Download Real GDP in Central-Eastern Europe and Russia 1989=100

Macroeconomic Issues
from a European
Perspective
Fabrizio Coricelli
Euro-Latin Network
Madrid October 9, 2002
Lessons from EU
Enlargement
Institutional reforms before or with
market liberalization
“Real” (trade) integration hand in
hand with financial integration
Safety nets key for successful
reforms
Issues
“Real” and nominal convergence:
satisfy inflation criteria while
catching up in income levels.
Choice of exchange rate regime
Speed of adoption of the Euro (two
views)
Development of financial sector:
low financial depth
Fiscal rules
……..Issues
No mechanisms to avoid crises are
present in the EU(currency crises
in Italy, UK and Sweden at the
beginning of 1990s)
Development of financial sector
Low financial depth
Domestic Credit in percent of GDP, 2000
140
EURO AREA AVERAGE
120
Portugal and Spain (1986 enlargement)
100
80
Greece (1981 enlargement)
60
40
20
0
Source: IFS, Accession Countries' National Central Banks
Institutional Reforms…
Importing institutions (against
Rodrik’s view)
May not be optimal, but more
credible
Safety nets to support reforms
……….lead to
Credibility bonus due to accession
to EU
Accession: anchor for market
expectations
Lower spreads in international
borrowing
Interest rate convergence
Creditworthiness
EMBI+
1800
450
EMBI+ Bulgaria
1600
400
EMBI+ Poland(RHS)
350
1400
300
1200
250
1000
200
800
150
600
100
400
50
200
Dec-97
0
Oct-98
Aug-99
Jun-00
Apr-01
Feb-02
Interest Rate Convergence
Euribor
Poland
Hungary
Czech Rep.
35
30
25
20
15
10
5
0
Jun-93
Jul-94
Aug-95
Sep-96
Oct-97
Nov-98
Dec-99
Jan-01
Feb-02
Potential drawbacks
Premature “eurosclerosis”:
unemployment rates close to 20%
in Poland and Slovakia
Large governments: high tax rates
Rigidity in labor market
Large implicit debt for pensions
Po
Sl
a
ia
a
ia
ov
ak
an
i
ov
en
Sl
ni
la
nd
th
ua
45
R
om
Li
tv
ia
ga
ry
La
H
un
to
ni
a
50
R
ep
.
ga
ria
55
Es
C
ze
ch
B
ul
Total expenditure (% of GDP)
2000
2004
EU
(45,8
40
35
30
25
20
Emerging market
themes
Integration has not
reduced volatility
Volatility is much higher than in
the European Union
Although cycle is highly correlated:
amplitude much higher
CEECs are small open economies
Correlation with EU cycle
25
EU
Poland
20
Hungary
15
10
5
0
-5
mar-94
lug-95
nov-96
mar-98
lug-99
nov-00
mar-02
Volatility
(standard deviation)
GDP
Real
Terms of effective
trade
exchange
rate
Real
interest
rate
Gov’t
revenue/GDP
CEECs
4,10
4,40
12,66
6,34
2,31
Latin
America
3,74
8,70
18,00
13,18
2,19
Emerging
Asia
4,11
5,92
8,65
2,52
1,82
Advanced
countries
2,09
3,73
5,90
2,07
1,02
Financial sector
Can magnify the cycle
Small and medium size firms are
leading growth but they are
generally cut off from borrowing
and thus from the possibility of
smoothing output decline
Alternative to bank credit: trade
credit, higher risk (chain)
Dominant role of foreign banks
does not help
Vulnerability to crises
Government debt: not high as a
ratio to GDP
Even less in terms of tax revenues
(compared to LAC)
However, large share of foreign
debt (as in Lac)
Debt indicators
Public debt
in % GDP
Public foreign
% of total
Public debt %
of revenues
Public foreign%
of revenues
Bulgaria
80,6
91,4
185,3
39,8
Czech
Rep.
17,3
10,5
42,6
4,3
5,3
67,4
13,6
26,2
Hungary
58,2
n.a.
126,8
n.a.
Latvia
13,0
60,9
43,3
18,3
Lithuania
28,3
77,8
93,7
23,5
Poland
40,9
48,8
103,3
19,3
Romania
31,6
44,9
100,3
14,1
Slovakia
32,8
49,0
92,9
17,3
Slovenia
25,8
48,8
60,3
20,9
avg.
CEECs
33,4
55,5
86,2
20,4
Estonia
External constraint
External debt External debt
% GDP
% exports
FDI inflow
% GDP
Current account
% GDP
Bulgaria
Czech Rep.
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovakia
Slovenia
86,4
42,8
61,4
67,3
65,9
42,9
42,9
27,0
56,3
34,3
148,3
56,2
64,6
97,3
144,0
95,1
214,5
81,7
76,5
58,1
8,3
9,1
6,4
2,6
5,6
3,3
5,9
2,7
10,7
0,2
5,9
4,8
6,8
3,9
6,8
6,0
6,3
3,7
3,7
3,3
Avg. CEECs
Latin
America
52,7
103,6
5,5
5,1
39,0
External constraint…..
Ext. Debt high in terms of GDP but
much lower (than in LACs) in terms
of exports
FDI inflows match current account
deficit
Privatization-related FDIs very
large
Current flows unlikely to be
sustained
Non-FDI flows
Pro-cyclical
Sharp reduction after Russian
crisis
Growth and capital flows
Poland
2000
Non FDI capital flows
8.0
Gdp a/a%
1500
1000
7.0
6.0
5.0
500
4.0
0
3.0
-500
2.0
-1000
1.0
-1500
0.0
96 97 97 97 97 98 98 98 98 99 99 99 99 00 00 00 00 01 01 01 01 02 02
19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20
4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
Czech Republic
Non FDI Capital Flow s
2500
0.07
GDP a/a%
0.06
2000
0.05
0.04
1500
0.03
0.02
1000
0.01
0
500
-0.01
-0.02
Q2 2002
Q4 2001
Q2 2001
Q4 2000
Q2 2000
Q4 1999
Q2 1999
Q4 1998
Q2 1998
Q4 1997
Q2 1997
Q4 1996
Q2 1996
-0.03
Q4 1995
0
Fiscal policy pro-cyclical
3
2
changes in CAB
1
0
-15
-10
-5
0
-1
-2
-3
-4
output gaps
5
10
After entry?
Full liberalization of K-flows
Short term K-flows bound to
increase
Exchange rate policy?
Fiscal rules?
Risks ahead
Delayed entry in Euro
EU fiscal rules inappropriate
Maastricht criterion is an ex post
limit on deficit with a pro-cyclical
bias
Need for ex ante expenditure rules
Conclusions…….
Trade integration possibly an
insurance for sudden capital flow
reversals
Candidate countries are affected
by “convergence play”:
expectation of entry in the
eurozone (interest rates converge
and spreads on international
borrowing very low)……….
……..Conclusions
However, postponing accession can
be a severe shock……….
Test of capability to manage large
capital inflows yet to come
Exchange rate policy a key issue
Mechanisms to avoid currency and
financial crises at the EU level
could be devised