1. The global financial crisis and macroeconomic policies: the situation in Southeast Europe Michael A Landesmann
First Bank of Greece Workshop on the
Economies and Eastern European and Mediterranean Countries
May 14th 2010, Athens

2. Topics: The global financial crisis and macroeconomic policies – Southeast Europe
Switch of ‘growth model’ in Southeastern Europe?
New (external and internal) constraints emerging from the crisis
How to deal with structural imbalances
Policy issues:
- short-run vs. medium- and long-run
- fiscal, exchange rates, financial market reform, structural policies
- EU and national policy agendas

3. Features of the ‘old’ growth model:
targeted at integration with the EU area
was associated with significant internal and external liberalization (trade, capital transactions, financial market integration)
benefits: capital inflows, trade integration, ‘technology’ transfer
the model worked - ‘convergence process’ – but emergence of structural imbalances

4. Growth – GDP at constant prices Average annual growth rates, 1995-2002 and 2002-2008, in %
Source: wiiw Annual Database incorporating national statistics, Eurostat.

5. The crisis

6. Exports total in EUR, Jänner 2008 = 100
Source: wiiw Database incorporating national statistics, Eurostat.

7. GDP real change against preceding year in %
Source: wiiw Database incorporating national statistics, Eurostat.

8. Gross industrial production, January 2008 = 100
Source: wiiw Database incorporating national statistics, Eurostat.

9. Gross industrial production, January 2008 = 100
Source: wiiw Database incorporating national statistics, Eurostat.

10. Adjustment of the ‘growth model’:
The legacy of structural imbalances
New constraints following the crisis

11. Trade balances of goods and services, 1996-2009 in % of GDP
CZ HU PL SK SI
BG RO HR MK RS AL
Source: Eurostat, wiiw calculations.

12. Trade balance of goods and services (BOP) in % of GDP
NMS-5
Baltics
SEE
NMS-5: CZ, HU, PL, SK, SI. Baltics: EE, LV, LT. SEE: BG, RO, HR, MK, BA (from 1998), RS (from 1999), ME (from 2001).
Source: wiiw Annual Database incorporating national statistics, Eurostat.
Source: wiiw Annual Database incorporating national statistics, Eurostat.

13. Trade balances of goods and services and income balances, 1996-2009 in % of GDP
CZ HU PL SK SI
BG RO HR MK RS AL
Source: Eurostat, wiiw calculations.

14. Industrial production cumulative change, 1995-1990, 2000-1990, 2008-1990
Note: ME; RS data for refer to CS.
Source: wiiw Annual Database incorporating national statistics, Eurostat

15. Industrial production cumulative change, 1995-1990, 2000-1990, 2008-1990
Note: ME; RS data for refer to CS.
Source: wiiw Annual Database incorporating national statistics, Eurostat

16. Exports of goods and services (BOP) in % of GDP
Source: wiiw Annual Database incorporating national statistics.

17. Low-skill industries, as % of total manufacturing exports to the EU-25
Source: Comext.

18. Technology-driven industries, as % of total manufacturing exports to the EU-25
Source: Comext.

19. Current account in % of GDP
NMS-5
Baltics
SEE
NMS-5: CZ, HU, PL, SK, SI. Baltics: EE, LV, LT. SEE: BG, RO, HR, MK, BA (from 1998), RS (from 1999), ME (from 2001).
Source: wiiw Annual Database incorporating national statistics, Eurostat.

20. Savings and investment in % of GDP
NMS-5
Baltics
SEE
NMS-5: CZ,HU,PL,SK,SI (from ). SEE: BG ( ) and RO (from ). Source: wiiw Annual Database incorporating national statistics, Eurostat.

21. Summary on structural imbalances:
Severe weaknesses of tradeable sector;
Strongly deteriorating private sector savings-investment imbalances;
Adds up to unsustainable current account imbalances;
Role of exchange rate regimes;
Problematic allocation of FDI across tradable and non-tradable sectors (not shown);

22. Constraints following the crisis:
External factors:
higher risk assessment of the region;
more difficult internal and external financing;
reduced growth expectations for most important export markets;
tougher to join the eurozone (new OCA debate)

23. Constraints following the crisis:
Internal factors:
‘deleveraging’ of private sector, increased propensity to save;
more limited room to manoeuvre for fiscal policy;
weaker and more cautious banking sector;
tightened financial market regulation (internal and external)

24. Summary of the argument on ‘redirecting the growth model’:
1. Adjusting to new external constraints and internal behavioural responses following the crisis:
- External: lower export market growth, more difficult financing conditions, tougher effective EMU membership conditions; financial market regulation
- Internal: weaker financial sector, deleveraging – higher domestic saving rates, less space for fiscal policy but more pressure on streamlining
2. Dealing with sustained structural imbalances:
- Differentiation across country groups (e.g. fix- and flex-exchr. economies)
3. Policy challenges:
- For the short run and the medium and longer run
- At national and at EU levels

25. Redirecting ‘the integration model of growth’
The policy choices:
Fixed vs. flexible rates
Fiscal consolidation vs. fiscal stimuli
Free flow vs. financial market regulation
Structural policy issues

26. Exchange rates
Flexible exchange rates have supported sustainable current account deficits
Countries with flexible exchange rate regimes may have had a less costly adjustment to the crisis
Fixed exchange rates tend to mandate pro-cyclical fiscal policies during the crisis and in the medium run
EMU membership may not protect against real exchange rate misalignments

27. Exchange rate and current account
Nominal exchange rate, average (NCU/EUR)
Current account in % of GDP
Source: Eurostat.

28. Real appreciation*, 2008-2009 EUR per NCU, PPI deflated, January 2008=100
*Values over 100 indicate appreciation relative to January 2008.
Source: wiiw Database incorporating national statistics.

29. Exchange rates* Flexible exchange rate: drastic real depreciation after September , EUR NCU, Jan = 100
*Values over 100 indicate appreciation over January 2008.
Source: wiiw Database, Eurostat.

30. Exchange rates* De-facto fixed exchange rate: modest real depreciation after September , EUR NCU, Jan = 100
*Values over 100 indicate appreciation over January 2008.
Source: wiiw Database, Eurostat.

31. Exchange rates* Currency board or euro as legal tender: minor real depreciation after September , EUR NCU, Jan = 100
Values over 100 indicate appreciation over January 2008.
Source: wiiw Database, Eurostat.

32. (Private and public) Debt and Fiscal Policy
In catching-up economies, in financially integrated areas, the (nominal) interest rate on public debt is below the (nominal) growth rate which implies that the sustainability of public debt is assured except if primary deficits are permanently higher than those that stabilize public debt to GDP ratios
In the current crisis, it does not seem that in most, not necessarily all countries, structural primary deficit has changed permanently so that fiscal balances are not sustainable
Finally, some of the hikes in fiscal deficits are the consequence of the deleveraging of private debts and thus fiscal consolidation is not the first best policy in those cases

33. Gross external debt and public debt % of GDP, 2004-2009
Source: wiiw Annual Database incorporating national statistics, Eurostat

34. Debt in % of GDP Gross external debt Public debt Private debt
Source: Eurostat.

35. Debt in % of GDP
NMS-5
SEE
NMS-5: CZ, HU, PL, SK, SI. Baltics: EE, LV, LT. SEE: BG, RO, HR. Source: wiiw Annual Database incorporating national statistics, Eurostat.

36. Real leading NB/ECB interest rates, 2008-2010 CPI-deflated, in % p.a.
Flexible ER
Fixed ER
Note: For Estonia: 1-month interbank lending rate (Talibor); for Lithuania: 1-month interbank lending rate (Vilibor).
Source: Eurostat.

37. Policy recommendations for the improvement or the redirection of the integration model of growth: National agenda
Exchange rate flexibility wherever that is feasible (countries that already use the euro or have committed to currency boards would have to make sure that the euro is an optimal currency union for them before joining EMU)
Countercyclical fiscal policy with sustainable fiscal deficits and public debt to GDP levels
Use of taxation or insurance to prevent bubbles in financial markets (sand in the wheels taxes on particular types of investments)
Structural policy to strengthen tradable sector

38. Policy recommendations for the improvement or the redirection of the integration model of growth: EU agenda
Copenhagen and Maastricht criteria should ensure that accession to the EMU leads to sustainable currency union ex ante
Enrichment of the Stability and Growth Pact with short-term crisis management facility (support for anti-cyclical fiscal policy while keeping track of fiscal sustainability)
Strengthening financial regulation for systemic risks; facilities for bank restructuring and for regulation of cross-border activities
Use of EU Funds to support development of tradable sector

39. Policy challenges for the
Short and medium term:
- getting credit going again
- real exchange rate adjustment vital in some countries
- pursue active fiscal policy in countries with room to manoeuvre
- labour market policy
Medium and long term:
- paying much closer attention to external disequilibria
- flexible exchange rate regimes have proven to be more successful
- sustainability of private and public debt development (cross-border financial market regulation, increased EU monitoring)
- policies to promote the tradable sector (also involving EU transfers)