Transcript Expectations versus Reality: Did we get a different Euro?

Slovak Experience with
the EURO
Obligation to adopt Euro
 All NMS entered EU as Economic and monetary
union members with a derogation (not
participating in the monetary union yet)
 have to adopt euro when the Maastricht criteria were
fulfilled
 do not have an option of not adopting euro (only
Denmark and UK have an opt-out)
 commitment to adopt euro was a part of the
Accession Treaty and the referendum on EU
accession
Yes or no? – When?
2
Individual Perspective:
Costs vs. Benefits
 Legal perspective: all EU countries w/o opt-out should
strive to improve nominal convergence, meet Maastricht
criteria and adopt €
 But in practice countries intentionally do not meet the
criteria
 Individual country can effectively chose whether/when it
wants to adopt the euro
 ideally compare costs and benefits
 may compensate losers
 eventually political decision
3
Maastricht Criteria Outlook
Inflation
Deficit
Debt
Int. rate
Exch.
rate
2013
2014
2013
2014
2013
2014
2013
2013
CZ
1.9
1.2
-4.4
-3.0
48.3
50.1
2.2
-3.6/3.8
HR
3.1
2.0
-4.7
-5.4
57.9
62.5
5.0
-1.3/1.8
HU
2.6
3.1
-1.9
-3.3
79.7
78.9
6.7
-9.0/8.3
PL
1.4
2.0
-3.9
-4.1
57.5
58.9
4.3
-7.6/5.8
LV
1.4
2.1
-1,2
-0.9
43.2
40.1
3.7
-1.0/1.0
LT
2.1
2.7
-3.2
-2.4
40.1
39.4
4.3
0.0/0.0
BG
2.0
2.6
-1.3
-1.3
17.9
20.3
3.8
0.0/0.0
RO
4.3
3.1
-2.9
-2.4
38.6
38.5
6.3
-5.1/6.0
DK
1.1
1.6
-4.0
-2.7
45.0
46.4
1.3
0.0/0.4
SE
0.9
1.4
-0.5
-0.4
40.7
39.0
1.6
-5.0/6.2
UK
2.8
2.5
-6.3
-6.3
95.5
98.7
1.6
-7.2/6.6
source: European Commission, ECB, NBS calculations
4
Maastricht Criteria Simulation
Inflation
Deficit
Debt
Int. rate
Exch. rat
2013
2014
2013
2014
2013
2014
2013
2013
AT
2,0
1,8
-2,2
-1,8
73,8
73,7
1,9
€
BE
1,3
1,6
-2,9
-3,1
101,4
102,1
2,4
€
CY
1,0
1,2
-6,5
-8,4
109,5
124,0
7,0
€
EE
3,6
3,1
-0,3
0,2
10,2
9,6
-
€
FI
2,4
2,2
-1,8
-1,5
56,2
57,7
1,7
€
FR
1,2
1,7
-3,9
-4,2
94,0
96,2
2,1
€
DE
1,8
1,6
-0,2
0,0
81,1
78,6
1,4
€
GR
-0,8
-0,4
-3,8
-2,6
175,2
175,0
16,8
€
IE
1,3
1,3
-7,5
-4,3
123,3
119,5
4,8
€
IT
1,6
1,5
-2,9
-2,5
131,4
132,2
4,9
€
LU
1,9
1,7
-0,2
-0,4
23,4
25,2
1,6
€
MT
1,9
1,9
-3,7
-3,6
73,9
74,9
3,8
€
NL
2,8
1,5
-3,6
-3,6
74,6
75,8
1,7
€
PT
0,7
1,0
-5,5
-4,0
123,0
124,3
7,8
€
SK
1,9
2,0
-3,0
-3,1
54,6
56,7
3,9
€
SI
2,2
1,4
-5,3
-4,9
61,0
66,5
5,6
€
ES
1,5
0,8
-6,5
-7,0
source: Eurostat, European Commission, NBS calculations
91,3
96,8
5,6
€
5
Although in most non-EA NMS nominal convergence
criteria are fulfilled or within reach, a wait-and-see
approach seems to prevail
Initial target Date of setting target Current position
BG 2010
2004-Pre-accesion
No target date
Economic program
CZ 2009/2010 2003-Czech Republic No target date
Euro acces.strategy
HU 2008
2003-Pre-accesion
No target date
economic programme
PL
2008/2009 2003-Pre accesion
No target date
economic programme
RO 2014
2007- Convergence
No target date
programme
The opportunities provided by euro adoption
became less obvious and costs more apparent..
• The advantage of lower borroving costs can no
longer be taken for granted:
- lower pre-crisis risk premia appear now to
have been largely the result of widespread
mispricing of risk at the time
- markets started again to evaluate risk on a
country-by-country basis (NMS have lower CDS
spreads than ES, IT,PT )
• Slugish growth in the EA renders enhanced trade
intergation less beneficial
• There are now direct costs associated with the
sovereign debt crisis and setup of crisis resolution
mechanisms – politically difficult to justify to general
public contributions made to the benefit of relatively
richer countries
Maastricht Criteria Assessment
 The criteria do not tell a country when it is ready
– they tell the current euro area members when a
potential entrant may be a danger to the club
 Fiscal policy is the most important test
 Criteria not binding after euro adoption
 Missing long-term perspective (or vague
“sustainability” test)
 Only nominal criteria, no real ones
9
Criticism of the Criteria
 Inflation
 why based on EU countries and not euro area (or ECB target)?
 gets tighter with EU expansion
 not fair to transition countries
 sustainability not well defined
 Government finances
 60% and 3% thresholds are arbitrary
 weak enforcement of the rules
 Exchange rate
 not clear what is “severe tensions”
 subject to attacks
 interaction with inflation criterion
 Interest rate
 what to do whit countries that have no debt?
10
Are Maastricht criteria enough?
• Recent years´ experience has substantially
altered the approach to euro adoption
-
-
before the crisis the opinion prevailed that meeting nominal criteria was
enough to prove the eligibility for/ compatibility with EA. Economist even
debated the excessive severity of the nominal criteria and the conflict
between their fulfilment and real convergence progress ( Buitter and Grafe
2002, Szapary 2001, Kopits 1999 )
During the crisis, it become obvious that the Maastricht criteria are not
enough to ensure succesful EA membership. Nominal convergence criteria
cannot be sustainably met unless competitivness,financial stability and
fiscal equilibrium are ensured. Real convergence criteria came to the
forefront.
Political vs. Economic Decision
 Ultimately, Euro adoption is a political decision
 Non-economic factors may be important
 history of legacy currency
 national pride
 geopolitical issues
 …
 but economic factors should nevertheless have
important weight in the decision
 without broad political support euro adoption will be
much more costly
12
Theory: Optimum Currency Area
 If two or more countries form a monetary union, they
may be hit by asymmetric shocks. The monetary union
will be more beneficial if:
 labor is mobile across borders (legislative barriers,
language barriers, culture, housing …)
 capital is mobile across borders
 wages and prices are flexible
 fiscal transfers are available
 business cycles are synchronized (asymmetric shocks
unlikely)
13
Benefits are not Distributed
Evenly
 Small countries
 Open economies (trading mostly
in €)
 Countries with flexible prices and
wages, labour mobility
 Countries with synchronized
economic cycles and shocks
tend
to benefit
more
(experience
confirms
theory)
14
350%
LU
300%
250%
DE
IT
UK FR
10000000
ES
SK
BE HU
CZ
NL
IE BG
AT
SE
DK
FI
PL RO PT
GR
1000000
Size of the economy (mil. PPS)
100000
200%
MT
EE
SI
LT
150%
100%
CY
LV
50%
10000
Trade openness (Ex+Im, % GDP)
Euro Ready?
0%
1000
Source: Eurostat
15
1
SI
ES
FR
DE
FI
IT
NL
SE
LU
PT
EE
LV
0,9
BE
CZ
AT
DK
UK
SK
PL
0,8
0,7
0,6
IE
0,5
LT
Correlation of cycles
Euro Ready?
0,4
0,3
GR
0,2
HU
0,1
0
180
160
140
Ease of Employing Workers
120
100
80
60
40
20
0
Source: World Bank – Doing Business 2009, Eurostat, Own calculations
16
Synchronization of Business Cycle
Real GDP Growth (%)
Correlation 0.87 since 2002
Source: Eurostat – seasonally adjusted, NBS calculation.
17
Slovak Example – Ex-Ante
financial
transaction costs
administrative
transaction costs
benefits
exchange rate
risks
long-run GDP increase by 7-20 %
costs
currency
conversion costs*
loss of
independent
(% GDP)
monetary policy
* for comparability with permanent effects the one-off conversion costs are
Source: NBS.
split to 5 annual installments
0
0,1
0,2
0,3
0,4
18
Benefits of Euro Adoption
• Direct (immediate) benefits
 elimination of exchange rate risk
against euro
 lower costs of capital
 elimination of some transaction
costs
 better resistance to (currency)
crises
 lower exchange rate risk against
USD
 higher price transparency
• Indirect (long-term) benefits
 trade growth
 increase of FDI
 faster growth / increase of living
standards / progress in real
convergence
19
Costs of Euro Adoption
 Technical costs of currency changeover
 Banking sector losses
 Loss of independent monetary policy – loss of an
instrument for stabilization of the economy
 Likelihood of moderately higher inflation in
transition countries
20
Immediate Inflation Effect
 NBS studied the “changeover inflation effect” in
January 2009
 5 different methods
 Estimates range 0.12-0.19%
 If price decreases are allowed average changeover
effect is 0.0%
 Similar results by Eurostat and MoF
 Caveat: identification of the changeover effect is ambiguous and there
is no standard methodology
21
Current view on the euro effects
in Slovakia
 Most direct benefits have materialised: transaction costs
declined, debt financing is easier (cheaper), exchange rate risks
were eliminated
 The global recession strengthened the role of the euro
as an insurance against the financial crisis (in the 1st phase)
 Indirect benefits (higher FDI, trade growth, GDP growth)
not visible – the effect of the crisis is much stronger than
the monetary integration effect
 The euro area debt crisis introduced additional entry costs
related to contagion and contributions to the EFSF and ESM
22
Key milestones on the recent
Slovak path to real convergence
(GDP per capita in PPS, % vs Czech)
0%
-3%
-5%
-5%
-18%
-20%
-21%
f
20
13
20
12
20
11
20
10
20
09
20
08
2004-06: structural
reforms, FDI boom
20
06
20
03
-27%
20
05
20
02
-27%
20
04
-27%
-30%
20
01
2009: euro
adopted
-24%
-25%
-27%
-9%
-12%
2003: Strategy of
asap euro
adoption
20
07
-15%
-9%
-10%
-10%
Source: Eurostat, VÚB
23
For Slovakia, preparation for Euro adoption was indeed a key
driver accelerating both growth and reform process
In small open economies,
exchange rate is not a key driver
for stimulating growth
GDP per capita in PPS (EU28=100)
Euro-tied Slovakia did the best in real converges of the three smaller V4 countries
90
85
80
75
70
65
60
55
50
45
40
Real GDP per capita development in V4 region
CR
SR
PL
HU
f
01 002 003 004 005 006 007 008 009 010 011 012 13
0
2
2
2
2
2
2
2
2
2
2
2
2
20
Source: Eurostat, VÚB
24
Currency Volatility
Exchange rate volatility against USD
EUR CZK GBP HUF PLN SEK
Before crisis
(1999-2006) 0,78% 0,86% 0,64% 0,89% 0,86% 0,81%
After crisis
(2009-2013) 0,81% 1,08% 0,75% 1,40% 1,29% 1,05%
10-day volatility, coefficient of variation
All non-euro floating European currencies are
more volatile after the crises, except GBP all are
more volatile against the USD than the euro
source: ECB.
25
Do we have a different Euro
now?
The crisis has show us:
• Original design of the euro has been
incomplete. Three shortcoming were acute
and contributed to debt crisis:
- Maastricht Treaty was a child of its time. It reflected
ambient overreliance on the disciplinary effects of
markets.
- Macroeconomic imbalances precede fiscal disequilibria.
But the Treaty only provide for a vague coordination of
economic policies.
- EU lacked a coherent approach to finacial sector
policies.
Reaction to the Crisis:
New Fiscal Coordination
Mechanism
European Financial Stability Fund
/ European Stability Mechanism
 explicit acknowledgement that
Euro area countries are directly
exposed to problems in other
member states
 explicit acknowledgment that
„no-bail-out rule“ was a noncredible threat
Improved governance: the 6-pack /
Fiscal compact
 strengthening Stability and
Growth Pact
– improved preventive arm
– automatic sanctions in the
excessive deficit procedure
– aim for balanced budget
 stronger national rules – e.g. debt
brakes
 new Macroeconomic imbalance
procedure
27
Reaction to the Crisis: In the
Pipeline
 Banking Union




centralized supervision of SIFIs
common supervision of all financial institutions
one resolution mechanism
one deposit insurance mechanism
 Fiscal Union




(even) more coordination
centrally planned deficits
eurobonds
still – no significant increase in transfers
 politically difficult, need to pass parliaments/referenda
28
International Role of the Euro
 international debt securities
 foreign exchange
 global reserves
2013
26%
20%
24%
2008
32%
19%
27%
------- euro trading in EU
49-63%
40-65%
29
source: ECB.
Public Support for Euro
Declining
EU average
30
source: Eurobarometer.
Instead of Conclusion
 Debt crisis is not Euro crisis
 some countries (GR) had grossly negligent fiscal policy
 some countries suffered erosion of competitiveness and need
to rebalance current accounts (PT, ES, IT)
 in some countries asset bubbles burst (IE, ES)
 Negative externalities from the crisis countries are very
expensive for the core
 The euro as a currency is not at risk
 The euro area landscape is changing – need to rethink
cost-benefit analysis
„The building of Europe is a great trasformation which will
take a very long time. Nothing would be more dangerous
31
than to regard difficulties as failures“
Jean Monnet
Debt Crisis in (some) Peripheral
Countries
 10-year government bond yields
Sept. ‘13 July ‘12
 Greece
10,1%
30,2%
 Portugal
7,1%
12,2%
 Spain
4,4%
6,3%
 Ireland
3,9%
7,4%
 Italy
4,5%
5,7%
 Slovakia
3,1%
3,6%
32
Support for the Euro
33
source: Eurobarometer
Long-term Interest Rates
%
24
21
18
15
12
9
6
3
0
1990
1992
BE
IT
PL
source: Eurostat
1994
BG
CY
PT
1996
CZ
LV
RO
1998
DK
LT
SI
2000
2002
DE
LU
SK
IE
HU
FI
2004
GR
MT
SE
2006
ES
NL
UK
2008
FR
AT
34
Long-term Interest Rates
During Crisis
%
24
21
18
15
12
9
6
3
0
2008
BE
IT
PL
2009
BG
CY
PT
2010
CZ
LV
RO
DK
LT
SI
2011
DE
LU
SK
2012
IE
HU
FI
GR
MT
SE
2013
ES
NL
UK
FR
AT
HR
35
source: Eurostat