Transcript Impact of the Eurozone crisis on CEE/SEE

Impact of the Eurozone crisis on CEE/SEE
– short term and long term consequences
PERC TU Economist network workshop
Kiev
4 October 2012
Béla Galgóczi
[email protected]
Eurozone crisis 2010-2012: fundamental questions on the
nature and construct of integration within EMU and the EU
The question is not anymore just about debt and
competitiveness, but about the basic principle of
integration, the extent of fiscal intervention, sovereignty
and democracy
To illustrate this, three questions from national
perspective:
Why Slovakia (with an income level of 1/3 of Greece)
should finance a Greek bailout?
Why and to what extent the German taxpayer has
responsibility for Greece and who represents him?
Can heads of the Eurozone interfer into the sovereignty of
Greece (tell what to do..)?
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Conflicting objectives in the post-crisis period
All three questions can be justified from a national
perspective, but can have fatal consequences for the
Eurozone as a whole (and then of course back to the
national level).
Although Slovakia was right to say, this is not the Eurozone we entered, this is not an excuse. The letter of the
Maastricht Treaty did not include such scenario, but an
implicit commitment of limited fiscal sovereignty was
there from the beginning. Now this will be more explicit
and some sort of a shared fiscal authority (if not
necessarily a full fiscal union) will appear.
In that case a bailout (even in form of guarantee) involves
interference into fiscal sovereignty (tell Greece what to
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do..)
What does this mean for CEE/SEE?
Even if the EMU is in a deep crisis it is still attractive for any
small CEE economy to join (compared to being outside, it is
still a safe-heaven)
All the more so that most CEE-s do not have a fundamental
competitiveness problem (like PT or GR) where exchange
rate could help (see later)
CEE is fully docked in on the German export machine, it is
fully integrated into German value chains (has also a trade
surplus with Germany) – ‘backyard’ of Eurozone centre
But they have large foreign exchange private loans.. (see
graph and the case of Estonia)
We have to keep in mind:
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CEE and SEE countries are not yet out of the crisis
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Just to keep in mind…
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Developments in unemployment for youth and adults,
2008Q2 and 2011Q2
Note: youth: 15-24 years, adults: 25-64 years.
Source: Eurostat (2011j).
One immediate consequence: the burden of foreign
loans
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Short term consequences of the EMU crisis on CEE/SEE
Short term consequences arise from the market turbulences
Any country with less solid finances and with a level of high
external financing is affected (more difficult debt financing,
spreads on interest rates go up, bond markets dry up,
exchange rates under pressure
These are very concrete threats and can bring state finances
on brink of collapse, with depreciating currencies debt
burden of household grows (domestic demand and GDP falls
> a vicious circle can be launched)
No country can afford to go against the markets - Hungary! the IMF again around the corner (and it is still the better
option…)
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The story of two countries in brief: Hungary and Latvia
Two different cases, but the same lesson: an enduring
overdosis of austerity kills the economy and poses a threat
also to democracy.
Hungary: longest period of austerity (started at the end of
2006!) – in 2010 it led to a landslide victory of a populist
party with the election promise of ‚down with austerity‘.
Right at the beginning ‚Brussels‘ made the new government
clear: no tolerance with expansionary fiscal policy. Answer of
the government: unortodox economic policy with chaotic
results (including the infringement of basis democratic
rights), including also the most brutal Labour Code in the EU.
By 2012: the IMF is again around the corner.
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The story of two countries in brief: Hungary and Latvia
Latvia was the first EU country to turn to the IMF in 2008 and
has carried out a robust austerity programme with the
adjustment course of ‚internal devaluation‘.
Since 2007, the country has lost 30% of ist GDP, but in 2011 it
showed 5.9% growth (highest in EU).
Hence the early conclusion of the EU Commission: ‚austerity
works!‘, Latvia put as example to south-EU crisis states.
BUT: the country suffered a 30% fall in GDP (and wages and
pensions), it suffered a migration exodus, but still
unemployment is 17%.
Well, it had 5.9% GDP growth last year, BUT precisely because
from 2010 it abandoned austerity. Seeing the GDP in free fall,
the IMF was flexible enough to accept a budget deficit of 12%.
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Mid term threat: a looming EMU recession will again effect the
export sector
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Although FDI dependence was questioned in the 2009
crisis, FDI led export sector is still the strongest element of
CEE economies.
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Core CEE countries have a very high export dependence
(CZ, SK, HU over 80% of GDP), partially concentrated in
cyclical branches (automobile; electronics)
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With a recession in the Eurozone and a slowdown in
Germany this will again hit the engine of these economies
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There are no other engines (domestic demand weak
(exception Poland) /also because indebtedness of
population/, banking sector weak, government
expenditures under pressure)
There is still one advantage of CEE countries compared to
southern EMU members (PT, GR)
Beside debt the other root of the Eurozone crisis was the
degrading competitiveness of the southern periphery
While Germany had no real wage growth in a decade, unit
labour costs (ULC) fell, domestic demand remained low
ULC in other Eurozone countries surged (ES, GR, PT) they
lost export competitiveness (+ GR and PT also have
structural weakness)
Even if CEE countries had larger wage and ULC increases
then the EMU periphery, they do not have a fundamental
competitiveness problem (because wages are still low and
the FDI led export sector is competitive)
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The last decade: higher wage dynamics in CEE then in both the
core and periphery of EMU
Eurozone
in 2010
Now we examine CEE wage
developments
in the last decade,
what were the drivers and what might be the consequences?
We show real wage developments in CEE countries and in
Germany
Real wages that practically stagnated in Germany grew in CEE
countries characteristically in the range of 35-75% with
Romania outpacing all other countries with an increase of 115%
Then we show the development of unit labour costs for selected
CEE-s, Germany and two crisis countries in the Eurozone,
Greece and Portugal
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What does this mean for CEE/SEE
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Change of nominal unit labour costs relative to Germany
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Higher wage dynamics in CEE than in both the core and
periphery of EMU
Eurozone in 2010
Unit labour costs that consider the effect of productivity as well,
are widely regarded as a measure of competitiveness
The claim in the Eurozone is that divergence in nominal unit
labour costs (NULC) led to unsustainable imbalances as the
gap between Germany and countries like Greece and Portugal
widened to unsustainable levels
The above graph showed that while NULC-s grew by around 35%
in Greece and Portugal, in CEE core countries it showed an
increase between 80 and 90% and in the Baltic states between
150 and 230% (here Estonia was shown with 150%)
CEE countries had either fixed exchange rates to the Euro
(Baltics + Bulgaria) or (real effective) appreciating exchange
rates
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Higher wage dynamics in CEE not necessarily a loss of
competitiveness
Increasing nominal ULC-s normally mean losing on
competitiveness, as we see in case of the EMU periphery
Still in CEE, no comparable loss of competitiveness occurred, as
trade balances, export performance and market share gains
show (see European Commission documents, as Annual
Growth Survey, 2011)
Part of the answer comes from the nature of transformation
economies (wage levels are still a fraction of that of the EU15
as the third graph below shows). At the same time productivity
increases in the exporting manufacturing branches are much
above national average and this `productivity reserve` gives
room for upward wage convergence
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Change (in %) in real compensation, 2000-2011
Note: Simple average of annual %-change by groups of countries.
Source: AMECO (2011).
Adjusted wage share (2000-2012)
Note: The adjusted wage share is measured as compensation per employee as percentage of GDP at current factor.
Source: AMECO (2011).
What does this mean for CEE/SEE
CEE countries even if their unit labour costs were growing
relative to Germany, this did not cause a competitiveness
problem, as ULC-s in the manufacturing sector are much
lower (due to higher productivity via FDI)
Southern Europe not only loses competitiveness because of
ULC trends, but because of structural reasons: they do not
have the type of productive base (FDI bases export
potential) than what CEE-s have
This is partially due to changing FDI patterns that favoured
CEE to South Europe (SK versus PT).
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Danger for CEE economies
Lost convergence: convergence was taken for granted (and
a big promise of European integration) – now it is on the
reverse
Wage convergence is also under pressure: the ruling
doctrine (not just by DG Ecfin, but my most national
governments) is that LOW WAGES are the key to
competitiveness and even if wages are low (IN CEE they
are much LOWER then productivity when both are
compared to EU27 average),
They should be CUT even more!!
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Lessons for the region
The impacts of Euro crisis has several dimensions for
CEE/SEE
Current market turbulences may remain prolonged: this makes
pressure on debt financing and exchange rate especially in
the vulnerable countries
This together with a likely recession in the EMU worsens
growth prospects
Financial instability may increase and a new round of IMF
involvement can be the consequence
Accession chances for SEE are not directly affected but the
general uncertainty in the EMU is not helpful (might lead to a
slowdown of the process > less willingness for more
heterogenity): it is hard to imagine now to talk about the
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accession of the Ukraine seriously!
Longer term impact of the EMU crisis
EMU accession for further CEE countries does not seem to be attractive at the
moment, although this would have a stabilising effect
Entry criteria are however likely to become stricter and the appetite for further
enlargement in EMU is also shrinking
There is also an institutional problem, EU countries outside the EMU are not
part of the decision making process although the results affect them
It is at least positive that CEE countries do not have a fundamental
competitiveness problem as certain southern European crisis states have.
For the real economy, the dangers of the turbulences matter
With the slowing EMU export-led growth is again in danger
It is however important to have a competitive export potential – in CEE/SEE it
is hard to imagine to have this without FDI
Europe used to be a synonym of ‚convergence‘, catching up for CEE countries:
is this over now?
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