Download ppt - wiiw 1 The global financial crisis and macroeconomic policies: the situation in Southeast Europe Michael A Landesmann First Bank of Greece Workshop

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The global financial crisis and macroeconomic

policies: the situation in Southeast Europe

Michael A Landesmann

First Bank of Greece Workshop on theEconomies and Eastern European and Mediterranean

CountriesMay 14th 2010, Athens

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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

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

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Growth – GDP at constant pricesAverage annual growth rates, 1995-2002 and 2002-2008, in %

Source: wiiw Annual Database incorporating national statistics, Eurostat.

02468

10

EU

-15

EU

-27

Austr

iaB

elg

ium

Denm

ark

Fin

land

Fra

nce

Germ

any

Irela

nd

Luxem

bourg

Neth

erlands

Sw

eden

Unite

dK

ingdom

Gre

ece

Italy

Port

ugal

Spain

Bulg

aria

Cypru

sC

zech R

ep.

Esto

nia

Hungary

Latv

iaLith

uania

Malta

Pola

nd

Rom

ania

Slo

vakia

Slo

venia

Cro

atia

Macedonia

Turk

ey

Alb

ania

B

osnia

&H

erz

eg

Monte

negro

S

erb

ia

Ukra

ine

Russia

0

2

4

6

8

10

EU

-15

EU

-27

Austr

iaB

elg

ium

Denm

ark

Fin

land

Fra

nce

Germ

any

Irela

nd

Luxem

bourg

Neth

erlands

Sw

eden

Unite

dK

ingd

Gre

ece

Italy

Port

ugal

Spain

Bulg

aria

Cypru

s

Czech R

ep.

Esto

nia

Hungary

Latv

iaLith

uania

Pola

nd

Rom

ania

Slo

vakia

Slo

venia

Cro

atia

Macedonia

Turk

ey

Ukra

ine

Russia

1995-2002

2002-2008

The crisis

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30405060708090

100110120130140150160

Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10

BG RO HR MK AL BA ME RS

Exports total

in EUR, Jänner 2008 = 100

Source: wiiw Database incorporating national statistics, Eurostat.

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-10

-5

0

5

10

15

2008-1Q 2008-2Q 2008-3Q 2008-4Q 2009-1Q 2009-2Q 2009-3Q 2009-4Q

BG RO HR MK AL RS

GDPreal change against preceding year in %


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10

40

60

80

100

120

140

160


BG RO HR MK ME RS

Gross industrial production,

January 2008 = 100


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70

80

90

100

110

120


CZ HU PL SK SI

Gross industrial production,

January 2008 = 100


Adjustment of the ‘growth model’:

1. The legacy of structural imbalances

2. New constraints following the crisis

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Trade balances of goods and services, 1996-2009 in % of GDP

-30

-20

-10

0

10

20

CZ HU PL SK SI

Source: Eurostat, wiiw calculations.

-30

-20

-10

0

10

20

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

BG RO HR MK RS AL

Trade balance of goods and services (BOP)in % of GDP

-24-18-12

-606

-24-18-12

-606

-24-18-12

-606

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

NMS-5

Baltics

SEE

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.Source: wiiw Annual Database incorporating national statistics, Eurostat.

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Trade balances of goods and services and income

balances, 1996-2009 in % of GDP

-30

-20

-10

0

10

20

30

Trade balance in % of GDP Income in % of GDP Transfers in % of GDP Current account in % of GDP

CZ HU PL SK SI

Source: Eurostat, wiiw calculations.

-30

-20

-10

0

10

20

30

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

BG RO HR MK RS AL

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Industrial production cumulative change, 1995-1990, 2000-1990, 2008-1990

-100

-50

0

50

100

150

200

CZ HU PL SK SI EE LV LT

1995-1990 2000-1990 2008-1990

-100

-50

0

50

100

150

AL BG HR MK ME RO RS NMS-8

Note: ME; RS data for 1995-1990 refer to CS.

Source: wiiw Annual Database incorporating national statistics, Eurostat

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Industrial production cumulative change, 1995-1990, 2000-1990, 2008-1990

-100

-50

0

50

100

150

AL BG HR MK ME RO RS NMS-8

Note: ME; RS data for 1995-1990 refer to CS.

Source: wiiw Annual Database incorporating national statistics, Eurostat

Exports of goods and services (BOP)

in % of GDP

Source: wiiw Annual Database incorporating national statistics.

0

10

20

30

40

50

60

70

80

90

NMS-4 BG RO HR MK AL BH ME RS

2004 2005 2006 2007 2008

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Low-skill industries,as % of total manufacturing exports to the EU-25

0

10

20

30

40

50

60

70

80

90

100

AL BA BG HR MK ME RO RS NMS8

2005 2006 2007 2008

Source: Comext.

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Technology-driven industries, as % of total manufacturing exports to the EU-25

0

10

20

30

AL BA BG HR MK ME RO RS NMS8

2005 2006 2007 2008

Source: Comext.

Current accountin % of GDP

-18

-12

-6

0

6

-18

-12

-6

0

6

-18

-12

-6

0

6

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

NMS-5

Baltics

SEE

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

-10

0

10

20

30

public saving private saving public investment private investment

-10

0

10

20

30

-10

010

20

30

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

NMS-5

Baltics

SEE

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 non-tradable 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)

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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

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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

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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

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Exchange rate and current accountNominal exchange rate, average (NCU/EUR) Current account in % of GDP

Czech Republic

-10

0

10

20

30

40

1995 1997 1999 2001 2003 2005 2007 2009

Bulgaria

-30

-25

-20

-15-10

-5

0

5

10

1995 1997 1999 2001 2003 2005 2007 2009

Source: Eurostat.

Croatia

-15

-10

-5

0

5

10

1995 1997 1999 2001 2003 2005 2007 2009

Poland

-8

-6

-4

-2

0

2

4

6

1995 1997 1999 2001 2003 2005 2007 2009

Real appreciation*, 2008-2009EUR per NCU, PPI deflated, January 2008=100

90

95

100

105

110

115

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

AL RO RS

*Values over 100 indicate appreciation relative to January 2008.

Source: wiiw Database incorporating national statistics.

90

95

100

105

110

115

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

BA BG ME HR

Serbia

80

85

90

95

100

105

110

115

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

nominal exchange ratereal exchange rate, PPI-deflated

Exchange rates*Flexible exchange rate: drastic real depreciation after

September 20082008-2009, EUR NCU, Jan. 2008 = 100

*Values over 100 indicate appreciation over January 2008.

Source: wiiw Database, Eurostat.

Exchange rates*De-facto fixed exchange rate:

modest real depreciation after September 2008 2008-2009, EUR NCU, Jan. 2008 = 100

Albania

75

80

85

90

95

100

105

110

115

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09


Croatia

75

80

85

90

95

100

105

110

115

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09


Macedonia

75

80

85

90

95

100

105

110

115

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09



*Values over 100 indicate appreciation over January 2008.

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

75

80

85

90

95

100

105

110

115

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

nominal exchange ratereal exchange rate, CPI-deflated

Montenegro

75

80

85

90

95

100

105

110

115

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

real exchange rate, PPI-deflated


Values over 100 indicate appreciation over January 2008.

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(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

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Gross external debt and public debt % of GDP, 2004-2009

0

20

40

60

80

100

120

BG RO HR MK AL BA ME RS

2004 2005 2006 2007 2008 2009

0

20

40

60

80

100

120

BG RO HR MK AL BA ME RSSource: wiiw Annual Database incorporating national statistics, Eurostat

Gross external debt

Public debt

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Debt in % of GDP

Gross external debt Public debt Private debt

Bulgaria

020406080

100120140160180

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Romania

0

10

20

3040

50

60

70

80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Slovenia

0

20

40

6080

100

120

140

160

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Croatia

0

20

40

60

80

100

120

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Eurostat.

Debt in % of GDP

0

50

100

150

Gross external debt Public debt, EU-def. Private debt (loans)

0

50

100

150

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

NMS-5

SEE

NMS-5: CZ, HU, PL, SK, SI. Baltics: EE, LV, LT. SEE: BG, RO, HR. Source: wiiw Annual Database incorporating national statistics, Eurostat.

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Real leading NB/ECB interest rates,

2008-2010 CPI-deflated, in % p.a.

-10

-8

-6

-4

-2

0

2

4

6

8

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

HU PL RO

-10

-8

-6

-4

-2

0

2

4

6

8

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

SK BG EE LV LT

Note: For Estonia: 1-month interbank lending rate (Talibor); for Lithuania: 1-month interbank lending rate (Vilibor).

Source: Eurostat.

Flexible ER Fixed ER

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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

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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

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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)