Download Dubravko Radosevic PEAC Final version Brussels

Final version
Capital Account Mismanagement, Deleveraging and Unstable Economy in the European
Union Periphery Countries:
The Case of Croatia and Slovenia
By
Dubravko Radošević,
Senior Research Fellow,
The Institute of Economics Zagreb (Croatia)
February, 2014
Abstract
Both countries – Croatia and Slovenia – in many respects implemented a common
development model. The model was based on financial market deregulation, with
strong reform incentives for external liberalization. Unfettered capital flows were the
main element of this growth model, accompanied with catching-up process and
institutional anchoring to the European Union. Capital account mismanagement and
unsustainable increase of external debt led to unstable economic structures. Unstable
economies are fragile to various external shocks, increasing contagion risk and
deleveraging. Banks’ deleveraging put additional deflationary pressures, deepening
financial crisis and recession and limiting policy options for exit strategies. Inflexible
implementation of the open economy trilemma in Croatia and Slovenia - that was
applied in accordance with the standard interpretations of the open economy trilemma
theory, in particularly based on experience of the capital account mismanagement in
both countries - had unfavorable outcomes for financial systems (in) stability,
increasing systemic risk in financial systems. In conclusion we suggest rebalancing
development model and an outline of counter – cyclical policy responses.
Key words: development model, capital account (mis)management, open economy
trilemma,
financialization,
monetary
vulnerability indicators, deleveraging
JEL classification: E52, F31, F32, H62
union,
unstable
economy,
imbalances,
1. Development model: Stylized facts
Until the global crisis 2007-2008, countries of central, eastern and south-eastern Europe
(CESEE) had been implemented a specific growth model that was based on integration with
European Union. Model was based on institutional, trade and financial integration with EU.
Slovenia and Croatia had two variants of the same development model. But, what was
common was that growth was based on financial deregulation and external and internal
liberalization of national economies. It was a consequence of financialization process. We use
terms „financialization“or „finance – dominated capitalism“(see e.g., Hein (2012) for the
macroeconomics of finance - dominated growth model), financialization means the increasing
role of financial motives, financial markets, financial institutions and financial actors in the
operation of domestic and international economies, the predominance of the financial over
real sector of national economy (see e.g., Palley (2007 for a detailed explanation of
financialization process). But, model of growth led to widespread misallocation of resources,
unsustainable growth patterns and unstable economies.
The core of development model has been based on integration with the EU, including political
integration, institutional development, trade integration, financial integration and labor
mobility. Macroeconomic developments in both countries (see charts 1 – 8) indicate
unfavorable trends, as a consequence of boom – bust cycles, i.e. debt – deflation recession
accompanied with structural imbalances.
2
Chart 1. Real GDP Growth, Y/y, %
Chart 2. Inflation (HICP), y/y, %
10,0
8,0
9,0
6,0
Croatia
8,0
4,0
Slovenia
7,0
2,0
6,0
0,0
-2,0
5,0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
4,0
3,0
-4,0
Croatia
2,0
-6,0
Sloveni
-8,0
1,0
0,0
-10,0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Eurostat
Source: Eurostat
Chart 3. Fiscal Balance (ESA 95), % of GDP
Chart 4. Real Short term Interest Rates, y/y
8,000
0,0
-1,0
2009
2010
2011
2012
Croatia
7,000
-2,0
Slovenia
6,000
Croatia
-3,0
5,000
Slovenia
-4,0
4,000
-5,0
3,000
-6,0
2,000
-7,0
1,000
-8,0
0,000
2004
-9,0
2005
2006
2007
2008
2009
2010
2011
Source: Eurostat
Source: Eurostat
Chart 5. Share Price Index, Year average 2005=100
Chart 6. Real Effective Exchange Rate, Y/y
300,0
2012
5,0
250,0
Croatia
4,0
Slovenia
3,0
200,0
2,0
150,0
1,0
0,0
100,0
2000 2001 2002
2003
2004
2005 2006 2007
2008 2009
2010 2011 2012
-1,0
50,0
-2,0
Croatia
-3,0
0,0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Slovenia
-4,0
Source: Eurostat
Source: Eurostat
Chart 7. Current Account, % of GDP
Chart 8. Total FX Reserves, in millions USD
20.000
4,0
2,0
Croatia
18.000
Slovenia
16.000
0,0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
-2,0
Croatia
Slov enia
14.000
12.000
10.000
-4,0
-6,0
-8,0
8.000
6.000
4.000
2.000
-10,0
Source: Eurostat
0
2004
2005
2006
Source: Eurostat
2007
2008
2009
2010
2011
2012
2013
1.1. Capital inflows
What is important is that there were huge capital inflows before the crisis, larger than in any
other emerging region, and most countries had lost its financial independence, because
banking systems were bought up by large EU cross – border banking groups, what is a unique
feature of CESEE economies, excluding Slovenia. Deregulation and massive capital inflows
have rapidly increased gross external assets and liabilities.
While the capital inflows have been favorable for economic growth in CESEE region,
composition of inflows was unfavorable. Slovenia had capital inflows in the form of FDIs
and, after entering European Monetary Union, in external loans, while Croatia relied heavily
on external borrowing. In particular, the share of capital inflows (FDIs) in the manufacturing
sector, the key sector for realization of sustainable medium – term growth rates, was
insignificant, capital inflows fuelled excessive credit growth for consumption and imports.
Before the crisis, the magnitude of cross – border loans exceeded FDIs inflows. Cross –
border loans are more volatile the FDIs inflows and composition of capital flows mattered.
Rising external indebtedness made macroeconomic and financial sector of CESEE
economies, including Croatia and Slovenia, inherently unstable. Countries that in the precrisis period relied more on foreign loan financing, recorded more intensive withdrawal of
foreign capital during the crisis; they are more exposed to „sudden stop“ and capital reversals.
1.2. Credit growth
The main source of vulnerabilities of emerging economies was credit expansion. Financial
crises are mostly preceded by excessive credit growth in the private sector, related real
effective exchange – rate appreciation and large current account deficits. Rapid credit growth
was generally considered a sign of catching – up process with the core EU, and policy makers
were not focused on vulnerability indicators. World Bank (2007) examined the nature of the
credit expansion and the (in) stability of the financial sector under the European Union
accession process. Central banks were under the pressure to balance between financial
deepening supporting economic growth and potentially excessive credit expansion fuelling
macroeconomic and financial imbalances, leading to high degree of macroeconomic
vulnerabilities.
The pre-crisis credit growth process has been extensively studied in the literature (see e.g.,
Becker and al., (2010) for a survey of CESEE credit expansion). Both demand and supply
factors determined pre-crisis credit expansion. The demand for credit was driven by
substantial decline in real interest rates, which resulted from nominal – interest rate
convergence, as a result of EMU entry, in the case of Slovenia. The euro zone offered the
opportunity to the private sector to borrow at low rates, both domestically and externally.
Common currency and ECB monetary policy across the EMU brought interest rates down to
German levels. Since inflation has tended to be higher in the EU periphery compared to core
EU, real interest rates in the periphery have tended to be even lower, and that fueled excessive
credit expansion, rising domestic demand and growth rates of peripheral economies.
In Croatia, decline of real interest rates (on external loans or/and on domestic loans extended
by Croatian banks in foreign ownership, which are denominated in foreign exchange
currency, which led to dollarization/euroization process and currency mismatch) was result of
the historically low and declining interest rates at the international capital markets1. With
large external and foreign currency indebtedness and limited reserves, Croatia’s economy is
highly vulnerable to macroeconomic and financial shocks. While most of these vulnerabilities
were built up during the pre-crisis boom years 2000 - 2007, the debt crisis in euro zone has
further worsened the situation, exposing Croatian economy’s weak fundamentals and a lack
of policy options.
In Slovenia, supply of bank credits was fuelled by financial globalization and huge capital
inflows after Slovenia become full member of EMU, because there was a lack of foreign
exchange risk. Contagion risk was considered very low, because EMU was stable and
decision makers were not expecting debt crisis in euro zone.
In Croatia, on the supply side, in the aftermath of privatization of the banking sector that was
implemented gradually during 1998 – 2001, and the predominance of foreign banks increased
the lending capacity of banking industry. Interest rate differentials in Croatia, between high
level of domestic interest rate (necessary to support pegged exchange rate arrangement,
1
Currency mismatches (see e.g., Goldstein and Turner (2004) for a controlling the currency mismatches and risk
of instability) not only increase the vulnerability of financial systems to currency and contagion risks, but also
limits the flexibility of the exchange – rate policy in external adjustment process, because of negative balancesheet effects on various sectors of national economies. Thus, beginning from 2007 when the global crisis already
started, International Monetary Fund analyze Croatia’s overall and sectoral vulnerabilities, using the Balance
Sheet Approach (BSA), as an integral part of their yearly Article IV. Consultation reports.
5
because fixed exchange rate was the nominal anchor in disinflation process) and interest rates
at international capital markets on external loans, enabled „carry trade“ to foreign banks, and
led to rising external debt.
1.3. European monetary union and debt crisis
In a nutshell, both countries (Croatia and Slovenia) were exposed to „external debt trap“,
where the main source of vulnerabilities was excessive credit growth, although with different
patterns. Both countries went through period of financial market deregulation, rapid credit
growth mostly financed through massive capital inflows, that were not neutralized or limited
by central banks macro prudential measures or capital controls, accelerating domestic
demand, rising inflation and asset prices, declinining real interest rates, fuelling asset market
price bubbles, appreciating real exchange rates and widening current account deficits. Both
countries pursued pro-cyclical fiscal policies in the context of fixed exchange rate
arrangements. These developments resulted in financial crisis.
A key distinguishing feature of these developments in Croatia and Slovenia was EU
membership and the prospects of euro adoption. Membership in the ERM2 was not designed
as safety mechanism against financial crisis in Slovenia, but at that time welfare gains of
EMU were considered beneficial for new entrants (see e.g., Štiblar (2012) for a experience of
Slovenia with introduction of euro and implications for Croatia). Policy stance by decision
makers was that membership in the EMU such as achieved by Slovenia from January 2007
offered the best protection against asymmetric demand shocks. Monetary union also gave
much needed credibility to the monetary policy and stable credit rating of the country. The
risks of an unexpected financial crisis followed by the recession and large fiscal costs seemed
small at that point. On the grounds that stronger members of the EMU would provide support
for the weak countries, international financial markets implicitly assumed that member of the
monetary union simply would not go bankrupt. This assumption was the basis for raising the
credit ratings of the EU periphery countries in 2007, including Slovenia, to levels that were
not fully justified by economic performance and macroeconomic fundamentals. Minskian
boom – bust scenario couldn't be ruled out and macroeconomic situation could be always
aggravated by some degree of contagion from the incomplete monetary union, as it happened
in late 2009, when Portugal, Ireland, Italy, Greece and Spain (PIIGS) defaulted. Credit boom
6
was followed with the subsequent recession. Financial markets and euro zone banks failed to
asses risks appropriately.
Convergence criteria of the Maastricht Treaty which are precondition for euro adoption are
basically deflationary, because restrictive fiscal and monetary policies accompanied with
rigidity of ERM2 arrangements (fixed exchange rate and capital flows liberalization).
Convergence criteria created a great divergence between European economies, except their
bond spreads and balance of payments. But, external imbalances and declining interest rates
acted as a big push for a rising external indebtedness of weak EMU members. Before the
introduction of the euro, France was the only country with current account surplus, but after
its introduction, Germany was the only euro zone member with current account surplus and
the rest of the euro zone moved further into deficit.
Chart 9. Current Account Balances in European Union
Source: European Central Bank Statistical Warehouse
Current account deficits were financed by borrowing abroad, and the introduction of the euro
was strong incentive for European cross-border banks to start with excessive credit expansion.
At the beginning of the monetary union, financial markets used to think that national
sovereign bond are safe assets with positive upside, they underestimated contagion risk and
systemic risk for stability of European monetary union, which had central bank (ECB) with
high credibility and they did not properly make assessment of systemic financial risk of
incomplete monetary union, without crisis resolution mechanisms in place. There was,
7
however, small but significant difference in bond yield between strong and weak members of
the European monetary union after the yields converged.
Chart 10. Euro zone Ten-Year Government Bond Yields
Source: European Central Bank Statistical Warehouse
Banks were trading extensively and swapping bonds with lower yields for a bond with higher
yields, they relied more on the credibility of the European central bank, and they did not
properly estimate the risk of the bond itself. When PIIGS needed bail-out, financial markets
started to differentiate the risk of the sovereign bonds in accordance with macroeconomic
fundamentals in each country – sovereign bond issuer, and than we could see divergence in
yields, rising interest rates on huge amount of external debt in weak economies of the EMU.
Contagion risk was spread across the European monetary union triggering recession in
economies that had large current account deficits and unsustainable level of external
indebtedness. This was mechanism behind recession in Slovenia, and to lesser extent, because
it was not the member of EU and EMU, in Croatia.
1.4. The signaling role of the current account? Why it was neglected?
The current account of the balance-of-payments has very important role in preventing external
debt crises and systemic financial crises. But it was neglected during the period of rapid credit
growth and accumulation of external indebtedness. The current account is the net result of
savings and investment, public and private. An increase in current account deficit can be
8
caused by an increase in investment or a fall in savings, or any combination of these, private
and public investment and savings. Decentralized optimal decisions will led to the balance –
the current account balance – which also can be optimal. What is important in structure of
current account deficit is that the borrower is not the same market agent that is the initial
source of deficit. Under these conditions there is relation between budget and current account
deficit. This is the basis for targets - instruments approach. The private spending boom gave
rise to the current account deficit that is unsustainable. Our assumption is that there is
divergence between private and social interests or/and private agent could unsoundly evaluate
risks of external borrowing accompanied with suboptimal investment decision, and thus is
harming society as a whole. In a nutshell, current account deficit matters, it has a signaling
role in monitoring external risks. Balance-of-payment policy measures are necessary in
preventing external debt accumulation. Because, decentralized decision-making could lead to
excessive foreign borrowing from the national economy point of view. This is relevant only
once debt ratios and current account deficits exceed certain levels and particularly when
increased borrowing is for consumption rather than investment. In addition, the possibility
that private spending decisions are non-optimal and unsound has to be taken into
consideration by decision-makers, especially when there are moral hazard problems as a
consequence of financial markets deregulation (financialization).
1.5. Capital account (mis)management and impossible trinity
Capital controls can help macroeconomic policies in small open economies, because their
financial systems are inherently unstable. Different policy measures could prevent non-euro
area countries from excessive external indebtedness. These are capital controls and macro
prudential policy. After 2007 - 2008 crisis, IMF has changed its policy stance against capital
controls, which was called as „productive incoherence“, (see e.g., Grabel, (2011) and (2013)
for a „productive incoherence“, i.e. for a changing view of IMF on capital account
liberalization) EU member countries cannot rely on capital controls because single market
prohibits such measures2. Domestic policy makers in euro-area could apply macro prudential
strategies. Macro prudential strategy has to deal with supervision and bailouts to cross-border
2
There was an exception in EU single market, in the case of Cyprus bailout, when in March 27, 2013 European
Commission and European central bank advised to monetary authorities introduction of capital controls on
capital outflows, as an emergency policy response to capital flight and increasing financial system instability.
According to some economists this leads to further fragmentation of European monetary union that was already
considered as an incomplete monetary union.
9
financial flows of EU and euro-area countries. Macro prudential strategy instruments are:
counter-cyclical capital and reserve requirements; dynamic provisioning against expected
losses; controlling leverage and currency mismatches, limits on speed of lending, limits on
foreign currency denominated lending, etc. The main goal of macro prudential strategy is to
prevent capital flows that have potential to create bubbles in asset prices, including exchange
rates as well to contain capital reversals (cross-border banks' deleveraging is particularly
harmful for financial stability), i.e. capital outflows, that have potential to further destabilize
financial system.
1.6. Capital controls
As we said, capital controls can help macroeconomic policies in small open economies and
they can be implemented a market-base policy instruments. Croatia and Slovenia has resorted
to such type of policy instruments. But, Croatian monetary authorities implemented capital
controls too late, when dynamics of rapid external indebtedness growth led to unsustainable
level of debt. Commercial banks evaded these controls by redirecting the external borrowing
to direct foreign loans of corporate sector by parent banks abroad. After imposition of capital
controls, most international borrowing was done directly by corporations and it was not
intermediated by the banking system. This resulted with changes in the composition of
external debt by sectors/type of borrowers and did not prevent Croatia of coming into debt
trap. Basically, capital controls affected only the structure of external indebtedness (chart 11
and 12), but it was not efficient in relation with speed of debt increase and level of
sustainability.
Slovenia implemented capital controls long before entering EU, as a market-based instrument,
also with mixed results. But, entering into EU and ERM2 country was not allowed to use any
type of controls on free capital flows. Cross-border capital flows were unfettered and after
euro adoption, country experienced substantial interest rate convergence, with substantial
decrease of real interest rates on external debt. This was the main stimulus for borrowing
abroad and external debt rapidly increased. In both countries capital controls were not longstanding type of controls, but episodic capital controls that are mostly not efficient3.
3
Klein (2013) distinguishes between „walls“, i.e. long-standing capital controls and „gates“, i.e. episodic
controls. Author finds that „gates“ do not help with medium-run measures such as growth and currency
appreciation, but „walls“ might. The cross-country regression analysis presented in his paper provides no
evidence that episodic capital controls contribute to higher rates of GDP growth, lower appreciation, or less
build-up of positions associated with financial vulnerabilities.
10
Chart 11. Gross external debt composition of Croatia, in %
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q3
Q1
Q1
Q3
12
11
11
10
10
09
09
08
08
07
07
06
06
05
05
13
04
13
04
12
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
General Government
Monetary Authorities
Banks
Other Sectors
Direct Investment: Intercompany Lending
Source: World Bank, External Debt Statistics
Chart 12. Gross external debt composition of Slovenia, in %
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
0
20
4Q
1
20
Q3
04
20
Q
05
1
05
20
Q3
0
20
6Q
General Government
1
20
06
Q3
20
Q1
07
20
Q
07
3
08
20
Monetary Authorities
Q1
0
20
8Q
3
Banks
20
09
Q1
20
Q
09
3
10
20
Q1
1
20
Other Sectors
0Q
3
20
11
Q1
20
Q3
11
20
Q
12
1
12
20
Q3
1
20
3Q
1
20
13
Q3
Direct Investment: Intercompany Lending
Source: World Bank, External Debt Statistics
11
We have to emphasize, that capital controls can not be easily evaded, if applied in a coherent
and effective way, and they do affect cross-market premium in a sustainable way (see e.g.,
Ostry (2010) for a high level of effectiveness and non-distortionary effects of capital
controls). This was not the case with both countries, Croatia and Slovenia.
EU member countries cannot rely on capital controls because single market regulation
prohibits such measures, except in a case of Cyprus bailout. The risk of destabilizing capital
flows has to be addressed through other means, although in case of imminent
financial/liquidity crisis, countries will be able to apply linear instruments such as capital
controls on capital outflows. Regulatory measures has to deal with the issue of denomination
of lending (for non-euro area economies), balance sheet problems that are linked with
exchange rate flexibility and funding problems for commercial banks subsidiaries. EU
countries with independent monetary policy (Croatia) will have to apply monetary strategy of
gradual reduction of currency substitution (de-euroization) and to increase flexibility of
exchange rate arrangement.
In summary, we conclude that financial (de)regulation and the exchange rate regime are at the
center of capital flows experiences and financial vulnerabilities. Inflexible exchange rate
arrangements (fixed exchange rate regime or ERM2 system and irrevocably fixing exchange
rate, i.e. premature membership in monetary union) may induce vulnerabilities, which may
lead to sharp capital account reversals. Prudential regulation has important role in containing
the financial instability in small open economies and contagion risk in EU periphery
countries.
1.7. Impossible trinity
The problems with managing capital flows, i.e. capital account management, in a volatile
international capital markets have generated renewed interest of the possibility of better
navigating the Mundell-Fleming „impossible trinity“ of fixed exchange rate arrangements,
free movement of capital and the independent monetary policy. Impossible trinity, or, „open
economy trilemma“, simply posits that an economy can choose at most two of these three:
free capital flows, a fixed exchange rate and the autonomous monetary policy. Some new
views look at the standard approach to policy trilemma as too restrictive. But, the conclusion
that countries with open capital markets must choose between monetary autonomy and
exchange rate management is a centerpiece of international macroeconomics. New
12
interpretations of policy trilemma and recent evidence regarding trade-off suggest that
government can „round the corners“of the triangle representing the policy trilemma, with
intermediate policies such as softly pegged exchange rates or temporary, narrowly targeted
capital controls.
Figure 1. The open policy trilemma
For Croatia, it is the most important policy framework (see e.g., Zdunić (2011) for a standard
approach to policy trilemma implementation in Croatia). For instance, Croatia is small open
economy with fully open capital markets and tightly pegged exchange rate and it has to
forego all monetary autonomy. Thus, Croatia is in position B of „Triangle“, so called „open
pegs“; but, exit strategy should move Croatia to position A. Countries in euro zone, Slovenia
included, are at the same position in triangle (position B, „open pegs“) and for euro-area
members it is not possible to shift monetary policy on their own, because they have the
common monetary policy implemented by European central bank.
A new approach suggest that the trilemma trade-off, can be with a country having greater
monetary autonomy as it either allows more exchange rate flexibility or as it prohibits some
types of international capital flows. In a nutshell, Croatia pursued standard approach, instead
of more nuanced view of policy trilemma, at the cost of giving up a monetary autonomy,
although it is a non-euro area member. Rey (2013) declares the death of trilemma, and she
suggest that financial cycle „transforms the trilemma into a dilemma“, or „irreconcilable
duo“: independent monetary policies are possible if and only the capital account is managed.
But monetary autonomy is possible under several specific conditions (Klein and Shambaugh,
2013), they find evidence that: (1) More exchange-rate flexibility is associated with greater
13
monetary-policy autonomy, so there is some rounding of that corner of the policy trilemma;
but, (2) temporary, narrowly targeted capital controls do not enable a country with a fixed
exchange rate to have greater monetary-policy autonomy than it has under full capital
mobility; (3) widely applied, longstanding capital controls break the link between domestic
and foreign interest rates under a fixed exchange-rate system.
It is important to emphasize that monetary autonomy can not insulate country from external
shocks, but there is better policy approach to make external adjustment through flexible
exchange rate arrangements or with strong capital controls than with pegged currency and
open capital account. This is important policy lesson. Before entering euro, Croatia has policy
option to choose greater monetary autonomy with capital controls (implemented as macro
prudential strategy of the central bank), while Slovenia is not in such position.
1.8. Exchange rate policy and EMU membership
We agree with policy approach that emphasizes the choice of exchange rate arrangement as
one of the key strategic options in countries that are at the path to European monetary union.
The choice of exchange rate regime is especially important4 when capital flows are
liberalized, financial sector deregulated and central bank supervision is weak. Fixed exchange
rate arrangements associated with free cross-border capital (in) flows almost always are
behind creating asset price inflation (booms) and related instability of the financial system in
the bust. Real appreciation syndrome as a result of fixed exchange rate arrangements
associated with large capital inflows led to declining international competitiveness, especially
of the tradable sector of national economy, external imbalances, large current account deficits
and rising external debt, and boom – bust cycles. Maastricht criteria, Stability and Growth
Pact (SGP) and Fiscal Compact rules underestimated the importance of external
disequilibrium, and this is the main reason why the signaling role of the current account
deficit was not implemented as policy instrument. Several issues are important, for our
research in this regard:
4
Beyond the scope of this paper is analysis of debate „fixed versus flexible exchange rate arrangements“ (so
called, „Bipolar View“, or, „corner solutions“), because we support pragmatic approach that in a volatile
international capital markets there is a need for more flexibility, when flexible exchange rate arrangements could
be optimal choice. There is considerable evidence that inflation targeting monetary regimes countries with
flexible exchange rate arrangements performed better during the financial crisis and in the aftermath than
countries that had fixed exchange rates (see, Gagnon, 2013). The benefits of flexible rates are not limited only to
large countries. Also, we support approach that the appropriate goals of monetary strategy are stabilizing
economic output, full employment and low inflation, i.e. „nominal GDP level targeting“monetary strategy.
14
-
The choice of exchange rate arrangement in the prolonged transitional period between
entering EU (but not EMU) and participation in ERM2 mechanism (“independent
monetary policy”);
-
The choice of exchange rate arrangement between participation in ERM2 mechanism
and euro adoption (“ERM2 strategy”);
-
The implementation of external sector policies during ERM2 mechanism prior to euro
adoption for new members into EMU (EU conditionality and nominal and real
convergence process, Six pack, or, Macroeconomic Imbalance Procedure, within the
framework of European Semester (“MIP strategy”);
-
The EU policies for sustainable long-term growth and stability after the accession to
the euro area (“EMU strategy”), with special emphasis on the full employment
(internal equilibrium) and current account balance (external equilibrium).
In this regard, it is interesting to see the evolution of exchange rate arrangements in Croatia
and Slovenia (table 1.). What we can conclude from this short summary? First, both countries
relied on de iure flexible exchange rate arrangements, but de facto pegged exchange rate
regimes, or, fixed exchange rate arrangements. Pegging to the currency of the main trading
partner was a nominal anchor for disinflation. Then, as second, Slovenia moved to ERM2
arrangements as a transitional monetary strategy of nominal convergence to euro, in
accordance with Maastricht criteria, while central bank has to manage central parity of the
exchange rate, with narrow band of fluctuations in a range of +/- 15 % around central parity.
Exchange rate policy within ERM2 could be defined as similar to fixed exchange rate
arrangement. Nominal convergence criteria were accompanied with fully liberalized capital
account of the balance-of-payments and deflationary fiscal and monetary policies. Croatia
unilaterally maintained a very narrow band, which is highly inflexible, because official ERM2
band is wider5. Then, as third, adopting euro was the final phase of ERM2 arrangement, when
central parity has to be translated into conversion rate, but at the competitive level that
excludes misalignment problem (it has to be fundamental equilibrium exchange rate). Croatia
will have to follow the same pattern as Slovenia, but ERM2 arrangement should be structured
5
Central bank of Croatia unilaterally determined informal narrow band by Croatian monetary authorities which
was +/- 5 % around central parity of Croatian kuna to euro, while this band in ERM2 was +/- 15 %, because this
was the main element of accelerated euro - adoption strategy as ultimate goal of the monetary and
macroeconomic policies. But, current EU strategy does not support early euro-adoption and there is a multiyear
period of MIP and AMR procedures as prerequisites for full EMU membership.
15
in a way to allow more flexibility in counter-cyclical policies implementation. Strategy for the
adoption of euro should satisfy also the Optimal Currency Area (OCA) criteria (sustainability
of current account balance and net foreign-asset position for new member of EMU). We think
that „Macroeconomic Imbalance Procedure“ could be seen as new EU strategy that rule out
accelerated euro- area entry, and as strategy of introducing external (current account)
sustainability as additional criteria for euro adoption6. Cost – benefit approach to OCA theory
puts the stress on the macroeconomic costs, and consequently we think that keeping the
autonomy of a country’s monetary policy, both in terms of domestic (interest rate) and
external (exchange rate) aspects will enable the capacity of the policy instruments to allow
external adjustment when facing asymmetric macroeconomic shocks. It should be stressed
that ERM2 arrangement makes sense in the framework of a temporary regime that facilitates
the quick convergence and acceptance of the „out“into the euro zone. If the prospects for
quick entry by the „out“are weak then an ERM2 arrangement may be undesirable (see e.g., de
Grauwe, (2012) for the convergence requirements under the ERM2 for the new EU member
countries and how to organize relations between member and non-members of EMU).
6
In this view, we claim that the national monetary policies are effective as instruments to correct for asymmetric
shocks, be they permanent or temporary (post-Keynesian approach). This may suggest, within the framework of
cost – benefit approach to optimum currency areas, and after debt crisis in euro zone, that the costs of entering to
the monetary union (macroeconomic costs of losing monetary sovereignty) are larger than benefits
(microeconomic benefits, such as lower transactions costs, removing uncertainty on exchange rate movements,
etc).
16
Table 1. Evolution of the exchange rate arrangements
Year
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Croatia
Managed floating
Managed floating
Managed floating
Managed floating, de facto peg to euro
Managed floating, de facto peg to euro, +/- 5 %
Managed floating, de facto peg to euro, +/- 5 %
Managed floating, de facto peg to euro, +/- 5 %
Managed floating, de facto peg to euro, +/- 5 %
Managed floating, de facto peg to euro, +/- 5 %
Managed floating, de facto peg to euro, +/- 5 %
Managed floating, de facto peg to euro, +/- 5 %
Managed floating, de facto peg to euro, +/- 5 %
Managed floating, de facto peg to euro, +/- 5 %
Managed floating, de facto peg to euro, +/- 5 %
Managed floating, de facto peg to euro, +/- 5 %
Managed floating, de facto peg to euro, +/- 5 %
Managed floating, de facto peg to euro, +/- 5 %
Managed floating, de facto peg to euro, +/- 5 %
Slovenia
Managed floating, de facto peg DM/euro
Managed floating, de facto peg DM/euro
Managed floating, de facto peg DM/euro
Managed floating, de facto peg DM/euro
Managed floating, de facto peg DM/euro
Managed floating, de facto peg DM/euro
Managed floating, de facto peg DM/euro
Managed floating, de facto peg DM/euro
ERM2, narrow band
ERM2, narrow band
ERM2, narrow band
Euro
Euro
Euro
Euro
Euro
Euro
Euro
Source: International Monetary Fund, Annual Report on Exchange Arrangements and
Exchange Restrictions, various issues.
Fixed exchange rate regimes contribute significantly to making foreign loans as the main
form of capital inflows (in real estate and services sector of national economy), rather than
FDIs (in manufacturing, tradable sector of national economy). Countries experiencing fixed
exchange rate arrangements were inclined to real appreciation problem, which reinforced
capital inflows. Namely, fixed exchange rate arrangements significantly contributed to
external borrowing with negative or low interest rates for domestic borrowers, because
policy-makers commitment to the stability of exchange rate arrangements made additional
stimulus for borrowing abroad. This became self-reinforcing cycle with monetary expansion
leading to higher domestic inflation and more negative real interest rates from the prospective
of local borrowers. Since funding of the commercial banks (predominantly in foreign
ownership, such as in Croatia) was practically unlimited (funding was on the international
capital markets and from the parent banks), supply of credit was increasing as long as nominal
interest rates remains attractive. This was the mechanism of rapid increase of foreign debt and
excessive credit expansion during 2000 – 2008. With negative real interest rates, investors
looked for real assets to hedge against inflation, which fuelled pre-crisis housing boom (boom
in property prices), rapidly increasing asset price inflation, while core inflation – which was
targeted by the most central banks in emerging economies - was around optimal rate of
inflation. Most empirical research studies suggest that fixed exchange rate regimes
17
contributed to the build-up of macroeconomic imbalances and to distortions in the allocation
of capital.
After crisis started in 2008, there was intense debate about currency devaluation versus
internal devaluation. There are several key differences between two options (see e.g., Becker
et al, (2010) for the main differences between two approaches to external adjustment), i.e.: (1)
timing, since currency devaluation is immediate, while internal devaluation takes a long time;
(2) magnitude of adjustment, since currency devaluation could lead to overshooting, while
internal devaluation may not bring adequate adjustment. Internal devaluation, i.e. price and
wage cuts, may not be sufficient enough, and adjustment in the private sector will not restore
international competitiveness, but, at the same time, unemployment rate could be so huge and
rapidly increasing, (3) because labor market adjustment will mainly be felt through job losses,
rather than through changes to the average wage. In summary, internal devaluations could
prove to be unsuccessful, causing job losses and without significant contribution to
international competitiveness. External adjustment, could be a consequence of demand
contraction, not wage cuts (such as in Latvia), and after recession external imbalances could
build – up again as well increase in foreign debt. On the whole, flexible exchange rates
proved to be better shock absorbers (see e.g., Gagnon, (2013).
The choice of exchange rate regimes for Croatia is trade-off between nominal anchor strategy
versus independent monetary policy and stability versus independent monetary policy to deal
with inflation and business cycle fluctuations. Or, the choice of exchange rate regimes is
crucial for a country's capacity to adjust to international competitiveness pressures. Our
conclusion is that Croatia could opt for currency devaluation/depreciation strategy with
independent monetary policy, while Slovenia, as a full member of EMU, has to apply internal
adjustment (wage and price cuts) strategy as only possible option. Fixed exchange rate
arrangements may constrain other macroeconomic policies (beyond impossible trinity of fixed
exchange rates, free capital flows and independent monetary policy) and may lead to procyclical policies, sudden stops, debt and banking crises. Croatia is a case study of a small
open economy with fixing the exchange rate too early in the catch-up process and was stuck
with an overvalued exchange rate and large stock of private and external debt. A strategy to
deal with potentially volatile capital flows and external and private-sector imbalances should
be in place before the exchange rate is fixed in anticipation of joining the euro (see e.g.,
18
Radošević (2012) and (2012a, for a gradual approach to euro-adoption strategy for Croatia
from 2014 to 2022, after convergence criteria and OCA criteria should be met).
In the pre-accession period, Slovenia relied on an exchange rate policy that targeted a
controlled depreciation of domestic currency vis-à-vis the Deutschemark (see e.g., Bofinger
(2001) for an evaluation of such Slovenian exchange rate policy). The exchange rate targeting
in Slovenia is especially interesting7. The country never announced any target for the
exchange rate, and kept its central parity against D-Mark within a very narrow band. The
substantial increase in foreign exchange reserves from 1992 to 1998 indicates that Slovenia
was always intervening in order to prevent or an appreciation or a depreciation that was less
pronounced than targeted. In retrospect, one can see that all transition countries, including
Slovenia, with targeted exchange rate paths were able to achieve higher growth rate and avoid
financial crisis. But after entering euro zone, Slovenia has only option for external adjustment,
and this is an internal devaluation.
2. The impact of the euro crisis on EU periphery: macroeconomic imbalances,
vulnerability and deleveraging
Following the euro zone crisis, financial stability in EU periphery becomes an issue of
concern. Pre-crisis reliance of huge capital inflows and accumulated external debt created a
systemic risk in non-euro area of European Union as well in weak economies of EMU area.
Euro zone area members were hit by systemic debt crisis, which as a consequence resulted
with interest rate divergence, sharp increase of sovereign bond yields and reassessment by the
large EU cross-border banks and international credit rating agencies of credit ratings of each
country of the EU and EMU individually in accordance with their macroeconomic
fundamentals. In euro-area, banking industry started to re-evaluate macroenomic stability of
EMU members on the basis of reassement of contagion risk, because at the beginning of euro
zone debt crisis EU did not have crisis mechanisms in place. Economic consequences that an
asymmetric shock had on different members of EU and EMU were negative on stability of the
national economies and financial systems. When the financial crisis revealed weaknesses in
7
Exchange rate targeting is a strategy that targets a nominal exchange rate path. Such a strategy is conceptually
more difficult than the two corner solution, since it requires a skilful combination of the interest rate and the
exchange rate levers of monetary policy, which are used simultaneously as operating targets of the central bank.
But Slovenia had to abandon such a strategy when it applied ERM2 transitional monetary arrangement as a part
of euro - adoption strategy.
19
EMU governance, EU responded in December 2011 with new prevention and crisis resolution
governance structure and counter-cyclical policies, so called Six Packs:
2.1. Macroeconomic imbalances
A new surveillance procedure for the prevention and correction of macroeconomic
imbalances, the so called Macroeconomic Imbalance Procedure (MIP) built around two-step
approach. The first step is an alert mechanism consisting in a scoreboard with early warning
indicators put in place by the European Commission to focus on risks; in a second step, a
more in- depth analysis is undertaken in those countries identifies in Alert Mechanism Report
(AMR). The MIP scorecard consists of eleven indicators and indicative thresholds, that are
signaling device of emergence of macroeconomic imbalances in early stages (see e.g.,
European Commission, (2012) and (2012a) for MIP scorecard methodology). The scoreboard
currently consists of the following indicators and indicative thresholds:
External imbalances and competitiveness
-
three - year average of the current account balance in percent of GDP, with indicative
thresholds of + 6 % of GDP and -4 % of GDP;
-
net international investment position (NIIP) in percentage of GDP, with an indicative
threshold of – 35 % of GDP, the NIP shows the difference between country's external
financial assets and its external financial liabilities;
-
five - years percentage change of export market shares measured in values, with an
indicative threshold of – 6 %;
-
three – years percentage change in nominal unit labor cost (ULC), with an indicative
thresholds of + 9 % for euro – area members and +12 % for non – euro area countries;
-
three – year percentage change of the real effective exchange rate (REER) based on
HICP deflators, relative to 41 other industrial countries, with an indicative thresholds
of +/- 5 % for euro – area countries and +/- 11 % for non – euro area countries,
respectively;
Internal imbalances
-
private sector debt (consolidated) in percent of GDP, with an indicative threshold of
133 %;
20
-
private sector credit flow as a percentage of GDP, with an indicative threshold of 15
%;
-
year – on – year changes in deflated house prices, with an indicative threshold of 6 %;
-
public sector debt in percentage of GDP, with an indicative threshold of 60 %;
-
three – year average of the unemployment rate, with an indicative threshold of 10 %;
-
year – on – year percentage change in total financial liabilities of the financial sector,
with an indicative threshold of 16,5 %.
Both countries, Croatia and Slovenia, are under MIP and AMR 2014 procedure and we
present short summary of these reports to analyze economic impacts of global and euro zone
crisis in both national economies (see e.g., European Commission, (2013) for full AMR and
MIP reports for Croatia and Slovenia).
In the MIP scorecard for Croatia, a number of indicators are above the indicative thresholds,
namely the NIIP, losses in export market shares and unemployment rate. The negative NIIP of
close to 90 percent of GDP at the end of 2012 is mainly the result of the accumulation of
current account deficits before the global crisis. Since that, current account has gradually
adjusted to an almost balanced position in the 2012, largely reflecting depressed domestic
demand, while export performance has been weak. External adjustment is a result of
recession, not growing demand in Croatian tradable sector of economy. Large capital inflows
in the pre-crisis period resulted in the accumulation of private sector debt, although recently
the private debt ratio has been leveling off and declined slightly below the indicative
threshold at the end-2012. These two indicators (NIIP and private sector debt) support our
view on capital account mismanagement in the pre-crisis period. The share of non-performing
loans (NPLs) increased significantly since 2008 - bubble burst and financial meltdown,
mainly in the corporate sector, reflecting prolonged recession in Croatia and deflationary
pressures. Deleveraging pressures weigh on the prospects for an economic recovery. At the
same time, due to recession and lack of any growth, tax base has been contracting and public
debt to GDP is increasing. European Commission started Excessive Deficit Procedure (EDP)
for Croatia in order to achieve considerable fiscal consolidation 2014 - 2016. Unemployment
rate has increased substantially, with youth unemployment rate above 40 percent which is
particular problem.
21
For Slovenia, European Commission concluded that country was experiencing excessive
macroeconomic imbalances, particularly involving risks to financial stability. In the updated
MIP scorecard, the NIIP and losses of export market shares are beyond their indicative
thresholds. Current account adjustment was balanced as a result of weak demand. On the
internal side, the private sector debt has decreased, driven by negative credit flows (credit
crunch) to both households and non-financial corporate. The private debt is below threshold,
but is particularly weighing on firms. The adjustment in housing market has resumed, which
will depress the value of the collateral held by the banks and increase NPLs as a consequence.
The financial sector is very fragile; NPLs are rising and puts pressure on their already thin
capital buffers. Asset Quality Review (AQR/ stress tests) by the ECB was implemented to
achieve real assessment of systemic banking risk, and banking sector restructuring should be
implemented in the near future. The government sector debt is rising rapidly and will exceed
their indicative threshold by end-2013, with further potential bank recapitalizations still to
come. The unemployment is high and has continued increasing, leading to rising social costs
of the adjustment.
2.2. Vulnerability Indicators
Development model based on financial deregulation and free capital flows, contributed in
building unstable economies in EU periphery countries. International financial institutions
devised various methodologies for macroeconomic and financial instability/vulnerability
indicators, but for our purpose vulnerability indicators of the European Bank for
Reconstruction and Development (EBRD, 2014) will be sufficient for our research.
Vulnerability indicators show the magnitude of macroeconomic and financial instability in
Croatia and Slovenia. Both countries are highly indebted abroad (external debt to GDP ratio
for Croatia is more than 104 %, and for Slovenia is more than 115 %). Bank loans to deposits
for private sector indicate high leverage ratio (for Croatia - 110 %, for Slovenia – 141 %).
But, there is significant difference in systemic foreign exchange risk between two economies:
the ratio of foreign exchange loans to total stock of loans in Croatia is 75 %, and in Slovenia
is 4 %. Taking into account that Slovenia is euro – area member, and Croatia is not, systemic
risk in Croatia is much higher and it is a risk for stability of the financial sector of national
22
economy. Non – performing loans (NPLs) in Croatia are at threshold of 15 %8 that could be
seen as the high level over which NPLs could be unsustainable and could trigger systemic
banking crisis. In Slovenia, according to EBRD NPLs are at 15 %, but it seems that it is
underestimated, the estimate of NPLs in Slovenia has been revised upwards significantly
(Asset Quality Review by the ECB) and NPLs could reach around 20 % of total loans.
Significant difference is also in unemployment rate, which is high in both countries, but in
Croatia it is 18 % and in Slovenia - 9,9 %. In both countries the main risks arises from
external indebtedness and high level of NPLs in the banking industry, while in addition to
this, Croatia has also high level of currency mismatch and unemployment rate.
8
This ratio of NPLs to total stock of loans extended by the banking sector is currently higher, in accordance
with the latest statistics of central bank: average NPL ratio is 15,6 %, but in corporate sector it is 28,12 %, at the
end of 2013 (Croatian national bank, 2014).
23
24
2.3. Capital reversals and deleveraging
Global deleveraging started with 2007 - 2008 global financial crises. Vienna Initiative was a
multilateral response to emerging market crisis (in particular in CESEE), and its concern was
that foreign (parent) EU cross – border banks retain their exposure in emerging financial
markets, or to prevent liquidity crisis and credit crunch and manage capital outflows, aiming
to preserve financial and macroeconomic stability. Funding reduction of western banks for
CESEE, including Croatia and Slovenia, continued and cumulative funding reductions have
been sizable in observed period, especially for some countries (Croatia, Hungary and
Slovenia). These three countries experienced the largest reductions in foreign bank funding
vis-à-vis all sectors, as well as in both gross and net positions of foreign banks vis-à-vis local
banking sectors (chart 13 - 15). In all three cases, concerns related to growth prospects, fiscal
development and internal and external imbalances and financial vulnerabilities, affected
banks' preferences and lending decisions (see e.g., Vienna Initiative, 2014).
The medium-term is likely to bring a further trend reduction of banks' funding for CESEE, but
there was also domestic deposit growth in some countries (which could be seen as sign of
“paradox-of-thrift recession”, due to sharp decrease of aggregate demand and consumption,
while there was a substantial increase of private savings in the banks) and domestic deposit
growth has cushioned but not fully offset decline of foreign bank funding. Weakness of
lending to households and lending to corporate sector remains a concern, giving rise to
challenges for individual countries. The main issue is how to recover credit growth and
foreign funding in the post-crisis approach and before that, what are the possibilities to
implement macro prudential policies that could neutralize the impact of sudden stop, capital
reversals and credit crunch, in order to achieve credit resumption ?
25
26
3. Rebalancing development model
Both countries – Croatia and Slovenia – in many respects implemented a common growth
model. The model was based on financial market deregulation, with strong reform incentives
for external liberalization. Unfettered capital flows were the main element of this growth
model, accompanied with catching-up process and institutional anchoring to the European
Union. Development patterns of both countries shared many common characteristics: they
went through excessive credit expansion, which fuelled asset price inflation, rising property
prices, misallocation of loans, because banks wanted to hedge their exposure in
emerging/transition economies against pricing risks, while core inflation was sustainable; and
these pro-cyclical policies were funded by rapid external borrowing, which was accumulated
with low real interest rates (so called, “carry trade”) and have to cope with real appreciation
pressures on their exchange rate arrangements. Both countries had capital account
mismanagement and misalignment problem, although there was different dynamics in this
process.
We have also found significant differences between two patterns of development: Croatia has
predominantly foreign ownership in banking industry, while Slovenia retained financial
independence; imbalances and current account deficit was more serious in Croatia (fixed
exchange rate contributed hugely to external imbalances), while Slovenia in pre-accession
phase pursued more flexible, nominal exchange rate targeting exchange rate policy, that
resulted with increasing international competitiveness of tradable sector, until it joined to
ERM2 arrangement and then adopted euro in 2007. After entering euro zone, interest rate
convergence in monetary union, fuelled increasing external borrowing in Slovenia. These
development pattern, although different, had the same outcome, and that was build – up of
accumulated external and private debt and unstable financial systems, that are currently
experiencing deleveraging of the EU cross-border banking groups, which caused credit
crunch and slow growth (in Slovenia) or stagdeflation (in Croatia) with high unemployment
rates. Croatia and Slovenia introduced administrative and regulatory measures to slow down
the growth of credit and to limit unhedged foreign currency loans. In addition, and what is
more important, administrative measures were applied aiming to increase the costs of
borrowing abroad, by imposing special tax or special unremunerated reserve requirements on
foreign currency loans. The problem was that commercial banks evaded such central banks'
measures by switching from domestic to direct borrowing abroad, redirecting of financing to
27
leasing, or switching foreign banks from subsidiaries to branches, all techniques made easier
in Croatia where foreign-owned banks were predominant on the financial market.
We do not offer definite or conclusive answers how to rebalance the development model. We
suggest a multilateral approach to the most urgent issue, how to stop capital reversals and
restart growth and credit resumption in emerging economies? Strategic disengagement from
countries with insufficient potential and critical mass or which no longer fit into the groupwide strategy cannot be ruled out. Considering that individual country is small, but has
unstable economy and fragile financial system, disengagement of large EU cross-border
banking groups, e.g. their subsidiaries in EU periphery countries, could cause severe damage,
e.g. a systemic financial crisis. Foreign ownership of banking system exposed Croatia to this
risk. These risks need to be closely monitored and managed by the international institutions
(ECB, IMF and central banks of the EU member countries). It is important to avoid
uncoordinated capital outflows (as in the case of PIIGS countries) and it can be expected that
capital controls could be needed (as in the case of Cyprus). In a nutshell, permanent and
selective approach to the management of capital account (see e.g., Bibow, (2011) for a capital
account management as a self - insurance strategies in emerging – market economies) will be
essential in the near future, allowing generous time lines for external adjustments.
4. Concluding remarks
European Commission warned about large-scale internal and external imbalances in Croatia
and Slovenia. Both countries in many respects implemented a common development model.
We have also found significant differences between two patterns of development.
Development model based on trade and financial integration with EU, after euro zone debt
crisis that started in 2009, has to be rebalanced in accordance with changing external and
internal conditions. AMR and MIP procedure is necessary framework for such development
model rebalancing in both countries.
In the short run, appropriate monetary policy and macro prudential strategies will have to
cope with deleveraging process and support resumption of capital inflows. The focus should
be on improving the debt-restructuring and bank recapitalization process in the financial and
private sectors. Sudden stop and capital reversals (deleveraging) as a consequence results with
credit crunch that hit the real sector of economies, promoting output declines and increasing
28
unemployment. Multilateral initiatives (such as Vienna Initiative) are not efficient enough and
deleveraging could turn both economies into long term stagnation and deflationary cycles
(stagdeflation).
Adjustment to reduced net capital imports can be addressed through smart „growth – oriented
fiscal consolidations“ and improvements of current-account situation by increasing external
competitiveness of the tradable sectors of national economies. This means dealing with
seriously misaligned exchange rates. Counter-cyclical policies in both countries have to be
different: Slovenia has to cope with internal devaluation, i.e. price and wage cuts, because it
has not independent monetary policy, as a full member of the euro zone. Croatia could make
external adjustment with reflationary counter - cyclical monetary policy (external devaluation,
or currency depreciation) because it still has an independent monetary policy and social costs
of such monetary strategy are much lower. As a euro-area member, Slovenia has better
position than Croatia, because it can resort to European central bank lending facilities
(because ECB by the end-2011 started to act as a lender-of-last resort) and Target2 payments
system. Croatia has a difficult task of implementing gradual strategy of euro-adoption in the
next decade, without direct support of ECB and Target2.
29
References
Bibow Joerg, (2011): Permanent and Selective Capital Account Management Regimes as an
Alternative to Self-Insurance Strategies in Emerging-market Economies; Working Paper No.
683.; Levy Economics Institute of Bard College; Annadale-on-Hudson; September 2011
Becker Torbjorn, Daianu Daniel, Darvas Zsolt, Gligorov Vladimir, Landesmann Michael,
Petrovic Pavle, Pisani-Ferry Jean, Rosati Dariusz, Sapir Andre and Weeder Di Mauro
Beatrice, (2010.): Whither Growth in Central and Eastern Europe? Policy Lessons for an
Integrated Europe; Bruegel Blueprint 11; Bruegel Institute; Brussels
Bofinger, Peter, (2001): Monetary Policy: Goals, Institutions, Strategies and Instruments;
Oxford University Press; Oxford
Brunnermeier Markus, de Gregorio Jose, Eichengreen Barry, Mohamed El-Arian, Fraga
Arminio, Ito Takatoshi, Lane R- Philip, Pisani – Ferry Jean, Prassad Eswar, Rajan Raghuram,
Ramos Maria, Rey Helene, Rodrik Dani, Rogoff Kenneth, Song Shin Hyun, Velasco Andres,
Weder di Mauro Beatrice and Yu Yongding, (2012): Banks and Cross-Border Flows: Policy
Challenges and Regulatory Responses; Committee on International Economic Policy and
Reform; Brookings Institution; Washington DC; September 2012
Croatian National Bank, (2014): Preliminary Unaudited Data on Credit Institutions as at 31
December 2013; Croatian national bank; Zagreb; http://www.hnb.hr/eindex.htm
European Commission, (2012): Scorecard for the Surveillance of Macroeconomic
Imbalances; European Economy; Occasional Papers No, 92; Brussels; February 2012
European Commission, (2012a): Completing the Scorecard for the MIP: Financial Sector
Indicator; Commission Staff Working Paper; Brussels; SWD (2012) 389 Final
EBRD, (2014): Regional Economic Prospects in EBRD Countries of Operations; EBRD
Office of the Chief Economist; London; January 2014
30
European Commission, (2013): Report from the Commission to the European Parliament, the
Council, the European Central Bank and European Economic and Social Committee – Alert
Mechanism Report 2014; Brussels; COM (2013) 790 Final
Gagnon, Joseph, (2013): Stabilizing Properties of Flexible Exchange Rates: Evidence from
the Global Financial Crisis; Peterson institute for International Economics; Washington DC;
November 2013
Goldstein Morris and Turner Philip, (2004): Controlling Currency Mismatches in Emerging
Markets; Institute for International Economics; Washington DC, April 2004
Grabel Ilene, (2011): Not Your Grandfather's IMF: Global Crisis, Productive Incoherence
and Developmental Policy Space; Cambridge Journal of Economics; 2011, 35,
doi:10.1093/cje/ber012
Grabel Ilene, (2013): The Rebranding of Capital Controls in an Era of Productive
Incoherence; PERI Working Paper Series Number 318; Political Economy Research Institute,
Amherst, MA; April 2013
de Grauwe, Paul, (2012): Economics of Monetary Union; Oxford University Press, Oxford
von Hagen Juergen and Iulia Siedschlag, (2008): Managing Capital Flows: Experiences from
Central and Eastern Europe; ADB Institute Discussion Paper No. 103. Asian Development
Institute; Singapore; April 2008
Hein, Eckhard, (2012): The Macroeconomics of Finance – Dominated Capitalism and Its
Crisis; Edward Elgar; Cheltenham
International Monetary Fund, (2012): The Liberalization and Management of Capital Flows:
An Institutional View; Washington DC; November 14, 2012
International Monetary Fund, (2012): The Republic of Croatia - 2012 Article IV. Consultation
Report; IMF County Report No.12/302; Washington DC; November 2012
31
International Monetary Fund, (2013): Financing Future Growth: The Evolving Role of the
Banking system in CESEE; Regional Economic Issues, Washington DC; April 2013
International Monetary Fund, (2014): The Republic of Slovenia - 2013 Article IV.
Consultation Report, IMF County Report No.14/11; Washington DC; January 2014
Klein, W. Michael, (2013): Capital Controls: Gates versus Walls; VoxEU.org, 17 January
2013
Klein, W. Michael and Shambaugh, C. Jay, (2013): Is there a Dilemma with the Trilemma?
VoxEU.org, 27 September 2013
Minsky, Hyman, (2008): Stabilizing an Unstable Economy, New York: McGraw Hill.
Ostry D. Jonathan, Ghosh R. Atish, Habermeier Karl, Chamon Marcos, Qureshi S. Mahvash
and Reinhardt B. S. Dennis, (2010): Capital Inflows: The Role of Controls; IMF Staff
Position Note SPN/10/04; International Monetary Fund; Washington DC; February 19, 2010
Palley I. Thomas, (2007): Financialization: What It Is and Why It Matters, The Levy
Economics Institute, Working paper 525; Amherst; MA; December 2007
Paris, Pierre and Wyplosz, Charles, (2014): Politically Acceptable Debt Restructuring in the
Euro zone; Geneva Report on the World Economy Special Report No. 3; International Centre
for Monetary and Banking Studies; Geneva, January 2014
Radošević Dubravko, (2012): Capital Account Management in Croatia and Debt Crisis in
European Monetary Union: A Reappraisal (in Croatian, Upravljanje kapitalnim računom
Hrvatske i dužnička kriza Evropske monetarne unije: Preispitivanje); Economic Survey;
Zagreb; No. 3 - 4; March – April 2012
Radošević Dubravko, (2012a): Capital Flows, Exchange Rate and European Monetary Union
(in Croatian, Kapitalni tokovi, tečaj i Europska monetarna unija; Jesenski and Turk
Publishing Co. and School for International Relations and Diplomacy Dag Hammarskjöld
Zagreb; July 2012
32
Rey, Helene, (2013): Dilemma not Trilemma: The Global Financial Cycle and the Monetary
Policy Independence; VoxEI.org; 31 August 2013
Sanchis i Marco, Manuel, (2012): The Economics of the Monetary Union and the Euro zone
Crisis; Springer Briefs in Economics, Springer; Heidelberg
Štiblar, Franjo, (2012): Experience of Slovenia with Euro and Implications for Croatia;
Lecture held at Round Table organized by Friedrich Ebert Stiftung Croatia; unpublished
manuscript; Zagreb; 27th June 2012
Stieglitz, Joseph and Greenwald, Bruce (2003): Towards a New Paradigm in Monetary
Economics; Cambridge University Press; Cambridge
Vienna Initiative, (2014): CESEE Deleveraging and Credit Monitor; Steering Committee of
the Vienna Initiative; Brussels/Vienna; February 14, 2014; http://vienna-initiative.com
World Bank, (2007): Credit Expansion in Emerging Europe: A Cause for Concern? World
Bank EU8+2; Regular Economic Report; Part II: Special Topic, Washington DC, January
2007
Zdunić Stjepan, (2011): Impossible Trinity and Economic Depression (in Croatian, Od
nemogućeg monetarnog trokuta do ekonomske depresije); Proceedings of Faculty for
Economy University of Rijeka; Rijeka; December 2011
33