Transcript Euro and Macroeconomic Stability

Euro and Macroeconomic Stability
New Issues Arising from the 2008 Financial Crisis
towards the Euro Adoption in the Czech Republic
Vladimir Tomsik
Board Member
November 25, 2008
Is Euro a shield?
Has the single currency been helpful in resolving the
2008 financial crisis? Is Euro a shield for Europe
against the external shock?
The macroeconomic situations in Hungary, Iceland, or
Belgium have shown that countries and their financial
markets have been suffering from crisis no matter
whether they are a member of the Euro zone or not.
Macroeconomic stability cannot be introduced or
imported via the adoption of Euro, but it must be
based on stable and reasonable economic policy.
Traditional indicators
So far the economists have analyzed following traditional
indicators:
• Real and nominal convergence process
• Equilibrium real exchange rate appreciation
• Business cycle synchronization
• Macroeconomic shocks
• Sufficient flexibility of production factors, etc.
The Czech Republic has been improving its macroeconomic
stability in most of the analysed indicators. Nevertheless, the
current macroeconomic situation shows that there are several
issues that have not been reflected in the analyses yet.
New issues
New issues that have not been reflected in our analyses
in more details yet.
• „Beggar your neighbour“ - policy on deposit
guarantees in the banking/financial sector
• Financial intermediation in domestic versus Euro
currency (especially in mortgages)
• Home versus host regulation, including lender-oflast resort questions
• Confidence in Stability and Growth Pact (there are
15 fiscal policies but only 1 monetary policy… !)
Stability outside the Euro zone
3M interest rates
• Financial stability is
possible in a small open
economy given that
domestic economic
policy is reasonable
• This enables domestic
interest rates to be
similar or even lower than
in the Euro zone (e.g. the
case of the Czech
Republic)
• It prevents the share of
FX loans in domestic
economy to be high
Instability outside the Euro zone
3M interest rates
National currency is
obviously no guarantee
against financial crisis
High inflation and/or high
fiscal deficits lead to high
nominal interest rates
This implies high share of
FX loans and exposure of
the domestic banking
sector to problems with
financing in case of a
crisis in foreign markets
Conclusions
• Recent cases in Hungary, the Baltic countries,
Iceland or some members of the Euro zone (e.g.
Belgium, Austria etc.) have shown that the point is
to have reasonable and stable economic policy
and prudential approach of domestic regulation
• Without it you cannot have stable economic
environment disregarding whether the country
is inside or outside the Euro zone
Thank you for your attention.
[email protected]