16th Dubrovnik Economic ConferenceJune 2010

Athanasios VamvakidisInternational Monetary Fund

Fiscal risks to the fore in advanced Europe

When Greece sneezes, who gets a cold? Can everyone become more competitive? Don’t forget emerging Europe Recent policy initiatives in Europe and… …what else can be done

July 2007 May 2010

9

Lower Interest Rates

Weaker Currency

Higher Exports

Top 10 Past AMConsolidations

Greece

Joint Probability of Distress (JPoD)

0

0.001

0.002

0.003

0.004

0.005

0.006

Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10

Joint Probability of Distress in 8 European Banks

Banking Stability Index (BSI)

0

0.5

1

1.5

2

2.5

3

3.5

4

Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10

Expected number of banks becoming distressed if at least one bank becomes distressed

Asia N. America Atlantic Western Europe Central Europe Southern Europe Northern Europe

Advanced Economies: Structural Heatmap

Japa

n

Korea

Hong K

ong

Singa

pore

Austra

lia

New Z

ealand

United

Sta

tes

Canada

United

Kin

gdom

Irelan

d

Icela

nd

Franc

e

Belgiu

m

Nether

land

s

Luxe

mbo

urg

Ger

man

y

Austri

a

Switzer

land

Italy

Spain

Portu

gal

Gre

ece

Denm

ark

Finlan

d

Norway

Sweden

Institutions and contractsInstitutions WEF 1.0 2.0 0.0 0.0 0.0 0.0 1.0 0.0 1.0 1.0 0.0 1.0 1.0 0.0 0.0 0.0 0.0 0.0 2.0 2.0 2.0 2.0 0.0 0.0 0.0 0.0Enforcing Contracts WB 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 0.0 1.0 0.0 0.0 1.0 1.0 0.0 0.0 0.0 0.0 2.0 1.0 1.0 2.0 0.0 0.0 0.0 1.0Legal structure and property rights IEF 1.0 1.0 0.0 0.0 0.0 0.0 1.0 0.0 1.0 1.0 0.0 1.0 2.0 0.0 0.0 0.0 0.0 0.0 2.0 2.0 2.0 2.0 0.0 0.0 0.0 0.0

InfrastructureInfrastructure WEF 0.0 0.0 0.0 0.0 1.0 2.0 0.0 0.0 1.0 2.0 0.0 0.0 0.0 0.0 1.0 0.0 0.0 0.0 2.0 1.0 1.0 2.0 0.0 0.0 1.0 0.0

Human capitalHealth and primary education WEF 1.0 1.0 2.0 0.0 0.0 0.0 2.0 0.0 1.0 0.0 0.0 0.0 0.0 0.0 1.0 1.0 0.0 1.0 1.0 2.0 1.0 2.0 0.0 0.0 0.0 0.0Higher education and training WEF 1.0 1.0 2.0 0.0 0.0 0.0 0.0 0.0 1.0 1.0 0.0 0.0 0.0 0.0 2.0 1.0 1.0 0.0 2.0 2.0 2.0 2.0 0.0 0.0 0.0 0.0

Labor market efficiencyLabor market efficiency WEF 0.0 2.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 0.0 1.0 1.0 1.0 1.0 1.0 1.0 0.0 2.0 2.0 2.0 2.0 0.0 1.0 0.0 0.0Labor market regulations IEF 0.0 2.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 1.0 0.0 0.0 2.0 2.0 0.0 1.0 1.0 1.0 2.0 0.0 2.0 1.0 2.0Employing workers WB 0.0 1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.0 0.0 1.0 2.0 1.0 0.0 0.0 1.0 2.0 1.0 2.0 0.0 1.0 1.0 1.0Employment protection OECD 0.0 0.0 . . 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.0 1.0 1.0 2.0 1.0 1.0 0.0 1.0 2.0 1.0 2.0 0.0 1.0 1.0 0.0

Goods market efficiencyGoods market efficiency WEF 0.0 1.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 0.0 1.0 1.0 0.0 0.0 0.0 0.0 0.0 0.0 2.0 2.0 2.0 2.0 0.0 1.0 1.0 0.0Business regulations IEF 1.0 1.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 0.0 0.0 1.0 1.0 1.0 0.0 1.0 0.0 0.0 2.0 2.0 2.0 2.0 0.0 0.0 1.0 0.0Starting a business WB 2.0 1.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 1.0 0.0 0.0 0.0 0.0 2.0 1.0 2.0 1.0 0.0 2.0 0.0 1.0 0.0 1.0 0.0 1.0

Openness to tradeMarket size WEF 0.0 0.0 1.0 1.0 0.0 2.0 0.0 0.0 0.0 1.0 2.0 0.0 1.0 0.0 2.0 0.0 1.0 1.0 0.0 0.0 1.0 1.0 1.0 1.0 1.0 1.0Trading across borders WB 1.0 0.0 0.0 0.0 0.0 1.0 0.0 0.0 0.0 1.0 2.0 1.0 0.0 0.0 0.0 0.0 0.0 0.0 2.0 1.0 2.0 2.0 0.0 0.0 0.0 0.0Freedom to trade IEF 2.0 1.0 0.0 0.0 1.0 0.0 0.0 1.0 0.0 0.0 2.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 1.0 1.0 1.0 2.0 0.0 1.0 2.0 0.0

Credit market efficiencyFinancial market sophistication WEF 1.0 1.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 1.0 2.0 0.0 1.0 1.0 0.0 1.0 1.0 0.0 2.0 1.0 2.0 2.0 0.0 0.0 0.0 0.0Credit market regulations IEF 2.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 0.0 0.0 1.0 0.0 1.0 2.0 0.0 1.0 2.0 0.0 2.0 2.0 0.0 0.0 0.0 0.0Getting credit WB 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 1.0 1.0 2.0 0.0 0.0 0.0 2.0 1.0 2.0 2.0 0.0 0.0 1.0 2.0

Innovation Technological readiness WEF 1.0 0.0 0.0 0.0 1.0 1.0 0.0 0.0 0.0 1.0 0.0 1.0 1.0 0.0 0.0 0.0 1.0 0.0 2.0 2.0 2.0 2.0 0.0 0.0 0.0 0.0Business sophistication WEF 0.0 1.0 0.0 0.0 1.0 2.0 0.0 1.0 0.0 1.0 1.0 0.0 0.0 0.0 1.0 0.0 0.0 0.0 1.0 1.0 2.0 2.0 0.0 0.0 1.0 0.0Innovation WEF 0.0 0.0 2.0 0.0 1.0 1.0 0.0 0.0 0.0 1.0 1.0 1.0 0.0 0.0 1.0 0.0 1.0 0.0 2.0 2.0 2.0 2.0 0.0 0.0 1.0 0.0

Currency mismatch and long-run growth in emerging economies, 2000-2009           

Change in currency mismatch 0.03** 0.02** 0.02** 0.02** 0.02**  (0.01) (0.01) (0.01) (0.01) (0.01)           Initial per capita GDP -1.10 -1.04*** -1.11** -1.21** -1.68***  (0.68) (0.37) (0.38) (0.47) (0.41)           Age dependency ratio   -0.10*** -0.09*** -0.09*** -0.12***    (0.02) (0.02) (0.03) (0.03)           Investment/GDP   0.18*** 0.19*** 0.19*** 0.13**    (0.04) (0.04) (0.05) (0.05)           Trade/GDP   -0.01 -0.01 -0.01 -0.01    (0.006) (0.006) (0.007) (0.007)           Inflation rate   0.03 0.00 -0.01 0.02    (0.03) (0.03) (0.05) (0.05)           Growth of terms of trade     0.10 0.12 0.08      (0.09) (0.09) (0.09)           Europe dummy       0.32 -0.23        (0.85) (0.95)           Change in external debt/GDP         0.02          (0.01)                      

Adjusted R2 0.1 0.68 0.68 0.67 0.71           Observations 29 29 29 29 29           

           

Growth in Sales and Currency Mismatch: Firm level data

Dependant Variable Growth in Sales between 2001 and 2004

Sample Small Firms in Non-Tradables Sectors

Estimation OLS

Currency Mismatch Dummy 0.087*** 0.081** 0.088** 0.070** 0.066** 0.070**

-0.032 -0.032 -0.035 -0.033 -0.033 -0.035

Initial Log of Sales (2001) -0.041*** -0.041*** -0.045*** -0.019* -0.021* -0.025**

-0.0099 -0.01 -0.011 -0.011 -0.012 -0.012

Log of Years in Operation -0.026 -0.025 -0.018 -0.047* -0.045* -0.031

  -0.025 -0.025 -0.027 -0.026 -0.026 -0.028

Initial Labor Productivity       -0.062*** -0.057*** -0.056***

Log(Sales/Employment) in 2001 -0.017 -0.018 -0.02

Share of Foreign Input in Production 0.0011*** 0.0011*** 0.0012***

-0.00038 -0.00041 -0.00043

Share of Employees with a University Degree 0.0013*** 0.0013** 0.0012**

-0.00047 -0.0005 -0.00054

Share of Skilled Workers 0.024 0.019 -0.0083

-0.047 -0.048 -0.051

Number of Firms 1010 1008 1008 955 953 953

Adjusted R-squared 0.049 0.051 0.06 0.073 0.072 0.081

Country Fixed Effects Yes Yes No Yes Yes No

Industry Fixed Effects No Yes No No Yes No

Country-Industry Fixed Effects No No Yes No No Yes

* significant at 10%; ** significant at 5%; *** significant at 1%        

Front-loaded deficit reduction in affected countries

Extended liquidity support and dollar swaps ECB securities market program Emergency loans (EU, IMF): Greece, EFSM, EFSF Reforms to establish medium-term and long-

term fiscal sustainability Completion of financial sector repair Structural reforms for growth Reform of euro area fiscal governance