1 klas eklund riga, january 24, 2003 the road to the eu and the euro: consequences for poland and...
TRANSCRIPT
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Klas EklundRiga, January 24, 2003
THE ROAD TO THE EU AND THE EURO:CONSEQUENCES FOR POLAND AND THE BALTIC ECONOMIES
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TOPICS
•General macro overview•Macroeconomic effects of EU
accession• Investment and migration •Policy challenges• The road to the euro• The company perspective• Institutional challenges
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GLOBAL UNCERTAINTY
• Lengthy hangover from the burst bubble - underestimated by most economists
•What potential US growth rate after the burst bubble?
•Deflation or reflation?•Will there be a war?•How long will Germany’s troubles
persist?
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THE GLOBAL ENVIRONMENT
•A wobbly international environment•Slow European growth - bleak
German performance•Volatile financial markets
•Bond yields up in 2003•Euro somewhat stronger
•Baltics and Poland must rely on own strength
- and impetus from EU convergence
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BALTICS & POLAND• Impressive shift to independence and
democracy• Credible fiscal policies, but external
vulnerability• Positive medium term growth outlook
•Potential growth rates 5-6% in Baltics, 4-5% in Poland
•Main constraints: Ageing populations in Baltics, weak public institutions, oversized public sector and imbalanced economic policy in Poland
• Fairly attractive to foreign investors• What impact of EU/EMU?
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THE EU
• Single market• Increasing trade within EU• Increasing investments• Utilising economies of scale• Higher productivity growth• Cross border transfers• But also increasing transformation
pressure and vulnerability for individual companies and sectors
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REAL CONVERGENCERatio of per capita GDP to EU average
0
25
50
75
100
125
1970 76 82 88 94 2000
SpainPortugalI relandEstoniaLatviaLithuania
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CONVERGENCE TO CONTINUE
2001 2005 2001 2005
Estonia 43 48 47 52
Latvia 33 37 54 56
Lithuania 38 42 48 49
Poland 40 42 54 58
GDP/cap level% of EU av.
Price level% of EU av.
Source: EU Commission, Nov 2002
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GROWTH PROJECTIONS FOR NEW MEMBERS 2005-2009
“Reference”No EU membershipNo changes
• “Central scenario”Integration into Internal MarketIncreasing FDISectoral shifts
• “Optimistic”Comprehensive reformsRapid sectoral shifts
2.9%
4.6%
6.1%
Source: EU Commission 2001
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FISCAL PRUDENCE - AND TRANSFERS
• Macroeconomic stability in EU presupposes strong public finances•Avoid crowding out, support low inflation and c/a
stability•Stability Pact: Balanced budgets or surpluses to
have room for stabilisation policies
• Challenge: Tax revenue •Political aim to cut taxes - while reaching
surpluses•EU harmonisation ahead - meant increasing taxes
in Club Med•EU transfers and common tariff
• Necessary: Strict budget procedures, institutional reform
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MAIN STRUCTURAL REFORMS NEEDED IN ENTERPRISE SECTORSAccording to EU Commission
Estonia
Latvia
Lithuania
Poland
• Strengthen SMEs
• Complete privatisation• Liberalise utilities• New bankruptcy law• Stamp out corruption
• Strengthen SMEs• Continue privatisation• Liberalisation of Energy• New bankruptcy law
• Strengthen SMEs• Continue privatisation• Restructure industries• Promote entrepreneurship• Revise bankruptcy law
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EUROPEAN FDI TO SPAIN AND CANDIDATE COUNTRIESBn USD
0
2
4
6
8
10
12
14
92 93 94 95 96 97 98 99
SpainEast
Source:laCaixa
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0
0,1
0,2
0,3
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
MIGRATION FROM NEW MEMBERS TO OLDAnnual migration from year 1 of membership, Per cent of home countries’ population
Source: EU Commission, 2001Note: Peak equals some 220,000 persons
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THE EMUStrengthens the single market:• Transparency, economies of scale, lower
costs• Means higher productivity and growthBut also:• Greater pressure on individual companies
through pricing• Greater difficulties in finding an optimal
stabilisation policy•Monetary policy decided in Frankfurt, fiscal policy
left on the national level
• And some risks along the road
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TIME TABLE FOR BALTICS AND POLAND• Referendum 2003• EU accession: May 2004• ERM: Autumn 2004? Maybe even spring?
•No great change for Estonia & Lithuania•But Latvia and Poland must peg to EUR
• 2005-2006: Assessment of Maastricht criteria
• EMU entry: January 2007?•Maybe 2006 if short ERM period is allowed?
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MAASTRICHT CRITERIAMembers-to-be 2001, Club Med 1994
Estonia +0.5 5 5.8 6.8Latvia -1.6 16 2.510.2Lithuania -1.9 23 1.3 6.3Poland -3.9 39 5.3 8.4Average -1.7 21 3.7 7.9Portugal -5.9 61 6.9 9.5Spain -6.7 59 5.3 10.1Italy -9.4 118 5.5 11.1Greece -10.5 109 8.9 n.aAverage -8.1 87 6.7 10.2
Budget Debt Inflation Bond deficit yields
Source: CEPS 2002
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VULNERABLE EXTERNAL POSITIONS• All four countries run c/a deficits• Dependence on FDI makes them vulnerable
to shifts in investor confidence
2000 2001 2002 2003Estonia -6.2 -6.4 -10.5 -9.5Latvia -6.9 -10.1 -9.0 -8.5Lithuania -6.0 -4.8 -6.5 -7.0Poland -6.3 -4.0 -3.7 -4.0
Source: SEB Baltic Outlook, Oct 2002
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POSSIBLE STRAINS DUE TO MAASTRICHT CRITERIA & ERM
• Criteria are nominal•Low inflation, low interest rates, low debt, low
budget deficit, stable exchange rate
• But a higher inflation is natural during the catch-up process•To fight it with appreciating currency is not
compatible with ERM - and to respond to stronger currency with low interest rates (Hungary!) may cause even higher inflation
•To fight it with tight budgets is politically difficult
• So: Nominal criteria can cause real problems
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EXCHANGE RATES
• Baltic states should not face severe problems
• Poland: A conflict between the need for a weak zloty and appreciation pressure
• Conclusion: Preserve flexibility as long as possible!
• Or persuade ECB to move straight from currency boards to the euro•Probable compromise: Keep currency boards
within ERM
• Or to adjust inflation target up
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THE NEED TO FIND THE RIGHT CONVERSION RATE
Strong currency• Slower exports - slower growth - lower
inflation - higher real rates - negative effect on asset markets - even slower growth
Weak currency• Stronger exports - stronger growth - higher
inflation - lower real rates - booming asset markets - even stronger growth
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STRATEGIC CHOICES FOR COMPANIES• Larger domestic market
•Single market and common currency will give economies of scale
• New procurement policy, aiming for the whole of EU
• Price transparency for comparable products• Sharper competition: More competitors and
pricing in common currency• Higher costs for consumer & environment
protection• Less graft & corruption. Insider contacts
less important
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WINNERS OR LOSERS?
• More joint ventures will come• Deeper integration of East European firms
into supply chains of leading Western manufacturers
• To make only operational preparations is a defensive policy for short-term survival
• An aggressive, long-term strategy means focusing on markets, competitors, products and prices
• The choice made can make the difference between survival or disaster
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CONSEQUENCES FOR BANKS
• Opportunities for cross-border business in EU
• Means also tightening competition• EU structural funds will support projects -
opportunities to participate as a co-financier
• EMU means smaller FX volume• Less volatile interest rates; devaluation
risks disappears• Potentially stronger demand for lending -
but watch out for changing credit risks!• Prepare new euro products!• Prepare systems updates!
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INSTITUTIONAL REFORMS
• More members mean today’s institutions must modernise
• The Nice treaty• The ECB• The Stability Pact• The need for institutional reform of
national fiscal policy• The Convention• The Nordic/Baltic fear of a superstate:
Let’s work together for openness!
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CONCLUSIONS
• EU membership is beneficial to growth• But a challenge to companies - and
individuals• Transformation pressure will sharpen• Prudent fiscal policy necessary• ERM is a risk• Several imbalances may result• Institutional reforms on EU and national
level will change economic policy-making• Companies face crucial strategic decisions• As do banks!