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1 The global financial crisis and macroeconomic policies: the situation in Southeast Europe Michael A Landesmann First Bank of Greece Workshop on the Economies and Eastern European and Mediterranean Countries May 14th 2010, Athens wiiw 2 Topics: The global financial crisis and macroeconomic policies – Southeast Europe Switch of ‘growth model’ in Southeastern Europe? New (external and internal) constraints emerging from the crisis How to deal with structural imbalances Policy issues: - short-run vs. medium- and long-run - fiscal, exchange rates, financial market reform, structural policies - EU and national policy agendas wiiw Features of the ‘old’ growth model: targeted at integration with the EU area was associated with significant internal and external liberalization (trade, capital transactions, financial market integration) benefits: capital inflows, trade integration, ‘technology’ transfer the model worked - ‘convergence process’ – but emergence of structural imbalances 10 8 6 4 2 0 Source: wiiw Annual Database incorporating national statistics, Eurostat. Ukraine Russia Albania Bosnia&Herzeg Montenegro Serbia Croatia Macedonia Turkey Bulgaria Cyprus Czech Rep. Estonia Hungary Latvia Lithuania Malta Poland Romania Slovakia Slovenia Greece Italy Portugal Spain Austria Belgium Denmark Finland France Germany Ireland Luxembourg Netherlands Sweden UnitedKingdom 0 Ukraine Russia Croatia Macedonia Turkey Bulgaria Cyprus Czech Rep. Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia Greece Italy Portugal Spain Austria Belgium Denmark Finland France Germany Ireland Luxembourg Netherlands Sweden UnitedKingd EU-15 EU-27 8 6 EU-15 EU-27 4 Growth – GDP at constant prices Average annual growth rates, 1995-2002 and 2002-2008, in % 10 1995-2002 4 2 2002-2008 wiiw The crisis 7 Exports total in EUR, Jänner 2008 = 100 BG RO HR MK AL Jan-09 May-09 BA ME RS 160 150 140 130 120 110 100 90 80 70 60 50 40 30 Jan-08 May-08 Sep-08 Source: wiiw Database incorporating national statistics, Eurostat. Sep-09 Jan-10 May-10 wiiw 9 GDP real change against preceding year in % BG RO HR MK AL RS 15 10 5 0 -5 -10 2008-1Q 2008-2Q 2008-3Q 2008-4Q 2009-1Q Source: wiiw Database incorporating national statistics, Eurostat. 2009-2Q 2009-3Q 2009-4Q wiiw 10 Gross industrial production, January 2008 = 100 BG RO HR MK ME RS 160 140 120 100 80 60 40 Jan-08 May-08 Sep-08 Jan-09 May-09 Source: wiiw Database incorporating national statistics, Eurostat. Sep-09 Jan-10 May-10 wiiw 11 Gross industrial production, January 2008 = 100 CZ HU PL SK SI 120 110 100 90 80 70 Jan-08 May-08 Sep-08 Jan-09 May-09 Source: wiiw Database incorporating national statistics, Eurostat. Sep-09 Jan-10 May-10 wiiw Adjustment of the ‘growth model’: 1. The legacy of structural imbalances 2. New constraints following the crisis RO Source: Eurostat, wiiw calculations. HR SK MK RS 1997 1999 2001 2003 2005 2007 2009 BG PL 1997 1999 2001 2003 2005 2007 2009 10 HU 1997 1999 2001 2003 2005 2007 2009 20 CZ 1997 1999 2001 2003 2005 2007 2009 10 1997 1999 2001 2003 2005 2007 2009 1997 1999 2001 2003 2005 2007 2009 14 Trade balances of goods and services, 1996-2009 in % of GDP 20 SI 0 -10 -20 -30 AL 0 -10 -20 -30 wiiw Trade balance of goods and services (BOP) in % of GDP 6 0 -6 -12 -18 -24 6 0 -6 -12 -18 -24 6 0 -6 -12 -18 -24 NMS-5 Baltics SEE 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 NMS-5: CZ, HU, PL, SK, SI. Baltics: EE, LV, LT. SEE: BG, RO, HR, MK, BA (from 1998), RS (from 1999), ME (from 2001). Source: wiiw Annual Database incorporating national statistics, Eurostat. 16 Trade balances of goods and services and income balances, 1996-2009 in % of GDP Trade balance in % of GDP Income in % of GDP Transfers in % of GDP Current account in % of GDP 30 20 CZ 10 HU PL SK SI 0 -10 -20 -30 30 20 BG RO HR MK RS AL 10 0 -10 -20 Source: Eurostat, wiiw calculations. 1997 1999 2001 2003 2005 2007 2009 1997 1999 2001 2003 2005 2007 2009 1997 1999 2001 2003 2005 2007 2009 1997 1999 2001 2003 2005 2007 2009 1997 1999 2001 2003 2005 2007 2009 1997 1999 2001 2003 2005 2007 2009 -30 wiiw 17 Industrial production cumulative change, 1995-1990, 2000-1990, 2008-1990 1995-1990 2000-1990 2008-1990 200 150 100 50 0 -50 -100 CZ HU PL SK SI EE LV LT AL BG HR MK ME RO RS NMS-8 150 100 50 0 -50 -100 Note: ME; RS data for 1995-1990 refer to CS. Source: wiiw Annual Database incorporating national statistics, Eurostat wiiw 18 Industrial production cumulative change, 1995-1990, 2000-1990, 2008-1990 150 100 50 0 -50 -100 AL BG HR MK ME Note: ME; RS data for 1995-1990 refer to CS. Source: wiiw Annual Database incorporating national statistics, Eurostat RO RS NMS-8 wiiw Exports of goods and services (BOP) in % of GDP 90 2004 2005 2006 2007 2008 80 70 60 50 40 30 20 10 0 NMS-4 BG RO HR MK Source: wiiw Annual Database incorporating national statistics. AL BH ME RS 20 Low-skill industries, as % of total manufacturing exports to the EU-25 2005 100 2006 2007 2008 90 80 70 60 50 40 30 20 10 0 AL Source: Comext. BA BG HR MK ME RO RS NMS8 wiiw 21 Technology-driven industries, as % of total manufacturing exports to the EU-25 30 2005 2006 2007 2008 20 10 0 AL Source: Comext. BA BG HR MK ME RO RS NMS8 wiiw Current account in % of GDP 6 0 -6 -12 -18 NMS-5 6 0 -6 -12 -18 6 Baltics 0 -6 -12 -18 SEE 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 NMS-5: CZ, HU, PL, SK, SI. Baltics: EE, LV, LT. SEE: BG, RO, HR, MK, BA (from 1998), RS (from 1999), ME (from 2001). Source: wiiw Annual Database incorporating national statistics, Eurostat. Savings and investment in % of GDP public saving private saving public investment private investment 30 20 10 NMS-5 0 -10 30 Baltics 20 10 0 -10 30 20 10 0 -10 SEE 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 NMS-5: CZ,HU,PL,SK,SI (from 2000-2007). SEE: BG (2000-2006) and RO (from 2004-2007). Source: wiiw Annual Database incorporating national statistics, Eurostat. Summary on structural imbalances: Severe weaknesses of tradeable sector; Strongly deteriorating private sector savings-investment imbalances; Adds up to unsustainable current account imbalances; Role of exchange rate regimes; Problematic allocation of FDI across tradable and nontradable sectors (not shown); Constraints following the crisis: External factors: higher risk assessment of the region; more difficult internal and external financing; reduced growth expectations for most important export markets; tougher to join the eurozone (new OCA debate) Constraints following the crisis: Internal factors: ‘deleveraging’ of private sector, increased propensity to save; more limited room to manoeuvre for fiscal policy; weaker and more cautious banking sector; tightened financial market regulation (internal and external) 30 Summary of the argument on ‘redirecting the growth model’: 1. Adjusting to new external constraints and internal behavioural responses following the crisis: - External: lower export market growth, more difficult financing conditions, tougher effective EMU membership conditions; financial market regulation - Internal: weaker financial sector, deleveraging – higher domestic saving rates, less space for fiscal policy but more pressure on streamlining 2. Dealing with sustained structural imbalances: - Differentiation across country groups (e.g. fix- and flex-exchr. economies) 3. Policy challenges: - For the short run and the medium and longer run - At national and at EU levels wiiw 31 Redirecting ‘the integration model of growth’ The policy choices: Fixed vs. flexible rates Fiscal consolidation vs. fiscal stimuli Free flow vs. financial market regulation Structural policy issues wiiw 32 Exchange rates Flexible exchange rates have supported sustainable current account deficits Countries with flexible exchange rate regimes may have had a less costly adjustment to the crisis Fixed exchange rates tend to mandate pro-cyclical fiscal policies during the crisis and in the medium run EMU membership may not protect against real exchange rate misalignments wiiw 33 Exchange rate and current account Nominal exchange rate, average (NCU/EUR) Current account in % of GDP Czech Republic Bulgaria 40 10 5 0 -5 -10 -15 -20 -25 -30 30 20 10 0 -10 1995 1997 1999 2001 2003 2005 2007 2009 1995 1997 1999 Croatia 2001 2003 2005 2007 2009 2005 2007 2009 Poland 10 6 5 4 2 0 0 -2 -5 -4 -10 -6 -15 -8 1995 1997 1999 Source: Eurostat. 2001 2003 2005 2007 2009 1995 1997 1999 2001 2003 wiiw Real appreciation*, 2008-2009 EUR per NCU, PPI deflated, January 2008=100 AL 115 RO RS 110 110 105 105 100 100 95 95 90 90 Jan- Apr08 08 Jul08 Oct- Jan- Apr08 09 09 Jul09 BA 115 Oct- Jan- Apr09 10 10 *Values over 100 indicate appreciation relative to January 2008. Source: wiiw Database incorporating national statistics. Jan- Apr08 08 Jul08 BG ME Oct- Jan- Apr08 09 09 Jul09 HR Oct- Jan- Apr09 10 10 Exchange rates* Flexible exchange rate: drastic real depreciation after September 2008 2008-2009, EUR NCU, Jan. 2008 = 100 Serbia nominal exchange rate real exchange rate, PPI-deflated 115 110 105 100 95 90 85 80 Jan- Apr08 08 Jul08 *Values over 100 indicate appreciation over January 2008. Source: wiiw Database, Eurostat. Oct08 Jan- Apr09 09 Jul09 Oct09 Exchange rates* De-facto fixed exchange rate: modest real depreciation after September 2008 2008-2009, EUR NCU, Jan. 2008 = 100 Albania Croatia nominal exchange rate real exchange rate, PPI-deflated Macedonia nominal exchange rate real exchange rate, PPI-deflated 115 115 110 110 110 105 105 100 100 95 95 90 90 85 85 85 80 80 80 105 100 95 90 75 75 Jan- Apr08 08 Jul08 Oct08 Jan- Apr09 09 Jul09 Oct09 75 Jan- Apr08 08 Jul08 Oct08 *Values over 100 indicate appreciation over January 2008. Source: wiiw Database, Eurostat. nominal exchange rate real exchange rate, PPI-deflated 115 Jan- Apr09 09 Jul09 Oct09 Jan- Apr08 08 Jul08 Oct08 Jan- Apr09 09 Jul09 Oct09 Exchange rates* Currency board or euro as legal tender: minor real depreciation after September 2008 2008-2009, EUR NCU, Jan. 2008 = 100 Bosnia and Herzegovina Montenegro nominal exchange rate real exchange rate, CPI-deflated 115 110 110 105 105 100 100 95 95 90 90 85 85 80 80 75 real exchange rate, PPI-deflated 115 75 Jan- Apr08 08 Jul08 Oct08 Jan- Apr09 09 Jul09 Oct09 Values over 100 indicate appreciation over January 2008. Source: wiiw Database, Eurostat. Jan- Apr08 08 Jul08 Oct08 Jan- Apr09 09 Jul09 Oct09 40 (Private and public) Debt and Fiscal Policy In catching-up economies, in financially integrated areas, the (nominal) interest rate on public debt is below the (nominal) growth rate which implies that the sustainability of public debt is assured except if primary deficits are permanently higher than those that stabilize public debt to GDP ratios In the current crisis, it does not seem that in most, not necessarily all countries, structural primary deficit has changed permanently so that fiscal balances are not sustainable Finally, some of the hikes in fiscal deficits are the consequence of the deleveraging of private debts and thus fiscal consolidation is not the first best policy in those cases wiiw 41 Gross external debt and public debt % of GDP, 2004-2009 Gross external debt 2004 2005 2006 2007 2008 2009 120 100 80 60 40 20 0 BG 120 RO HR MK AL HR MK AL BA ME RS Public debt 100 80 60 40 20 0 BG RO Source: wiiw Annual Database incorporating national statistics, Eurostat BA ME RS wiiw 42 Debt in % of GDP Gross external debt Public debt Bulgaria 180 160 140 120 100 80 60 40 20 0 Private debt Romania 80 70 60 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Slovenia 160 140 120 100 80 60 40 20 0 Croatia 140 120 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Eurostat. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 wiiw Debt in % of GDP Gross external debt Public debt, EU-def. Private debt (loans) 150 100 NMS-5 50 0 150 100 SEE 50 0 2000 2001 2002 2003 2004 2005 NMS-5: CZ, HU, PL, SK, SI. Baltics: EE, LV, LT. SEE: BG, RO, HR. Source: wiiw Annual Database incorporating national statistics, Eurostat. 2006 2007 2008 2009 45 Real leading NB/ECB interest rates, 2008-2010 CPI-deflated, in % p.a. SK 8 -10 Note: For Estonia: 1-month interbank lending rate (Talibor); for Lithuania: 1-month interbank lending rate (Vilibor). Source: Eurostat. Jan-10 -10 LT Oct-09 -8 Jul-09 -8 Apr-09 -6 Jan-09 -6 Jan-10 -4 Oct-09 -4 Jul-09 -2 Apr-09 -2 Jan-09 0 Oct-08 0 Jul-08 2 Apr-08 2 Jan-08 4 LV Fixed ER 6 4 EE Oct-08 Flexible ER BG Jul-08 6 RO Jan-08 8 PL Apr-08 HU wiiw 49 Policy recommendations for the improvement or the redirection of the integration model of growth: National agenda Exchange rate flexibility wherever that is feasible (countries that already use the euro or have committed to currency boards would have to make sure that the euro is an optimal currency union for them before joining EMU) Countercyclical fiscal policy with sustainable fiscal deficits and public debt to GDP levels Use of taxation or insurance to prevent bubbles in financial markets (sand in the wheels taxes on particular types of investments) Structural policy to strengthen tradable sector wiiw 50 Policy recommendations for the improvement or the redirection of the integration model of growth: EU agenda Copenhagen and Maastricht criteria should ensure that accession to the EMU leads to sustainable currency union ex ante Enrichment of the Stability and Growth Pact with short-term crisis management facility (support for anti-cyclical fiscal policy while keeping track of fiscal sustainability) Strengthening financial regulation for systemic risks; facilities for bank restructuring and for regulation of cross-border activities Use of EU Funds to support development of tradable sector wiiw 51 Policy challenges for the Short and medium term: - getting credit going again - real exchange rate adjustment vital in some countries - pursue active fiscal policy in countries with room to manoeuvre - labour market policy Medium and long term: - paying much closer attention to external disequilibria - flexible exchange rate regimes have proven to be more successful - sustainability of private and public debt development (cross-border financial market regulation, increased EU monitoring) - policies to promote the tradable sector (also involving EU transfers) wiiw