Transcript Incetinirea cresterii economice

Tipping into what in Europe?
What lies ahead for Romania?
Daniel Daianu
26 October, Bucharest, 2011
1
contents
• Global context: the Great Shift and the
New Normalcy
• Euro-zone crisis; A new recession
looming? (crisis management vs. solving
the euro zone crisis)
• Romania’s predicament
• Policy issues and debunking myths
1.The Great Shift
• The Great Shift: the rise of Asia
• Uphill capital flows!
• Black swans (tail risks): financial/economic, ecological; demographic
crises
• The struggle over limited resources: oil, food, water (new terms of
trade)
• Inter-connectedness and systemic risks/ Financial markets as
an in-built destabilizer and extracting an undue rent
• Overstretched societies: economically; socially; militarily…political
strain;
• Governance bottlenecks (national; regional (EU); global)
• An age of uncertainty, insecurity and distributional struggle
(volatility, domino effects/contagion; back up systems…costs)
• Economic slowdown (quasi-stagnation) in industrial societies
(Japanization)?
1.1 The Crisis impact
• Massive costs of bail outs
• Debt problem compounded by dimmed growth prospects
(debt deflation?)
• Fear and lack of confidence factors
• Global crowding out effect : impact on interest rates
• Social strain (erosion of the middle class, but which has
started in the early 90s)
• A fairness issue (a winners’ take all society?)
• An ethical issue (socializing costs)
• Getting out of an era of profligacy in an orderly way…
• Entering an age of forced diminished expectations
• Intensity of contagion effects
1.2 Relapse into a new recession
(same crisis)?
• Signs: flight to liquidity (equity markets); bonds
valuations; banks’ funding (do markets freeze
again?); rising CDSs
• Economic slowdown: the IFIs estimates for the
EU in Q3 and Q4, and forecasts for 2012 revised
downwards
• Dysfunctional politics; confidence crisis, market
sentiment…
• Policy stalemate in the EU (EMU)
• The specter of 1937…
1.3 Scenarios
• Tipping into a new recession by sheer dynamics of
market forces and inaction of policy-makers; worsening
of bank balance-sheets (new bank
recapitalization…)…vicious circles
• Avoiding a new recession by FED and ECB intervention;
bigger firepower of the EFSF (leverage it up), G20
coordination and IMF support…
• A new Lehman Brothers (disorderly default in the Eurozone):
• An orderly default of Greece; can contagion be avoided
(is a firewall possible)?
• A long stagnation/contraction (Kondratiev cycles, but
with the great shift in the world economy
2. The Euro zone crisis
• It is a structural/design crisis (EMU deficits are below those of the
US: 85% vs. 95% of GDP for public debt; cca.6% vs 8% of GDP for
budget deficit in 2010)
• Public debts have gone up by 1/3 on average following bail outs and
automatic stabilsers
• Public and private debts are to be blamed for the sovereign debt
crisis; Spain and Ireland had public debts of below 40% of GDOP
before 2008; Spain has a public debt inferior to Germany’s (60% vs.
75%) but markets judge growth prospects
• There is no Monetary Union without a common treasury (lender
of last resort) and tools for coping with asymmetric shocks
• Crisis management vs. dealing with structural flaws
• The political hurdle (no taxation without representation)
• How to foster economic growth?
2.1 Rescuing the euro-zone: crisis
management vs. dealing with
structural problems
•
•
•
•
•
Fiscal rules are necessary, but not sufficient
Bolster the EFSF to over 2,000 billion
ECB operations
Bank recapitalization
Orderly restructuring of sovereign debts where
necessary
• Crisis management of long duration?
2.2 Fortune reversals? NMS vs
EMU periphery
• Euro as shelter vs. euro as a major constraint on
adjustment policy
• The Great Moderation as a Great Misperception;
CDSs reflected market myopia and overshooting
(misperception); when euro-zone weak links
borrowed very cheaply –resource misallocation
• NMSs are better rated now by markets than
EMU periphery (CDSs)
• Huge externality (the euro zone crisis): finance,
trade, market sentiment, etc
CDS, 5y
1200
800
700
1000
600
RO
500
800
it
de
400
bg
300
hu
200
600
es
pt
400
ie
pl
100
cz
200
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
0
0
Jan-11
Mar-11
May-11
Jul-11
Sep-11
6000
5000
4000
3000
2000
gr
1000
0
10
GDP dynamics
8
% change
6
% change
4
2
0
-2
RO
-4
Bg
-6
Hu
-8
Pl
8
6
4
2
0
-2
-4
-6
-8
Gr
Pt
2008
2009
2010
2011p
2012p
Gr
1
-2
-4.5
-5
-2
Pt
0
-2.5
1.3
-2.2
-1.8
2008
2009
2010
2011p
2012p
RO
7.3
-7.1
-1.3
1.5
3.5
Es
0.9
-3.7
-0.1
0.8
1.1
Bg
6.2
-5.5
0.2
2.5
3
It
-1.3
-5.2
1.3
0.6
1.3
Hu
0.8
-6.7
1.2
1.8
1.7
Ie
-3
-7
-0.4
0.4
1.5
Pl
5.1
1.6
3.8
3.8
3
De
1.1
-5.1
3.7
2.7
1.3
Source: IMF-World Economic Outlook, Sep 2011, Eurostat
Es
It
Ie
De
11
Current account dynamics
8
8
3
3
% GDP
%GDP
-2
-7
-12
RO
-17
Bg
-22
-27
-2
-7
Gr
-12
Pt
-17
2008
2009
2010
2011p
2012p
Es
Hu
Gr
-14.7
-11
-10.5
-8.3
-6.1
It
Pl
Pt
-12.6
-10.9
-9.9
-7.5
-5.2
Ie
De
2008
2009
2010
2011p
2012p
RO
-11.6
-4.2
-4.1
-4.4
-4.8
Es
-9.6
-5.2
-4.5
-4.1
-4.1
Bg
-23
-8.9
-1
-2
-2.6
It
-2.9
-2.1
-3.3
-3.5
-3.3
Hu
-7.3
0.4
2.1
1.6
1.9
Ie
-5.6
-3
-0.7
1.2
1.8
Pl
-4.8
-2.2
-3.4
-4.1
-4.1
De
6.2
5.6
5.7
4.7
4.6
12
Source: Eurostat, European Commission Spring Forecast 2011
Budget deficit
2.0
%GDP
0.0
-2.0
RO
-4.0
Bg
-6.0
-8.0
-10.0
8.0
3.0
-2.0
-7.0
-12.0
-17.0
-22.0
-27.0
-32.0
-37.0
% GDP
4.0
Hu
2011 2012
2004 2005 2006 2007 2008 2009 2010
p
p
Pl
Gr
Pt
2011 2012
2004 2005 2006 2007 2008 2009 2010
p
p
Gr -7.5 -5.2 -5.7 -6.4 -9.8 -15. -10. -9.5 -9.3
Es
It
Pt -3.4 -5.9 -4.1 -3.1 -3.5 -10. -9.1 -5.9 -4.5
Ie
RO -2.3 -1.5 -1.4 -0.1 -1.8 -6.0 -5.6 -4.7 -3.6
Es -0.3 1.0
De
Bg
It
-3.5 -4.3 -3.4 -1.5 -2.7 -5.4 -4.6 -4.0 -3.2
Ie
1.4
1.8
1.0
1.9
1.1
1.7
-4.7 -3.2 -2.7 -1.6
Hu -6.4 -7.9 -9.3 -5.0 -3.7 -4.5 -4.2
Pl
1.6
-3.3
-5.4 -4.1 -3.6 -1.9 -3.7 -7.3 -7.9 -5.8 -3.6
1.6
2.0
2.9
1.9 -4.2 -11. -9.2 -6.3 -5.3
0.1 -7.3 -14. -32. -10. -8.8
De -3.8 -3.3 -1.6 0.3
0.1 -3.0 -3.3 -2.0 -1.2
13
Source: Eurostat, European Commission Spring Forecast 2011
Gross public debt
80
% GDP
70
%GDP
60
50
40
RO
30
Bg
20
10
170
150
130
110
90
70
50
30
Hu
2011 2012
2004 2005 2006 2007 2008 2009 2010
p
p
Pt
2011 2012
2004 2005 2006 2007 2008 2009 2010
p
p
Gr 98.6 100.0 106.1 105.4 110.7 127.1 142.8 157.7 166.1
Es
It
Pt 57.6 62.8 63.9 68.3 71.6 83.0 93.0 101.7 107.4
Ie
RO 18.7 15.8 12.4 12.6 13.4 23.6 30.8 33.7 34.8
Es 46.2 43.0 39.6 36.1 39.8 53.3 60.1 68.1 71.0
De
Bg
It 103.9 105.9 106.6 103.6 106.3 116.1 119.0 120.3 119.8
37
27.5 21.6 17.2 13.7 14.6 16.2
18
Pl
Gr
18.6
Hu 59.1 61.8 65.7 66.1 72.3 78.4 80.2 75.2 72.7
Ie
Pl
De 65.8 68.0 67.6 64.9 66.3 73.5 83.2 82.4 81.1
45.7 47.1 47.7 45.0 47.1 50.9 55.0 57.4 55.1
29.6 27.4 24.8 25.0 44.4 65.6 96.2 112.0 117.9
14
Source: Eurostat, European Commission Spring Forecast 2011
2.2 Pluses of NMSs, but…no
decoupling possible
•
•
•
•
Lower public debts (except Hungary)
Capacity to adjust
Being outside the euro-zone
Some NMSs are more compatible,
competitiveness-wise, with the hard core
of the EMU
3. Romania: a fragile growth model
• Overreliance on external indebtedness (mostly done by
the private sector!)
• Premature opening of the capital account (EU rule; it
has overlooked Asian/Latin American experience
and the danger of fickle capital flows)
• Rising external (CA) deficits during 2005-2008 (3/4 due
to the private sector)
• Non-tradable sectors oriented growth
• massive euroisation induced by financial liberalization
and high interest rate differentials
• Very low fiscal revenues (at 28% of GDP,cca 4% lower
than NMSs average and about 10% below EU-27
average)
3.1 Impact of the crisis
• Deep recession
• The level of potential output has been reduced;
• The potential yearly economic growth rate has
probably come down from cca. 5-5,5%, before the crisis,
to about 3%, but…
• Twin deficits syndrome since 2009
• Debt service up
• The crisis of the euro zone: CDS spreads + economic
slowdown in Europe + undermining confidence in local
markets too + the Greek conundrum (banking sector)
• Strategic importance of EU funds
3.2 Romania (1)
• Fiscal consolidation underway (but a new
recession in Europe?)
• Strong reduction of the CA deficit (from double
digit numbers before 2009 to around 4.5%
during 2009-2011)
• Higher exports, though they are likely to
slowdown;
• Strong disinflation after the VAT shock of 2010
• A plus: not being in the euro-zone
(autonomous MP and Ex rate policy, but partially
emasculated by euroization)
3.2 Romania (2)
• Rising public debt (speed of borrowing): from cca 18% end 2008 to
36%, with a big rise in external borrowing
• The rising cost of sovereign debt service (in spite of sovereign rating
improvement)
• Fiscal consolidation needs further steps: the deficit of the social
security system; the inefficiency of the public sector
• EU funds and better tax collection can prevent a strongly procyclical fiscal correction (a 3% budget deficit in 2012 involves a
correction of cca 2.5% of GDP assuming a 2% GDP growth rate,
and a higher correction if growth is below 2%). For a 2% budget
deficit the correction would rise above 4% since GDP dynamics is
impacted by the very fiscal correction.
• EU economic slowdown further complicates the policy choice
Budget expenditures
55
% GDP
%GDP
50
45
RO
40
Bg
35
Hu
30
2006 2007 2008 2009 2010 2011p 2012p
Pl
70
65
60
55
50
45
40
35
30
Gr
Pt
2006 2007 2008 2009 2010 2011p 2012p
Gr
44.9
46.3
49.6
52.7
49.6
49.7
49.5
Pt
44.5
44.3
44.6
49.8
50.7
47.7
46.9
RO 35.5
36.3
38.3
40.6
40.8
38.8
36.1
Es
38.4
39.2
41.3
45.8
45.0
42.9
42.0
Bg
34.4
39.7
37.6
40.7
37.7
37.4
36.6
It
48.7
47.9
48.9
51.9
50.6
49.9
49.2
Hu 52.0
50.0
48.9
50.6
48.8
50.4
45.3
Ie
34.5
36.7
42.8
48.2
67.0
45.5
43.9
Pl
42.2
43.2
44.5
45.7
45.8
50.4
De 48.6
48.4
50.1
54.0
53.0
53.1
53.6
43.9
Source: European Commission Spring Forecast 2011
Es
It
Ie
De
20
55
50
50
45
% GDP
%GDP
Budget revenues
45
RO
40
Bg
35
Hu
30
2006 2007 2008 2009 2010 2011p 2012p
Pl
40
Gr
35
30
Pt
2006 2007 2008 2009 2010 2011p 2012p
Gr
39.2
40.0
39.9
37.3
39.1
40.2
40.2
Pt
40.5
41.1
41.1
39.7
41.5
41.8
42.4
RO 33.3
33.7
32.6
32.1
34.3
34.1
34.5
Es
40.4
41.1
37.1
34.7
35.7
36.5
36.7
Bg
36.2
40.8
39.3
36
34.5
34.7
35
It
45.4
46.4
46.1
46.5
46.0
45.9
46.1
Hu 42.6
45.0
45.2
46.1
44.6
52.0
42.0
Ie
37.4
36.8
35.5
33.9
34.6
35.0
35.1
Pl
40.3
39.5
37.2
37.8
40.0
40.1
De 43.7
43.8
43.9
44.5
43.3
43.3
43.2
40.2
Source: European Commission Spring Forecast 2011
Es
It
Ie
De
21
Budget/Tax revenue: RO, NMSs and EU27
Budget revenue
46.0
44.0
42.0
40.0
38.0
36.0
34.0
32.0
30.0
Tax revenue
2004 2005 2006 2007 2008 2009 2010
2011 2012
p
p
32.3
32.4
33.3
33.7
32.6
32.1
34.3
34.1
34.5
NMSs 38.1
38.4
38.2
38.8
38.3
38.7
38.2
39.2
EU27
44.4
44.9
RO
44.8 44.6
NMSs
44.0 43.9
EU27
44.5
RO
37.0
35.0
33.0
31.0
29.0
27.0
25.0
%GDP
%GDP
39.0
44.0
2004
2005
2006
2007
2008
2009
RO
27.2
27.8
28.5
29.0
28.0
27.0
37.7
NMSs
38.8
39.1
39.6
39.6
39.3
38.4
44.5
EU27
33.1
33.4
33.5
34.1
33.9
33.41111
Source: European Commission Taxation Trends, 2011, European Commission
Spring Forecast 2011
RO
NMSs
EU27
22
3.3 Economic policy in Romania,
next (the 3L and 3H)
• Continue fiscal consolidation
• Do the utmost to increase EU funds absorption
• Raise fiscal revenues (fight tax evasion;
corruption; increase royalties); a more optimal
taxation is needed
• Structural reforms (labor markets; state
companies); privatization
• Agriculture, infrastructure, industrial rejuvenation
projects: the role of EU funds
• Trade links outer the EU
• Plan B
3.4 The 3L and 3H
• 3 L (low EU funds absorption; low fiscal
revenues; low productivity)
• 3H (high corruption; high waste, high
inefficiency)
4. The convergence challenge in
the EU
• It is of long vintage (structural and cohesion funds)
• Only very partial success: the “mezzogiornification of the
southern fringe”/ fractures in the EMU (EU), which were
obscured by the Great Moderation period (cheap credit
and imports)
• The competitiveness challenge in the EMU (in the EU);
• Weaknesses of the growth model in NMSs
• Redesigning growth models in a new world context
• What can EU policies do?
• The role of the EU budget
4.2 EU funds in Romania
• An absorption ratio of above 3% of GDP would
increase budget revenues by 2% (cca 1% of
Romania’s GDP is its contribution to the EU
budget)
• A net rise in budget revenues/expenditure of 2%
of GDP could increase the economic growth rate
by 0,6-1%
• Should worst case scenario occur, EU funds
could play a significant damage limitation
function
4.3 EU funds in Romania (II)
• In the case of deeper euro-zone crisis: can EU funds be
used in order to protect the local banking sector?
• Agriculture in a world with rising relative food prices; it
should be seen as a priority for the EU as a whole;
• Infrastructure development
• The scarcity of capital worldwide puts an additional
premium on EU funds;
• The opportunity cost of not absorbing EU funds is
enormous: a/ EU funds could be reoriented to other
users; b/ the economic cost per se; c/ it could backfire by
signaling fiscal indiscipline and resulting sanctions
5. Debunking myths
• The EU as a shelter (the euro zone)
• The EMH (efficient markets hypothesis)
• FDI as a deus ex machina (the role of domestic
saving)
• Crises do not befall mature economies on a
large scale (due to strong institutions and good
practices)
• Sovereign debt crises have fiscal origins par
excellence
• The Great Moderation as a Great Misperception
6. Rethinking policies for longer
term dynamics
• A premium on “Policy space” (policy flexibility)
• Diversity of policy/ instruments (when policy aims are many (Dani
Rodrik)
• Questionable policies: neglect of industrial policies; premature
opening of the capital account, etc
• Stimulate domestic savings
• Diminish euroization
• Foster tradable goods oriented investment. There is need for
hands on policies
• Dealing with fairness (burden sharing and income distribution)
• Managing expectations in an age of frugality
• Taming financial markets is a must for regaining financial stability
and fostering economic growth (Glass Steagall: implementing anti–
trust policies; segregating banks geographically?)