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