dg ecfin session iii: panel discussion euro and macroeconomic stability servaas deroose director dg...
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DG ECFIN
Session III: Panel discussionSession III: Panel discussionEuro and macroeconomic stabilityEuro and macroeconomic stability
Servaas DerooseServaas DerooseDirector DG ECFIN, European CommissionDirector DG ECFIN, European Commission
Conference hosted by Mr. Miroslav Kalousek, Conference hosted by Mr. Miroslav Kalousek, Minister of Finance of the Czech Republic,Minister of Finance of the Czech Republic,
November 25, 2008November 25, 2008
Ten Years of the EuroTen Years of the Euro
Inspirations for the Czech RepublicInspirations for the Czech Republic
DG ECFIN
S. Deroose, Director, Macroeconomy of the euro areaS. Deroose, Director, Macroeconomy of the euro areaEuropean Commission, Economic and European Commission, Economic and Financial AffairsFinancial Affairs
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OutlineOutline
Assessing macroeconomic stabilityAssessing macroeconomic stabilityo Domestic: from overheating to hard-landing?Domestic: from overheating to hard-landing?o Financial: Are financial systems resilient?Financial: Are financial systems resilient?o External: Are external positions sustainable?External: Are external positions sustainable?
Lessons from EMU@10 for future € Lessons from EMU@10 for future € membersmembers
o ChallengesChallenges
o Policy requirementsPolicy requirements
ConclusionConclusion
DG ECFIN
S. Deroose, Director, Macroeconomy of the euro areaS. Deroose, Director, Macroeconomy of the euro areaEuropean Commission, Economic and European Commission, Economic and Financial AffairsFinancial Affairs
3
Real convergence is advancing but Real convergence is advancing but remains a long-term challengeremains a long-term challenge
GDP per capita in 2007 (in PPS, EU=100) and average change, 2004-2007
DG ECFIN
S. Deroose, Director, Macroeconomy of the euro areaS. Deroose, Director, Macroeconomy of the euro areaEuropean Commission, Economic and European Commission, Economic and Financial AffairsFinancial Affairs
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-2
0
2
4
6
8
10
12
14
2002 2003 2004 2005 2006 2007 H1-08
Bulgaria
Estonia
Latvia
Lithuania
0
2
4
6
8
10
12
14
2002 2003 2004 2005 2006 2007 H1-08
Czech Republic
Hungary
Poland
Romania
Slovakia
Growth is slowing considerably due to global and domestic factors
(in %, y-o-y)
DG ECFIN
S. Deroose, Director, Macroeconomy of the euro areaS. Deroose, Director, Macroeconomy of the euro areaEuropean Commission, Economic and European Commission, Economic and Financial AffairsFinancial Affairs
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Price level convergence but Price level convergence but also demand pressuresalso demand pressures
-2
0
2
4
6
8
10
12
14
16
18
2002 2003 2004 2005 2006 2007 2008
reference value BulgariaEstonia LatviaLithuania -2
0
2
4
6
8
10
2002 2003 2004 2005 2006 2007 2008
reference value Czech RepublicHungary PolandRomania Slovakia
12-month average inflation (in %, y-o-y)
DG ECFIN
S. Deroose, Director, Macroeconomy of the euro areaS. Deroose, Director, Macroeconomy of the euro areaEuropean Commission, Economic and European Commission, Economic and Financial AffairsFinancial Affairs
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Financially-driven convergence – large capital Financially-driven convergence – large capital inflows and extension of external balance inflows and extension of external balance sheetssheets
NMS - External debtin percentage of GDP
0
20
40
60
80
100
120
Average 9 NMS Baltics + BG CZ HU RO PL SK
2002
2007
Source: Eurostat and Commission services and ECB
Net capital inflows (surplus on the capital account and financial account of the BoP without reserves, % of GDP)
0
5
10
15
20
25
30
NMS-9 Fixers' Floaters'
2000 2007
DG ECFIN
S. Deroose, Director, Macroeconomy of the euro areaS. Deroose, Director, Macroeconomy of the euro areaEuropean Commission, Economic and European Commission, Economic and Financial AffairsFinancial Affairs
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Very rapid financial deepening from a Very rapid financial deepening from a low base (less pronounced amongst low base (less pronounced amongst
‘floaters’)‘floaters’)
Domestic credit growth (in % of GDP)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2002 2003 2004 2005 2006 2007 H1-08
Bulgaria
Estonia
Latvia
Lithuania
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2002 2003 2004 2005 2006 2007 H1-08
Czech RepublicHungaryPolandSlovakiaRomania
DG ECFIN
S. Deroose, Director, Macroeconomy of the euro areaS. Deroose, Director, Macroeconomy of the euro areaEuropean Commission, Economic and European Commission, Economic and Financial AffairsFinancial Affairs
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Large external imbalances Large external imbalances (especially in ‘fixers’)(especially in ‘fixers’)
-25%
-20%
-15%
-10%
-5%
0%
2002 2003 2004 2005 2006 2007
Bulgaria
Estonia
Latvia
Lithuania
-25%
-20%
-15%
-10%
-5%
0%
2002 2003 2004 2005 2006 2007
Czech RepublicHungaryPolandRomaniaSlovakia
Balance on current account (in % of GDP)
DG ECFIN
S. Deroose, Director, Macroeconomy of the euro areaS. Deroose, Director, Macroeconomy of the euro areaEuropean Commission, Economic and European Commission, Economic and Financial AffairsFinancial Affairs
9
CZ
EE
LV
LT
HU
PLSK
BG
RO
-8
-6
-4
-2
0
2
4
6
0 10 20 30 40 50 60 70government debt (in % of GDP)
bu
dge
t b
alan
ce (
in %
of
GD
P)
60%
-3%
Fiscal positionsFiscal positionsExternal constraints seem to matter for fiscal performance
General government balance and government debt (in % of GDP; 2007)
DG ECFIN
S. Deroose, Director, Macroeconomy of the euro areaS. Deroose, Director, Macroeconomy of the euro areaEuropean Commission, Economic and European Commission, Economic and Financial AffairsFinancial Affairs
10
70
80
90
100
110
120
130
2002 2003 2004 2005 2006 2007 2008
BGN
EEK
LVL
LTL
↓ depreciation
70
80
90
100
110
120
130
2002 2003 2004 2005 2006 2007 2008
CZKHUF
PLNRON
SKK
↓ depreciation
Exchange rate developmentsvs. euro, monthly averages (index numbers, Jan 2007 = 100)
DG ECFIN
S. Deroose, Director, Macroeconomy of the euro areaS. Deroose, Director, Macroeconomy of the euro areaEuropean Commission, Economic and European Commission, Economic and Financial AffairsFinancial Affairs
11
Price stabilityPrice stability: equilibrium real appreciation complicates inflation control ; shorter : equilibrium real appreciation complicates inflation control ; shorter history of anti-inflation policy and lower credibility ; conflict between fiscal and history of anti-inflation policy and lower credibility ; conflict between fiscal and monetary authorities ; wage catching upmonetary authorities ; wage catching up
Effective Effective adjustment capacityadjustment capacity (incl. (incl. stabilisationstabilisation))::
To deal with shocks without exchange rate instrument (but nominal exchange To deal with shocks without exchange rate instrument (but nominal exchange rate flexibility acts also as shock propagator, hence less ‘cost’ of giving up the rate flexibility acts also as shock propagator, hence less ‘cost’ of giving up the XR instrument); XR instrument);
Relatively more frequent and persistent common shocks with asymmetric impact Relatively more frequent and persistent common shocks with asymmetric impact (exchange rates, terms of trade, shifting comparative advantages…); (exchange rates, terms of trade, shifting comparative advantages…); asymmetric shocks still possible (see Spain, Ireland, …)asymmetric shocks still possible (see Spain, Ireland, …)
Correction of large current account imbalances may require long and painful Correction of large current account imbalances may require long and painful disinflation processes if coupled with stagnating productivitydisinflation processes if coupled with stagnating productivity
EMU and financial integrationEMU and financial integration help efficient resource allocation and allow for help efficient resource allocation and allow for longer adjustment periods, but managing credit booms can be a challenge (already longer adjustment periods, but managing credit booms can be a challenge (already well before euro adoption) well before euro adoption)
Do not lose sight of Do not lose sight of long-term challengeslong-term challenges: sustain high potential growth, in a : sustain high potential growth, in a context of ageing, globalisation (with more rapid scontext of ageing, globalisation (with more rapid shifts in comparative advantages)hifts in comparative advantages)
Lessons from EMU@10 for futureLessons from EMU@10 for future euro area members euro area members (1 - challenges)(1 - challenges)
DG ECFIN
S. Deroose, Director, Macroeconomy of the euro areaS. Deroose, Director, Macroeconomy of the euro areaEuropean Commission, Economic and European Commission, Economic and Financial AffairsFinancial Affairs
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Improved budgetary control to reduce the risk of fiscal policy pro-Improved budgetary control to reduce the risk of fiscal policy pro-cyclicality; cyclicality; budgetary frameworks in NMS are less developed and budgetary frameworks in NMS are less developed and assessing cyclical component even more challengingassessing cyclical component even more challenging
Sustainability of public financesSustainability of public finances
Quality of public finances ; Quality of public finances ; bias towards current expenditure in NMSbias towards current expenditure in NMS
Flexible and integrated goods and factor marketsFlexible and integrated goods and factor markets
More efficient use of labour resources (participation rates, structural More efficient use of labour resources (participation rates, structural unemployment, skill mismatches)unemployment, skill mismatches)
Business environment and investment climate (innovation, FDI, education, Business environment and investment climate (innovation, FDI, education, favour entry /exit of firms)favour entry /exit of firms)
Growth-enhancing use of capital inflows ; Growth-enhancing use of capital inflows ; NMS are receiving huge NMS are receiving huge inflows , included EU funds; utilisation has differed a lot across inflows , included EU funds; utilisation has differed a lot across NMSNMS
Effective supervision and regulation of financial markets ; Effective supervision and regulation of financial markets ; NMS NMS experience experience accelerated financial developmentaccelerated financial development
Lessons from EMU@10 for futureLessons from EMU@10 for future
euro area members euro area members (2 – policy needs)(2 – policy needs)
DG ECFIN
S. Deroose, Director, Macroeconomy of the euro areaS. Deroose, Director, Macroeconomy of the euro areaEuropean Commission, Economic and European Commission, Economic and Financial AffairsFinancial Affairs
13
Fiscal policyFiscal policy
Fiscal policy has to balance multiple Fiscal policy has to balance multiple challenges challenges need for well-targeted public spending need for well-targeted public spending
(infrastructure, education and R&D)(infrastructure, education and R&D)vsvs fiscal policy key to rein in demand pressures and fiscal policy key to rein in demand pressures and
overheating risks, especially in fixed XR regimesoverheating risks, especially in fixed XR regimes
Preventing imbalances may require Preventing imbalances may require substantial surpluses of longer periodssubstantial surpluses of longer periods
Quality of public finances (pro-growth Quality of public finances (pro-growth priorities) priorities)
DG ECFIN
S. Deroose, Director, Macroeconomy of the euro areaS. Deroose, Director, Macroeconomy of the euro areaEuropean Commission, Economic and European Commission, Economic and Financial AffairsFinancial Affairs
14
Coping with financial Coping with financial deepening and credit growthdeepening and credit growth
Vigilance to prevent the build-up of Vigilance to prevent the build-up of imbalances and vulnerabilitiesimbalances and vulnerabilities
Prudential and administrative measuresPrudential and administrative measureso Raise minimum capital adequacy ratioRaise minimum capital adequacy ratioo Strengthen loan-loss provisioningStrengthen loan-loss provisioningo Mandatory loan-to-income or loan-to-value limitsMandatory loan-to-income or loan-to-value limits
Strengthen supervisory frameworkStrengthen supervisory frameworko Improvements in credit registersImprovements in credit registerso Strengthening risk management, expand stress Strengthening risk management, expand stress
testingtestingo Harness cross-border supervisionHarness cross-border supervision
DG ECFIN
S. Deroose, Director, Macroeconomy of the euro areaS. Deroose, Director, Macroeconomy of the euro areaEuropean Commission, Economic and European Commission, Economic and Financial AffairsFinancial Affairs
15
Structural policy implicationsStructural policy implications
Boost external competitivenessBoost external competitiveness
Ensure favourable business environment and investment Ensure favourable business environment and investment climate climate
Encourage innovation and entrepreneurship to maintain Encourage innovation and entrepreneurship to maintain competitiveness and move up the value-added chain competitiveness and move up the value-added chain
Move toward high value-added and fast-growing sectors Move toward high value-added and fast-growing sectors Sectoral composition of exportsSectoral composition of exports Productivity growth in the tradables sectorProductivity growth in the tradables sector
Enhance internal economic adjustmentEnhance internal economic adjustment
NMS will have to manage underlying structural divergences for NMS will have to manage underlying structural divergences for some timesome time
Ensure functioning of goods, services and labour marketsEnsure functioning of goods, services and labour markets labour mobility, skill development & wage flexibilitylabour mobility, skill development & wage flexibility wage setting in line with productivity gainswage setting in line with productivity gains Entrepreneurship, etc. Entrepreneurship, etc.
DG ECFIN
S. Deroose, Director, Macroeconomy of the euro areaS. Deroose, Director, Macroeconomy of the euro areaEuropean Commission, Economic and European Commission, Economic and Financial AffairsFinancial Affairs
16
ConclusionConclusion
Catching-up is proceeding but accompanied by Catching-up is proceeding but accompanied by varying imbalances varying imbalances
Euro adoption – readiness more important than Euro adoption – readiness more important than timingtiming
Ability to cope with country-specific adjustment needsAbility to cope with country-specific adjustment needs
Adequate preparation in fiscal, structural and Adequate preparation in fiscal, structural and prudential domainsprudential domains
Short-term challenges: deal with fall-out from the Short-term challenges: deal with fall-out from the financial crisis; manage orderly unwinding of financial crisis; manage orderly unwinding of imbalances among the ‘fixers’, keep progress towards imbalances among the ‘fixers’, keep progress towards convergence on track for the ‘floatersconvergence on track for the ‘floaters