Transcript Accession of the New EU Members into the Eurozone

Accession of the New EU
Members into the Eurozone
Tamás Réti
Institute of Economics
Hungarian Academy of Sciences
Outline
• Milestones of integration into the European
Union
• Forerunners of accession into the eurozone
• Latecomers: Bigger countries
• Countries with currency board or fixed
exchange rate
• Conclusions
Milestones of integration
• Europe Agreements – free trade area + political dialogue. Trade and
financial integration, banking integration
• Copenhagen criteria – functioning market economy + capability to
cope with competitive pressure and market forces
• From 1998-1999 entry negotiations
Pre-accession boom in the candidate countries
Nominal and real convergence
• 2004-2007 Membership in the EU
From post-accession boom to economic recession
• Entry into the eurozone
Slovenia (2007), Slovakia (2009), Estonia (2011)
Annual GDP Growth (%)
(Eurostat, 2011)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
BG
4.2
4.7
5.5
6.7
6.4
6.5
6.4
6.2
-5.5
0.2
CZ
2.5
1.9
3.6
4.5
6.3
6.8
6.1
2.5
-4.1
2.3
EE
7.5
7.9
7.6
7.2
9.4
10.6
6.9
-5.1
-13.9
3.1
LV
8.0
6.5
7.2
8.7
10.6
12.2
10.0
-4.2
-18.0
-0.3
LT
6.7
6.9
10.2
7.4
7.8
7.8
9.8
2.9
-14.7
1.3
HU
3.8
4.1
4.0
4.5
3.2
3.6
0.8
0.8
-6.7
1.2
PL
1.2
1.4
3.9
5.3
3.6
6.2
6.8
5.1
1.7
3.8
RO
5.7
5.1
5.2
8.5
4.2
7.9
6.3
7.3
-7.1
-1.3
SI
2.8
4.0
2.8
4.3
4.5
5.9
6.9
3.7
-8.1
1.2
SK
3.5
4.6
4.8
5.1
6.7
8.5
10.5
5.8
-4.8
4.0
Vulnerability Indicators (Transition
Update May 2011)
% FX credit
in total
lending
External
Debt % of
GDP 2010
Gross
Reserves %
of GDP May
2011
Foreign
owned banks
share in total
assets 2009
Country
risk CDS
spread
May 2011
Share of
nonperforming
loans %
BG
61.0
102.3
35.0
84.0
205.6
18.1
EE
1.6
117.6
13.4
98.3
……
6.5
LV
74.3
85.7
19.7
91.5
…….
19.2
LT
91.7
165.2
31.6
69.3
203.7
19.3
HU
61.3
143.9
37.1
81.3
245.1
8.4
PL
33.0
66.8
19.6
72.3
140.7
8.8
RO
63.3
74.2
28.2
84.3
230.3
16.4
SI
5.5
133.7
2.0
29.5
…..
6.9
SK
0.7
14.7
0.9
91.6
80.8
5.8
Slovenia: the best is the first
Strategy of euro adoption
• 2003 Government + Central Bank accepted program of joining the ERMII
and adoption of euro
• First priority of government economic policy
• Joining ERMII on June 2004 (together with Estonia and Lithuania) less than
2 months after EU accession
• Minimum two-year period. Smooth stay. Market exchange rate close to
central parity.
• European Commission + ECB: Slovenia fulfilled all Maastricht convergence
criteria & ready for inclusion (May 2006)
• Reasons for success: focus on fiscal and BOP equilibrium, wide support
among political parties & in the public. Social pact with labor unions.
Consensus across governments. Target date accepted as realistic,
credible, lowered inflationary expectations. Tradition to save in DM/Euro
Slovenia
2004
2005
2006
2007
2008
2009
2010
GDP %
4.3
4.5
5.9
6.9
3.7
-8.1
1.2
Government
budget %
-2.2
-1.4
-1.3
-0.1
-1.8
-6.0
-5.6
Government
Expenditure %
45.9
45.3
44.6
42.5
44.1
49.0
49.0
Government
Revenue %
43.6
43.8
43.2
42.4
42.3
43.1
43.4
Public debt %
27.2
27.0
26.7
23.1
21.9
35.2
38.0
HICP %
3.7
2.5
2.5
3.8
5.5
0.9
2.1
Long-term interest
rate
4.7
3.8
3.8
4.5
4.6
4.4
3.8
239.087
239.568
239.596
239.640
239.640
239.640
239.640
Current account %
-2.6
-1.7
-2.5
-4.8
-6.7
-1.5
-1.1
Rate of
Unemployment
6.3
6.5
6.0
4.9
4.4
5.9
7.3
Exchange rate
SIT/EUR
Slovenia, euro and the crisis
• Global crisis shifted ratio between benefits and costs of
membership
• Slovenian model of consensus-seeking + high government
redistribution is being questioned.
• Inflation higher than expected. Strongly trade-dependent economy
– no possibility of devaluation
• Growth of nominal unit labor costs (2008: 6.2%, 2009: 7.9%)
• Political changes: Social democrats defeated centre-right
government (2008) - unfunded social promises
• Deeper and longer lasting crisis – Slow recovery. Decreased foreign
demand + lack of foreign financing
• Largest strike of public employees (October 2010).Cuts in social
benefits, increase of retirement age
• Public referendum rejected government programme (June 2011)
Slovakia: from political federation to
economic-monetary union
• Political consensus across governments to early entry in the eurozone.
• Future membership is an external anchor to implement market reforms.
• SKK enttered ERMII on November 2005 with a central parity at
38.455SKK/EUR.
• SKK was revalued from March 2007 by 7.8% to 35.4424
• On May 2008 by 15% to 30.1260.
• The centre-right Mikulas Dzurinda government elaborated entry strategy
in 2004 and set the target date by January 2009.
• The social-democratic Fico government asked the European Commission
and the ECB on April 2008 to evaluate its preparedness and to authorize
the entry on January 2009.
• Positive standpoint by the European Parliament, ECOFIN Council, and
European Council: exchange rate 30.126SKK/EUR
Slovakia
2004
2005
2006
2007
2008
2009
2010
GDP %
5.1
6.7
8.5
10.5
5.8
-4.8
4.0
Government
budget %
-2.4
-2.8
-3.2
-1.8
-2.1
-8.0
-7.9
Government
Expenditure %
37.7
38.0
36.6
34.3
35.0
41.5
41.0
Government
Revenue %
35.3
35.2
33.4
32.5
32.9
33.6
33.1
Public debt %
41.5
34.2
30.5
29.6
27.8
35.4
41.0
HICP %
7.5
2.8
4.3
1.9
3.9
0.9
0.7
Long-term interest
rate %
5.0
3.5
4.4
4.5
4.7
4.7
3.9
40.0220
38.5990
37.2340
33.7750
31.2620
30.1260
30.1260
Current account %
-3.4
-8.4
-8.2
-5.3
-6.2
-3.2
-3.4
Rate of
Unemployment
18.2
16.3
13.4
11.1
9.5
12.0
14.4
Exchange rate
SKK/EUR
Slovakia, euro and the crisis
• Highly export dependent – over 80% of GDP
• Production of transport equipment, consumer electronics.
Steep decline during the crisis, but fast recovery.
• SK faced global recession with a de facto fixed exchange rate
since mid 2008. Became too strong in relation to neighbouring
countries’ devaluated currencies
• Big and persistent decline in manufacturing employment
• Unusual price increase (service prices) as a result of
changeover from December 2008 to February 2009.
• Severe deterioration in public finances.
• Euro-membership offered a shield – higher investor
confidence, more favourable bank lending rates
Estonia: from currency board to single
currency
• Political and social consensus about the need of the entry into the
eurozone. Pre-accession government won the 2011 election despite
the serious effects of the crisis. Economic–monetary integration
does not contradict to political sovereignity.
• Small and very open economy – need to further advance
integration. Significant economic convergence. Prudent fiscal policy
before the crisis – liquidity reserves. Corruption perception lowest
in CEE.
• 2000-2007 Fast economic growth based on private credit
expansion, strong investment flows . Household and corporate debt
doubled. Real interest rates turned negative. Wage increases
outpaced productivity, pushed up unit labor costs. Appreciation of
real effective exchange rate. Two digits current account deficits.
Overheated economy.
Estonia
2004
2005
2006
2007
2008
2009
2010
GDP %
7.2
9.4
10.6
6.9
-5.1
-13.9
3.1
Government
budget %
1.6
1.6
2.4
2.5
-2.8
-1.7
0.1
Government
Expenditure %
34.0
33.6
33.6
34.4
39.9
45.2
40.0
Government
Revenue %
35.6
35.2
36.0
36.9
37.0
43.4
40.1
Public debt %
5.0
4.6
4.4
3.7
4.6
7.2
6.6
HICP %
3.0
4.1
4.4
6.7
10.6
0.2
2.7
15.6466
15.6466
15.6466
15.6466
15.6466
15.6466
15.6466
-11.3
-10.0
-15.3
-17.2
-9.7
4.5
3.6
9.7
7.9
5.9
4.7
5.5
13.8
16.9
EEK/ EUR
Current account %
Rate of
Unemployment
Estonia: Changeover to Euro
• Andrus Ansip PM : For many Estonians besides positive
emotions changeover to Euro could easily remain almost
unnoticed
• Fixed exchange rate – no hope to lower production costs
via depreciation
• Economic adjustment started in early 2008. Cummulative
GDP loss amounted to 19% in 2008-09.
• Internal devaluation. Labour shedding, reduction of
working time, decline in wage bill. Downward flexibility
of wages.
• Recovery from crisis faster than expected. Rapid
convergence in per capita income
Latecomers: Bigger countries
Czechia: almost able but not keen
• Floating exchange rate + inflation targeting
• Prior to crisis: External balances are solid, central bank is able to manage
monetary policy. Lack of pressing constraints to change. Hard measures
could be postponed.
• Government document on the fulfilment of the convergence criteria (Dec.
2010):
• Compliant with price stability criterion
• Sustainability of public finance is not being fulfilled – excessive deficit
procedure was opened for the second time
• Appropriate timing of ERMII entry is key importance.
• Low degree of spontaneous euroisation is due to confidence to domestic
currency + sustained low inflation
• Low government debt started to rise fast – high share of mandatory
expenditure
Czech Euro: Invisible
•
•
•
•
•
•
•
•
•
‚Milestones on the Road to Adopting the Euro in the Czech Republic’
October 2003 Government adopts Euro Changeover Strategy – possible term
2009-2010
August 2007 Original unofficial term (2009-2010) is being abandoned.
May 2010 3 party coalition – agreement do not fix date of adoption
July 2010 New Czech government decides not to fix date for euro adoption
Government should not set a target date for the entry and should not attempt
to enter ERMII during 2011
Since the global crisis: exchange rate and interest rate volatility, government
deficit and public debt increased. Austerity measures invited strong social
resistance: strike of public transportation workers
Budget deficit 2010: GDP 4.7% - 2013: 2.9%
Nominal cuts in the wages of public employees, rise in retirement age,
reductions in social benefits – Consitution Court rejected austerity package
Czech and Polish Convergence Data
2007
2008
2009
2010
2007
2008
2009
2010
GDP
6.1
2.5
-4.1
2.3
GDP
6.8
5.1
1.7
3.8
Budget
-0.7
-2.7
-5.9
-4.7
Budget
-1.9
-3.7
-7.3
-7.9
Debt
29.0
30.0
35.3
38.5
Debt
45.0
47.1
50.9
55.0
HICP
3.0
6.3
0.6
1.2
HICP
2.6
4.2
4.0
2.7
CA
-3.2
-0.7
-3.2
-3.8f
CA
-4.7
-4.8
-2.2
-3.4
Long-term
interest
rate
4.3
4.6
4.8
3.9
5.5
6.1
6.1
5.8
Rate of
unemploy
ment
5.3
4.4
6.7
7.3
Longterm
interest
rate
Rate of
unemploy
ment
9.6
7.1
8.2
9.6
PLN/Euro
3.78
3.51
4.3
3.99
CZK/Euro
27.76 24.94 26.43 25.28
Poland: not able, not keen
•
•
•
•
•
•
•
•
•
Strategic Guidelines for National Euro Changeover Plan (October 2010)
Full membership among top priorities: as soon as possible, however secure
euro area membership
Expected economic benefits: elimination of PLN/EUR exchange rate risk, drop
in market interest rates, increased stability and credibility of government’s
macroeconomic policy
Political benefits: participation in decision process of ECB and activities of
Eurogroup
Benefits will stimulate trade, investments, reduce debt servicing costs,
strengthens competitive position
Immediate benefit (estimate): 0.9-1.9% of GDP
Long-term benefit: 2.5-7.5% of GDP
Costs: organisational and technical adjustment, adaptation of IT systems,
acquisition and distribution of euro banknotes and coins etc.
Risk of temporary, atypical price developments, abandoning independent
monetary policy
Polish Convergence Programme 2011
• Integration with euro area – one of the government’s
priorities
• Changes made introduction more distant
• Safe membership in ERMII – impossible to set credible target
date
• Economic policy framework consistent with priorities of
‚Europe 2020’
• Objective to reduce general government excessive deficit,
ensure long-term sustainability of public finances
• Political and social consensus is required to adopt the euro
• Need to change the constitution – lack of political support
Romania: keen but not able
• Target date for euro
adoption 2015
• Economy has been severely
hit by the crisis
• Real convergence is
progressing slowly
• Especially inflation rate,
government budget deficit,
long-term interest rate are
far beyond convergence
criteria
• Political cohesion is weak
between political parties
2007 2008 2009 2010
GDP
6.3
7.3
-7.1
-1.3
Budget
-2.6
-5.7
-8.5
-6.4
Public
debt
12.6
13.4
23.6
30.8
HICP
4.9
7.9
5.6
6.1
Rate of
Unemp
6.4
5.8
6.9
7.3
CA
-13.4 -11.6 -4.2
-4.1
RON/EUR 3.33
3.68
4.23
4.21
Long-tem 7.1
Interest
rate
7.7
9.7
7.3
Bulgaria, Latvia, Lithuania (currency board)
• Litas joined ERMII already in June 2004 . Lithuania planned to adopt euro
from 1. January 2007, but average annual inflation was marginally higher
than reference value therefore European Commission rejected its
application on May 2006. Lithuania had 8.9 % budget deficit in 2010 and
its long term interest rate was too high, 12.1%.
• Bulgaria was not allowed to join ERMII in 2010 due its higher than
expected budget deficit. Bulgaria main weaknesses were in 2010 long
term interest rate (6.0%), unemployment rate (10.2%). Its budget deficit
amounted to 3.2%, government debt to 16.2%, and inflation 3.0%. In the
previous years it had two digits deficit in current account.
• Latvian lats entered ERMII on May 2005. Its government sets January 2014
for Euro adoption. Latvia had 7.7% budget deficit in 2010. Government
debt and inflation figures were low, but it had 17.8% rate of
unemploment.
• The sustainability of these figures could be questioned.
Conclusions
• Besides nominal and real convergence, capability to cope with
competitive pressure is important criteria (Maastricht +
Copenhagen)
• Timing and international environment of the entry to ERMII and
eurozone are having significant importance. Eurozone itself is going
through changes concerning its regulation therefore it is getting
harder to enter.
• Political cohesions, consensus, political culture, cross-party
solidarity is required to enter the eurozone
• Global economic-financial crisis has changed governments’
priorities.
• Political constituency of adoption of euro has been weakening
• Those who are already in may further benefit.
• Alternative solutions to adoption of the euro are not providing
better results.