Prospects: Short and Long
Vladimir Gligorov
Contents
• Changing monetary regime• European challenges (changing policy
framework)• The Balkans: the adjustment problem
Changing Monetary Regime
• Interest rate hike is all but certain, but the timing is uncertain• The uncertainty is fuelling the volatility of the exchange rates
inter alia • FED wants to normalise, to change the monetary regime, i.e.
go to above 3 per cent rate in two years or so, but does not want to start the process and have to reverse course (as happened to ECB and Bank of Sweden, and also to the FED in 2007)
• However, the FED does not want to remain passive and miss the change in expectations because of too much dependency on the past data – it needs to get ahead of the curve at some point
Effects of Changed Monetary Regime
• Effects on the euro area: mostly positive, assuming non-perverse exchange rate reaction
• In part because lower euro does the work of the ECB for it (in terms of boosting inflation)
• Emerging markets challenged (if the history of past changes in monetary regimes are to go by)
• In part because of oil and commodity prices remaining depressed while currencies are devaluing
European Challenges
• Policy framework will continue to evolve, albeit slowly
• Public and intra-euro foreign debts will push for banking union and some elements of a fiscal union
• Risks of disintegration will increase as EU continues to underperform in supply of the basic public goods: security, justice, and welfare
• Assuming preserved political stability, or sustainable instability, growth prospects will continue to improve, however slowly
New Europe
• Convergence growth returns in the East and even in the South
• Mostly on the basis of export performance and better debt profiles in Central European and Eastern Balkan EU member states
• Especially in countries with strong exporting sectors
The Balkans
• The Balkans still face the adjustment problem due to, in part,
• rigid price and policy structure and low openness
• Examples: Greece and Croatia (slow export and investment recovery)
• Alternative examples: Serbia and Bulgaria (export recovers, but not investments)
• And political instability
Consumption, Deleveraging, and Investment
• Investment decline everywhere• Consumption persistence• Both of households and of governments• Trade and current account deficits closing• i.e. savings increasing (deleveraging)• (all the data is from EUROSTAT, so some
smaller Balkan countries are not covered, but they do not differ substantially)
Gross Fixed Capital Formation/GDP
EU28
EU15
EURO19
Bulgaria
Czech Rep
ublic
Estonia
Greece
Spain
Croati
aLat
via
Lithuan
ia
Hungary
Austria
Poland
Portuga
l
Romania
Slove
nia
Slova
kia
Macedonia
Albania
Serb
ia0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
20082014
Gross Capital Formation/GDP
EU 28
EURO 19
Bulgaria
Czech Rep
ublic
Estonia
Greece
Spain
Croati
aLat
via
Lithuan
ia
Hungary
Austria
Poland
Portuga
l
Romania
Slove
nia
Slova
kia
Macedonia
Albania
Serb
ia0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
20082014
Government’s Final Consumption/GDP
EU 28
EURO 19
Bulgaria
Czech Rep
ublic
Estonia
Greece
Spain
Croati
aLat
via
Lithuan
ia
Hungary
Austria
Poland
Portuga
l
Romania
Slove
nia
Slova
kia
Macedonia
Albania
Serb
ia0
5
10
15
20
25
20082014
Household Final Consumption/GDP
EU 28
EURO 19
Bulgaria
Czech Rep
ublic
Estonia
Greece
Spain
Croati
aLat
via
Lithuan
ia
Hungary
Austria
Poland
Portuga
l
Romania
Slove
nia
Slova
kia
Macedonia
Albania
Serb
ia0
10
20
30
40
50
60
70
80
90
20082014
Final Consumption/GDP
EU 28
EURO 19
Bulgaria
Czech Rep
ublic
Estonia
Greece
Spain
Croati
aLat
via
Lithuan
ia
Hungary
Austria
Poland
Portuga
l
Romania
Slove
nia
Slova
kia
Macedonia
Albania
Serb
ia0.0
20.0
40.0
60.0
80.0
100.0
120.0
20082014
Consumption Beats Investment
• Final consumption (as a share of GDP) holds up (in smaller EU states and those in the South)
• Investment plunges• Household consumption less volatile than
government• Consumption of households especially strong
in the Balkans
Export Growth
• Exports have grown strongly in the crisis• But less in Greece, Croatia, Spain, Portugal • While much more in other Balkan countries
and also in the Baltics• Why?• Basically because of the pre crisis loss of
competitiveness and the post-crisis difference in the readiness to adjust
Exports/GDP
EU 28
EURO 19
Bulgaria
Czech Rep
ublic
Estonia
Greece
Spain
Croati
aLat
via
Lithuan
ia
Hungary
Austria
Poland
Portuga
l
Romania
Slove
nia
Slova
kia
Macedonia
Albania
Serb
ia0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
20082014
Imports/GDP
EU 28
EURO 19
Bulgaria
Czech Rep
ublic
Estonia
Greece
Spain
Croati
aLat
via
Lithuan
ia
Hungary
Austria
Poland
Portuga
l
Romania
Slove
nia
Slova
kia
Macedonia
Albania
Serb
ia0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
20082014
Exports, euro
Bulgaria
Czech Rep
ublic
Estonia
Greece
Spain
Croati
aLat
via
Lithuan
ia
Hungary
Austria
Poland
Portuga
l
Romania
Slove
nia
Slova
kia
Macedonia
Serb
ia0.0
50,000.0
100,000.0
150,000.0
200,000.0
250,000.0
300,000.0
350,000.0
400,000.0
20082014
Export and Import Growth, 2014/2008
Bulgaria
Czech Rep
ublic
Estonia
Greece
Spain
Croati
aLat
via
Lithuan
ia
Hungary
Austria
Poland
Portuga
l
Romania
Slove
nia
Slova
kia
Macedonia
Serb
ia
-40.0
-20.0
0.0
20.0
40.0
60.0
80.0
importsexports
Exports/GDP and GDP growth
-6.00 -5.00 -4.00 -3.00 -2.00 -1.00 0.00 1.00 2.00 3.00 4.000.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
f(x) = 3.0567250171521 x + 49.1107249323387R² = 0.0639886335904081
growth %
expo
rt/g
dp
Foreign Trade
• There is striking differentiation in export performance
• Where Southern EU countries (including Croatia) do worse or much worse than Balkan and Baltic countries
• One lesson: small economies can increase exports even if external demand is not improving and is even deteriorating (they are price takers)
• So, there is a supply problem in the export performance
Manufacturing
• On the supply side the problem is low share of the tradable sector
• In particular of manufacturing• Both in Southern Europe and the Balkans
Manufacturing Value Added, % GDP
2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
5
10
15
20
25
30
Czech RepublicRomaniaSloveniaSlovakiaHungaryAustriaPoland
Manufacturing Value Added, % GDP
2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
2
4
6
8
10
12
14
16
18
20
EstoniaLatviaLithuaniaEU 28
Manufacturing Value Added, % GDP
2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
2
4
6
8
10
12
14
16
18
GreeceSpainCroatiaPortugalSerbiaMacedoniaAlbania
Growth, Manufacturing, Exports
• More open economies, in terms of exports to GDP, grow faster
• Higher share of manufacturing supports exports
• It helps to manufacture in order to grow (here exports of goods and services)
Growth and Exports
-3 -2 -1 0 1 2 3 4 50
10
20
30
40
50
60
70
80
90
GDP growth
Expo
rt/G
DP
Growth and Manufacturing/GDP (2005-2014), smaller less industrialised countries
4 6 8 10 12 14 16 18 20 22 24
-3
-2
-1
0
1
2
3
4
5
manufacturing/GDP
grow
th
Growth and Manufacturing/GDP (2005-2014), EU plus some candidate countries
4 6 8 10 12 14 16 18 20 22 24
-3
-2
-1
0
1
2
3
4
5
manufacturing/gdp
grow
th
Manufacturing/GDP and Exports/GDP (2005-2014)
20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.000
5
10
15
20
25
export/gdp
man
ufac
turin
g/gd
p
The Adjustment Problem
• If there is a loss of competitiveness and rigid exchange rate regime
• Adjustment has to go via decline of imports to achieve improvement in the current account, and with:
• Real exchange rate depreciation• Decline in wages, and• Increase in unemployment
Current Account
2008 2009 2010 2011 2012 2013 2014 2015 2016
-60
-50
-40
-30
-20
-10
0
MacedoniaTurkeyMontenegroSerbiaAlbania
Current Account
2008 2009 2010 2011 2012 2013 2014 2015 2016
-25
-20
-15
-10
-5
0
5
10
BulgariaCzech RepublicEstoniaGreeceSpainCroatiaLatviaLithuania
Current Account
2008 2009 2010 2011 2012 2013 2014 2015 2016
-15
-10
-5
0
5
10
AustriaPolandPortugalRomaniaSloveniaSlovakiaHungary
Exchange Rate and Employment
• Real depreciation especially strong in Greece and Croatia, but also in Spain and Portugal
• (this is USD REER ULC based against the rest of the world)
• Employment decreases and unemployment increases again more or less in the same group of countries
Real Effective Exchange Rates, 2010=100
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160
20
40
60
80
100
120
140
AustriaPolandPortugalRomaniaSloveniaSlovakiaHungary
Real Effective Exchange Rates, 2010=100
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160
20
40
60
80
100
120
140
BulgariaCzech RepublicEstoniaGreeceSpainCroatiaLatviaLithuania
Employment rate, 15-64
EU28
Bulgaria
Czech Rep
ublic
Estonia
Greece
Spain
Croati
aLat
via
Lithuan
ia
Hungary
Austria
Poland
Portuga
l
Romania
Slove
nia
Slova
kia
Macedonia
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
20082014
Employment rate, 25-54
EU28
Bulgaria
Czech Rep
ublic
Estonia
Greece
Spain
Croati
aLat
via
Lithuan
ia
Hungary
Austria
Poland
Portuga
l
Romania
Slove
nia
Slova
kia
Macedonia
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
20082014
Unemployment rate
EU28
Bulgaria
Czech Rep
ublic
Estonia
Greece
Spain
Croati
aLat
via
Lithuan
ia
Hungary
Austria
Poland
Portuga
l
Romania
Slove
nia
Slova
kia0.0
5.0
10.0
15.0
20.0
25.0
30.0
20082014
Wages
• Nominal wages mainly held up• But grew very slowly or not at all in Southern European and
Balkan countries• So, with inflation, mostly shared among this group of countries,
that is reflected in the real exchange rate depreciation• Increased unemployment serves to sap the growth of wages• Serbian wages are given separately in euro to correct for the
unusually high inflation• In a number of countries wages have continued to increase, i.e.
if there was no or little loss of competitiveness before 2009 (e.g. Poland and Romania)
Wages (nominal)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
20,000
40,000
60,000
80,000
AlbaniaSerbiaMacedoniaCzech Republic
Wages (real, in euro)
2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
100
200
300
400
500
600
Serbia
Serbia
Wages (nominal)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Croatia
Croatia
Wages (nominal)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
PolandRomania
Wages (nominal)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
200
400
600
800
1,000
1,200
1,400
1,600
1,800
SlovakiaSloveniaBulgariaEstoniaLatviaLithuaniaBiH
Productivity and Competitiveness
• Productivity improved in majority of the countries, though notably not in Greece, Hungary, Macedonia and not much in Croatia and Slovenia
• Unit labour costs adjusted in countries with overvalued real exchange rates before the crisis
• Higher wage share in GDP is not correlated with higher growth rates
Real Labour Productivity (2010=100)
EU
Bulgaria
Czech
Republic
Estonia
GreeceSpain
CroatiaLa
tvia
Lithuania
Hungary
Austria
Poland
Portugal
Romania
Slovenia
Slovakia
Macedonia
0.0
20.0
40.0
60.0
80.0
100.0
120.0
2008 2009 2014
Nominal Unit Labour Costs (2010-100)
EU
Bulgaria
Czech
Republic
Estonia
GreeceSpain
CroatiaLa
tvia
Lithuania
Hungary
Austria
Poland
Portugal
Romania
Slovenia
Slovakia
Macedonia
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
2008 2009 2014
Wages and GDP
25.0 30.0 35.0 40.0 45.0
-3
-2
-1
0
1
2
3
4
5
wages/GDP
GDP
grow
th
Public Debt/GDP
• Apart from Greece, Croatia and Serbia stand out
• There is a steep trend line in the chart showing the path of Croatian public debt
• Projections for 2015-2016 are from the EU
Gross Public Debt/GDP
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160
20
40
60
80
100
120
140
160
180
200
BulgariaCzech RepublicEstoniaGreeceSpainCroatiaLinear (Croatia)SpainLatviaLithuania
Gross Public Debt/GDP
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160
20
40
60
80
100
120
140
AustriaPolandPortugalRomaniaSloveniaSlovakiaHungary
Gross Public Debt/GDP
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160
10
20
30
40
50
60
70
80
90
Macedonia FYRTurkeyMontenegroSerbiaAlbania
Legitimacy Risk
• In Macedonia and now in Montenegro, but also in Kosovo and Bosnia and Herzegovina there is either acute or chronic issue of legitimacy
• What is meant by that?• Take the Montenegrin case first, and then the
Macedonian one• Finally the case of Bosnia and Herzegovina
Prospects for Growth• Assumptions and Potential (this mostly applies to the Balkan less open
economies)• Slow growth of household final consumption, e.g. 1 percent• No growth in government final consumption• Strong increase in investment• Faster growth of exports than imports• Potential growth rate for countries like Croatia, Serbia, and most other
less open economies, is about 3 percent – in next 5 years or so• Assuming adjustment is accomplished by the end of that period with no
dramatic changes in the external environment, potential growth rate could be somewhere between 4 and 5 percent as long as employment rates reach the levels characteristic for more developed economies in Europe
Conclusions• Monetary regime is changing – interest rates are going to get
detached from zero• Energy and commodity prices should stay low• EU and euro area, barring major destabilisation, should benefit
from the changed monetary regime and low import prices• Central European countries should benefit from sustainable
overall policy framework and from increased prospects for exports
• Balkan countries and others that face sustainability issues will have to transit to more sustainable macroeconomic conditions with slower potential growth of up to 3 percent in next 5 years or so
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