Transcript The Euro After Five Years Achievements and Challenges

Recent Development of
the Czech Economy
and
Perspective of Euro Adoption in New
Member States
Ludek Niedermayer
Czech National Bank, Prague
www.
.cz
Czech economy in 80s
• In 80s, Czechoslovakia one of the most rigid and most
heavily regulated economies in the East block;
• Level of macroeconomic stability, private savings and
credibility of the currency relatively high;
• Nominal inflation low, hidden inflation high (demand
overhang on market with state controlled prices);
• Field for the monetary policy;



limited number of banks (monobank dissolved in Nov 89);
no financial markets;
koruna not convertible, existence of limited black market.
Economic reform – January 91
•
•
•
•
•
Liberalization of prices;
Liberalization of foreign trade;
Internal convertibility of Koruna (for CA transactions);
Start of privatization;
Unification of exchange rates and introduction of fixed
rate against trade weighted basket.
• Due to weak credibility, low capital inflows, financing
through official resources at the beginning.
Results – early days
25%
20%
15%
10%
GDP
5%
Inflation
0%
-5%
1990
1991
1992
1993
1994
1995
1996
-10%
-15%
Note : In 1993, split of Czech and Slovak Federation
Note : Inflation in 1991 was 56,6%, in 1993 VAT introduction
Development in this decade
• Economy faced several problems at the end of 90s:



Growing demand, while slow change of suply side
Growing internal and external imbalances
Corporate governance problems (mainly banks)
• In May 97, CZK was forced out of semi-fixed FX
regime, since 1998 CNB adopted inflation targetting
• Privatisation of banking sector (since late 90s)
• Changes in politics, policy of promotion of FDI
New millenium - More growth …
10
8
Meziroční růst v %
• From the beginning of
decade the economy
accelerates its growth,
in spite of not always
favorable external
conditions;
• Export and investments
are leaders of growth in
2006, consumption (and
investments) growth is
picking up now.
6
4
2
0
-2
01/I III 02/I III 03/I III 04/I III 05/I III 06/I III 07/I
HDP Spotřeba domácností Fixní investice
…inflation mostly below the target …
• In 2006 (1-3 Q) inflation is pulled up
by regulated prices and energies,
net inflation is still low;
• In 2007 (1- 3 Q) inflation still below
the target but heading up, recently
4% y-o-y (food, energy);
• In 2008, inflation will be pushed up
by increase of VAT and other taxes;
• But the monetary policy will react on
2nd round effects only, the
expecatations;
• Wages are crucial.
• Globaly, is inflation on the rise?
7.0
Meziroční inflace v %
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
1/01 5 9 1/02 5 9 1/03 5 9 1/04 5 9 1/05 5 9 1/06 5 9 1/07 5 9
…allows low nominal interest rates…
3M pribor
6,0
5,0
4,0
3,0
2,0
1,0
20070131
20070731
I.07
III.07
20060731
20060131
20050731
20050131
20040731
20040131
20030731
20030131
20020731
20020131
20010731
20010131
20000731
20000131
0,0
Swap rates (1,5,10 Y)
6
5
4
3
2
1
V.07
XI.06
IX.06
VII.06
V.06
III.06
I.06
XI.05
IX.05
VII.05
V.05
I.05
III.05
XI.04
IX.04
V.04
VII.04
III.04
0
I.04
• The inflation in this decade was
most of the time below the
target;
• Even long term interest rates
often below Euro rates,
boosting lending market;
• Low nominal rates have made
CZK financing currency for
many investors. Summer
market volatility has brought
correction;
• Market is now again expecting
appreciation;
• FX rate uncertainty is one of the
key risks of any CNB forecast.
Surplus in trade balance despite high
energy costs and growth of demand...
Current account and its components / GDP ratios (moving annual cumulations in %)
I/98 III I/99 III I/00 III I/01 III I/02 III I/03 III I/04 III I/05 III I/06 III I/07
6
4
2
0
-2
%
• Change of foreign trade balance
into surplus caused mainly by
growth of export (role of FDI);
• Current account deficit is outcome
of negative balance of income
(mostly reflects the profit of FDI).
Part of profit is reinvested, but
proportion fluctuates;
• Currently speed of growth of
exports similar to imports, but new
capacities can bring improvement;
• Market pays more attention to
external balance now.
-4
-6
-8
-10
-12
trade balance
income balance
current account
balance of services
current transfers
FDI on GDP
1998
1999
CZ
16,7
24,4
AT
6,9
7,2
DE
5,1
7,3
PT
11,7
12,7
HU
.
.
PL
.
11,7
SI
.
.
SK
6,4
.
Zdroj. Eurostat, výpočet ČNB
2000
29,6
10,8
15,7
16,9
.
13,9
.
.
2001
34,3
11,7
13,8
19,1
.
16,1
10,5
.
2002
37,7
11,2
15,1
20,7
.
15,9
11,8
22,9
2003
34,9
10,8
15,5
20,5
.
17,5
12,6
20,6
2004
37,8
.
14,2
21,6
37,0
22,7
14,3
.
2005
42,2
.
.
.
35,6
22,5
14,9
.
… good macro is pushing CZK …
55
40
50
45
35
40
USD
35
30
30
XDR
EUR (rs)
25
25
20
20070930
20061031
20051130
20041231
20040131
20030228
20020331
20010430
20000531
19990630
19980731
19970831
19960930
19951031
19941130
20
19931231
15
19930131
• Trend of CZK appreciation
continues since 90´s and is one
of key factors of low inflation;
• Pro appreciation – strong
fundamentals (including BoP
until recently), EU catch up;
• Against – sometime regional
links, low nominal interest
rates, perspective of the BoP;
• Recent financial turbulence has
caused appreciation of CZK, as
many short positions have been
cancelled.
… labour market improvement
substantial, is it just cyclical?
•
•
Unemployment falls slowly in 2005-6, share of long-term unemployment is high;
Since mid 2007, decline more evident despite of no substantial improvement of labour
market regulations;
Employment increased more than 1,7% in 2007;
Growing evidence of labour shortage in recent months, outflow of foreign workers is a
real threat;
Openness of market (access of non-residents) can compensate small flexibility of
domestic labour market;
Than, issue of outflow of foreign labour creates new risk.
•
•
•
•
Míra nezaměstnanosti a Beveridgeova křivka (sezonně očištěné údaje)
MPSV
VŠPS
140
130
120
110
8/07
100
90
80
70
1/99
60
50
40
30
360 380 400
Počet volných prac. míst
11
10
9
8
7
6
5
I/00 III I/01 III I/02 III I/03 III I/04 III I/05 III I/06 III I/07
1/07
1/06
1/03
1/05
1/02
1/01
1/00
1/04
420 440 460 480 500
Počet nezaměstnaných osob
520
540
… and fiscal policy is source of
concern…
10,0
8,0
6,0
4,0
2,0
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
0,0
20
00
• Effort to consolidate public
finance „in good times“ was
„limited“;
• EU commitment not respected;
• Since 2007, new social transfers
approved, in 2006 tax cuts;
• Reform package (tax reform
and some expenditure cuts)
effective next year, is not
primarily focused on deficit
reduction;
• After deficit reduction in 2008,
year 2009 uncertain;
• Brussels commitment should be
respected as the minimal effort.
-2,0
-4,0
-6,0
-8,0
-10,0
Conv. Prog. XI/05
Budget
Result
Result adj.
GDP
Risks for Economy
• Growth perspectives in EU source of more concern than earlier;
• Reaction of the economy on price increases next year;
• Currency appreciation – at which level it can hurt the growth?
• Problems in the field of public finance still last;
• Problems in structural sphere are not solved so far:
 Pension reform;
 Changes in health care.
• Problems on labour market (partly flexibility of labour market, set
up of social system and qualification / regional mismatch) – more
should be done;
• Education system should better respond to a „real world“.
Czech Republic, new EU states and Euro
Discussion on Euro in new EU states …
• New member countries do not have „opt out“, now more
„outs“ than „ins“; from 10 new member countries 7 planned
after EU accession to adopt Euro till the end of decade, first
already in 2007;
• Reality different, so far, only Slovenia is in Eurozone, Cyprus
and Malta will join next January;
• Some countries „changed their mind“ – issue of willingness to
do now the fiscal reform key for many states;
• In CR the discussion on Euro was not a priority :


Crown does not suffer from the lack of credibility and is stable in last
years, interest rates are not higher than in Eurozone;
Financial market offers different types of short-term FX risk
management tools.
New EU states „at glance“
• „South wing“


Small countries, only one „catching up economy;
Managed float, relatively small financial market;
• North wing


Small countries, fastly catching up, closely linked
to Scandinavia;
Currency pegs for many years;
……
• „Central Europe“




Medium size countries, „catching up economies;
All forced to leave FX anchors, currently mostly
free floaters;
More volatile economic development with periods
of divergence;
More problems with fiscal policy.
Some aggregate figures – poor and
cheap neighbors…
GPD pre capita (EU – 12)
Price level (EU – 12)
1998
1999
43,4
42,9
CZ
102,5
102,6
AT
110,3
109,1
DE
77,5
77,9
PT
44,0
44,7
HU
47,6
46,1
PL
40,3
38,2
SK
70,2
70,4
SI
Zdroj: Eurostat, výpočet ČNB.
2000
45,1
101,8
109,3
79,2
46,9
51,9
42,1
69,7
2001
47,6
104,6
109,0
80,5
49,2
57,8
41,4
70,9
2002
53,2
102,4
107,7
81,0
54,1
54,3
42,6
71,4
2003
50,0
100,6
104,2
80,2
54,0
47,6
45,8
71,7
2004
50,7
100,1
103,1
81,5
56,9
47,0
49,6
70,4
2005
55,3
100,6
103,1
81,2
59,1
54,5
51,3
70,7
2006
57,8
100,0
102,5
81,4
56,5
55,6
53,7
70,6
Growing together ? No, thanks…
• GDP cycle
symchronisation weak, as
economy started its robust
growth;
• Some benefits of both
growth or even slow down
of EU;
8
6
EU-12
CZ
4
2
0
-2
-4
01/97
01/98
01/99
01/00
01/01
01/02
01/03
01/04
01/05
01/06
Zdroj: Eurostat, výpočet ČNB.
16
12
8
• Manufacturing influenced
by German industry a lot
(car market).
4
0
-4
EU-12
-8
CZ
-12
01/99
01/00
01/01
Zdroj: Eurostat, výpočet ČNB.
01/02
01/03
01/04
01/05
01/06
01/07
Trade argument holds? Yes !
• Very strnong trade
relations;
• Similar
development in
investments side;
• Even 3rd country
firms producing
for EU market.
75
75
70
70
65
65
60
60
55
55
50
50
45
45
40
40
35
CZ
AT
DE
PT
35
CZ
SI
HU
SK
PL
30
30
1998 1999 2000 2001 2002 2003 2004 2005 2006
1998 1999 2000 2001 2002 2003 2004 2005 2006
Zdroj: IMF, výpočet ČNB.
75
75
70
70
65
65
60
60
55
55
50
50
45
45
40
40
35
CZ
AT
DE
PT
30
35
CZ
HU
SI
SK
PL
30
1998 1999 2000 2001 2002 2003 2004 2005 2006
Zdroj: IMF, výpočet ČNB.
1998 1999 2000 2001 2002 2003 2004 2005 2006
Euro dicsussion:
Economy vs. ideology
• Often divided into „nominal convergence“ (mainly Maastricht treaty
rules) and „real convergence“ (OCA).
• Fundamental and well-founded discussion on risks of FX volatility and
competitive advantages of countries that will adopt Euro, or on costs
of Euro adoption and benefits of independent monetary policy is not
too advanced;
• Many economists do not believe it can bring exact results as exact
arguments for or against could be hard to found.
• If anything matters, than it is flexibility of economy ...
• …but it should be demanded also without EMU entry…
• …and rate of flexibility is difficult to measure …
“ Real Convergence – CR “
+
• Correlation of macro indicators
growing up but still “moderate“
at maximum;
• Structure of economy different
from economies of most EU
members;
• No inprovement of the
flexibility of economy in recent
years;
• EU growth is a very strong
determinant of our economic
growth;
• Very high proportion of foreign
trade with EU (FDI as well);
• Reduction of costs on foreign
trade will accelerate economic
growth;
• Members of Eurozone grow
more slowly than „outs“;
• To fulfil the criteria can be
difficult.
• Euro adoption will solve some
domestic problems.
… rules and „new“ national
strategies are there …
• Base to access nominal convergence is the fulfillment of
Maastricht conditions;
• Real convergence is relevant for future development (cost /
benefits) of a new member of Eurozone.
• Remaining „Outs“ have various strategies – in some cases
the „first attempt“ has failed;
• Peggers are now strugling with high inflation (among other
things);
• Slovakia on its way to adopt Euro in 2009;
• For rest of the countries in our region, adoption of Euro
means more significant change of monetary policy. In
some countries, not a clear politic support.
… how are the rules applied ?…
• Case of Lithuania and Slovenia showed willingness of
Eurozone to accept new members but at the same time
illustrates that the examination is very strict;
• Next wave of Cyprus and Malta without big discussion;
• Recently more discussion about real convergence issues.
• So are new members ready?
• In general, economic situation and rate of convergence of
10 new members differs from the situation of most
countries that have created monetary union.
Balance :
CR vs. Maastricht
• Stable and safe observance of 3 % limit of public deficit
requires changes in public finances (pension reform will
can increase deficits in future too);
• Recent rigid interpretation of inflation criterion could be a
source of concerns too and requires certain level of
preparation;
• Capability to limit FX rate volatility, and pass
„successfully“ ERM II and „correctly fix FX rate“, could
be a challenge for macro policies (see Slovakia);
• Other two conditions (public debt and long term interest
rates) seem to be easier to fulfil;
• What means sustainability? Maybe we will learn soon.
New EU vs. Maastricht :
State of play
• Entry of new members into Eurozone in 2007 (Slovenia) and
in 2008 (Cyprus, Malta);
• After „Lithuania case“ more concerns among applicants, but
Cyprus treated „friendly way“;
• Baltic applicants out of game for some time due to very high
inflation;
Next on the line is Slovakia, that is more similar to other VI
4.
• Bad state of Hungarian public finances put off possibility of
quick Euro adoption in Hungary, in Poland it is not a
political priority;
• These countries do not want to stay at ERM for a long time;
• New strategy for CR (after giving up date 1/1 2008) set no
date so far, yearly autumn evaluations will continue.
[email protected]
www.cnb.cz