Transcript HELLENIC REPUBLIC MINISTRY OF ECONOMY AND FINANCE

HELLENIC REPUBLIC
MINISTRY OF ECONOMY AND FINANCE
Directorate General for Economic Policy
Directorate for Macroeconomic Analysis and Forecasting
Inflation in New EU Members (1)
• Remarkable progress has been made in
bringing inflation down to single-digit
rates
• Reducing inflation from relatively low
levels to even lower ones is a difficult
task
• Inflationary pressure from high
productivity growth (the BalassaSamuelson effect) is cited as the main
reason for higher inflation
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Directorate General for Economic Policy
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Inflation in New EU Members (2)
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30
Private Consumption Deflator
20
10
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
-10
Czech Republic
Estonia
Hungary
Latvia
Lithuania
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Directorate General for Economic Policy
Poland
Slovakia
Slovenia
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Inflation in New EU Members (3)
However, the Balassa-Samuelson effect
• cannot explain alone the persistence of
inflation differentials vis-à-vis the euro area;
• is estimated within a range of 1 to 2
percentage points;
• should not be overstated when explaining
inflation rates in the new members.
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Directorate General for Economic Policy
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Inflation in New EU Members (4)
• Inflation criterion is not to be seen as an
immediate requirement, but as a mediumterm objective
• Progress in nominal and real convergence
should be pursued in parallel
• The key element of a successful strategy is to
control the sources of inflation, other than the
Balassa-Samuelson effect
• balanced monetary and fiscal policy mix
• control of real wage increases
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Directorate General for Economic Policy
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The Convergence Strategy (1)
An essential element of the strategy was its
comprehensive character:
• consisted in macroeconomic, monetary and
financial policies – structural reforms and
adjustment measures
• with central exchange rate stability criterion,
component of an approach incorporating targets
for the government balance and deficit, the
inflation rate and the interest rate
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Directorate General for Economic Policy
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The Convergence Strategy (2)
Taking into account
• the inadequate policy mixture of the late 1980s;
• the quality of the convergence criteria;
• the availability and adaptability of policy
instruments;
• the necessary consensus in the Greek society;
• the time horizon.
Greece set the tactical and strategic
priorities – disinflation policy was the key
element for the nominal convergence effort.
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Directorate General for Economic Policy
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The Greek Performance in the 1980s
The main feature of the Greek economy
in the period 1981–1992 was stagflation
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25
10%
CPI
8%
6%
20
4%
15
2%
10
GDP growth rate
0%
5
-2%
0
-4%
1980
1981
1982
1983
1984
1985
1986
1987
1988
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Directorate General for Economic Policy
1989
1990
1991
1992
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The Greek Performance in Early 1990s
By early 1990s, macroeconomic imbalances
were among the largest in all industrial
countries.
In 1991,
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•
•
•
inflation averaged 20%;
fiscal deficit to GDP ratio reached 16%;
current account deficit to GDP exceeded 8%;
real interest rates approached zero.
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Directorate General for Economic Policy
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Greek Convergence Process (1st period)
In response to the macroeconomic imbalances
and high inflation
• income policy was tightened,
• wage indexation system was abolished,
• monetary expansion was restrained
along with the
• appreciation of the real exchange rate and
• weak economic growth
inflation was reduced to low two
digit rates by 1994.
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Directorate General for Economic Policy
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Greek Convergence Process (1st period)
• Inflation’s inertia was obstructing any
further progress by 1994
• Further tightening of monetary policy in
1994 was the precursor of reorientation of
monetary and economic policy
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Greek Convergence Process (2nd period)
• In 1995, the Bank of Greece announced as the
main and central objective of the monetary
policy the deceleration of the inflation.
• HARD DRACHMA POLICY was adopted
and a specific exchange rate target was set.
The course of action consisted in two intermediate
targets:
• annual depreciation of drachma against ECU (3% in
1995; 1% in 1996);
• containing monetary expansion (the growth rate of M3)
to 7%–9%.
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Directorate General for Economic Policy
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Greek Convergence Process (2nd period)
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•
Inflation reached almost 5.5% in 1997, instead of 8.9% in
1995
Real GDP growth averaged 2.8% during 1995–1997,
instead of only 1% during 1992–1994
16
10%
CPI
14
8%
12
GDP growth rate
6%
10
4%
8
2%
6
0%
4
-2%
2
0
-4%
1993
1994
1995
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Directorate General for Economic Policy
1996
1997
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Disinflation Strategy Success
• The most significant parameters of the hard
drachma policy implementation were
psychological
• Other initiatives of Greek authorities were
facilitated by the low inflation expectations and
strengthened the inflation downward
momentum:
• measures for fiscal adjustment were activated, so as to
reduce the fiscal deficit, relative to GDP
• financial system had been almost fully deregulated
• Bank of Greece became fully independent
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Greek Convergence Process (3rd period)
The third period of the disinflation process was
largely different compared to the 1995–1997 period
in terms of tactical movements by Greek authorities
• Hard drachma policy was abandoned
• GRD joined the ERM, devaluated by 12.3% against the ECU
• The ERM strengthened credibility.
Further reduction in inflation rates was supported
by fiscal and structural measures as well as the
tactics of a temporary character.
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Greek Convergence Process (3rd period)
Short-Term Interest Rates (3 months money market)
25.0
GR
20.0
15.0
10.0
EURO AREA
5.0
0.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
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Directorate General for Economic Policy
1999
2000
2001
2002
2003
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Greek Convergence Process (3rd period)
Bilateral Exchange Rate (GRD/EURO)
350.0
300.0
250.0
200.0
150.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
MINISTRY OF ECONOMY AND FINANCE
Directorate General for Economic Policy
1999
2000
2001
2002
2003
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Greek Convergence Process (3rd period)
Apart from the strict and credible monetary strategy,
• cuts in indirect taxes
• public enterprises (utilities, transport) frozen prices
• gentleman’s agreements with commercial and industrial
enterprises as well as service providers
• adjustments in fiscal policy, so as to achieve lower deficit
ratios
• strong productivity growth
• moderate wage increases
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Directorate General for Economic Policy
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Greece on the Threshold of EMU
January 1, 2001 – Greece became the 12th member of the euro area
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25
20
Greece, CPI
15
10
5
0
1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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Directorate General for Economic Policy
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Greece on the Threshold of EMU
Long-Term Interest Rates (10-year Government bond yield)
25
GREECE
20
15
10
EURO AREA
5
0
1990
1991
1992
1993
1994
1995
GREECE
1996
1997
1998
1999
2000
2001
2002
2003
EURO AREA
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Directorate General for Economic Policy
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Greek Convergence Process (3rd period)
Apart from the strict and credible monetary strategy,
• cuts in indirect taxes
• public enterprises (utilities, transportation) frozen prices
• gentleman’s agreements with commercial and industrial
enterprises as well as service providers
• adjustments in fiscal policy, so as to achieve lower deficit
ratios
• strong productivity growth
• moderate wage increases
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Directorate General for Economic Policy
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Remarks on Greek Convergence Process
Useful lessons drawn from Greece’s successful
strategy:
• the right setting of priorities;
• safety margin maintained, when reducing interest rates;
• strengthening of financial system through the necessary
reforms;
• GRD’s time point of entry into the ERM, once significant
progress had already been made;
• political consensus for the EMU objective.
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Directorate General for Economic Policy
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The Greek Post – Euro Era
• Inflation has converged to the levels close to the EU
average
• Nominal and real interest rates have been reduced
to the EU average level
• The growth rate of GDP exceeds the EU average
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Unemployment persists (more than 10%)
Prices are high
Exports are sluggish
Current account deficit remains high
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Concluding remarks
The goal of entry into the euro area is an
ambitious one - it is necessary to start preparing
for this prospect well in advance by:
– activating policies for the nominal criteria and structural
reforms required for the real convergence in parallel and,
– implementing macro and microeconomic adjustments
necessary to join the euro area and maintain the growth
momentum.
Most of the new countries have already proceeded with
significant steps towards a succesful convergence.
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Directorate General for Economic Policy
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Thank you
for your attention