorporating national statistics, Eurostat.
6 Composition of the current account of the balance of payments, 1995-2009 Goods&Services Income Transfers Current account 15,0 10,0 5,0 0,0-5,0-10,0-15,0-20,0-25,0 LATAM-8 ASIA-6 MENA-6 EU-COH CE-5 SEE-2 B-3 WB-6 TR Note: ASIA-6 excl. Taiwan. Source: IMF International Financial Statistics and IMF WEO October 2010.
7 Net private financial flows in % of GDP, 1993-2009 LATAM-8 ASIA-6 MENA-6 EU-COH CE-5 SEE-2 B-3 WB-6 TR Source: IMF Balance of Payments Statistics. ASIA-6 excl. Taiwan.
8 External debt: public and private (% of GDP), 2008 Intercompany lending Other Sectors Banks 120,00 100,00 80,00 60,00 40,00 20,00 Monetary Authorities General Government 0,00 LATAM-8 ASIA-4 MENA-4 CE-5 SEE-2 B-3 WB-3 Note: ASIA-4 excl. PH, TW. MENA-4 excl. LB, SY. B-3 excl. FYROM, BA, RS. Source: World Bank, World Databank.
9 CESEE: GDP growth was well above the interest rate before the crisis; perceived Ponzi scheme Nominal interest rate on government debt and nominal GDP growth (%), 2000-2010 20.0 CESEE 20.0 OECD (non-cesee) 15.0 15.0 10.0 10.0 5.0 5.0 0.0-5.0 Nominal GDP growth Nominal interest rate 0.0-5.0 Nominal GDP growth Nominal interest rate 2000 2002 2004 2006 2008 2010 2000 2002 2004 2006 2008 2010 Note: Interest rate = government interest expenditures / previous year gross debt.
11 Debt in % of GDP Gross external debt Public debt Private debt 180 160 140 120 100 80 60 40 20 0 Bulgaria 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 90 80 70 60 50 40 30 20 10 0 Romania 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 140 120 100 80 60 40 20 0 Slovenia 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 160 140 120 100 80 60 40 20 0 Croatia 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: wiiw Annual Database incorporating Eurostat statistics.
13 Basic structural weaknesses: De- und Re-Industrialisation Industrial Production - Levels relative to 1989: 1995, 2000, 2008
14 Position of manufacturing and longer-term trade balances Share of manufacturing in GDP in 2005 and exports/imports of goods and services, average 2002-2008 25.0 CZ Share of manufacturing in GDP, 2005 20.0 15.0 10.0 EL LV RO BG PT LT HR ES PL EE SK SI HU IT FR BE DK AT NL IE DE FI SE 5.0 0.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 110.0 120.0 Exports/Imports of goods and services, 2002-2008 Source: Eurostat and wiiw own calculations.
17 Structural distortions: differences in the composition of foreign direct investment Large part in manufacturing, infrastructure, trade in central Europe Large part in real estate, finance in Baltic region 17
19 The role of exchange rate regimes: Fixers vs floaters amongst the CESEEs CESEE float CESEE fix Credit/GDP, change from 2004 to 2008 (percentage points) 20.5 32.8 Real interest rate average, 2005-2007 1.6-1.6 Current account balance/gdp, 2007 (%) -6.6-11.8 Gross external debt, 2009 (% of GDP) 78.8 95.6 GDP-growth, 2008-2010 1.18-1.78 FDI to finance and real estate sectors, 2007 (per cent of total FDI stock) 26.5 40.2 Change in unemployment rate from 2007 to 2010 (percentage points) 1.5 3.9 Source: wiiw calculations.
20 Summarizing some of the features of European EMEs High growth prior to the crisis; high degree of openness: particularly strong growth in international financial integration Fast growth of credit to private sector in many European EMEs; important role of foreign banks Clear link between private credit growth and current account deterioration; and hence foreign debt positions Public debt situation not that different between European EMEs and other EMEs Differences in industrial production growth and the build-up of export capacity in different EMEs Differences between fix- and flex-exchange rate countries
21 Debt levels (of the corporate and household sectors) and investments and household final consumption Corporate debt and subsequent gross fixed capital formation growth 2008-2011 Household debt and subsequent household consumption growth 2008-2011 Source: wiiw Database incorporating national and Eurostat statistics, own calculations.
23 Non-financial corporations net lending/borrowing % of gross value-added CZ HU PL SK GIIPS Rest of EU15 BG EE LT LV RO SI 30 30 20 20 10 10 0 0-10 -10-20 -20-30 2005 2007 2009 2011-30 2005 2007 2009 2011 Source: Eurostat.
24 Differentiated developments of exports and imports 2008-2011 Weak development of exports Source: wiiw Database incorporating national and Eurostat statistics, own calculations.
25 Continuation of deindustrialisation in some countries: Development of GDP and gross industrial production: 2008-2011 Industrial production contracting more strongly than GDP Cumulated real GDP growth 2008-2011 -20-10 0 10 20 ME MK GR ES IT BG HR SI RS PT HU LT CZ RU LV TR SK BA IE RO UA EE -40-20 0 20 Cumulated gross industrial production growth 2008-2011 PL KZ Source: wiiw Database incorporating national and Eurostat statistics, own calculations.
26 Manufacturing activity concentrated in Central Europe, low manufacturing export intensity in many CESEE countries
27 Industrial production Sept 2008 =100 CZ HU PL SI SK 120 110 100 90 80 70 60 2007 2008 2009 2010 2011 2012 EE LT LV 120 110 100 90 80 70 60 2007 2008 2009 2010 2011 2012 BG RO 120 110 100 90 80 70 60 2007 2008 2009 2010 2011 2012 ES GR IT PT 120 110 100 90 80 70 60 2007 2008 2009 2010 2011 2012 Seasonally adjusted data. Source: Eurostat.
28 Industrial production in SEE Sept 2008 =100 HR MK RS 120 110 100 90 80 70 60 50 40 Jan- 07 May- 07 Sep- 07 Jan- 08 May- 08 Sep- 08 Jan- 09 May- 09 Sep- 09 Jan- 10 May- 10 Sep- 10 Jan- 11 May- 11 Sep- 11 Jan- 12 May- 12 Sep- 12 SEE: HR, MK, BA, RS. Source: wiiw Monthly database.
29 Development of gross industrial production (real) (July 2012 relative to September 2008 = 100) 120,0 July 2012 110,0 100,0 90,0 80,0 70,0 60,0 CZ HU PL SI SK BG EE LV LT RO ES GR IT PT HR MKME RS TR RU UA Source: wiiw Monthly Database incorporating national and Eurostat statistics.
30 Claims of European banks on selected CESEE countries, June 2005 = 100 700 LT LV RO SI HU PL CZ 600 500 400 300 200 100 0 jun.05 jun.06 jun.07 jun.08 jun.09 jun.10 jun.11 jun.12 Source: BIS.
31 Foreign banks reduce their balance sheets in Southeast Europe, Russia and Ukraine Consolidated foreign claims on banks, USD million Source: BIS.
33 A NPLs legacy to be managed 31/05/2013 33
34 Towards a more self-funded banking system Evolution of Bank Funding, 2007:Q4-2012:Q3 (Percent of GDP, 4-quarter moving average, exchange-rate adjusted) CESEE excluding Russia and Turkey CESEE Sources: BIS, Locational Banking Statistics; IMF, International Financial Statistics; and IMF staff calculations. 34
36 Post crisis - the predicament of Europe s periphery In many countries (Southern and Eastern periphery) high debt levels of private sectors (corporate and household sectors) deleveraging processes; public sector debt has significantly increased Foreign banks in retrenchment credit constraints severe; cross-border banking goes through a process of re-nationalisation Current accounts adjust strongly mechanisms different in fix- and flexexchange rate countries; in a range of economies strong legacy of distorted tradable/non-tradable sector structures FDI and inward capital flows sharply down Long-term structural problems for countries with insufficient or noncompetitive tradable sector (high policy priority!!)
37 Forecast 2013-2014 Future growth can rely little on the contribution of the external sector (different from 2010/11) Thus, greater dependence on domestic demand But: - Consumption and investment demand characterized by difficult financing conditions and deleveraging processes - Fiscal policy in most countries restrictive; cross-country multiplier effects Dampened recovery processes that will extend over 2013, 2014 Implications for the labour market
38 Exports of goods (nominal, euro-based) change in % against preceding year, 3-month moving average CZ HU PL SK SI 60 40 20 0-20 -40 jan.08 jan.09 jan.10 jan.11 jan.12 jan.13 BG EE LT LV RO 60 40 20 0-20 -40 jan.08 jan.09 jan.10 jan.11 jan.12 jan.13 AL BA HR ME MK RS 100 50 0-50 jan.08 jan.09 jan.10 jan.11 jan.12 jan.13 KZ RU UA TR 100 50 0-50 jan.08 jan.09 jan.10 jan.11 jan.12 jan.13 Source: wiiw Database incorporating national and Eurostat statistics.
39 Youth unemployment (15-24) and long-term unemployment (more than 12 months) have increased strongly 35 3Q 2008 3Q 2011 30 25 20 15 10 5 0 total long-term youth (15-24) total long-term youth (15-24) total long-term youth (15-24) total long-term youth (15-24) total long-term youth (15-24) total long-term youth (15-24) total long-term youth (15-24) total long-term youth (15-24) total long-term youth (15-24) total long-term youth (15-24) total long-term youth (15-24) total long-term youth (15-24) EU-27 BG CZ EE LV LT HU PL RO SI SK HR Source: Eurostat.
41 Principal policy lessons: In national and EU policy frameworks: neglect of private sector debt build-up relative to public sector; structural distortions Financial market regulation severely underdeveloped; specific issue in CESEE region: high level of cross-border banking Fixed exchange rate regimes bear high risks; but what are the options of highly euroized EU members and candidates? Financial market pressure prevents use of fiscal space European convergence model (based on downhill capital flows ) has to be rethought: stronger focus on tradable sector ( Standortpolitik ; cluster policy; use of EIB/EBRD/Structural Funds support for industrial policy); less reliance on fixed exch. regimes; delayed EMU membership