Challenges of Real Convergence Conference on: Ten Years of the Euro Inspirations for the Czech Repub

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Challenges of Real Convergence Conference on
Ten Years of the Euro Inspirations for the
Czech RepublicPrague, November 25, 2008

• Michael Landesmann landesmann_at_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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GDP per head, real growth annual averages
1993-2000 and 2001-2007, in percent EU-27
countries
Source Eurostat.
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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
GDP growth rates in
Source wiiw annual database
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Current account in of GDP, 1995-2007
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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,
1998100
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), 1996100
Note Values over 100 indicate appreciation
relative to 1996100.
Source wiiw database incorporating national
statistics.
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Average gross monthly wages, total, EUR, 1995100
Source wiiw database incorporating national
statistics.
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Unit labour costs(Austria100)
Source wiiw-Database
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GDP, 2000-2007real change against preceding year
Source wiiw-Annual Database.
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General government deficit, 1998-2006in of GDP
Source Eurostat.
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Gross industrial production, 2000-2007real
change against preceding year
Source wiiw-Annual Database.
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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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Labour productivity in manufacturing
industrygrowth in , 1995100
Source wiiw database incorporating national
statistics.
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Market shares in EU-25 imports,
Czech Republic
Hungary
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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

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GDPgrowth in , 1995100
Source wiiw database incorporating national
statistics.
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Real per capita GDP in transition countries, at
PPP European Union (27) average 100
Source wiiw-Annual Database, Eurostat.