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Michael Landesmann landesmann @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. Topics. Real convergence outside and within the EMU: some general remarks

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Michael Landesmann landesmann @wiiw.ac.at

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  1. Challenges of Real ConvergenceConference on: Ten Years of the Euro – Inspirations for the Czech RepublicPrague, November 25, 2008 Michael Landesmannlandesmann@wiiw.ac.at

  2. 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

  3. 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.

  4. 1993-2000 2001-2007 GDP per head, real growth annual averages 1993-2000 and 2001-2007, in percent EU-27 countries Source: Eurostat.

  5. 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

  6. GDP growth by country GDP growth rates in % Source: wiiw annual database

  7. Current account in % of GDP, 1995-2007

  8. Consumer prices, 2000-2007(Month in the previous year = 100) Source: wiiw-Database

  9. Nominal exchange rates, 1998-2007 EUR per NCU, 1998=100 Ascending line indicates appreciation. Source: wiiw database incorporating national statistics.

  10. Real exchange rates, 1996-2007 EUR per NCU (PPI deflated NCU + EUR), 1996=100 Note: Values over 100 indicate appreciation relative to 1996=100. Source: wiiw database incorporating national statistics.

  11. Average gross monthly wages, total, EUR, 1995=100 Source: wiiw database incorporating national statistics.

  12. Unit labour costs(Austria=100) Source: wiiw-Database

  13. General government deficit, 1998-2006in % of GDP Source: Eurostat.

  14. 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

  15. 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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