Wiener Institut für Internationale Wirtschaftsvergleiche

The Vienna Institute for International Economic Studies

www.wiiw.ac.at

Challenges of Real Convergence

Conference on: Ten Years of the Euro – Inspirations for

the Czech Republic

Prague, November 25, 2008

Michael Landesmann landesmann@wiiw.ac.at

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Topics

Real convergence outside and within the EMU: some

general remarks Real convergence of the NMS: different patterns of

‚fixers‘ and ‚flexers‘ What makes NMS different from Spain and Portugal? The issue of monetary instability and financial

architecture – lessons from the current crisis

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Topics

Real convergence outside and within the EMU: some

general remarks:

- advantages outside: exchange rates may remove mis-

alignments in case of shocks; otherwise all burdens fall on wage

and (more generally) labour market flexibility

- advantages inside: mainly escape from currency mismatch

problems in case of contagion; ‚real interest rate effect‘ can lead

to falling savings rate, asset bubbles.

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Source: Eurostat.

GDP per head, real growth annual averages 1993-2000 and 2001-2007, in percent EU-27 countries

0

1

2

3

4

5

6

7

8

9

EU

-27

EU

-15

Au

stri

aB

elg

ium

Den

mar

kF

inla

nd

Fra

nce

Ger

man

yIr

elan

dL

uxe

mb

ou

rgN

eth

erla

nd

sS

wed

enU

nit

ed K

ing

do

m

Gre

ece

Ital

yP

ort

ug

alS

pai

n

Bu

lgar

iaC

ypru

sC

zech

Rep

ub

licE

sto

nia

Hu

ng

ary

Lat

via

Lit

hu

ania

Mal

taP

ola

nd

Ro

man

iaS

lova

k R

epu

blic

Slo

ven

ia

EU

-27

EU

-15

Au

stri

aB

elg

ium

Den

mar

kF

inla

nd

Fra

nce

Ger

man

yIr

elan

dL

uxe

mb

ou

rgN

eth

erla

nd

sS

wed

enU

nit

ed K

ing

do

m

Gre

ece

Ital

yP

ort

ug

alS

pai

n

Bu

lgar

iaC

ypru

sC

zech

Rep

ub

licE

sto

nia

Hu

ng

ary

Lat

via

Lit

hu

ania

Mal

taP

ola

nd

Ro

man

iaS

lova

k R

epu

blic

Slo

ven

ia

1993-2000 2001-2007

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Topics

Real convergence of the NMS: different patterns of

‚fixers‘ and ‚flexers‘

- fixers: lower risk premium on foreign borrowing; higher current

account deficits, more private sector debt, more fear of currency

mismatch in case of contagion; more serious testing of exchange rate

regime in current crisis; more liquidity crunch in period of crisis?

- flexers: higher inflation rates, lower current account deficits,

exchange rate reacted to financial market crisis; formerly appreciation

pressures

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GDP growth by country

0

2

4

6

8

10

12

BG CZ EE HU LV LT PL RO SK SI

2000 2001 2002 2003 2004 2005 2006 2007

GDP growth rates in %

Source: wiiw annual database

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-10

-5

0

5

Czech Republic Hungary Poland Slovak Republic Slovenia

1995 1996 1997 1998 1999 2000 20012002 2003 2004 2005 2006 2007

Current account in % of GDP, 1995-2007

-25-20-15-10-505

Estonia Latvia Lithuania

1995 1996 1997 1998 1999 2000 20012002 2003 2004 2005 2006 2007

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-10

0

10

20

30

40

50

60

Jän.00Jul.00Jän.01Jul.01Jän.02Jul.02Jän.03Jul.03Jän.04Jul.04Jän.05Jul.05Jän.06Jul.06Jän.07Jul.07

CZ HU PL SK SI BG RO

Consumer prices, 2000-2007(Month in the previous year = 100)

Source: wiiw-Database

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Nominal exchange rates, 1998-2007 EUR per NCU, 1998=100

0

20

40

60

80

100

120

140

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

CZ HU PL SK SI BG RO

Ascending line indicates appreciation.

Source: wiiw database incorporating national statistics.

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Real exchange rates, 1996-2007 EUR per NCU (PPI deflated NCU + EUR), 1996=100

100

120

140

160

180

200

220

240

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

CZ HU PL SK SI BG RO

Note: Values over 100 indicate appreciation relative to 1996=100.

Source: wiiw database incorporating national statistics.

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Average gross monthly wages, total, EUR, 1995=100

50

100

150

200

250

300

350

400

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

CZ HU PL SK SI BG RO AT

Source: wiiw database incorporating national statistics.

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10

20

30

40

50

60

70

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

CZ HU PL SK SI BG RO

Unit labour costs(Austria=100)

Source: wiiw-Database

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General government deficit, 1998-2006in % of GDP

-14

-12

-10

-8

-6

-4

-2

0

1998 1999 2000 2001 2002 2003 2004 2005 2006

HU CZ PL SK SI

Source: Eurostat.

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Topics

A tale of two countries (Spain, Portugal) What makes NMS different from Spain and Portugal?

- NMS: longer experimentation of monetary and exchange rate

alignment with Eur-zone; much tighter financial market

integration; some economies with sophisticated and robust

export structures (more like Spain or even Ireland); problems with

fiscal policy – political business cycles

- Lessons: beware of real interest effect, household savings,

asset price bubbles; real exchange rate and current accounts

(hence ‚competitiveness‘) issues do not disappear

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Topics

What do we learn from the current crisis? The issue of

monetary instability and financial architecture

- Differences in the vulnerability across economies: fixers vs.

flexers, those with high/low foreign debt/private debt; fiscal

recklessness and political business cycles

- Contagion transmission through foreign banks; not sufficient

condition for stability in credit markets; strict regulation important

- On balance: quick transition to full EMU membership desirable