Challenges of Real Convergence
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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. Topics. Real convergence outside and within the EMU: some general remarks

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Challenges of Real ConvergenceConference on: Ten Years of the Euro – Inspirations for the Czech RepublicPrague, November 25, 2008

Michael [email protected]


Topics
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


Topics1
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.


1993-2000

2001-2007

GDP per head, real growth annual averages 1993-2000 and 2001-2007, in percent

EU-27 countries

Source: Eurostat.


Topics2
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


Gdp growth by country
GDP growth by country

GDP growth rates in %

Source: wiiw annual database



Consumer prices 2000 2007 month in the previous year 100
Consumer prices, 2000-2007(Month in the previous year = 100)

Source: wiiw-Database


Nominal exchange rates 1998 2007 eur per ncu 1998 100
Nominal exchange rates, 1998-2007 EUR per NCU, 1998=100

Ascending line indicates appreciation.

Source: wiiw database incorporating national statistics.


Real exchange rates 1996 2007 eur per ncu ppi deflated ncu eur 1996 100
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.


Average gross monthly wages total eur 1995 100
Average gross monthly wages, total, EUR, 1995=100

Source: wiiw database incorporating national statistics.


Unit labour costs austria 100
Unit labour costs(Austria=100)

Source: wiiw-Database


General government deficit 1998 2006 in of gdp
General government deficit, 1998-2006in % of GDP

Source: Eurostat.


Topics3
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


Topics4
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


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