Transcript Folie 1

Wiener Institut für
Internationale
Wirtschaftsvergleiche
The Vienna Institute for
International Economic
Studies
www.wiiw.ac.at
Session on:
Economic integration and its impact
Current state and crisis of Europe’s
model of integration
Michael A Landesmann
IDEAS Conference, Delhi 29 January 2012
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Main Issues
 What is at the root of the crisis in Europe?
 Is the Euro-zone going to pull through? In which
shape?
 What is the predicament of Europe’s ‘periphery’?
 Pitfalls in the ‘European integration model of growth
and convergence’?
 More generally: growth and catching-up in an era of
financial market integration
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What is at the root of the crisis in Europe? Why is EU more hit
than other advanced economies?
 No-bail-out clause plus constitution of the ECB makes the Euro-zone very
vulnerable in times of very nervous financial markets; but the additional important
ingredient is:
 Pronounced developments of external imbalances within the Euro-zone, driven by
financial market integration and – mostly – fast private sector debt accumulation
 Policy-mechanisms to deal with these imbalances non-existent or in-effective: no
established crisis management mechanism at EU/Euro level (ECB mandate, no
pooling of debt responsibility; no fiscal stabilisation function); financial markets
insufficiently (and nationally) regulated;
 real exchange rates diverge persistently driven by capital inflows (interest rate
convergence before the crisis); relative price adjustment very slow – hence, during
the crisis, rebalancing through incomes;
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Current state of the crisis in Europe
 Banks very weak; no effective re-capitalisation; implicit liability of
states – sovereign debt problem and feed-back processes; national
segmentation of responsibility and differentiated vulnerability of countries
persists – very slow move towards some ‘mutualisation of debt’
 Austerity in fiscal policies, deleveraging processes (corporate,
households, banks) generate stagnation; sustainability of debt of both
private and public sectors judged (by markets) as unresolved; banking
and sovereign debt crisis could further escalate
 Any resolution in sight?
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Policy master-plan?
 Exclusive focus on fiscal consolidation: Germany sees this as a precondition for any move towards joint action/mutualisation on the debt
problem and widening ECB’s mandate – focus to bring long-term public
debt ratios down (constitutional amendments; tightening of fiscal control)
 Recapitalisation of banks asked for, but happens through shrinkage of
balance sheets – credit crunch
 Some moves towards EU-wide regulatory and supervisory bodies; but
lacking teeth so far; in the short-run more national segmentation of
banking
 Measures to monitor development of competitiveness in the future;
details to be worked out; unlikely to be very effective

No growth strategy, except lip-service to change revenue and
expenditure structures in ‘growth enhancing’ manner; plus liberalisation
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Economic Integration and Emerging Economies:
general issues emerging from the crisis
 International financial markets integration can strongly accentuate
the possibility of external and internal imbalances
 Exchange rate regimes are very important in this context
 Catching-up processes can be seriously derailed due to the build-up
of imbalances
 Impact on distorting economic structures (domestic savings
behaviour, capital allocations across tradable/non-tradable sectors,
asset prices, competitiveness – real exchange rates, etc.)
 The setting for catching-up economies in (EU)rope is special: affects
not only EU members but also economies in the neighbourhood
(e.g. Balkans)
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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
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Growth – GDP at constant prices
Average annual growth rates, 2002-2008, in %
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European periphery and comparisons with other
emerging economies



CE-5: Czech Republic, Hungary, Poland, Slovakia and Slovenia

EU-Coh: Greece, Portugal, Spain

Asia-6: Indonesia, Korea, Malaysia, Philippines, Taiwan and
Thailand

Latam-8: Argentina, Brazil, Chile, Columbia, Ecuador, Mexico,
Peru and Uruguay
BB-5: Bulgaria, Romania (SE-2); Estonia, Latvia, Lithuania (B-3)
WB-6: Albania, Bosnia and Herzegovina, Croatia, Former Yugoslav
Republic of Macedonia, Montenegro and Serbia;
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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
LATAM-8 ASIA-6 MENA-6 EU-COH CE-5 SEE-2
B-3
WB-6
TR
-25.0
Note: ASIA-6 excl. Taiwan.
Source: IMF International Financial Statistics and IMF WEO October 2010.
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Net private financial flows
in % of GDP, 1993-2009
LATAM-8 ASIA-6 MENA-6 EU-COH CE-5
Source: IMF Balance of Payments Statistics. ASIA-6 excl. Taiwan.
SEE-2
B-3
WB-6
TR
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Credit to the private sector (%GDP, 1995-2009)
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Financial integration - Changes in: (i) assets plus liabilities; (ii)
credit to private sector in % of GDP (percentage point change), 2001-2007
LATAM-8
200.0
ASIA-6
MENA-6
300.0
EU-COH
SEE-2
B-3
WB-6
TR
60.0
250.0
50.0
200.0
40.0
100.0
150.0
30.0
50.0
100.0
20.0
150.0
0.0
CE-5
10.0
50.0
0.0
0.0
-50.0
Exports plus Imports
Assets and liabilities
-10.0
Assets and liablities
Credit to private sector
Note: Assets and liabilities: EU-COH: 265.82%; WB-6: 212.14%.
Source: IMF International Financial Statistics. ASIA-6 excl. Taiwan, MENA-6 excl. Lebanon.
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External debt: public and private (% of GDP), 2008
Intercompany lending
Other Sectors
Banks
Monetary Authorities
General Government
120.00
100.00
80.00
60.00
40.00
20.00
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.
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External debt: public and private (% of GDP), 2008
Intercompany lending
Other Sectors
Monetary Authorities
General Government
Banks
250.00
200.00
150.00
100.00
50.00
0.00
LATAM-8
ASIA-4
MENA-4
EU-COH
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.
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CESEE: GDP growth was well above the interest rate
before the crisis
Nominal interest rate on government debt
and nominal GDP growth (%), 2000-2010
CESEE
20.0
15.0
15.0
10.0
10.0
5.0
5.0
Nominal GDP growth
0.0
OECD (non-CESEE)
20.0
0.0
Nominal GDP growth
Nominal interest rate
Nominal interest rate
-5.0
Note: Interest rate = government interest expenditures / previous year gross debt.
2010
2008
2006
2004
2002
2000
2010
2008
2006
2004
2002
2000
-5.0
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Debt in % of GDP
Gross external debt
Public debt
Bulgaria
180
160
140
120
100
80
60
40
20
0
Private debt
Romania
90
80
70
60
50
40
30
20
10
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Slovenia
140
Croatia
160
140
120
100
80
60
40
20
0
120
100
80
60
40
20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: wiiw Annual Database incorporating Eurostat statistics.
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Foreign bank ownership, 1998-2005
(assets owned by foreign banks as % of banking system assets)
LATAM-8
ASIA-6
MENA-6
CE-5
SEE-2
B-3
WB-6
TR
B-3
WB-6
CE-2
SEE-2
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
LATAM-8
ASIA-6
MENA-6
Turkey
1999
2000
2001
Note: ASIA-6 excl. Taiwan, MENA-6 excl. Syria.
Source: from Claessens et al (2008).
2002
2003
2004
2005
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Summary: Specific features of European EMEs
 Opening of the capital account: a rule of the game in the EU;
deep financial integration
 Reliance on massive imports of capital; only 4 CESEE-countries
could avoid skyrocketing external (private) debt
 Bank credit: the overwhelming source of external funding
 Financial integration: major channel for transmitting shocks (EUCoh, B-SEE regions hit hardest by the crisis)
 So far no meltdown of financial systems in CESEE - advantage of
the presence of foreign banks?
 Differentiation across CESEE economies linked to extent of buildup of industrial production and export capacity
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Principal policy lessons:
 In national and EU policy frameworks: neglect of private sector
debt build-up relative to public sector
 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?
 Current situation characterised by very fragile banking system;
protracted deleveraging processes; strong financial market
pressure prevents use of fiscal space;
 Consequence: ‘European integration model of growth’ requires
severe re-shaping
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Relationship between pre-crisis credit growth
and current account balances
20.0
average CA/GDP 2004-2007
15.0
MYS
10.0
TWN
5.0
CHL
EGY PHL
ARG
ECU
KOR
IDN
PER
THA
MEX
URY
COL
TUN SYR
POLCZE
0.0
SVN
-5.0
LBN
IRL
MKD
TUR
HRV
ALB
PRT
GRC LTU
ROU
JOR SRB
BIH
EST
HUN
SVK
-10.0
BRA MAR
-15.0
ESP
BGR
LVA
MNE
-20.0
-60.0
-40.0
-20.0
0.0
20.0
40.0
60.0
80.0
Change in credit/GDP 2004-2007
Source: IMF World Economic Outlook.
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Structural features: European and other EMEs
LATAM-8
ASIA-6
MENA-6
CE-5
EU-COH
B-SEE
Credit/GDP, change from 2004 to 2008
(percentage points)
15.85
-8.97
7.02
6.68
56.88
39.21
Real interest rate average, 2005-2007
4.33
3.17
-0.09
1.10
-3.10
-0.26
Current account balance/GDP, 2007 (%)
0.14
3.35
-1.42
-4.88
-10.09
-15.21
Gross external debt, 2009 (% of GDP)
20.8
34.8
20.9
62.7
229.6
80.4
GDP growth, 2008-2010
3.82
3.47
5.38
0.50
-1.67
-1.55
Source: wiiw calculations.
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Structural features: the role of exchange rate regimes
‘Fixers’ and ‘floaters’ amongst the CESEEs
CESEE float
CESEE fix
20.5
32.8
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
1.5
3.9
Credit/GDP, change from 2004 to 2008 (percentage points)
Real interest rate average, 2005-2007
Change in unemployment rate from 2007 to 2010 (percentage points)
Source: wiiw calculations.
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GDP development, 2005-2012
2008=100
LATAM-8
ASIA-6
EU-COH
CE-5
SEE-2
B-3
WB-6
120.0
TR
ASIA-6
LATAM-8
TR
WB-6
CE-5
115.0
110.0
105.0
100.0
SEE-2
EU-COH
B-3
95.0
90.0
85.0
80.0
2005
2006
2007
2008
2009
Source: wiiw forecast and IMF World Economic Outlook, October 2010.
2010
2011
2012
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