Transcript Folie 1

Wiener Institut für
Internationale
Wirtschaftsvergleiche
The Vienna Institute for
International Economic
Studies
www.wiiw.ac.at
Can the Euro Hold?
Michael A Landesmann
IDEAS Tenth Anniversary Conference, Chennai, 24-26 January 2012
2
Main Issues
 Why has the crisis in the Eurozone escalated that
much?
 Where are we at the moment? Is there a policy
master-plan?
 Is the Euro-zone going to pull through? In which
shape?
 What is the predicament of Europe’s ‘periphery’?
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Why has the crisis in the Eurozone escalated that much?
 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:
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 rebalancing through incomes; no
established crisis management mechanism at EU/Euro level (ECB mandate, no
pooling of debt responsibility; no fiscal stabilisation function)
 Banks very weak; no effective re-capitalisation; implicit liability of states – sovereign
debt problem and feed-back processes; national segmentation of responsibility
 Fiscal policies, deleveraging and weak banks generate stagnation; sustainability
of debt of both private and public sectors judged (by markets) as unresolved
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Public and private debt in % of GDP
Public debt
Private debt
Corporations
Banks
Households
Ireland
Greece
600
160
140
120
100
80
60
40
20
0
500
400
300
200
100
0
2000 200120022003 200420052006 200720082009 2010
2000 20012002 20032004 200520062007 20082009 2010
Spain
Portugal
250
250
200
200
150
150
100
100
50
50
0
0
2000 200120022003 200420052006 200720082009 2010
2000 200120022003 200420052006 200720082009 2010
Source: wiiw Annual Database incorporating Eurostat statistics.
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Public and private debt in % of GDP
Public debt
Private debt
Corporations
Banks
Households
Poland
Bulgaria
80
70
60
50
40
30
20
10
0
200
150
100
50
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2000 20012002 20032004 2005 20062007 20082009
Croatia
Romania
160
140
120
100
80
60
40
20
0
80
70
60
50
40
30
20
10
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
2000 20012002 20032004 2005 20062007 20082009 2010
Source: wiiw Annual Database incorporating Eurostat statistics.
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Where are we at the moment? Is there a 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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Is the Euro-zone going to pull through? In which
shape?
 Economic issues:
- recession(s) 2012/13; then medium-term stagnation/low growth
- unfolding of fiscal consolidation; widening of ECB activity – important transitory
role; slow build-up of EFSF/ESM (role vis-a-vis banking system and sovereign
debt); Greek default – contagion effects – ‘ring-fencing’; access to capital markets
will remain/become very problematic for a range of countries (IT,SP,PO,GR,HU,
Ro,...)
 Political issues:
- How are polities going to react? espec. in high austerity countries
- Technocratic handling of the crisis; reaction against MerkMontozy; tensions in
and towards inter-governmental processes; reactions in national
parliaments/polities; field for populist/nationalist parties; little debate on alternative
strategies
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What is the predicament of Europe’s ‘periphery’?
 In many countries (Southern and Eastern periphery) high debt levels of private
sectors (corporate and household sectors) – deleveraging processes; public
sector debt has significantly increased
 Foreign banks in retrenchment – credit constraints severe; cross-border
banking goes through a process of re-nationalisation
 Current accounts adjust strongly – mechanisms different in fix- and flex-exchange
rate countries; big differences across countries in underlying strength of export
sector; in a range of economies strong legacy of distorted tradable/nontradable sector structures
 The strong slowing down/contraction of German, Italian etc. growth affects
peripheral region strongly

FDI and inward capital flows sharply down – ‘catching-up model’ (‘downhill
capital flows’) will have to be significantly rethought (stronger focus on industrial
policy; emphasis on tradable sector; less reliance on fixed exch. regimes; EMU?)
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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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Is the Eurozone/the EU likely to disintegrate?
 Analytical approaches to this question: Bolton/Roland; Alesina et al; Rodrik
- heterogeneity issues; impact of international liberalisation; importance of EU
wide public goods (and scale effects in their supply); problems with transfer
Union; role of mobility

2008-2012 crisis is an historical threshold event for the EU:
- weakness of the institutional/policy set-up has become very apparent
- a large number of institutional reforms are emerging: fiscal policy
frameworks (‘fiscal compact’; six-pack); EU wide regulation and supervision;
increased tax base of EU?; evolution of crisis and risk management
(EFSF/ESM; Bank Risk Fund?; sovereign default procedures); widening of ECB
mandate also de jure?
 Political commitment of European elites (is it changing?); popular resentment
towards crisis management/technocratic/legitimacy issues
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‘... As it is, men have devised ways to impoverish
themselves and one another; and prefer collective
animosities to individual happiness.’
J.M. Keynes: The Economic Consequences of the
Peace, 1920
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Economic Integration and Emerging Economies:
Main lines of the argument
 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 buildup of imbalances
 Impact on distorting economic structures (domestic savings
behaviour, capital allocations across tradable/non-tradable
sectors, asset prices, competitiveness, 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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Comparing emerging market economies (EMEs)
 European EMEs:
CE-5; B-SEE (B-3, SEE-2; WB-6); EU-COH; Turkey
 Non-European EMEs:
ASIA-6 (w/o China, India); LATAM-8; MENA-6 (non-oil)
 Focus areas: specific characteristics of European integration;
European vs. global capital market integration; evolution of
disequilibria; policy environment and policy choices
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Comparing emerging market economies (EMEs)
 CE-5: Czech Republic, Hungary, Poland, Slovakia, Slovenia
 B-3: Estonia, Latvia, Lithuania
 SEE-2: Bulgaria, Romania
 WB-6: Albania, Bosnia and Herzegovina, Croatia,
Former Yugoslav Republic of Macedonia, Montenegro, Serbia
 B-SEE: B-3 + SEE-2 + WB-6
 EU-COH: Greece, Portugal, Spain, Ireland
 Turkey
 ASIA-6: Indonesia, Korea, Malaysia, Philippines, Taiwan, Thailand
 LATAM-8: Argentina, Brazil, Chile, Columbia, Ecuador, Mexico, Peru,
Uruguay
 MENA-6: Egypt, Jordan, Lebanon, Morocco, Syria, Tunisia
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Capital market integration and emerging economies
 The question of ‘downhill’ vs. ‘uphill’ capital flows in the global
economy (see e.g. Prasad/Rajan/Subramanian, 2006;
Gourinchas/Jeanne, 2009; Abiad/Leigh/Mody, 2009)
 The issue of financial and monetary integration and catching-up
economies (‘threshold’ effects, ‘institutional anchoring’)
 The nature of external disequilibria and the composition of capital
(in)flows; role of exchange rate regimes
 Which disequilibria are ‘sustainable’ and under which external
circumstances?
 The available spaces for policy choices
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The European integration model of catching-up
 targeted at 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, 1995-2010, in %
LATAM-8
ASIA-6
MENA-6
EU-COH
CE-5
SEE-2
B-3
WB-6
TR
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
av. 1995-2002
av. 2002-2008
Source: IMF World Economic Outlook, October 2010.
EBRD and wiiw Annual Database incorporating national statistics, Eurostat..
av. 2008-2010
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Quarterly GDP developments
3rd quarter 2008 = 100
LATAM-8
ASIA-6
EU-15
EU-COH
CE-5
SEE-2 + HR
B3
MENA-6
ASIA-6
LATAM-8
110.0
MENA-6
105.0
CE-5
100.0
EU-COH
95.0
SEE-2 + HR
90.0
B-3
85.0
Source: Eurostat, wiiw calculations.
2010Q4
2010Q3
2010Q2
2010Q1
2009Q4
2009Q3
2009Q2
2009Q1
2008Q4
2008Q3
2008Q2
2008Q1
2007Q4
2007Q3
2007Q2
2007Q1
2006Q4
2006Q3
2006Q2
2006Q1
2005Q4
2005Q3
2005Q2
2005Q1
80.0
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Differentiating features of EMEs
 Degree of openness:
- trade integration; financial market integration
 Private sector borrowing and debt
 External disequilibria: current accounts, composition of capital
flows; real exchange rate developments
 Sectoral ‘distortions’ (tradable/non-tradable sectors); FDI
allocation
 Fiscal policy during the crisis; public debt development
 Recovery from the crisis: level and trend effects
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Openness indicators: trade and financial integration, 2007
in % of GDP
LATAM-8
150.0
ASIA-6
MENA-6
300.0
CE-5
SEE-2
B-3
WB-6
TR
300.0
250.0
100.0
EU-COH
250.0
200.0
200.0
150.0
150.0
100.0
100.0
50.0
50.0
50.0
0.0
0.0
Exports plus Imports
Exports plus Imports
0.0
Assets and liablities
Assets and liablities
Note: Assets and liabilities: EU-COH: 618.1%; ASIA-6 excl. Taiwan, MENA-6 excl. Lebanon.
Source: IMF International Financial Statistics.
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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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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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Industrial Production - Index
1993=100, 2000, 2008
1993
2000
2008
250.0
200.0
150.0
100.0
50.0
0.0
LATAM-8
ASIA-6
MENA-6
EU-COH
CE-5
B-SEE
Note: ASIA-6 excl. Taiwan. B-SEE excl. Bosnia and Herzegovina, Montenegro and Serbia.
Source: World Bank.
TR
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Change in openness to trade, 1995-2008
in % of GDP (percentage point change)
Source: IMF International Financial Statistics.
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Summarizing some of the features of European EMEs
compared to other EMEs
 High growth prior to the crisis
 High indicators for openness: trade and particularly strong growth
in international financial integration
 Much greater role of foreign banks in European EMEs compared
to other EMEs
 Fast growth of credit to private sector in many European EMEs
 Differences in industrial production growth and the build-up of
export capacity in different EMEs
 Next: the build-up of significant disequilibria before the crisis
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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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Real exchange rate developments, 1995 to 2010
Misalignment in the
Baltics/Balkans
70
Relative price level (percent)
1995
2010
60
2010
1995
2010
Appreciation hand-inhand with catching-up
in Central Europe
2010
2010
50
1995
40
1997
CE-5
BB-5
30
WB-5
1995
Stable real X-rate in
20 Asia post crisis
ASIA-7
LATAM-9
20
30
40
50
60
70
Relative GDP per capita at PPP (percentage points)
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Differences in the composition of FDI
Large part in
manufacturing,
infrastructure,
trade in central
Europe
Large part in real
estate, finance in
Baltic region
35
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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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Real lending NB/ECB interest rates, 2003-2010
CPI-deflated, in % p.a.
LATAM-8
ASIA-6
EU-COH
CE-5
SEE-2
B-3
WB-6
15.0
10.0
5.0
0.0
-5.0
SEE-2
EU-COH
B-3
-10.0
2003M01 2004M01 2005M01 2006M01 2007M01 2008M01 2009M01 2010M01 2011M01
Source: IMF International Financial Statistics. ASIA-6 excl. Taiwan, MENA-6 excl. Lebanon.
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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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Debt in % of GDP
Gross external debt
Public debt
Greece
200
Private debt
Ireland
1200
1000
150
800
100
600
400
50
200
0
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Portugal
Spain
250
250
200
200
150
150
100
100
50
50
0
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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Debt in % of GDP
Gross external debt
Public debt
Czech Republic
90
80
70
60
50
40
30
20
10
0
Private debt
Slovakia
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
Hungary
180
160
140
120
100
80
60
40
20
0
Croatia
140
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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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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General government balance and gross debt
(% GDP), 2000-2010
Debt
80.0
Balance
2.0
70.0
1.0
60.0
0.0
50.0
-1.0
40.0
-2.0
30.0
-3.0
20.0
CESEE
-4.0
CESEE
10.0
OECD (non-CESEE)
-5.0
OECD (non-CESEE)
CESEE: low debt (on average), even after the crisis
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2010
2008
2006
2004
2002
2010
2008
2006
2004
2002
2000
2000
-6.0
0.0
47
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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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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50
Summarizing the build-up to the crisis – differentiated
patterns in the EMEs
 Different developments amongst European EMEs
EU-Coh, CE-5, B-SEE
and compared to other EMEs
 Current account developments; real exchange rate appreciation
 Composition of net capital inflows (credits, portfolio, FDI)
 Credit growth to the private sector; low (partly negative) real
interest rates
 Public debt situation not that different between European EMEs
and other EMEs
 Clear link between private credit growth and current account
deterioration; and hence foreign debt positions
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51
The impact of the crisis and patterns of recovery
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52
Pre-crisis credit growth and GDP growth in 2009
10.0
TWN
URY
PER
LBN
THA
ARG
PHL
MYS
KOR
IDN
EGY
CHL
SYR
MEX
COL
TUN
ECU JOR
POL
GDP growth in 2009
5.0
0.0
BRA
MAR
ALB
PRT
IRL
ESP
MKD
SRB
BIH
GRC
CZE
SVK
TUR
BGR
HRV
HUN
-5.0
MNE
ROU
SVN
-10.0
EST
LTU
-15.0
LVA
-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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Pre-crisis credit growth and GDP growth in 2010
10.0
TWN
URY PER
LBN
TUR
BRA
THA
ARG
PHL
MYS
KOR
IDN
EGY
CHL
SYR
MEX
COL
SVK
MAR
TUN
POL JOR
ECU
ALB
CZE
EST
SRB LTU
MKD
PRT
BIHHUN
BGR
GDP growth in 2010
8.0
6.0
4.0
2.0
SVN
0.0
HRV
-2.0
MNE
ROU
GRC
-4.0
-60.0
IRL
ESP
LVA
-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: 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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Fiscal policy reaction: huge adjustment in CESEE
Average annual changes in total general government
expenditures, 2008-2010
Nominal per cent change
Real per cent change
2008
2009
2010
2008
2009
2010
3.7
1.4
4.1
10.3
-9.0
9.4
B-3
20.5
-4.4
1.4
6.5
-7.9
0.2
SEE-2
27.7
2.9
4.0
7.1
-12.0
-1.7
WB-6
16.8
4.5
6.0
4.7
-5.8
-2.2
EU-15
6.3
5.4
1.8
2.8
4.8
0.6
ASIA-6
14.2
6.9
4.7
7.3
5.3
1.4
LATAM-8
20.8
13.0
10.1
12.7
8.0
5.2
CE-5
Note: Nominal from data in EUR.
Source: IMF World Economic Outlook, wiiw Database and Eurostat.
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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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Summarizing the crisis impact
 Stronger impact of the crisis on European EMEs than on other
EMEs (level and – medium-term – trend effect)
 Countries with high current account deficits and high credit
growth prior to the crisis have stronger downturn
 Significant differences between ‘fixers’ and ‘floaters’ amongst
European EMEs
 Substantial pro-cyclical contraction of real government spending
in European EMEs during the downturn
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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)
 In general no meltdown of financial systems in CESEE
(advantage of the presence of foreign banks? Implies also less
socialization of private debt in CESEE – i.e. lower public debt
effects); difference to EU-Coh in which there was massive
nationalisation of private sector debt
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The outlook on recovery after the crisis
 Which pattern of recovery after the crisis? European EMEs show
level and trend effect of crisis impact
 Fiscal policy: less room for manoeuvre because of reduced
growth expectations and higher interest rates; in EU-Coh
socialisation of private debt; full blown sovereign debt crisis
 Household deleveraging process and fragile banks (lasting credit
constraint); some countries banking system on the brink
 Capital flows to European vs. non-European EMEs: pattern
reversed from before the crisis; depending on built-up debt
positions and (revised) growth expectations
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Policy space in different environments:
 Specific policy environment for European EMEs:
- no capital controls
- highly integrated financial markets; Euro-zone members or Eur anchorage
- compliance with Single Market regulations
- Maastricht criteria and Growth and Stability Pact (GSP) set fiscal criteria
 Advantages of this policy environment:
- institutional and policy anchorage for trade and production networks and
for fast growth of financial intermediation
- fast institutional and behavioural convergence
 Disadvantages:
- De facto no independent monetary policy; use of exchange rate as policy
instrument severely restricted; prone to credit/asset bubbles
- use of industrial policy restricted; other supply side policies
(education/training, labour mobility, R&D, regional) encouraged
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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; but very
high degree of financial market integration; 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?
 Scope for counter-cyclical fiscal policy was used much less in
European CE-EMEs during crisis; post-crisis: task to restructure
public finance in growth-enhancing manner
 Current situation characterised by very fragile banking system;
protracted deleveraging processes; severe drag on recovery
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