warsaw, polandspain vs. emu positive human capital contribution vs. negative tfp and capital per...

1

Research Department

Warsaw, Poland October 24, 2003 Manuel Balmaseda

2

Europe, the driving force of economic policy

1936-1959 Civil War, Autarky

1959 Stabilization Plan

1970 Preferential Agreement with EEC

Pre-Europe

1986 Spain joins EU

1989 Spain joins ERM-EMS

1992 Single Market

1999 Spain joins EMU (Euro)

European

Integration

Phase I

Phase II

1975 Democracy

3

The multiple “meanings” of Europe

From autarky to European integration

4

A GOAL A final objective, shared by all agents

For Spain’s economy, “Europe” has been:

•Trade openness

•Nominal convergence

•Fiscal consolidation

•Capital infrastructure effort

•Capital flow liberalisation

•Central Bank independence

5

AN EXCUSE Desirable domestic policy, which Europe served as an excuse to implement


•Privatisation

•Foreign Direct Investment in Spain

•Labour market reform

•Government subsidy reduction

•Deregulation

6

A CULPRITNot clearly desirable policy, which Europe forced Spain to implement


• Agricultural policy

• Fishing industry

• External economic ties

(Latin-America import quotas)

7

A DEAD WEIGHT An external impediment to carry out desirable domestic policies


• EU Labour market rigidities

• EU Goods and services market rigidities

• EU Cross-border merger impediments

• Protectionism

8

The multiple “meanings” of Europe

From autarky to European integration:

The economy of the transition

The economy of European integration

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1. Modernization of the State

• Democratic State

• Welfare State

• Modern tax system

• Industrial restructuring

• Freedom of enterprise

• Eliminate price controls (floors and ceilings)

• Modernization of education and research


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3. Labor market• Wage liberalization but preservation of life-long

employment, real wage boom

• Labor union revival. Centralized wage bargaining

4.- Incipient trade openness

•Quasi-federal State (Autonomous regions)

•Separation of powers (legislative, judiciary)

• Increased role of local governments (city hall)

2. Decentralization


11

The economy of European integration

International trade openness

Increased FDI flows into and out of Spain

Internacionalization

Increased competition

Privatization process

Deregulation

Eficiency gains and growth

Cohesion policies (European structural funds)

Infrastructure investment

Increase saving, development of financial system and real estate market

Education reform

Physical capital accumulation

Human capital accumulation

12

Full trade liberalization, progressive mobility of capital and adherence to EMS in 1989.

The economy of European integration: greater external openness

10

20

30

40

50

60

7019

80

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Degree of Openness of the Spanish Economy(X+M)/GDP (%)

EEC

EuropeanSingle Market

EMU

13

The economy of European integration: greater external openness

Large inflow of FDI (automotive, food, retail, iron works, banking) initially with even larger outflow later (banking, telecom, utilities)

Foreign Direct Investment (GDP %)

0%

1%

2%

3%

4%

5%6%

7%

8%

9%

10%

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

To Spain

From Spain

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Liberalization of profesional associations

Rates charged by notaries and propertyregisters have been reduced by 50% (1997)

Electricity sector deregulation

Accumulated decrease in electricity rates for households exceding 10% (1997- 2000).

Telecom liberalization

Reduction of 40% in international call rates(1997-1999)

Bankingcompetition

Mortgage credit commissions had beenreduced from 4% to 0,5% (1993-1997)

Air transportcompetition

Regular air ticket prices have come down 50% (1995).

Labor market New more flexible contracts (1994, 97, 2000-01)

The economy of European integration : increasing competition

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Public investment, financed to a largeextent via EuropeanFunds, has allowedthe capital stock toreach 83% of the EU average (40% in 1986).

The economy of European integration: structural funds

0

10

20

30

40

50

60

Ig(n

ati o

nal)/

Ig(U

E) (

%)

85 86 87 88 89 90 91 92 93 94 95 96

Ireland

Greece

Spain

Portugal

% of public investment finance via European Funds

16

CredibilityDeficit reduction

Lower exchange rate volatility

Interest rates at historical lows

Bank of Spain’s independence

The economy of the Euro:credibility gains

Probability of EMU Accession(J.P. Morgan)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jul-9

6Au

g-96

Sep-

96O

ct-9

6N

ov-9

6D

ec-9

6Ja

n-97

Mar

-97

Apr-

97M

ay-9

7Ju

n-97

Jul-9

7Au

g-97

Sep-

97N

ov-9

7D

ec-9

7Ja

n-98

Feb-

98M

ar-9

8

Spain

Italy

PortugalFrance

17

In the financial crisis of 1998-99, the “flight to quality” towards the D-Mark led to only a small increase in sovereign risk premiums in Spain and Italy.

BONDS

Change in long-term differential with Germany.

Su-DI-No Spa Por Ita"Tequila" 86 156 127 198

Russian Crisis 92 45 33 54Potential variation 167 136 212Brazilian crisis 32 16 11 20Potential Variation 57 47 73

Widening of 10-yr differentials w/ GermanyIn basis points

0 50 100 150 200 250

Sw-Di-No

Spain

Portugal

Italy

“Tequila”

Russia

Brazil

The economy of the Euro:“umbrella” effect

What would have happened without the Euro?

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Neither the peseta nor the lira were affected by the emerging countries’ crisis in Russia or the Brazil.

European Currencies depreciation rates.

Sw-Di-No Spa Por Ita"Tequila" 7,7 11,0 3,7 23,4Russian crisis 6,8 0,2 0,5 0,4Potencial Variation 9,9 3,3 20,9Brazilian crisis 4,8 0,0 0,0 0,0Potential variation 6,9 2,3 14,5

CURRENCIES

Greece

Depretiation RatesEuropean Currencies against D-Mark

0% 5% 10% 15% 20% 25%

Sw-Di-No

Spain

Portugal

Italy

“Tequila”

RussiaBrazil

The economy of the Euro:“umbrella” effect

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The process of nominal convergence with Europe has led to an important fall in interest rates, due to the reduction of the exchange rate risk premium.

The economy of the Euro:interest rate reduction

In fact, short term real interest rates are negative at present.

Long-Term interest Rates (10 y)

2

4

6

8

10

12

14

1619

87

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Germany

Spain

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From transition to the Euro:

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• Wage boom following labor union revival

• No firing: enterprises went bankrupt after oil shocks

• Industrial restructuring

•Reversal of emigration flows

Transition had a high cost in terms of employment :

0

5

10

15

20

25

09-7

6

09-7

8

09-8

0

09-8

2

09-8

4

09-8

6

09-8

8

09-9

0

09-9

2

09-9

4

09-9

6

09-9

8

09-0

0

Unemployment rate : percentage of active population

From transition to the Euro:first costs, later benefits

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• Labor market reforms of 1994, 1997 and 2000

•Change in Labor Unions attitude

• Moderate wage pressures (low ex-post real wages)

Employment has grown at over 2% yearly since 1996

0

5

10

15

20

25

09-7

6

09-7

8

09-8

0

09-8

2

09-8

4

09-8

6

09-8

8

09-9

0

09-9

2

09-9

4

09-9

6

09-9

8

09-0

0

Unemployment rate : percentage of active population


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-8,0

-6,0

-4,0

-2,0

0,0

2,0

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

Structural deficit(%/GDP)

From structural equilibrium to a

deficit in excess of 5% of GDP

•Construction of democratic State and decentralization

•End of the process of deficit monetization

Transition had a cost in public deficit terms:

Return to nominal and

structural balance (2002)

Reduction of public deficit has contributed to macroeconomic stability.

Debt below the 60%

ceiling set by Maastricht.


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GDP per capita convergence w/ UE

55%

60%

65%

70%

75%

80%

85%

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

Between 1975 and 1986, due to economic restructuring, the Spanish economy diverged from the EU’sin terms of GDP per capita by 8 percentage points (from 81% to 73% of the EU average).

Transition had a cost in GDP per capita terms:Spain’s GDP per capita stands currently at 85% of the EU and 54% of the US.

1986-2002Convergence since

EU membership:(from 73% to 85%)

Growth differential in 1996-2002 has been

1,2 points.


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Productivity is the key to continued convergence

Spain had converged in labor productivity terms with the EU by 1986 …

... but it has diverged since.

From transition to the Euro:the road ahead

0,1%

1,1%

2,1%

3,1%

4,1%

5,1%

6,1%

7,1%

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

US

Spain

EMU

Labor Productivity5 yr. moving avg.

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Labor productivity

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3,5%

4,0%

SP ITA EMU FRA GER UK US

1965-1990

1991-2000


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Productivity growth differentials and components:Spain vs. EMU

Positive human capital contribution vs. negative TFP and capital per employee.

Spain had converged in labor productivity terms with the EU by 1986. Since it has diverged.

-1,0%

-0,5%

0,0%

0,5%

1,0%

1,5%

1966-1975 1976-1985 1986-1995 1996-2000

TFP K/L H Labour prod.



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REGULATION IN THE LABORAND GOODS MARKETS (1998)

AUS

BEL

CANALEDIN

FINL

FRAGRE

IRL

ITAL

JAPHOL

NOR

PORTESP

SUE

EEUU

RU

0.0

0.5

1.0

1.5

2.0

2.5

0.0 1.0 2.0 3.0 4.0LABOR MARKET

GO

OD

S M

ARK

ET

Source: OCDE

Institutional problems in the goods markets (opening hours in commerce, firm creation, justice) and in the labor market (collective bargaining, high firing costs...).

Regulation in European markets seems excessive


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The Spanish experience should serve as a reference for the CEECs. It will probably take these economies an extended period of time to converge (decades).

All countries, except Hungary, have diverged since 1990, mapping the Spanish experience after 1975.

Their starting points, however, are significantly lower.

GDPs per capita convergence w/ EU:

20%

30%

40%

50%

60%

70%

80%

90%

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

Czech R.

Poland.

Spain

Latvia

Lituania

Lessons for Accession Countries

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Lessons for Accession Countries

• “Europe” can help adopt necessary policies which lack public support

• There are short term costs of reform, but “no pain, no gain”

• Reform should not end with accession: EU is not the lead to follow

• Productivity enhancing policies should be implemented (human capital, R&D, etc.)

31

Research Department

Warsaw, Poland October 24, 2003 Manuel Balmaseda

warsaw, polandspain vs. emu positive human capital contribution vs. negative tfp and capital per...

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