Transcript English title - National Bank of the Republic of Macedonia

The Czech Republic on its Way
Towards the Euro
Petr KRÁL
Monetary and Statistics Department
Czech National Bank
Conference: "Competitiveness of the South Eastern
European Countries: Challenges on the Road to EU
Skopje, May 30, 2008
Presentation Outline
• Milestones on the Czech Republic's way to the West
• Economic effects of the EU membership
• Economic aspects of the adoption of the euro
• Euro-adoption plans
2
Milestones on the Czech Republic's way
to the West
• Successful transition from central
planning to a functioning market
economy
 1989 – “Velvet Revolution” in
former Czechoslovakia
 1993 – split of Czechoslovakia
into the Czech Republic and
Slovak Republic
 1995 – OECD membership
 1999 – NATO membership
 2004 – European Union
membership (derogation on
euro introduction
• Characteristics of a small open
economy
3
Economic effects of EU the membership
Pre-accession economic developments (i)
•
Fundamental transformation steps and so-called transitory
recession (1990 – 94)
•
Demand-driven economic recovery with supply side lagging behind
resulting into an overheating (1994 – 1997)
•
Financial and subsequent economic crisis (1997 – 1999)
•
Abolition of pegged ER combined with monetary targeting (1997) and
adoption of inflation targeting framework (1998)
•
Supply-side improvements (FDIs) and acceleration of
convergence (2000 – )
4
Economic effects of EU the membership
Pre-accession economic developments (ii)
• massive inflow of FDI started in 1998 (paradoxically in economic bad times)
• introduction of government investment incentives and privatization of state-owned
property kicked-off the inflow Král (2004):Identification and Measurement of Relationships
Concerning Inflow of FDI: The Case of the Czech Rep. (CNB Working Paper)
• subsequently enterprises under foreign control begun to gain growing share on
economic activity
Penetration of foreign capital into enterpreneurial sector
FDI inflow and FDI stock
60.00
1 400 000
180 000
160 000
1 200 000
50.00
140 000
1 000 000
40.00
800 000
100 000
600 000
80 000
60 000
%
mil. of CZK
120 000
30.00
20.00
400 000
40 000
200 000
10.00
20 000
0
0
93/I
94/I
95/I
96/1
97/I
98/I
99/I
00/I
01/I
03/I
04/I
0.00
98/I
III
99/I
III
00/I
III
01/I
III
02/I
III
03/I
III
time
time
FDI inflow (right axis)
02/I
FDI stock
Share of EUFC on VA
Share of EUFC on GFCF
5
04/I
III
Economic effects of EU the membership
Pre-accession economic developments (iii)
• inward FDI has been both vertical benefiting from the comparative advantage of the
Czech economy in terms of input prices, government promotion of FDI and economic stability
• and horizontal focusing on the LR growth and market size prospects arising from
the expected Czech Republic’s future accession to the EU
• FDIs were coming prevailingly from EU countries (Germany, Austria, Netherlands?)
Shares on cumulative FDI inflow during 1993-2003
Shares on cumulative FDI inflow during 1993-2003
15%
16%
18%
Transport, storage and communications
5%
Financial intermediation
4%
31%
5%
Trade, hotels and restaurants
Machinery and equipment
21%
6%
Real estate and business activities
Electricity, gas, and water supply
Food and tobacco
8%
12%
13%
Refined petroleum and chemicals
others
6%
7%
9%
13%
Germany
Netherlands
Austria
France
United States
Belgium
Switzerland
others
11%
6
Economic effects of EU the membership
Pre-accession economic developments (iv)
• as a result the Czech Republic became one of the most FDI penetrated country in the region
and in the world and openness and export performance of the country are also tremendous
• positive effects of inward FDI on the supply side of the economy (capital stock + crowding-in
effects, primary and secondary technological spillovers) contributed significantly to the gradual
acceleration of potential (non-inflationary) output growth
FDI inflow per capita (in USD)
FDI stock per capita (in USD)
1 000.0
4 000.0
900.0
3 500.0
800.0
3 000.0
700.0
600.0
2 500.0
500.0
2 000.0
400.0
1 500.0
300.0
1 000.0
200.0
500.0
100.0
0.0
0.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Czech Republic
Hungary
Poland
Slovakia
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Czech Republic
Hungary
Poland
Slovakia
7
Economic effects of EU the membership
EU entry – acceleration of ongoing trends and new phenomena (i)
• EU single market – 4 freedoms of movement

Goods

Services

Labour

Capital
• EU regulations

Acquis communautaire

EU norms, tax harmonization, common policies (e.g. trade, agriculture)
• Access to EU funds
• “Reputation” effect
8
Economic effects of EU the membership
EU entry – acceleration of ongoing trends and new phenomena (ii)
• acceleration of GDP growth and its potential
• speed-up of the real convergence vis-à-vis western countries
• rapidly growing export capacities are the main driver (extreme in 2004)
• steadily increasing openness of the economy
12
90
25
80
10
20
70
8
60
15
50
6
CZ
40
EA
EE+LV+LT 30
HU+PL+SI+SK
4
10
20
2
5
10
0
0
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
-2
96
97
98
99
00
01
02
03
04
05
06
07
08
09
Share-exports
Share-imports
growth-exports (righ axis)
growth-imports (righ axix)
9
Economic effects of EU the membership
EU entry – acceleration of ongoing trends and new phenomena (iii)
Czech exports have developed specialized
in machinery and transport equipment,
mainly as a result of FDI
As a result, trade balance turned to positive
numbers being driven by the surplus of the
trade with SITC 7 items
duben
duben
duben
duben
100%
75%
Misc.manufactured
goods
Machines, transport
equipment
Basic manufactures
50%
Chemicals
25%
SITC 0-4 and 9
0%
total
1993
total EU15
2000
total EU15
2005
04
05
06
07
srpen
srpen
srpen
srpen
04
05
06
07
prosinec 04
prosinec 05
prosinec 06
leden 08
350
300
250
200
150
100
50
0
-50
-100
-150
fuels
chemicals
Manufactured Machinery Manufactured
goods
and transport
articles
equip.
10
Economic effects of EU the membership
EU entry – acceleration of ongoing trends and new phenomena (iv)
Macroeconomic policies


MP – EU entry itself no major challenge (tax harmonization: no
large price shock)
FP – task to meet Stability and Growth Pact requirements
11
Economic aspects of the euro adoption
Why to adopt the euro
• Legal obligation (no opt-out clause, only derogation)
• Economic reasoning





Exchange rate and interest rate stability
Lower transaction cost (reduction in exchange rate risk, access to
more liquid financial markets)
Higher price transparency
Disciplining effect on domestic economic policies
Final step in the EU integration
12
Economic aspects of the euro adoption
Possible risks
• Loss of independent monetary policy

Interest rates handed over to ECB
=> ECB’s common monetary policy does not have to fit the Czech
reality
=> Limited reaction to asymmetric shocks

Solution ?!
180
• Inflation acceleration
y = 0.7547x + 24.529
R2 = 0.8469
160
Price level of consumption (2006, EU12=100)
Economic alignment
Flexible alternative
stabilization mechanisms
 Fiscal policy
 Labour market
140
DK
IS
NO
120
FI
CH
SE
IE
UK
IT FR
100
PT
80
CY
HR
TR
60
PL
RO
LV
40
MK
MT
NL
DE BE
GR
AT
ES
SI
EE
HU
LT SK
CZ
BG
20
0
0
20
40
60
80
100
120
HDP v PPS (2006, EU12=100)
140
160
13
180
Economic aspects of the euro adoption
Timing of the euro adoption
Formal conditions
Maastricht criteria
 Price stability
Inflation: below three best
performing EU countries’
inflation +1.5 pp

Sustainability of government
finance
Fiscal deficit: < 3% of GDP
Gov. debt: < 60% of GDP

Exchange rate stability
Exchange rate: ERM II
participation for 2 years
without sever tensions

Compatibility of legal
framework
 Including the central
bank status with EU
regulation
Informal conditions
Economic consideration
 Symmetry
 Flexibility
Durability of convergence
LT interest rate: below three
best (inflation) performing
EU countries’ IR +2.0 pp
14
Euro-adoption plans of the Czech Rep.
Strategic documents
• CNB & Government
 The CR’s EA accession strategy
First in 2003
Updated in 2007
 Assessment of the fulfilment of the Maastricht convergence
criteria and the degree of economic alignment of the CR with
the EA
• CNB
 Analyses of the CR’s current economic alignment with the EA
 http://www.cnb.cz/en/monetary_policy/strategic_documents
• Government
 Convergence programme of the CR

http://www.mfcr.cz/cps/rde/xchg/mfcr/xsl/conv_program.html
15
Euro-adoption plans of the Czech Rep.
First EA Accession Strategy (2003)
• Common stance by the CNB and the Government
• Benefits outweigh risks, but risks can be reduced

quality preferred to speed
• CNB will continue in IT until the CR adopts the euro
• Participation in ERM II only for minimum possible period

2 years
• Expected date of the euro adoption => 2009 – 2010 conditional
on

Criteria fulfilment
 Including a consolidation of public finances


Achievement of a sufficient level of real convergence
Adequate progress with structural reforms
 Leading to a sufficient degree of economic alignment
16
Euro-adoption plans of the Czech Rep.
Fulfillment of the Maastricht criteria
Fiscal deficit 
14.0
16
Inflation 
14
12.0
LT sustainability?
12
BUT 2008
10
10.0
8
8.0
6
6.0
4
2
4.0
0
2.0
-2
1999
2000
2001
2002
2003
2004
2005
2006
2007
0.0
Reference value
Czech Republic
Hungary
ERM II 
Poland
Public debt 
70.0
60.0
1997
Slovakia
1998
1999
2000
2001
Czech Republic
2002
Hungary
2003
2004
Poland
2005
2006
2007
Slovakia
14
LT IR 
12
50.0
10
40.0
8
30.0
6
20.0
4
10.0
2
0
0.0
1997
1998
1999
2000
2001
Czech Republic
2002
Hungary
2003
Poland
2004
2005
Slovakia
2006
2007
2001
2002
Reference value
2003
2004
Czech Republic
2005
Hungary
2006
Poland
2007
Slovakia
17
Euro-adoption plans of the Czech Rep.
Economic Alignment (i)
Long-run convergence
120
2006; euro area average = 100
100
80
60
40
20
0
CZ
AT
DE
PT
GDP per capita in PPP
HU
PL
SI
SK
Average GDP price level
• Progress achieved
• Important gap persists for the CR – especially in the price
level
18
=> expectation of the real exchange rate appreciation
Euro-adoption plans of the Czech Rep.
Economic Alignment (ii)
Correlation of GDP Growth
1.0
vis-à-vis the euro area, 2001:Q1-2006:Q1
0.8
0.6
0.4
0.2
0.0
CZ
AT
DE
year-on-year differences
HU
PL
SI
SK
quarter-on-quarter differences
• Major difference between the cycle of the CZ and EA real GDP
growth
• Low correlation with the euro area characteristic also for
macroeconomic shocks
19
• Higher level of correlation seems to prevail for industrial
production
Euro-adoption plans of the Czech Rep.
Economic Alignment (iii)
Fiscal deficits
8
Cyclical deficit
7
Cyclically adjusted deficit
6
Total deficit
5
4
3
2
1
0
-1
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
• Fiscal deficit structural in nature
• Little room left for automatic stabilizers
• Some reforms have been implemented, some are in the
pipeline and some have been announced
• Figures for 2007 - 2008 revised downwards
• Long-term sustainability remains an issue
20
Euro-adoption plans of the Czech Rep.
Economic Alignment (iv)
LT unemployment and regional differences
Long-term unemployment:: % share of long-term unemployed (12Ms or more) in total unemployment, 2006
Variation coefficient of regional unemployment: NUTS2, 2005, CNB calculation
80
70
60
50
40
30
20
10
0
CZ
AT
DE
PT
Long-term unemployment
HU
PL
SI
SK
Variation coefficient
Both indicators are relatively high – showing structural problems
on the labour market (including low mobility)
21
Euro-adoption plans of the Czech Rep.
An Up-dated EA Accession Strategy (2007) (i)
• Strategy from 2003 has proven to be useful and in some sense
fulfilled
BUT
• Major obstacle was seen in fiscal consolidation




EDP should be abrogated ASAP (1st stage of fiscal reforms)
Maastricht criterion not ambitious enough
Medium-term objectives (SGP) should be targeted
Long-run challenges stemming from demographic changes have to be
addressed
• Still low flexibility and efficiency of the economy

the labour market must be markedly enhanced
22
Euro-adoption plans of the Czech Rep.
An Up-dated EA Accession Strategy (2007) (ii)
• Conclusion
No particular date of entry proposed


New euro-adoption date will not be set until sufficient progress is
made in fiscal consolidation and flexibility of the economy
The same conclusions drawn in the last annual Assessment of
the fulfilment of the Maastricht convergence criteria and the
degree of economic alignment published at the end of 2007
CR will not initiate the ERM II entry in 2008
23
Thank you for your attention
www.cnb.cz
[email protected]
24