Transcript Impact of the crisis on New Member States

Adjusting Exit
Strategies to
the Needs of
New Member States
Zsolt Darvas
Workshop
'The Impact of the Crisis on the New Member
States - Non-Eurozone New Member States‘
EPP Group, CRIS Committee
9 December 2010
Impact of the crisis on New Member States
• Countries in Central and Eastern Europe (including new
EU Member States) have been hit the hardest by the crisis
among all regions of the world and recovery is weak
• Yet the “worst problems from past crises”, such as
currency overshooting, bank runs and banking system
collapse, have been avoided
• Although huge affect on average, but substantial variation
across countries
• Less benign external environment: slower growth in EU15; deleveraging; more differentiation; financial regulation;
euro-area crisis
2
Starting point: severe shock and weak
recovery in NMS
GDP, 2008 Q3 = 100 (2005 Q1–2010 Q3)
100
100
100
95
95
95
90
90
90
85
80
Poland
Slovakia
Czech Rep.
Hungary
Slovenia
85
80
2010Q1
2009Q1
2008Q1
2007Q1
2006Q1
2010Q1
2009Q1
2008Q1
2007Q1
2006Q1
2005Q1
80
75
2005Q1
75
75
Bulgaria
Romania
Estonia
Lithuania
Latvia
85
2006Q1
Asia-6
Latam-7
EU-15
NMS-10
Asia-6: Indonesia, Korea, Malaysia, Philippines, Taiwan and Thailand
Latam-7: Argentina, Brazil, Chile, Columbia, Ecuador, Mexico and Uruguay
2010Q1
105
2009Q1
105
Regions
105
2008Q1
110
2007Q1
110
2005Q1
110
Growth before the crisis
•
•
•
In the last decade the region experimented with unique
model of growth through integration into the EU
Key features
– Strong institutional anchoring
– Trade and FDI integration
– Financial integration (downhill capital flows)
– Labour mobility
Made considerable sense in view of initial conditions
– Foster institutional build-up after transition
– Substitute lack of domestic saving by foreign saving
– Make use of wealth of human capital
4
Has the growth model broken?
•
Elsewhere (Asia, Latin America) such crises in the
past decades led to major questioning and policy
changes
•
Questions :
– Was Emerging Europe wrong to rely on foreign
savings at a time other emerging economies were
doing the opposite?
– Has EU framework been a blessing or a curse?
– Wrong model or policies inadequate to the
model?
– Exit from the crisis and invigorating growth
5
Two different clusters within NMS
1. Central Europe: Czech Republic, Hungary, Poland,
Slovakia and Slovenia
2. Baltics/Balkans: Bulgaria, Estonia Latvia, Lithuania,
and Romania
• Differences across countries
– Same overall developments, but different degree
– External imbalances & indebtedness; domestic
credit booms; housing booms
– Composition of capital flows & composition of FDI
– Unit labour costs/real exchange rates
– Export performance
6
Composition of FDI
Composition of the stock of FDI
2007, percent of total stock
Latvia
CZ, HU, PL, SK,
SI
Manufacturing
9
38
Finance + Real estate
47
32
Other sectors
45
100
30
100
Unit labour costs: Latvia vs Czech
Republic (1999Q1=100)
500
450
400
500 500
450 450
400 400
Latvia
500
450
400
Czech Republic
350
350 350
350
300
300 300
300
250
250 250
250
200
200 200
200
150
150 150
150
100
100 100
100
00
02
04
06
08
Total economy
Construction (F)
Financial and business services (J_K)
00
02
04
06
08
Manufacturing (D)
Trade, transport and communication (G_I)
‘Internal devaluation’: will it work?
Average nominal monthly wages, 2001 Q1 – 2010 Q3; s.a.
20,000
16,000
20,000
Estonia
16,000
12,000
600
500
600
Latvia
500
400
400
300
300
200
200
12,000
8,000
8,000
State
Priv ate Estonian
4,000
4,000
00
01
02
03
04
05
06
07
08
09
100
10
2,800
2,400
Public sector
Priv ate sector
2,800
Lithuania
2,000
2,000
1,600
1,600
1,200
1,200
Public sector
Priv ate sector
01
02
03
04
05
06
07
08
09
10
800
800
Bulgaria
2,400
800
100
00
600
600
400
400
Public sector
Priv ate sector
200
800
00
01
02
03
04
05
06
07
08
09
10
00
01
02
03
04
05
06
07
08
09
10
200
Which were the important factors?
Some made better use of the model than other
– Overall policy mix: importance of macro stability
Other factors
– Initial conditions (significant role of development
level); geographic closeness; size
– Exchange rate regimes (floaters more successful)
– Financial regulation
– Structural policies e.g. infrastructure investment,
competition (entry) play important role in shaping
allocation of capital
– Fiscal policy
EU institutional framework: not well designed for
catching-up economies and for crisis management 10
Exit? From what?
Fiscal and monetary policies during the crisis
Fiscal policy
Monetary policy
Bulgaria
consolidation
currency board
Estonia
consolidation
currency board
Czech Republic
stimulus
loosening
Hungary
consolidation
tightening
Latvia
consolidation
quasi currency board
Lithuania
consolidation
currency board
Poland
stimulus
loosening
Slovakia
automatic stabilisers
euro
Slovenia
stimulus
euro
Romania
consolidation
tightening
11
Estonia
Bulgaria
Luxembourg
Romania
Sweden
Czech Rep.
Slovakia
Slovenia
Lithuania
Denmark
Finland
Latvia
Poland
2007
Netherlands
Cyprus
Malta
140
Spain
Austria
Germany
Hungary
UK
France
Portugal
Belgium
Ireland
Italy
Greece
General government gross debt (% GDP)
160
2012
120
100
80
60
40
20
0
Fiscal policy implications
• Fiscal sustainability was not the problem prior to the crisis
(interest rate well below growth)
• ... but pro-cyclical and little demand management to contain
pre-crisis credit growth
• Whether the recent increase in expenditure/GDP ratio will
become structural depends on GDP developments
• Key to public-debt: consolidation of private debt
• In case of risk to sustainability: prudent policies based on
conservative growth and interest rate assumptions
• But in order cases: premature fiscal consolidation while private
sector deleveraging should be avoided
• Fiscal institutions
• Role of the EU: support counter-cyclical fiscal policy and
assess fiscal sustainability, instead of focusing on the 3% target
Policies: How good the EU framework?
• Benefits of integration model conditional on national
policies
• But EU responsibility: incentivise good national policies,
help focus the policymakers’ attention on the important
• Positives
– Single market: market access, mobility of technology, capital
and labour
– EU transfers
– Institutional and policy anchoring (avoidance of costly firstorder policy mistakes)
– Crisis management initiatives (Vienna initiative, financial
assistance) – but no ECB support
14
The negatives
• No coherent growth strategy
– Instruments (structural funds) were there, but growth
policy (Lisbon) often ill-suited to emerging economies,
and ineffective
– Unused structural funds
• Fiscal focus
– Too often, implicit assumption that all what you need is
only to keep your fiscal house in order
• Too benign view of capital market integration
– Micro: risks of misallocation of capital underestimated
– Macro: destabilising capital flows and foreign currency
borrowing not considered an issue
• Fatal attraction of monetary union
– Euro membership as holy grail, rather than case-by- 15
case approach to exchange-rate regime choice
Some structural characteristics of NMS
Quality
of
institut
ions
Corrup
tion
percep
tion
Ease of
doing
busine
ss
(rank)
Market
s
Emplo
yment
rate
(%)
Quality
of the
educati
onal
system
Techno
logy
access
Absorp
tive
capacit
y
Creativ
e
capacit
y
Infrastr
ucture
Bulgaria
3.3
3.8
44
2.8
4.4
62.6
3.3
3.8
3.6
3.1
Czech R.
3.9
4.9
74
4.1
5.2
65.4
4.7
5.0
4.5
4.2
Estonia
4.9
6.6
24
4.4
5.1
63.5
4.5
5.5
4.7
4.4
Hungary
3.9
5.1
47
3.9
5.0
55.4
3.2
4.8
4.4
4.1
Latvia
4.5
4.5
27
3.8
4.9
60.9
3.7
4.5
4.5
3.7
Lithuania
4.2
4.9
26
4.2
4.8
60.1
3.7
4.7
4.5
4.0
Poland
3.6
5.0
72
2.8
4.8
59.3
3.8
4.4
4.2
3.6
Romania
3.6
3.8
55
2.6
4.7
58.6
3.6
4.2
3.8
3.4
Slovakia
3.9
4.5
42
3.6
5.2
60.2
3.4
5.0
3.9
3.6
Slovenia
4.4
6.6
53
4.5
4.5
67.5
4.4
4.6
4.9
4.4
NMS
4.0
5.0
46.4
3.7
4.9
61.4
3.8
4.6
4.3
3.8
EU-15
5.1
7.1
34.6
5.7
5.4
64.8
4.6
5.4
5.1
4.8
USA
4.9
7.5
4
6.1
6.0
70.9*
5.0
5.8
5.6
scale: from
1 to 7 in
most cases
16
5.8
Lessons to learn
• Preserve integration model of growth
– Cost of ditching it would be significant
• But reform it
– More emphasis on supply-side conditions
– More economic (less legalistic) approach of
integration
– Get the EU framework right: proper incentives &
surveillance
• Conditions for successful financial integration
• EU should support counter-cyclical fiscal policy
• Review conditions for euro membership
• Design better crisis resolution mechanism
17
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