Macroeconomic policies in the CEE New Member States

1
Macro-economic policiesin the CEE New Member
States

• Paris, 26 01 2007

Gintare Kemekliene European Trade Union
Institute for Research, Education and Health and
Safety http//www.etui-rehs.org
2
Overview of presentation

• Macroeconomic developments in the NMS
• Accession to the European Monetary Union
• Implications of Maastricht criteria
• Economic linkages (trade, migration, FDI)

3
Common European macro framework

• Since Maastricht Treaty Common European
  framework for all
• Excessive public deficit procedure (3)
• Stability Pact (zero deficit even public surplus)
• All currencies are linked to the Euro and thus
  also their monetary policies but the links are
  different for different countries
• However, some differences continue to exist
• NMS do not belong to the Eurozone (except
  Slovenia)
• Financial sanctions when not respecting fiscal
  discipline for NMS, access to European Cohesion
  Fund could get blocked
• The New SGP medium-term objectives, specific to
  each country
• NMS Identical framework poses particular
  difficulties because their economies are different

4
Macroeconomic developments in the NMS

• Economic dynamism and transformation
• Substantially poorer than Eurozone countries
• GDP/capita (in PPP) is roughly 60 of EU25
  average
• Convergence
• Real GDP growth twice as high as the EU15, with
  nominal real growth rates close to 10 in some
  cases and now averaging 4-5

5
GDP per capita in PPS, 2001-2006 (EU25100)
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Real GDP, annual change,
7
Convergence within a generation?
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Major labour market characteristics in the NMS

• jobless growth in most countries, exc. HU,
  LT.(SK?)
• big differences in unemployment rates Estonia,
  Czech Republic around 6 Poland, Slovakia around
  14
• lower employment rates (with the exception of the
  Czech Republic and Slovenia)
• high and persistent long-term unemployment
  (social exclusion)
• high youth unemployment (Poland around 40! )
• low mobility, rigid workplace structure
• high level of the informal economy

9
Unemployment rates, 2000 and 2006
10
Employment rates 2000-2005,
Source Eurostat 2007
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Average wage levels
Yearly compensation per employee, 2006 (1000 Euro)
12
Wage growth
Real compensation per employee 2006 (compared to
2003)
13
Productivity developments
Source Eurostat 2007
14
Price levels
Source Ameco
15

• Balassa-Samuelson effect relatively faster
  productivity growth in tradable sector converts
  into higher inflation rate if the exchange rate
  remains constant
• NMS price level convergence with EU 15 higher
  inflation for some time
• This means that Maastricht type rules are
  inappropriate
• Need for some exchange rate flexibility while
  this process is taking place

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EMU accession Maastricht criteria

• Exchange rate stability
• Long term interest rate (5.9)
• General government gross debt (60)
• General government deficit (-3.00)
• HICP inflation (2.6)
• Reference value for 03/2006

Source European Commission, 2006
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Exchange rate systems

• 1st group - fixed exchange rates (LT, EE, LV, SI)
• 2nd group - flexible nominal exchange rates (SK,
  CZ, HU, PL)
• ERM II - exchange rate stability within a /15
  band for two years in order to qualify for EMU
  accession
• Reasonable level of exchange rate stability since
  the introduction of the euro in all CEE NMS
• Baltic states with fixed peg or currency board
  arrangements - a constant exchange rate
• Questions had been raised regarding whether a
  criterion with such a wide band for two years
  makes sense or even poses extra risks due to
  mounting financial speculation

18
Real long-term interest rates, 2000-2005
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Fiscal and monetary convergence, planned EMU
accession
Notes ? prognosis
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Why the SGP criteria do not fit NMS

• 1st mismatch - different macroeconomic framework
  in NMS compared with steady, stagnating EU12
• Higher dynamism
• Fast and uneven productivity growth
• Distorted price and cost structures, wages below
  potential levels gt adjustments still underway
• Result higher inflationary potential as a
  result of the Balassa-Samuelson effect, the
  distorted price and cost levels, and the wage
  reserve.

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Why the SGP criteria do not fit NMS

• Second mismatch - fiscal pressures
• Welfare deficit due to forced modernisation and
  structural change (ESM?)
• Employment issues need for more active LMP
  spending
• Need for more public investments
  (infrastructure, environment, RD, education,
  training)
• The fiscal issue is not just a question of
  pushing deficits down, it is a choice of policies
  and priorities (ESM, Lisbon)
• Result Due to low debt rates and higher growth
  higher than 3 deficit rates are sustainable
  (4-4.5 are estimated) the 3 deficit ratio was
  designed for other framework conditions (Belgium,
  Italy)

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One-size-fits-all tax regimes

• 'Flat tax' - a recurring issue in the new member
  states 
• To date, the following countries have introduced
  flat tax regimes
• risk of tax competition
• progressive rates - an important redistributive
  factor

23
Cross-border movements of capital, goods and
labour

• Impact on macroeconomic performance and
  employment in the NMS
• Relocation and migration as functional
  equivalents? Efforts to prevent one will
  increase pressure for the other
• Economic adjustment mechanism
• The continued flow of FDI (including reinvested
  profits) the share of FDI stock as a percentage
  of GDP has also grown substantially
  contribution to growth and employment

24
FDI as a of GDP
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Labour migration

• cross-border migration primarily reflects
  inequalities of income and employment
  opportunities that are, in themselves, bad and
  whose reduction should be an aim of policy.
  (Currently narrowing quite rapidly)
• Advantages Remittances, can raise domestic human
  capital (provided M temp), can reduce
  unemployment and by reducing labour supply
  improve wages and working conditions, additional
  welfare of higher wages to migrants themselves
• Disadvantages Brain-drain, loss of best
  workers, shortages in critical sectors, loss of
  purchasing power, returns on public investment
  (esp in education) are reaped by other countries,
  human capital losses (when surgeons pick fruit),
  can exacerbate demographic problems
• At the same time labour (and capital) mobility
  can be an adjustment mechanism that brings about
  an equalisation effects for source countries

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Conclusions

• CONVERGENCE PROCESS UNDER WAY BUT LENGTHY
• NEED FOR SUPPORT FROM STRUCTURAL FUNDS
• AVOID IMPOSING INAPPROPRIATE CONDITIONS
  (MAASTRICHT)
• STEPS TO AVOID UNFAIR COMPETITION AND DUMPING
  BALANCE BETWEEN COMPETITION RULES AND DEVELOPMENT
  PROMOTION