european monetary integration ii. dana viktorová

European Monetary Integration II.

Dana Viktorová

© Viktorová, 2004 2

Stability and Growth Pact (1997)

fiscal stability/discipline is a cornerstone of

stable EMU sound government finances strengthen the

price stability and strong sustainable growth

and thus employment creation fiscal discipline mentioned in the Maastricht

Treaty (EDP) full provisions took affect as euro launched


Stability and Growth Pact

if national fiscal instruments are a source of

externalities, they should be subjected to

collective control income externalities via trade borrowing costs externalities

budget deficits financed by government bonds

issue create undesirable movements on

financial markets threat for disciplined states


SGP - Three Elements political commitment to budget surveillance preventive elements

preventing budget deficit going

above 3% reference value submission of stability and

convergence programmes early warning mechanism if

significant slippage in a budgetary

position dissuasive elements requiring to make

immediate corrections, allowing sanction

imposing ? excessive deficit procedure


Stability and Growth Pact

end of independent fiscal policy ?? controversial issues

pro-cyclical effects asymmetry (binding during bad years)


Code of Conduct of stability and convergence

programmes SCP submitted to Council & COMM updated annually euro area – stability programmes non euro area – convergence programmes assumptions on economic development assessment of medium-term objectives and their

effect on the budget (medium-term = length of

business cycle) when assessing budgetary position cyclical-

adjusted balances in addition to nominal

balances


Case of the Czech Republic

CP public finance development ongoing procedure under Article 104

of the EC Treaty (EDP) – 2004 COMM report 12.5.2004 COMM opinion 24.6.2004 Council decision +

recommendation 5.7.2004


Public Finance Situation in CR


European System of Central Banks

ESCB (1998) Statute of the ESCB (Treaty protocol) General Council (ECB + EU NCBs) independency Eurosystem (ECB + euro area NCBs) euro area (MS that adopted euro)

ECB (1998) supranational body Executive Board Governing Council

Decision making process


European Central Bank (1998)

supranational body – MP authority loss of full influence in MP and ER policy authority in MP over the national governments

of participating MSs and other European

supranational institutions central bank independency vs. anti-inflationary

performance (more independent ? lower

inflation rate), correlation between CB

independency and price stability


Monetary policy strategy/conduct

primary objective – maintain price stability “The primary objective of the ESCB

shall be to maintain price stability.

Without prejudice to the objective of

price stability, the ESCB shall support

the general economic policies in the

Community with a view contributing

to the achievement of the objectives of

the Community as laid down in Article

2”.(Art.105, the Treaty) fighting the inflation is absolute

priority supporting growth and employment

come next


Monetary Policy Strategy (1998)

two pillars strategy (money base M3

targeting + monitoring of non-

monetary indicators)

provisions of single monetary policy in the

Constitution


Monetary Policy Conduct

1998-2003 quantified definition of

price stability defined as a year-on-

year increase in the HICP in the euro

area between 0 – 2 percentage rate

over a medium term redefinition of quantitative expression

of price stability 5/2003 – onwards inflation objective

defined as below but close to 2,0

percentage level room for interpretation ? close to

2%, medium term


ECB’s Challenges

increase of oil prices (2000) movements in the FX and stock markets

(2002) worldwide economic slowdown geopolitical tension because of Sept. 11

maintaining of the low inflation –

price stability little volatility in ST IR


National Shares of GDP at Current Market Prices in

Enlarged Euro Area 1996 1997 1998 1999 2000 2001 2002 2003 2004 Belgium 3,60 3,57 3,54 3,57 3,56 3,50 3,47 3,50 3,51 Czech Rep. 0,82 0,82 0,86 0,84 0,87 0,93 1,04 1,03 1,07 Germany 31,84 30,81 30,36 29,98 29,19 28,53 28,00 27,61 27,26 Estonia 0,06 0,07 0,08 0,08 0,09 0,09 0,10 0,11 0,11 Greece 1,66 1,77 1,73 1,79 1,77 1,81 1,88 1,99 2,05 Spain 8,15 8,19 8,33 8,57 8,78 8,99 9,28 9,66 9,87 France 20,76 20,52 20,56 20,53 20,42 20,30 20,28 20,21 20,22 Ireland 0,97 1,17 1,23 1,36 1,48 1,59 1,70 1,75 1,82 Italy 16,46 17,03 16,94 16,79 16,77 16,76 16,74 16,88 16,87 Cyprus 0,13 0,12 0,13 0,13 0,14 0,14 0,14 0,15 0,15 Latvia 0,07 0,09 0,09 0,10 0,12 0,13 0,13 0,13 0,14 Lithuania 0,11 0,14 0,16 0,15 0,18 0,19 0,20 0,21 0,22 Luxembourg 0,24 0,25 0,27 0,28 0,31 0,31 0,30 0,31 0,32 Hungary 0,60 0,67 0,66 0,68 0,73 0,80 0,92 0,95 1,01 Malta 0,05 0,05 0,05 0,06 0,06 0,06 0,06 0,06 0,06 Netherlands 5,50 5,50 5,57 5,67 5,78 5,91 5,91 5,89 5,78 Austria 3,16 3,05 3,03 3,03 3,02 2,97 2,94 2,93 2,90 Poland 2,05 2,24 2,38 2,34 2,60 2,85 2,69 2,40 2,42 Portugal 1,50 1,55 1,59 1,64 1,66 1,69 1,71 1,69 1,67 Slovenia 0,27 0,28 0,30 0,30 0,30 0,30 0,31 0,32 0,32 Slovakia 0,28 0,31 0,31 0,29 0,32 0,32 0,34 0,37 0,40 Finland 1,71 1,79 1,83 1,82 1,87 1,86 1,86 1,85 1,83 Enlarged Euro Area 100,00 100,00 100,00 100,00 100,00 100,00 100,00 100,00 100,00


New Decision-Making Process in Enlarged ECB

new decision-making – changes in allocation

of votes if more than 15 NCB or 22 NCB EB remains at 6 members acc. GDP (5/6) and agg. balance

sheet (1/6) share MS divided into

groups 2-group rotation system ? 5

gov.= 4 votes & 11-16 gov.= 11

votes 3-group rotation system ? 5

gov.= 4 votes & half of gov.= 8

votes & remaining gov.= 3 votes


Level of Difficulty in the Enlarged Governing Council of

the ECB

Euro Area

Number of Governors

- Member States

Governing Council of the ECB

Single Majority

Number of Additional Votes to vote with

the Executive

Board

Percentage Level of

Difficulty (%)

EMU I

11 17 9 3 27,3

12 18 9* 3 25,0 13 19 10 4 30,8

EMU II

14 20 10* 4 28,6 EMU III

15 21 11 5 33,3

16 22 11* 5 31,3 17 23 12 6 35,3

EMU IV

18 24 12* 6 33,3 EMU V

16 - 21 21 11 5 39,6 - 61,9

EMU VI

22 - ? 21 11 5 ? 65,1


New Member States

economic position – emerging economies in

the middle of the catching-up processes economic differences – transformation

processes


Meeting Maastricht Criteria

euro area enlargement chronology political power behind convergence

assessment veto power trade off ??

even fulfilling Maastricht criteria - NMS remaining different from core-group (GDP growth, inflation rate) because of the catching-up

though converging towards euro area average over time, economic synchronization

completion of convergence process


Relationship between Maastricht Fiscal

Criteria

PY

Dg

PY

D)(

D is public debt

Y is the GDP

P is the price level

is inflation

g is the growth rate


Real Convergence

closing a gap of income levels measured by GDP per capita by means of higher economic

performance real GDP growth in national currency

vs. in euro currency


Real GDP per Capita in PPP, Comparative Levels (EU15=100)

19961997

19981999

2000

2001

New MS

Euro zone 120

10

20

30

40

50

60

70

80

90

100


Real GDP per Capita in PPP,

Comparative Levels (EU15=100) 1996 1997 1998 1999 2000 2001 2002f 2003f 2004f 2005f

Euro zone 12 99,3 98,9 99,0 98,9 98,7 98,6 98,2 97,9 97,8 97,7 Cyprus 74,2 73,1 73,6 74,5 76,2 78,4 76,8 78,0 78,8 79,9

Czech Republic . . . . 59,6 60,6 61,9 62,7 63,2 64,1 Hungary 44,7 45,8 46,8 47,8 48,8 51,5 53,4 55,3 56,6 57,9 Estonia 32,3 35,0 35,8 35,2 37,5 38,6 40,2 42,2 44,7 47,0

Latvia 27 28,9 29,7 30,1 31,5 33,4 34,8 36,6 37,8 39,2 Lithuania 32 33,7 35,4 34,3 35,1 37,2 39,1 41,4 43,2 45,0 Malta . . . 71,3 70,9 69,5 69,1 69,2 69,8 69,9

Poland 39,1 37,8 40,4 41,8 41,8 41,9 41,7 42,9 43,7 44,8 Slovakia 41,7 43 43,4 42,9 43,7 44,7 47,1 49,1 49,5 50,1 Slovenia 62,3 63,7 64,4 66,6 66,4 67,9 69,0 69,7 70,6 71,8

New MS . . . . 45,7 46,6 47,3 48,7 49,6 50,7


Equation to Express a Real GDP Growth Rate in the Euro

Currency

EMUNDCEUR p - p er - y y

( EURy ) … real GDP growth rate in euro currency

right hand side … sum of real GDP growth rate in domestic currency ( DCy ), relative

change of nominal exchange rate DC/EUR and the difference of national inflation rate

( Np ) and inflation rate in euro area ( EMUp )


Real GDP Growth, National & Euro

Currencies 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Avrg. CZE -0.1 2.6 4.8 3.9 0.3 -2.2 -0.4 3.3 3.1 2.0 2.9 3.3 1.9 HUN -2.3 2.9 1.5 1.3 4.6 4.9 4.2 5.2 3.8 3.5 2.9 3.3 3.0 POL 3.8 5.2 7.0 6.1 6.8 4.8 4.1 4.0 1.0 1.4 3.7 4.0 4.3 SKV -4.1 4.9 6.8 6.6 6.5 4.1 1.9 2.2 3.3 4.4 4.0 4.5 3.8 SLO 1.3 4.9 4.1 3.3 4.6 3.8 5.2 4.6 2.9 2.9 2.2 3.4 3.6 EMU -0.8 2.4 2.2 1.4 2.3 2.9 2.8 3.5 1.6 0.9 0.4 1.8 1.8

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Avrg. CZE . 8.1 11.7 11.0 -5.5 15.8 -2.6 8.0 14.3 2.8 -1.6 . 6.2 HUN . -1.7 -4.5 8.2 11.7 4.2 13.4 9.0 17.6 10.8 -5.7 . 6.3 POL . 10.1 26.1 10.9 11.3 10.2 8.4 19.6 12.7 -13.0 -14.9 . 8.1 SLO . 13.3 14.8 5.9 14.0 -3.1 11.5 10.4 10.8 8.4 11.2 . 9.7 SKV . . . . . . . 4.0 6.4 3.0 2.9 . 4.1 EMU -0.8 2.4 2.2 1.4 2.3 2.9 2.8 3.5 1.6 0.9 0.4 1.8 1.8


Nominal Convergence

decrease of disparities in price levels through two channels (combination of

both channels) ER channel – ER appreciation inflation channel – higher domestic

inflation case of CR – 1. infl.ch., 2. ER ch. inflation pressures due to transition …


Comparative Price Levels of (EU15=100)

1995 1996 1997 19981999

20002001

2002p

New MS

Euro zone 12

0

20

40

60

80

100


Comparative Price Levels of (EU15=100)

1995 1996 1997 1998 1999 2000 2001 2002p

Euro zone 12 102,0 101,7 98,8 98,1 97,4 96,1 96,8 97,2 Cyprus 79,2 78,3 79,1 79,7 80,6 81,4 81,2 83,1

Czech Republic . . . . . 45,3 48,8 53,1 Hungary 42,1 42,4 44,5 44,0 44,9 46,6 50,2 54,9 Estonia 38,3 44,1 46,1 49,7 51,3 51,2 54,0 56,1

Latvia 33,5 37,5 42,2 43,7 45,9 51,7 52,6 50,4 Lithuania 27,9 33,1 39,5 41,8 43,1 48,4 49,9 51,1 Malta . . . . 68,6 71,8 72,9 71,9

Poland . . . . 48,0 54,0 60,7 57,4 Slovakia 38,1 38,6 40,6 40,9 38,7 42,5 43,2 43,5 Slovenia 72,8 70,0 70,2 72,6 71,8 70,4 70,6 72,6

New MS 43,0 45,0 47,0 48,0 48,0 51,8 56,3 56,1


Development in the Czech Republic, 1993-2003

1993 1994 1995 1996 1997 1998 Average 1993-98

Real GDP growth in CZK - 0.9 2.6 4.8 3.9 0.3 - 2.2 1.7 Inflation rate in CR 20.8 10.0 9.1 8.8 8.5 10.7 11.2 Inflation rate in EMU 3.2 2.7 2.5 2.1 1.6 1.1 2.7 Inflation differential 17.6 7.3 6.6 6.7 6.9 9.6 9.1 Nominal exchange rate CZK/EUR 33.58 34.17 34.06 33.91 38.22 35.02 34.83 Nominal change CZK/EUR . 1.8 -0.3 -0.4 12.7 -8.4 1.1 Real change CZK/EUR . -7.1 -6.4 -6.6 -6.7 -9.6 -7.3 Real GDP growth in EUR . 8.1 11.7 11.0 -5.5 15.8 8.2

1999 2000 2001 2002 2003 Average

1999-03 Average 1993-03

Real GDP growth in CZK -0.4 3.3 3.1 2.0 2,9 2.2 1.8 Inflation rate in CR 2.1 3.9 4.7 1.8 0,1 2.5 7.3 Inflation rate in EMU 1.1 2.1 2.4 2.2 2.1 2.1 2.1 Inflation differential 1.0 1.8 2.3 - 0.4 - 2,0 0.5 5.2 Nominal exchange rate CZK/EUR 36.13 35.09 31.98 31.60 32.41 33.44 34.19 Nominal change CZK/EUR 3.2 -2.9 -8.9 -1.2 2.5 -1.5 -0.2 Real appreciation CZK/EUR -1.0 -1.8 -2.3 0.4 2.0 -0.5 -3.9 Real GDP growth in EUR -2.6 8.0 14.3 2.8 -1.6 4.2 6.2


Balassa-Samuelson Theorem

EURCZKCZKCZK NERRER %% increase in productivity in tradable sector (TS)

increase in wages in TS

increase in wages in non-tradable sector (NTS) due to

wage contagion without adequate increase in productivity

increase in NTS prices

increase of the national inflation rate

national currency ER pegged

then RER appreciation


Comparison of Income and Price Levels in 1996 and 2002 for New Member States and

Euro Area (EU15=100)

25

35

45

55

65

75

85

95

105

25 35 45 55 65 75 85 95 105

Income Level

Pri

ce L

evel

LAT

CZE

CYP

LIT

EST

POL

SKV

HUN

EUR

NMS

SLOMAL

Nominal convergence

Real convergence


Enlargement of the Euro Area under the Economic Conditions

of 2003

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

-2,0 0,0 2,0 4,0 6,0 8,0 10,0

Real GDP Growth Rate

HICP


Maastricht Constraints for Nominal and Real

Convergence

aspiration to fulfil Maastricht criteria

might induce distortions into economy too restrictive monetary policy appreciation of nominal ER due to

investment inflows ? RER

appreciation

european monetary integration ii. dana viktorová

Documents

dana viktorov viktorov

cr viktorov

elements viktorov

real convergence viktorov

growth pact viktorov

euro currency viktorov

nominal convergence

enlarged ecb viktorov