development and crisis: the economies of former communist countries turned eu members
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Development and crisis: the economies of former communist countries turned EU members. Károly Attila Soós Institute of Economics Budapest [email protected]. Breakdown of exports by technological level , Central and Eastern Europe and „old EU”. And the crisis came. - PowerPoint PPT PresentationTRANSCRIPT
Development and crisis: the economies of former communist
countries turned EU members
Károly Attila SoósInstitute of Economics Budapest
SloveniaSlovakia
RomaniaPoland
LithuaniaHungary
EstoniaCzech R.
BulgariaEuro Area
Latvia
0 2 4 6 8
(Data in percent)Average GDP Growth Rates between 1998-2007
Bulgaria Czech RepublicEstonia HungaryLatvia Lithuania
Non-CEE PolandRomania SlovakiaSlovenia
Non-CEE, 17 countries,88.5%
measured in GDP, at purchasing power paritiesThe share of Central and Eastern European countries in the EU
Bulgaria Czech RepublicEstonia HungaryLatvia Lithuania
Non-CEE PolandRomania SlovakiaSlovenia
Non-CEE, 17 countries, 79,3%
measured in populationThe share of Central and Eastern European countries in the EU
0 10,000 20,000 30,000 40,000
AustriaGreeceFrance
Euro AreaSpain
SloveniaCzech R.
EstoniaSlovakiaHungaryLithuania
LatviaPoland
RomaniaBulgaria
Euro Area
In 2005 US dollarsPer capita GDP in purchasing power parities, in 2007
0 5 10 15
HungaryEstonia
Slovak RepublicPoland
LithuaniaCzech Republic
RomaniaLatvia
BulgariaSlovenia
AustriaSpain
GreeceFrance
(In percent, calculated on the basisof goods and services exports data in constant 2000 US Dollars)
Average annual growth of exports between 1995 and 2006
Breakdown of exports by technological level, Central and Eastern Europe and „old
EU”Technological level 1999 2007
2007 to „old EU”
„Old EU” (EU-13)
High tech 15 14 12
Medium high tech 41 40 37
Medium low tech 11 13 14Low tech 33 34 37Total 100 100 100
CEE (EU-10)
High tech 7 11 11
Medium high tech 36 40 43
Medium low tech 15 16 15Low tech 42 32 31Total 100 100 100
02
04
06
08
0
Bulgar
ia
Czech
R.
Estonia
Hunga
ry
Latvi
a
Lithu
ania
Poland
Roman
ia
Slovak
ia
Sloven
ia
Austri
a
Franc
e
Greec
e
Spain
(IIT is measured with the Grubel - Lloyd index. Horizontal IIT: less than 15%difference in price/weight; HQ VIIT: export price/weight>import p/w by more than 15%)
(Horizontal + high-quality vertical IIT [in SITC 5 to 8 products])
The share of non-inferior intra-industry tradein the trade with EU-15 in 1999 and 2007
noninferior99 noninferior07
And the crisis came
Intensive participation in Intensive participation in the international economythe international economy
Main strength before the crisis
Main weakness in the crisis
old EU
new EU
0 50 100 150exports+imports in % of GDP
EstoniaSlovenia
Slovak RepublicHungary
Czech RepublicLithuania
LatviaBulgaria
PolandRomania
GreeceFranceSpain
Austria
(Exports+imports of goods and services in percent of GDP)Openness to trade in 2006
0 20 40 60 80 100ranking in FDI inflow/GDP among 158 countries
Slovenia
Romania
Lithuania
Poland
Latvia
Slovakia
Bulgaria
Czech R.
Hungary
Estonia
0 1 2 3 4FDI inflow in percent of GDP
Slovenia
Romania
Lithuania
Poland
Latvia
Slovakia
Bulgaria
Czech R.
Hungary
Estonia
Ranking according to FDI/GDP among 158 countries (left panel)and the share of FDI in GDP (right panel)
(average data 1994-2007)
0 20 40 60 80 100
Estonia
Slovakia
Czech R.
Lithuania
Hungary
Bulgaria
Poland
Romania
Latvia
Slovenia
Foreign ownership share of the banks in 2005, in percent
High share of foreign ownership of banks
Exposure to the probably most dangerous kind of protectionism: banks are under pressure to maintain a certain level of lending at home, and they control their total lending by lending less abroad
There is anecdotal evidence on such practices.
0 20 40 60 80
Latvia
Estonia
Hungary
Lithuania
Romania
Bulgaria
Poland
Slovakia
Czech R.
Slovenia
The share of foreign currency loans in 2007,in % of total loans
Flexible exchange rates
-10 0 10 20
Czech R.
Bulgaria
Poland
Slovakia
Romania
Hungary
Lithuania
Slovenia
Estonia
Latvia
Net foreign assets in percent of GDP in 2006
020
4060
80
2000 2002 2004 2006 2008year
Hungary Poland
020
4060
80
2000 2002 2004 2006 2008year
Bulgaria Romania
020
4060
80
2000 2002 2004 2006 2008year
Estonia Latvia
Lithuania
020
4060
80
2000 2002 2004 2006 2008year
Czech R. Slovakia
Slovenia
(In 2001-2007, percent of the GDP)Pulic debt in the 10 new menber states
-4 -2 0 2 4
Bulgaria
Czech R.
Poland
Slovakia
Slovenia
Hungary
Romania
Latvia
Lithuania
Estonia
(Data in percent of GDP, average 1994-2006)
Current account balance, FDI covered andnon-FDI-covered current account deficits
current account fdi-coverednon-fdi
Severe: Estonia, Latvia, Lithuania, Romania and Hungary
Estonia, Latvia, Lithuania: rapid economic growth, asset price bubble
Hungary, Estonia, Lithuania: High level of openness to trade and FDI, including to FDI in banks
Hungary, Romania: high share of loans in foreign currency, with flexible exchange rates
Estonia, Latvia, Lithuania: hard but not „bullet-proof” (remember Argentina) peg of currency to €.
Estonia, Latvia, Lithuania, Hungary: low level of net foreign assets
LatviaLatvia
EstoniaEstonia
LithuaniaLithuania
EU totalEU total
HungaryHungary
SloveniaSlovenia
Czech R.Czech R.
BulgariaBulgaria
RomaniaRomania
PolandPoland
SlovakiaSlovakia
-8 -6 -4 -2 0 2 4
EU total
(According to the January 2009 interimforecast of the European Commission)
Expected GDP growth in 2009 and 2010
EC GDP growth forecast 2009 EC GDP growth forecast 2010
100
110
120
130
140
150
01 A
ug 0
8
01 S
ep 0
8
01 O
ct 0
8
01 N
ov 0
8
01 D
ec 0
8
01 Ja
n 09
01 F
eb 0
9
date
SFR EUR
(31 July 2009=100)
The depreciation of the Hungarian forintagainst the Euro and the Swiss franc
0 1,000 2,000 3,000
January 09
July 08
(In Hungarian forint vs. in foreign currencies, data in billion forints)
Household mortgage debt composition
in HUF in FC
0 5,000 10,000
January 09
July 08
(In Hungarian forints vs. in foreign currencies, data in billion forints)
Public debt composition
in HUF in FC
The region impact„Because we are being included in
the same pack, it makes me fear that, in the end, we will need aid. We fear that. We would like to be in a different region”(Mirek Topolanek, Prime Minister of the Czech Republic, quoted in „Western investors panic over region's bad news”, The Prague Post, 26 February 2009).
A puzzle: why does the Polish zloty behave even worse than the HUF?
60
65
70
75
HU
F/P
LN
9.5
10
10.5
11
11.5
HU
F/C
ZK
Aug2008 Oct2008 Dec2008 Feb2009 Apr2009 Month
HUF/CZK HUF/PLN
to the Czech koruna and the Polish zlotyExchange rates of the Hungarian forint
Do we need the €?Should an EU member country at a more or less low
level of real convergence and thus with a high growth potential join the Euro area?
Yes (Spain) but then overheating, asset price bubble. And a hard peg of the currency to the € (Estonia, Latvia, Lithuania) leads to similar consequences.
No (Hungary) but then the floating currency will be exposed to such fluctuations that are rather harmful for a highly open economy.
Hungary’s extremely difficult situation suggests that keeping the national currency might be the worse one of the two bad options.
A part of the troubles caused by keeping the national currency was the leeway left for the government to pursue mistaken or outright mad policies: large public sector deficits and allowing massive borrowing by housebusinesses in foreign currencies: not only in €, but mostly in SFR (!) and to some extent even in Japanese Yen!!!!!
Do we need the €?
Now, at the edge of the precipice, the Hungarian government recognises that keeping the national currency for maintaining the possibility of irresponsable policies was dangerous, and the preparation for Euro Area accession has been announced.
At the same time, the actual economic policy of the government consists of trying to hold the budget deficit below 3% of the GDP and also to reduce wage taxes (supply-side rigidities).
Conclusion
ConclusionNot all economists agree with this policy but
changing it would require the approval of the IMF and the European Commission who prevented an unfolding currency crisis by granting a loan to Hungary in in last November.
Foreseeing any kind of outcome of any national policies in the given situation would be hard. Now, developments mostly depend on events going on outside of the region