Prospects: Short and Long

Vladimir Gligorov

Contents

• Changing monetary regime • European challenges (changing policy

framework) • The Balkans: the adjustment problem

Changing Monetary Regime

• Fed and interest rate uncertainty • Interest rate hike is all but certain • Effects on the euro area: mostly positive,

assuming non-perverse exchange rate reaction • Emerging markets challenged • In part because of oil and commodity prices

remaining depressed while currencies devaluing

European Challenges

• Policy framework will continue to evolve • Public and intra-euro foreign debts will push for

banking union and some elements of a fiscal union

• Risks of disintegration will increase as EU continues to underperform in supply of the basic public goods: security, justice, and welfare

• Assuming preserved political stability, or sustainable instability, growth prospects will continue to improve, slowly however

New Europe

• Convergence growth returns • Mostly on the basis of export performance

and better debt profiles in Central European and Eastern Balkan EU member states

• Especially in countries with strong exporting sectors

The Balkans

• The Balkans face the adjustment problem • i.e. rigid price and policy structure and low

openness • Example: Greece • Example: Croatia • Other examples: Serbia and Bulgaria • Longer term aims and prospects

Export Growth

• Exports have grown strongly in the crisis • But less in Greece, Croatia, Spain, Portugal • While much more in other Balkan countries

and also the Baltics • Why? • Basically because of pre crisis loss of

competitiveness and post-crisis readiness to adjust

Main Components of GDP

• Investment decline everywhere • Consumption persistence • Both of households and of governments • Trade and current account deficits closing • I.e. savings increasing

Gross Fixed Capital Formation

0,0

5,0

10,0

15,0

20,0

25,0

30,0

35,0

40,0

45,0

2008

2014

Gross Capital Formation

0,0

5,0

10,0

15,0

20,0

25,0

30,0

35,0

40,0

2008

2014

Government’s Final Consumption

0

5

10

15

20

25

2008

2014

Household Final Consumption

0

10

20

30

40

50

60

70

80

90

2008

2014

Final Consumption

0,0

20,0

40,0

60,0

80,0

100,0

120,0

2008

2014

Exports

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

80,0

90,0

100,0

2008

2014

Imports

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

80,0

90,0

100,0

2008

2014

Exports, euro

0,0

50.000,0

100.000,0

150.000,0

200.000,0

250.000,0

300.000,0

350.000,0

400.000,0

2008

2014

Export and Import Growth, 2014/2008

-40,0

-30,0

-20,0

-10,0

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

imports

exports

Employment rate, 15-64

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

80,0

2008

2014

Employment rate, 25-54

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

80,0

90,0

100,0

2008

2014

Unemployment rate

0,0

5,0

10,0

15,0

20,0

25,0

30,0

2008

2014

Gross Public Debt

0

20

40

60

80

100

120

140

160

180

200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Bulgaria

Czech Republic

Estonia

Greece

Spain

Croatia

Spain

Latvia

Lithuania

Gross Public Debt

0

20

40

60

80

100

120

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Austria

Poland

Portugal

Romania

Slovenia

Slovakia

Hungary

Gross Public Debt

0

10

20

30

40

50

60

70

80

90

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Macedonia FYR

Turkey

Montenegro

Serbia

Albania

Current Account

-15

-10

-5

0

5

10

2008 2009 2010 2011 2012 2013 2014 2015 2016

Austria

Poland

Portugal

Romania

Slovenia

Slovakia

Hungary

Current Account

-60

-50

-40

-30

-20

-10

02008 2009 2010 2011 2012 2013 2014 2015 2016

Macedonia

Turkey

Montenegro

Serbia

Albania

Current Account

-25

-20

-15

-10

-5

0

5

10

2008 2009 2010 2011 2012 2013 2014 2015 2016Bulgaria

Czech Republic

Estonia

Greece

Spain

Croatia

Latvia

Lithuania

Real Effective Exchange Rates, 2010=100

0

20

40

60

80

100

120

140

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Austria

Poland

Portugal

Romania

Slovenia

Slovakia

Hungary

Real Effective Exchange Rates, 2010=100

0

20

40

60

80

100

120

140

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Bulgaria

Czech Republic

Estonia

Greece

Spain

Croatia

Latvia

Lithuania

Wages

0

1.000

2.000

3.000

4.000

5.000

6.000

7.000

8.000

9.000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Croatia

Croatia

Wages

10.000

20.000

30.000

40.000

50.000

60.000

70.000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Albania

Serbia

Macedonia

Czech Republic

Wages

0

100

200

300

400

500

600

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Serbia

Serbia

Wages

0

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Poland

Romania

Wages

0

200

400

600

800

1.000

1.200

1.400

1.600

1.800

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Slovakia

Slovenia

Bulgaria

Estonia

Latvia

Lithuania

BiH

Prospects for Growth • Slow growth of household final consumption, e.g. 1 percent • No growth in government final consumption • Strong increase in investment • Faster growth of exports than imports • Potential growth rate for countries like Croatia, Serbia, and

most other less open economies, is about 3 percent – in next 5 years or so

• Assuming adjustment is accomplished by the end of that period with no dramatic change in the external environment, potential growth rate could be somewhere between 4 and 5 percent as long as employment rates reach the levels characteristic for more developed economies in Europe

Conclusions • Monetary regime is changing – interest rates are going to

get detached from zero • Energy and commodity prices should stay low • EU and euro area, barring major destabilisation, should

benefit form the changed monetary regime and low import prices

• Central European countries should benefit from sustainable overall policy framework and from increased prospects for exports

• Balkan countries and others that face sustainability issues will have to transit to more sustainable macroeconomic conditions with slower potential growth of up to 3 percent in next 5 years or so