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Economic and Political Challenges of Acceding to the Euro Area

Economic and Political Challenges of Acceding to the Euro Area Is current account the real challenge ? Cinzia Alcidi, CEPS. December 7, 2009, Sofia. Outline of the presentation. Situation before the crisis Impact of the crisis Beyond Maastricht criteria Current account External debt

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Economic and Political Challenges of Acceding to the Euro Area

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  1. Economic and Political Challenges of Acceding to the Euro Area Is current account the real challenge ? Cinzia Alcidi, CEPS December 7, 2009, Sofia

  2. Outline of the presentation • Situation before the crisis • Impact of the crisis • Beyond Maastricht criteria • Current account • External debt • Concluding remarks

  3. The region before the crisis • High level of growth • Wages increase • Widespread construction booms • Close to meet Maastricht criteria • Good state of government finances • But lack of consolidation • Inflation • LT interest rates

  4. The advent of the recession Source Ameco October 22, 2009

  5. Trends in government debt

  6. Differences within the region: Forex regimes • Region contains cases of extreme bubbles • Baltics worst in terms of height and duration of bubble. • The fixed forex rigidity • Poland and CZ little bubble • Flex forex • Bulgaria • Currency board issue

  7. How recovery will look like? • Weak. Permanent fall in output cannot be excluded • EU banking sector still in disrepair • EU productive sector relies on banking sector • Low productivity within EU • Effects housing bust long and difficult to absorb • Weak global demand (US) • Large debt: first private now public

  8. Beyond Maastricht: Current accounts • Maastricht criteria do not include current account balance • Why? • CA deficits are not necessarily a bad thing • CA deficits signal: • Competitiveness problem • Excess (national) saving over (national) investment • Low savings versus large investment

  9. Current account balance

  10. Bulgaria: External debt

  11. Greece: The troubled neighbour

  12. Concluding remarks: • Foreign investment good but is a form of debt: • growth model • Borrowed foreign funds for non-productive spending • Domestic savings and the ability to repay • Should we accept lower consumption?

  13. Thank you

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