Eesti Panga president Ardo Hansson esines euroala majanduskasvu erinevustest tulenevate riskide ja struktuursete reformide teemal Leedu keskpanga korraldatava rahvusvahelise konverentsi “Convergence Dynamic in the EU after the Economic Crisis” paneelis 25.04.2014

1. Ardo Hansson
Eesti Pank
Convergence Dynamics in the EU after the Economic Crisis
25 April 2014

2. Topics
A. The risks from growth differentials for sustainable
convergence
B. Which structural reforms should receive more attention
if sustainable growth is to be ensured?
2

3. A. The risks from growth differentials for
sustainable convergence: background
The euro area, like the EU, has relatively high variation in income and
productivity levels.
This helps to explain the significant differences in economic growth
between ‘new’ (poorer) and ‘old’ (richer) euro area member countries.
Although convergence of income and productivity levels is a positive
development that reduces the differences between member countries and
thereby makes the conduct of monetary policy easier, there are potential
risks to this process.
During simultaneous real and nominal convergence there is a risk of several
‘amplification channels’ being activated that might lead macroeconomic
imbalances and vulnerabilities to arise.
3

4. 1. Self-fulfilling expectations;
2. Collateral and wealth effects;
3. The real interest rate channel.
All three ‘amplification’ channels played a role in the Baltic states throughout
the boom in 2004-07 and the recession of 2008-09.
The relevance of the episode for the future is underscored by the fact that all
of the three countries had credible fixed exchange rate regimes and operated
under macroeconomic conditions not unlike those in the euro area.
The risks from growth differentials for sustainable
convergence: amplification channels
4

5. A cyclical peak is defined as being when the quarterly GDP is higher than in the
two preceding quarters and higher than in the next two quarters.
A cyclical trough is defined as being when the quarterly GDP is lower than in the
two preceding quarters and lower than in the next two quarters.
Sample: 23 advanced economies and 18 emerging market economies
Data: 1960 Q1 – 2012 Q2, seasonally adjusted, constant prices.
Source: IMF IFS database
Variables: (1) GDP
(2) net foreign capital inflows
(3) real interest rates
(4) CPI-based REER
Altogether 188 episodes of recession
We concentrate on developments four years before and three years after the
peak in output level.
The cyclical pattern in the Baltic states in
international comparison: methodology and data
5

6. A comparison of the cyclical pattern in 2004-2011
in the Baltic states with previous cycles in other
countries: real GDP
A. GDP dynamics during the four years
before the cyclical peaks (t-15=100)
B. GDP dynamics during the three
years after the cyclical peaks (t0=100)
6

7. A comparison of the cyclical pattern in 2004-2011
in the Baltic states with previous cycles in other
countries: net foreign capital inflows
A. Net foreign capital inflows during the
four years before the cyclical peaks
(% of GDP)
B. Net foreign capital inflows during the
three years after the cyclical peaks
(% of GDP)
7

8. A comparison of the cyclical pattern in 2004-2011
in the Baltic states with previous cycles in other
countries: real interest rates
A. Real interest rates during the four years
before the cyclical peaks (%)
B. Real interest rates during the three
years after the cyclical peaks (%)
8

9. The risks from growth differentials for
sustainable convergence: summary
• Comparable cyclical swings to those of GDP, foreign capital inflows
and real interest rates were also evident in real estate and stock prices
and in loan volumes.
• Overall, previous experience has clearly demonstrated that during
speedy convergence, strong amplification channels create the risk of
macroeconomic imbalances.
• To an extent, similar developments were visible in several of the euro
area countries that ran into substantial difficulties.
• Although the re-run of the boom/recession cycle in the Baltic states is
less strong than before, it is important to keep in mind that strong
convergence in a currency union requires a response at a national
level to address the potential rise of macroeconomic imbalances.
• As a result, national policies like fiscal and macro-prudential policies
should be used early and decisively.
9

10. B. Which structural reforms should receive more
attention if sustainable growth is to be ensured?
10
Source: World Economic Forum, Global Competitiveness Report
In a country by country
analysis, the scores of the
countries by the 12 ‘pillars’ are
mostly related to the overall
productivity level of a given
country (and not the previous
economic growth).
However, there are also two pillars
out of 12, which are positively
related to the economic growth
between 2001-2013.
These pillars are:
1. Macroeconomic environment;
2. Labour market efficiency;
EU-28 rank EA-18 rank
out of all 148 countries out of all 148 countries
Global Competitiveness Index (total) 40 37
Basic requirements (21.7%) 39 34
Institutions 46 44
Infrastructure 31 27
Macroeconomic environment 61 72
Health and primary education 27 21
Efficiency enhancers (50.9%) 35 33
Higher education and training 26 25
Goods market efficiency 43 41
Labour market efficiency 56 61
Financial market development 53 61
Technological readiness 24 24
Market size 48 56
Innovation and sophistication (28.3%) 38 33
Business sophistication 39 35
Innovation 36 35

11. Which structural reforms should
receive more attention if sustainable
growth is to be ensured?
1111
Source: World Economic Forum, Global Competitiveness Report
Ranking in EU-28
Macroeconomic
environment
Labour market
efficiency
1 Luxembourg Denmark
2 Sweden United Kingdom
3 Finland Ireland
4 Estonia Estonia
…
25 Hungary Spain
26 Italy Portugal
27 Portugal Greece
28 Greece Italy

12. Which structural reforms should receive more
attention if sustainable growth is to be ensured?
1. Strengthening of the macroeconomic environment;
2. An increase in labour market efficiency;
These are also the areas where both the euro area and EU
had the lowest ranking in global comparison in 2013.
12