EU Membership: A Post-Accession Boom, but New Policy Challenges Christoph Rosenberg IMF Office for Central Europe and the Baltics 18 th Economic Forum in Krynica September 28
Most new member states have experienced an acceleration of growth after joining the EU 12 Average GDP growth (percent) 2-4 5-7 1 8 6 4 2 Source: Eurostat. * 4-6 & 7-8 respectively CZ EE LL LT HU PL SI SK BG* RO*
As a result the region has been converging very fast Convergence in Emerging Europe and in the Rest of the World, 22 6 Average growth of PPP per capita GDP, 22 6 2 15 1 5 MD UA BA AL BY RO TR MK LV RS LT BG HU EE RU SK PL 6 7 8 9 1 11 12 CZ ln(ppp per capita GDP), 22 Rest of the world Europe Linear (rest of the world) Linear (Europe) HR 2 15 1 5
This exceeded expectations of most observers 12 GDP growth and average IMF and EC projections, 24-27 (percent) 1 8 6 4 2 LV EE LT SK CZ PL SI HU Source: Eurostat, IMF, European Commission.
Increased access to foreign capital is believed to be a major contributor to the post-accession boom 1 5 Current account deficit in percent of GDP Emerging Asia Latin America -5-1 -15-2 ROM & BUL Baltics CE4-25 2 1 2 3 4 5 6 7 8Q1 Source: National authorities.
And it is related to financial deepening 7 6 5 Change in credit to private sector 22-27 (in ppt of GDP) Change in external private debt 22-27 (in ppt of GDP) 4 3 2 1 N.A. -1 EE LV BG LT RO HU SI CZ PL SK Sources: National authorities; and IMF staff calculations.
The credit-driven post-accession boom has created new vulnerabilities and policy challenges Examples related to financial stability: Large current account deficits related to overheating Cross-border contagion risks Currency mismatches
C/A deficits in some countries exceed what would be consistent with macro fundamentals (Rahman, IMF WP 8/92) Current Account Balances and Model Predictions Percent of GDP -2-4 -6-8 -2-4 -6-8 -1-12 Current account model predictions, emerging Europe -1-12 -14 Current account balances, emerging Europe, average 23-7 -14 Source: Rahman 28. -16-18 Latvia Estonia Bulgaria Romania Current account model predictions, Asia Lithuania Hungary Slovak Rep. Czech Rep. Poland Slovenia -16-18
Since the onset of the 27 financial crisis, these countries face higher financing cost 35 3 Ukraine Change in CDS since july 27 25 2 15 1 5 Latvia Bulgaria Iceland Romania Estonia Lithuania South Africa Turkey Hungary Mexico Poland Brazil Greece Slovakia Portugal Czech Republic Russia China -3-25 -2-15 -1-5 5 1 15 C/A deficit, 27 Source: Bloomberg, IMF.
Cross-border exposures by international banks (especially from Austria, Italy, Sweden, Germany) create new channels of contagion 1% Concentration of Emerging Europe Exposure to Western Europe, 27 (Percent) 8% 6% 4% 2% % BA BY AL SK HR RO MD CZ UA HU BU RU PL MK LV LT EE Austria Italy Germany France Sweden Switzerland Netherlands Other Source: Bank for International Settlements, Quarterly Review, June 28. Note: Country names are abbreviated according to the ISO standard codes. 1/ Emerging Europe exposure to western European banks is defined as the share of the reporting banks in each western European country in the total outstanding claims on a given emerging European country (both bank and nonbank sectors). For example, about 42 percent of Croatia's exposures to Western European reporting banks is owed to Austrian banks, 38 percent to Italian banks, 13 percent to French banks, etc. For the Baltic countries, 85 percent or more of exposures to the reporting banks is owed to Swedish banks.
Rapid credit growth has been accompanied by a growing share loans denominated in foreign currencies (EUR and CHF) NMS: Credit to the private sector percent of GDP 45 4 Foreign currency Local currency 45 4 Emerging Markets: Foreign exchange borrowing 25, as % of total loans to the private sector NMS 35 3 35 Russia, Ukraine, and Moldova 3 25 2 15 25 2 15 Latin America Western Balkans 1 5 1997 1998 1999 2 21 22 23 24 25 26 27 Note: The indicator is calculated as total credit to the private sector divided by GDP for the NMS (excl. Slovenia). All figures were previously transformed to euros. Source: national authorities, Eurostat, IMF staf calculations. 1 5 East Asia Note: Regional figures are calculated as medians for respective countries in the region. Source: Tamirisa and others, 27, pp. 3; national authorities, 5 1 15 2 25 3 35 4 45 5 55
This has led to large currency mismatches in the non-financial private sector Net FX position, 27 percent of GDP 2 1-1 -2-3 -4-5 EST LAT LIT CZK POL HUN Change in net FX position, 22-27, percent of GDP 2 1-1 -2-3 -4 EST LAT LIT CZK POL HUN Sectoral net FX position, 27, percent of GDP 4 2 Government Banks Other sectors -2-4 -6-8 EST LAT LIT CZK POL HU N ource: National authorities, IMF staff calculations.
Empirical results (Rosenberg and Tirpak, 28): Euroization is a byproduct of convergence. EU membership boosts foreign exchange borrowing through multiple channels: it offers better access to foreign funds in a fully liberalized environment of capital flows, it provides natural hedging opportunities, through increasing trade openness, it may boost private sector s confidence in exchange rate stability and imminent euro adoption. Regulatory measures have limited effectiveness due to opportunities to borrow directly from abroad (i.e., for corporations).
Conclusions EU membership fundamentally changes the policy-making landscape, requiring more international cooperation Examples in the area of financial stability: Emergency lines of credit for countries that are vulnerable to capital outflows (Iceland) Close cooperation of financial supervisors in home and host countries Euro adoption
Thank you! Dr. Christoph B. Rosenberg Senior Regional Representative International Monetary Fund Regional Office for Central Europe and Baltics Ul. Zielna 37C -18 Warszawa Tel.: + 48 22 338 67 E-mail: cee-office@imf.org Visit our website at: www.imf.org/cee