economic and political challenges of acceding to the euro area
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Economic and Political Challenges of Acceding to the Euro Area Is current account the real challenge ? Cinzia Alcidi, CEPS. December 7, 2009, Sofia. Outline of the presentation. Situation before the crisis Impact of the crisis Beyond Maastricht criteria Current account External debt - PowerPoint PPT PresentationTRANSCRIPT
Economic and Political Challenges of Acceding to the Euro Area
Is current account the real challenge ?
Cinzia Alcidi, CEPS
December 7, 2009, Sofia
Outline of the presentation
• Situation before the crisis
• Impact of the crisis
• Beyond Maastricht criteria
– Current account
– External debt
• Concluding remarks
The region before the crisis
• High level of growth• Wages increase• Widespread construction booms• Close to meet Maastricht criteria
– Good state of government finances• But lack of consolidation
– Inflation– LT interest rates
The advent of the recession
GDP growth
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
%
EU-27 EA-16 Bulgaria Estonia Lithuania Hungary Poland Romania Sweden
Source Ameco October 22, 2009
Trends in government debtGovernment gross debt % GDP
0.0
20.0
40.0
60.0
80.0
100.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
%
EU-27 EA-16 Bulgaria Estonia Lithuania
Hungary Poland Romania Sweden
Differences within the region: Forex regimes
• Region contains cases of extreme bubbles – Baltics worst in terms of height and duration of
bubble.• The fixed forex rigidity
• Poland and CZ little bubble– Flex forex
• Bulgaria– Currency board issue
How recovery will look like?
• Weak. Permanent fall in output cannot be excluded– EU banking sector still in disrepair
• EU productive sector relies on banking sector
– Low productivity within EU– Effects housing bust long and difficult to
absorb – Weak global demand (US)– Large debt: first private now public
Beyond Maastricht: Current accounts
• Maastricht criteria do not include current account balance
• Why?• CA deficits are not necessarily a bad thing• CA deficits signal:
– Competitiveness problem– Excess (national) saving over (national)
investment • Low savings versus large investment
Current account balanceCurrent account balance
-10000
-8000
-6000
-4000
-2000
0
2000
Mil
lio
ns
US
D
Bulgaria Estonia Hungary Latvia Lithuania Poland
Bulgaria: External debtBulgaria: Gross external debt components
0
5
10
15
20
25
30
35
40
2005-09 2005-12 2006-03 2006-06 2006-09 2006-12 2007-03 2007-06 2007-09 2007-12 2008-03 2008-06 2008-09 2008-12 2009-03 2009-06
Bill
ions
US
D
GG Banks Other sectors
Greece: The troubled neighbour
0
100
200
300
400
500
600
2003-06 2003-12 2004-06 2004-12 2005-06 2005-12 2006-06 2006-12 2007-06 2007-12 2008-06 2008-12 2009-06
Greece: Gross external debt components
GG MA Banks Other sectors
Concluding remarks:
• Foreign investment good but is a form of debt:
– growth model
• Borrowed foreign funds for non-productive spending
• Domestic savings and the ability to repay
– Should we accept lower consumption?
Thank you