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DG ECFIN
Ten Years of the Euro
Inspirations for the Czech Republic
Session III: Panel discussion
Euro and macroeconomic stability
Servaas Deroose
Director DG ECFIN, European Commission
Conference hosted by Mr. Miroslav Kalousek,
Minister of Finance of the Czech Republic,
November 25, 2008
Outline
DG ECFIN
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Assessing macroeconomic stability
o Domestic: from overheating to hard-landing?
o Financial: Are financial systems resilient?
o External: Are external positions sustainable?
Lessons from EMU@10 for future € members
o
Challenges
o
Policy requirements
Conclusion
S. Deroose, Director, Macroeconomy of the euro area
European Commission, Economic and Financial Affairs
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DG ECFIN
Real convergence is advancing but
remains a long-term challenge
GDP per capita in 2007 (in PPS, EU=100) and average change, 2004-2007
S. Deroose, Director, Macroeconomy of the euro area
European Commission, Economic and Financial Affairs
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Growth is slowing considerably due to
global and domestic factors
DG ECFIN
(in %, y-o-y)
14
14
Bulgaria
Estonia
12
12
Latvia
Lithuania
10
Czech Republic
Hungary
Poland
Romania
Slovakia
10
8
8
6
6
4
4
2
2
0
2002
2003
2004
2005
2006
-2
S. Deroose, Director, Macroeconomy of the euro area
European Commission, Economic and Financial Affairs
2007
H1-08
0
2002
4
2003
2004
2005
2006
2007
H1-08
Price level convergence but
also demand pressures
DG ECFIN
12-month average inflation (in %, y-o-y)
10
18
16
8
14
12
6
10
4
8
6
2
4
2
0
0
-2
2002
2003
2004
reference value
Bulgaria
Estonia
Latvia
Lithuania
2005
2006
2007
2008
S. Deroose, Director, Macroeconomy of the euro area
European Commission, Economic and Financial Affairs
reference value
Hungary
Romania
-2
2002
5
2003
2004
2005
2006
Czech Republic
Poland
Slovakia
2007
2008
DG ECFIN
Financially-driven convergence – large capital
inflows and extension of external balance sheets
Net capital inflows (surplus on the capital account and
financial account of the BoP without reserves, % of GDP)
NMS - External debt
in percentage of GDP
30
120
25
100
2002
20
2007
80
15
60
10
40
5
20
0
NMS-9
Fixers'
Floaters'
0
Average 9 NMS
2000
2007
S. Deroose, Director, Macroeconomy of the euro area
European Commission, Economic and Financial Affairs
Baltics + BG
CZ HU RO PL SK
Source: Eurostat and Commission services and ECB
6
Very rapid financial deepening from a low
base (less pronounced amongst ‘floaters’)
DG ECFIN
Domestic credit growth (in % of GDP)
100%
100%
90%
90%
80%
80%
70%
70%
60%
60%
50%
50%
40%
40%
30%
Bulgaria
Estonia
Latvia
Lithuania
20%
10%
0%
Czech Republic
Hungary
Poland
Slovakia
Romania
30%
20%
10%
0%
2002
2003
2004
2005
2006
S. Deroose, Director, Macroeconomy of the euro area
European Commission, Economic and Financial Affairs
2007
H1-08
2002
7
2003
2004
2005
2006
2007
H1-08
Large external imbalances
(especially in ‘fixers’)
DG ECFIN
Balance on current account (in % of GDP)
-25%
-25%
Bulgaria
Estonia
Latvia
Lithuania
-20%
-20%
-15%
-15%
-10%
-10%
-5%
-5%
0%
0%
2002
2003
Czech Republic
Hungary
Poland
Romania
Slovakia
2004
2005
2006
S. Deroose, Director, Macroeconomy of the euro area
European Commission, Economic and Financial Affairs
2007
2002
8
2003
2004
2005
2006
2007
Fiscal positions
DG ECFIN
External constraints seem to matter for fiscal performance
General government balance and government debt (in % of GDP; 2007)
6
budget balance (in % of GDP)
4
BG
EE
2
0
LV
60%
LT
-2
RO
CZ
SK
PL
-3%
-4
HU
-6
-8
0
10
S. Deroose, Director, Macroeconomy of the euro area
European Commission, Economic and Financial Affairs
20
30
40
50
government debt (in % of GDP)
9
60
70
Exchange rate developments
DG ECFIN
vs. euro, monthly averages (index numbers, Jan 2007 = 100)
70
BGN
EEK
LVL
LTL
80
70
80
90
90
100
100
110
110
120
↓ depreciation
↓ depreciation
120
130
2002
CZK
HUF
PLN
RON
SKK
130
2003
2004
2005
2006
2007
S. Deroose, Director, Macroeconomy of the euro area
European Commission, Economic and Financial Affairs
2008
2002
2003
10
2004
2005
2006
2007
2008
Lessons from EMU@10 for future
euro area members (1 - challenges)
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Price stability: equilibrium real appreciation complicates inflation control ; shorter history of
anti-inflation policy and lower credibility ; conflict between fiscal and monetary authorities ;
wage catching up
Effective adjustment capacity (incl. stabilisation):
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To deal with shocks without exchange rate instrument (but nominal exchange rate
flexibility acts also as shock propagator, hence less ‘cost’ of giving up the XR instrument);
Relatively more frequent and persistent common shocks with asymmetric impact
(exchange rates, terms of trade, shifting comparative advantages…); asymmetric shocks
still possible (see Spain, Ireland, …)
Correction of large current account imbalances may require long and painful disinflation
processes if coupled with stagnating productivity
EMU and financial integration help efficient resource allocation and allow for longer
adjustment periods, but managing credit booms can be a challenge (already well before euro
adoption)
Do not lose sight of long-term challenges: sustain high potential growth, in a context of
ageing, globalisation (with more rapid shifts in comparative advantages)
S. Deroose, Director, Macroeconomy of the euro area
European Commission, Economic and Financial Affairs
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Lessons from EMU@10 for future
DG ECFIN
euro area members
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(2 – policy needs)
Improved budgetary control to reduce the risk of fiscal policy pro-cyclicality;
budgetary frameworks in NMS are less developed and assessing cyclical
component even more challenging
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Sustainability of public finances
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Quality of public finances ; bias towards current expenditure in NMS
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Flexible and integrated goods and factor markets
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More efficient use of labour resources (participation rates, structural unemployment,
skill mismatches)
Business environment and investment climate (innovation, FDI, education, favour
entry /exit of firms)
Growth-enhancing use of capital inflows ; NMS are receiving huge inflows ,
included EU funds; utilisation has differed a lot across NMS
Effective supervision and regulation of financial markets ; NMS experience
accelerated financial development
S. Deroose, Director, Macroeconomy of the euro area
European Commission, Economic and Financial Affairs
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Fiscal policy
DG ECFIN
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Fiscal policy has to balance multiple
challenges
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vs
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need for well-targeted public spending (infrastructure,
education and R&D)
fiscal policy key to rein in demand pressures and
overheating risks, especially in fixed XR regimes
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Preventing imbalances may require
substantial surpluses of longer periods
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Quality of public finances (pro-growth
priorities)
S. Deroose, Director, Macroeconomy of the euro area
European Commission, Economic and Financial Affairs
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Coping with financial deepening
and credit growth
DG ECFIN
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Vigilance to prevent the build-up of
imbalances and vulnerabilities
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Prudential and administrative measures
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Raise minimum capital adequacy ratio
Strengthen loan-loss provisioning
Mandatory loan-to-income or loan-to-value limits
Strengthen supervisory framework
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Improvements in credit registers
Strengthening risk management, expand stress testing
Harness cross-border supervision
S. Deroose, Director, Macroeconomy of the euro area
European Commission, Economic and Financial Affairs
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Structural policy implications
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Boost external competitiveness
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Ensure favourable business environment and investment climate
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Encourage innovation and entrepreneurship to maintain competitiveness
and move up the value-added chain
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Move toward high value-added and fast-growing sectors
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Sectoral composition of exports
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Productivity growth in the tradables sector
Enhance internal economic adjustment
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NMS will have to manage underlying structural divergences for some time
Ensure functioning of goods, services and labour markets
labour mobility, skill development & wage flexibility
wage setting in line with productivity gains
Entrepreneurship, etc.
S. Deroose, Director, Macroeconomy of the euro area
European Commission, Economic and Financial Affairs
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Conclusion
DG ECFIN
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Catching-up is proceeding but accompanied by varying
imbalances
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Euro adoption – readiness more important than timing
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Ability to cope with country-specific adjustment needs
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Adequate preparation in fiscal, structural and prudential
domains
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Short-term challenges: deal with fall-out from the financial
crisis; manage orderly unwinding of imbalances among the
‘fixers’, keep progress towards convergence on track for the
‘floaters
S. Deroose, Director, Macroeconomy of the euro area
European Commission, Economic and Financial Affairs
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