1. Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies www.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 @wiiw.ac.at

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

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

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

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

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

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

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

13.  wiiw 13 GDP, 2000-2007 real change against preceding year Source: wiiw-Annual Database.

14.  wiiw 14 General government deficit, 1998-2006 in % of GDP Source: Eurostat.

15.  wiiw 15 Gross industrial production, 2000-2007 real change against preceding year Source: wiiw-Annual Database.

16.  wiiw 16 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

17.  wiiw 17 Labour productivity in manufacturing industry growth in %, 1995=100 Source: wiiw database incorporating national statistics.

18.  wiiw 18 Market shares in EU-25 imports, % Czech Republic Hungary

19.  wiiw 19 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

20.  wiiw 20 GDP growth in %, 1995=100 Source: wiiw database incorporating national statistics.

21.  wiiw 21 Real per capita GDP in transition countries, at PPP European Union (27) average = 100 Source: wiiw-Annual Database, Eurostat.