24/03/ :11. EMU entry. Revisiting the case. Mateusz Szczurek Chief economist, CEE March 2013

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Jarosław Urban
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1 EMU entry Revisiting the case Mateusz Szczurek Chief economist, CEE March 2013

2 Jakie warunki MUSZĄ być spełnione przed wejściem Znacząca liberalizacja rynku pracy wobec obecnego poziomu Pan-europejski system gwarantowania depozytów Obniżenie średnioterminowego (w cyklu koniunkturalnym) deficytu budżetowego do zera Bezrobocie niższe od średniej w strefie euro PKB/głowę na poziomie 90% przeciętnej UE Dobry, narodowy system nadzoru bankowego Zapewnienie, że Polska nie będzie płaciła ani grosza na spłacanie długów starej strefy euro Obniżenie długu publicznego do 40% PKB Pan-europejski system nadzoru bankowego Kryteria Maastricht Właściwy kurs wejścia 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 1

3 Mikro zalety, makro niepewność Czy wspólna waluta europejska nadal ma sens? Czy stały kurs /PLN byłby dziś lepszy dla Polski niż pełne wejście do strefy euro? nie Tak tak Nie Czy Twojej firmie opłaca się jak najszybsze wejście Polski do strefy Euro? Jeżeli Polska miałaby przystąpić do strefy Euro i spełniłaby wszystkie warunki takiego przystąpienia, to powinno to stać się raczej wcześniej czy później? Nie Tak możliwie najpóźniej możliwie najwcześniej 2

4 Benefits and costs of EMU entry The list was well known it is their relative importance that changed Elimination of the FX risk premium Macro stability and increased competitiveness Lower interest rates Financial market integration International trade promotion Increase in investments Political power within the EU Wrong interest rate Structural Cyclical Loss of the FX, interest rates, bank regulations as shock absorbers Risk of a wrong exchange rate Asset price misalignements Conversion costs, one-of price jump Maastricht criteria costs Costs of future rescues 3

5 FX risk premium NBP estimated it at 230bp in 2009 It is probably lower now Crude LC vs eurobond spread average at 130bp. But this excludes sizeable liquidity premium of the eurobonds Denmark vs Finland: similar credit quality, limited FX risk Czech Republic vs Belgium: FX risk, still negative spread! 4

6 Are non-emu economies disadvantaged in funding in euro? Certainly not, considering their ratings Non-eurozone countires enjoy lower yields (in euro) than predicted by their credit ratings This can mean a number of things PL, CZ, BG eurobonds are too expensive CEE ratings are too low Or. Basis point volatility (delivered vol weighed times 10yr yield) Market discounts much lower move in eurobond yields Lower risk justifies low yields in CEE countries 5

7 Mar-95 Dec-95 Sep-96 Jun-97 Mar-98 Dec-98 Sep-99 Jun-00 Mar-01 Dec-01 Sep-02 Jun-03 Mar-04 Dec-04 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Jun-12 Dec-95 Sep-96 Jun-97 Mar-98 Dec-98 Sep-99 Jun-00 Mar-01 Dec-01 Sep-02 Jun-03 Mar-04 Dec-04 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Jun-12 Financial market integration More capital flows = better life? EMU membership allows for even bigger financial integration Free capital flows are good Better allocation of capital Forcing the right policies but evidence on capital flows vs growth is mixed Higher financial instability No evidence of ST capital flows lastingly promoting GDP Too much capital when not needed and too little when lacking! Spanish balance of payments ( bn, net) Current and capital account net Higher volatility of capital flows Current account deficit appears after eurozone entry GDP level (4Q98=100) Growth before and after EMU entry +12.5% +13.0% Portfolio+direct investments, net 6

8 Financial openness and growth EU membership alone provides for enough of capital market integration if financial integration has a positive effect on growth, there is as yet no clear and robust empirical proof that the effect is quantitatively significant. Eswar Prasad, Ken Rogoff, Shang-Jin Wei and Ahyan Kose (2003) 7

9 Can interest rates be too low? Competitiveness loss as in the crisis 8

10 REER appreciation (%, ) How much is FX flexibility worth? More in some countries than in others Poland s real exchange rate and external balance changes FX depreciation protects jobs, but the relationship is weak Latvia 15,0 10,0 Bulgaria 5,0 Slovakia Russia Czech ,0 Croatia -5,0 Romania -10,0 Ukraine Hungary ,0 Poland Turkey REER (% YoY, rhs) CA (YoY diff, % of GDP) Relationship is significant even after correcting for business cycle -20, Employment change (%, ) 9

11 European/global governance vs national interests Banking union: who pays up, who benefits? Too few systemically important banks in Poland to benefit much from the common supervision and deposit insurance Will common supervision help in easing business cycle differences? Net effects for non Eurozone countries of joining banking union (net effects sum up to zero, % of EU-total gains minus % of total costs) United Kingdom Spain Sweden Netherlands Denmark Malta Cyprus Luxembourg Estonia Latvia Slovenia Lithuania Slovakia Ireland Bulgaria Finland Hungary Czech Republic Belgium Portugal Austria Greece Romania France Italy Poland Germany

12 Potential costs of EMU rescues ESM capital subscription Portugal Greece Slovenia Slovakia Italy Poland Spain Cyprus Estonia Malta Germany France Ireland Netherlands Finland Belgium Austria Luxembourg 0% 2% 4% 6% 8% 10% 12% 11

13 It is not the 2013 budget we should be worrying about Increase in public expenditure related to aging (% of GDP) additional budget gap created by aging by 2060 if policies do not change Luxemburg Slovenia Belgium Cyprus Malta Slovakia Finland Netherlands Romania Ireland Germany Czech Republic Lithuania Austria Spain Sweden EU average UK France Denmark Bulgaria Hungary Portugal Poland Estonia Italy Latvia Pensions Healthcare Long term care Education Unemployment

14 What needs to be done ahead of entry? Non-EMU members can take their time on the way in Maastricht, including legal criterion is not enough! Dealing with wrong interest rates Waiting for natural rate to converge? Better investment environment to channel demand to investments, not consumption Macroprudential regulations allowing for cooling consumption or real estate booms Industrial policy? Innovation vs cheap labour. Dealing with reduced policy flexibility Much better public finances in good times allowing for much looser policy in bad times Dealing with costs of pan-emu policies Negotiate better 13

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