Transcript Real Growth of GDP Euro Area Countries

Euro – Benefits, Costs and Risks
Juraj Karpiš
www.INESS.sk
[email protected]
Topics
•
•
•
•
EU and Euro
Benefits as NBS sees them
Risks and costs as I see them
Is there an alternative?
I know that
• Slovakia agreed before entering EU to adopt Euro in the
future
• We don’t have an official opt-out option as Denmark or
UK have or de facto opt – out (after NO in 2003
referendum) of Sweden
• The majority of Slovaks support Euro
So the question is not IF but WHEN
50 years of EU, two different views
about future direction:
Centralization
There should follow deeper
integration:
one constitution, one
currency, common
foreign policy, common
defense, harmonized
taxes, central
governement.
Competition
EU should only grant
freedom of movement of :
Goal: European Superstate
Goal: free trade and
cooperation in Europe
•
•
•
•
people
goods
services
capital
Benefits of Euro according to NBS
Direct (immediate):
• Abolishing exchange rate risks 0,02% GDP
• Lower costs of capital
• Lower transaction costs - 0,36% GDP
• Transparency of prices
Indirect (long-term)
• Higher volume of international trade (allows
deeper specialization)
• Increased direct investments
• Faster growth, higher living standards
I would add:
• PR for Slovakia – it’s a good sign that
Slovakia is ABLE to adopt Euro
• Hard limits for irresponsible politicians –
“Maastricht leash”
Costs and risks according to NBS
• One time expenses for currency change 0,3 to 0,8%
GDP
• Loss of some bank profits and temporary higher
costs of banks
• Loss of independent monetary policy as a tool for
stabilizing economy
• Probably slightly higher inflation rate
NBS:
Benefits are much higher than costs =>
Euro ASAP
Problems
• Euro is a political construct, has not its own
history and is not a choice of consumers
• Currency change is a complicated process
and it is impossible to quantify its effect with
precision
• Factors that we can quantify (or we think
that we can) are not necessarily more
important than factors that we are not able
to quantify
• Costs and benefits can be reasonably used
only when we talk about individuals not
about nation. Costs and benefits are not
evenly distributed. Some people will bear
costs, other benefits.
Is Euro a Condition for Strong Economic Growth?
Real Growth of GDP
Euro Area Countries
Noneuro Area Countries
F – France, G – Germany, I-Italy
S-Sweden, UK – United Kingdom,
D - Denmark
5
5
4
4
S
3
%
3
%
UK
2
D
F
2
G
I
1
1
2007
2006
2005
2004
2003
2002
2001
2000
2007
2006
2005
2004
2003
2002
2001
2000
1999
1999
0
0
Costs and Risks as I see them:
Heavy wallets!
Costs and Risks as I see them:
• Lack of real convergence – therefore inflationary
pressures – depreciation of savings
• Monetary policy not suited for Slovak Business Cycle
• Centralization – all eggs in one ECB basket, less
currency competition and flight opportunities
• Arbitrariness in setting final exchange rate - impact on
wealth of Slovak citizens
• The biggest countries ignore Stability pact therefore in
the future we might bear the risks of costly pension
systems of the biggest euroarea countries (ITA, DE, FR)
Euro is in the long term inflationary
• Hindering of currency
competition which forced
national central banks to
behave responsibly or else
flight to other currencies
• Probable future pressure on
expansive monetary policy
to cover deficits of costly
social systems of biggest
euro areal countries
• Euro makes fiscal free riding
possible
• Easier coordination in
monetary expansion
between world CBs
Stability pact – does anyone care?
• The biggest countries of
euroarea ignore the
Stability pact’s criteria
• Greece entered the
euro-area with the help
of phony statistics
Problems Ahead
Fiscal deficits as a % of GDP in the largest euro-countries
% HDP
2,0
-3,0
1999 2000 2001 2002 2003 2004 2005 2006 2007
G
F
I
-8,0
Where is the Convergence?
Price level and GDP per capita in Slovakia as % of EU average
GDP per capita
Relative Price level
In 27 months 20%
Vývoj kurzu SKK/EUR od 1.1.2004 do 26.3.2007
43
41,08
41
Centrálna parita
pri vstupe do
ERMII 28.11.2005;
38,455
39
37
35
Nová centrálna
parita; 19.3.2007;
35,4424
33
32,878
2.3.2007
2.1.2007
2.11.2006
2.9.2006
2.7.2006
2.5.2006
2.3.2006
2.1.2006
2.11.2005
2.9.2005
2.7.2005
2.5.2005
2.3.2005
2.1.2005
2.11.2004
2.9.2004
2.7.2004
2.5.2004
2.3.2004
2.1.2004
31
Which means:
Convergence of price levels only by the way
of absolute price increases
Higher inflation
+
Negative real interest rates
=
Devaluation of citizen’s SKK savings
Example of Slovenia – will we follow?
Inflation HICP in Percent YOY
12
10
8
6
4
2
0
Euro
Introduction
Loss of control over monetary policy
• Does they know (executive board ECB) what currency we need?
• Control in the hands of people, on which Slovak won’t have any
influence
• No feedback – probability that you meet Mr. Trichet in the streets of
your town is by magnitude lower than the probability that you meet Mr.
Sramko
• We will have to accept monetary policy of ECB which will be dictated
by the needs of biggest countries – do we need lower interest rates
when we grow double digit a year? (base rate 4.25% vs. 4,0%)
Is there an alternative?
Let them compete ! Parallel circulation – legalize the
use of other currencies in Slovakia as a legal tender
(EUR, USD, SFR others) and let the people choose
- exchange risk eliminated, lower transaction costs
Conclusion
• Euro as a tool for further political integration,
moves control further from citizen – it is a way of
centralization
• Lack of real convergence – risk of higher
inflation and saving devaluation
• The biggest countries don’t fulfill the Maastricht
criteria – inflationary risks in the future
• Loss of control over monetary matters
Therefore we should wait or not enter at all.
Thank You
www.INESS.sk
[email protected]