Transcript PowerPoint-presentation

THE EURO
Klas Eklund
April 7, 2003
1
STARTING POINT: GLOBALISATION
POSES CHALLENGES
• Globalisation makes it more difficult to go
against international trends: “The golden
straight-jacket”
• The national state is turning obsolete in
important aspects
• Stronger transformation pressure also on
business
• How to react? Stand at the sidelines? Share
responsibility? Grasp opportunities? Ponder
super nationalism?
• Practical people are already making these
choices...
2
CURRENCY SYSTEMS AND GOALS
• Three goals
• Stability, liquidity and autonomy
• Three currency systems
• Fixed (but adjustable) currencies
• Floating rates
• Currency union or dollarisation
• No system fulfils all goals
• No system is perfect. Greatest risks with
fixed rates – and greatest opportunities
in a currency union
• The trend is towards larger blocs which
float
3
CALMFORS COMMISSION (1996)
• Political advantages in joining
• More important as the union grows
• Higher growth
• Larger market, increased trade, economies of
scale, transparencey, stiffer competione
• Results in more rapid productivity growth
• But risks of instability
• EMU is no “optimal currency area”
• Sweden had budget deficits, inflation history,
instable currency
• “Asymmetric shock” may cause unemployment
• Conclusion: Enter at a later stage - when
Sweden has become more stable
4
IS THE CALMFORS ANALYSIS
STILL VALID?
• A larger union makes it politically more
costly to stay outside
• Suspicions arise that we are willing to export
problems to others
• A (larger) currency union gives stronger
impetus to trade and growth
• New research strengthens this case
• But a larger union also makes one-sizemonetary policy more difficult
• Although the risk of shocks is smaller
• Conclusion: Both opportunities and
difficulties are greater
5
MORE TRADE – ESPECIALLY FOR
SMALL COMPANIES
• Vertical specialisation has become more
important
• Currency volatility is problematic
• Investments are needed to expand abroad
• Currency volatility an obstacle
• New insight: The existence of different
currencies itself is problematic
• Conclusion: Elimination of currencies should
have great repercussions
• Empirical evidence has been lacking – until
recently
6
TRADE EFFECTS FROM
CURRENCY UNIONS
Rose (2000)
Frankel & Rose (2002)
Engel & Rose (2002)
Glick & Rose (2000)
Rose & Wincoop (2001)
Lopez & Meissner (2001)
Levy (2001)
Flandreau & Maurel (2001)
Nitsch (2002)
Klein (2002)
235%
290%
240%
100%
140%
100%
50%
220%
85%
50%
Source: Alesina, Barro, Tenryo, NBER 2002
(only significant results)
Rose (2002, meta-survey)
7
ca 100%
EXPORTS OF GOODS FROM EU
TO REST OF WORLD
Value, index 1998=100
8
EFFECTS OF INCREASING TRADE
• Increasing trade means higher growth
• Economies of scale
• Sharper competition
• 100% more trade can give 30% higher
per capita income after 20 years
(Frankel and Rose)
• Increasing freedom of choice for
consumers
• Means higher welfare
• And stronger correlation of business
cycles
9
ADVANTAGES OF A LARGE
CAPITAL MARKET
• Savings and investments gradually decouple for
individual countries
• A larger and more liquid currency gives greater
stability
• Better chances of absorbing shocks
• More problems will be ”internalised”
• Smaller risk premium lowers bond yields
• Higher liquidity means lower costs
…not least in government budgets
• Greater access to funding, also for SMEs
• Signs of higher valuations (Tobin’s Q)
• Increasing investments
10
MORE MERGERS AND
ACQUISITIONS
• Common currency enhances market
integration
• Less price segmentation in a currency
union
• Vertical trade integration should mean
more M&A
• Half the rulings in EU Commission has
been about competition on a national level
• Cf Volvo and SAAB
• May change in one common market?
11
EURO WILL PUT PRESSURE
ON PRICES
• National boundaries and currencies create
price segmentation
• Increased transparency for consumers
means long-term price pressure through
stiffer competition
• Important for Sweden, with a price level
20 % over EMU average
• Heaven or hell for different companies.
Effects depend on sector, price elasticities
• Need for new pricing and branding
strategies
12
”HAVEN’T FLOATING RATES BEEN
GOOD FOR SWEDEN?”
• Exports have been helped by weak krona.
But purchasing power has eroded
• A weak currency may give increased
competitiveness in the short run – but not longterm growth and transformation
• Less pressure for structural reforms
• Floating krona has not been the cause of
stability
• The reasons are reform of public finances,
EU membership, convergence programs,
inflation target and Riksbank independence
• Krona has been unstable despite all this!
13
YIELD SPREAD TO GERMANY
10 year government bonds
5,0
4,5
First convergence program
4,0
3,5
3,0
2,5
2,0
1,5
1,0
0,5krona
Floating
0,0 target
Inflation
-0,5
91
92
93
94
95
96
97
98
99
00
01
02
cma 5
Source: EcoWin
14
THE KRONA
TCW
150
Göran Persson’s EMU plans
145
140
135
130
125
120
115
110
Calmfors commission
105
100
93
94
95
96
97
98
99
00
01
02
S weden
15
TCW
index ,
c
EUR/SEK and ERICSSON
8,00
160
8,25
8,50
8,75
EUR/SEK
Price/SEK
80
9,00
9,25
40
9,50
9,75
20
sep
10,00
dec
mar
jun
98
99
Ericsson B, SEK
Spot Rates, EUR/SEK
sep
dec
mar
jun
sep
00
dec
mar
jun
01
sep
Source: EcoWin
16
PRICING ON CURRENCY MARKETS
IS OFTEN IRRATIONAL
• Signal effect of currency is overrated
• Market prices may stray far from
”fundamentals”
• Uncertain expectations
• Financial markets dominate
• Herd behaviour, incentive systems
• Desired FX exposure
• Risks that the krona becomes a “swing
currency” if No
• Is Sweden too small for a currency of its
own?
• FDI effects? Will companies move out?
17
THE EURO WILL INCREASE
STABILITY
• Currency union does not mean a ”fixed rate”
but a disappearing krona! Sweden will still
have a floating currency – but with fewer
partners
• 40% of Swedish foreign trade is with EMU
members, 45% including Denmark. More when
candidate members join
• Half of krona volatility in trade will be
”internalised”
• Means more stability for business – not least
for small companies
• …and for economic policy
18
CONCLUSION – SO FAR
• Common currency creates a significant
increase of trade
• Productivity gains
• Transparency and freedom of choice for
consumers
• A more liquid capital market, lower risk
premium
• Better access to funding, increasing
investments
• Result: Higher growth rates, increased
welfare
19
WHAT DO BUSINESS AND
ECONOMISTS SAY?
• 83 %
yes
• 70 %
• 60 %
• 20 %
• 19 %
of CEOs of listed companies will vote
of CEOs in small companies
of economics professors will vote Yes
No
Undecided
• Political pros: 57 %
• Political cons: 11 %
• Economic pros: 40 % (Lower price level, higher
growth)
• Economic cons: 29 % (Unemployment risks)
20
WILL STABILISATION PROBLEMS
BE DIFFICULT?
• Larger currency area means more
stability on currency markets
• Lack of national monetary policy is a
problem only if Sweden deviates
strongly
• But Sweden is in step – and integration
will continue further
• Conclusion: Normally, the ECB will
stabilise also Sweden
21
SWEDEN IN STEP WITH THE EMU
Output gap differential
Sweden minus EMU
Percentage
points
6
4
4
2
2
0
0
-2
-2
-4
-4
-6
22
6
78 80 82 84 86
Sources OECD, SEB
88
90
92
94
96
98
00
02
04
-6
BUT IF SWEDEN DEVIATES?
• Asymmetric shocks less likely
• But deviations may occur e.g because of
wage formation
• National fiscal policy is still here, if needed
• Important role in post-bubble periods
• Automatic stabilisers are strong
• Tough surplus target needed to meet
stability pact
• Nonetheless - a need to strengthen rules for
discretionary fiscal policy
23
A SOUNDER FRAMEWORK FOR
FISCAL POLICY
• Sweden may stray
• Low real rates could create asset price
bubbles
• Can politicians handle increased
responsibility?
• Budget policy should learn from monetary
policy
• Well-defined target
• Clear means
• Transparency
• Competence
24
”WON’T ERM BE DANGEROUS?”
• No! ERM is not like the old fixed rate
• A temporary phase before the krona
disappears
• Central parity probably becomes conversion
rate
• Central parity will be negotiated with market
reaction in mind
• Some room for fluctuations within the band
• Central parity to be defended by the ECB
system
• No country has experienced speculative
attacks in new ERM system
25
”WON’T ERM MEAN HIGHER
INTEREST RATES?”
• The contrary! Interest rate parity holds:
ySw = yGe + FXe + rp
• In ERM rates will be dominated by (stable)
currency
• Means lower bond yields as risk premium
falls
• Riksbank can cut repo rate
• Inflation forecast low
• High rates won’t help; transmission mechanism is
weakened (both via currency and bond yields)
26
KEY RATE FORECAST
Per cent
9
8
Per cent
9
EMU: Refi rate
Sweden: Repo rate
8
Forecast
SEB
7
6
6
5
5
4
4
3
3
2
2
1
27
7
96
97
98
99
Sources: EcoWin, SEB
00
01
02
03
04
1
”GERMANY’S PROBLEMS TELL US:
AVOID THE EURO”
• No, the German problems are deeper
• The problems are domestic:
• Costs of reunification
• Rigid labour market
• Sloppy budget disciplin
• Rate cuts can give short-term relief – but
not long-term growth
• Germany cannot devalue - not even with a
currency of its own!
• Germany needs structural reforms
28
GERMANY: LONG-TERM
EMPLOYMENT PROBLEMS
Index 1991=100
110
110
108
108
106
106
104
104
102
102
100
100
98
98
96
29
Euro-zone excl. Germany
Germany
91 92 93 94 95
Sources: OECD, SEB
96
97
98
99
00
01
96
CONCLUSION
• From a business point of view, the euro
means
• Larger markets
•
•
•
•
•
•
Greater stability
Lower transaction costs
Lower rates
Better access to funding
Price pressure
Stiffer transformation pressure
• New environment means need for strategic
decisions
30