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Conferences of Ezoneplus at a Glance
The Eastward Enlargement of the Eurozone - Impacts on Trade, FDI and Capital Markets
Cracow, 21-24 November 2002
Warsaw School of Economics and Institute of Strategic Studies in Cracow
Minutes of participants´ contributions
Prof. Dr. hab. Katarzyna Zukrowska; Prof. Dr. Hanns-D. Jacobsen: Introduction
The two professors opened the conference by introducing the programme and the Ezoneplus project itself, stressing the fact that Eurozone enlargement will bring about a variety of new challenges with regards to mere EU enlargement. For instance, there is no such thing like an optimal exchange-rate policy for all applicants: Instead, different approaches reveal different economic demands and policy priorities.
At last, Prof. Jacobsen presented an outlook on the Ezoneplus workshop in Brussels next May, which shall bring together leading EU officials and members of the academia, in order to transmiss the outcomes of Ezoneplus' research into policy-making procedures.
Mr. Vít Bárta (Advisor to the Czech National Bank): "Czech National Bank and euro: major options and issues"
Mr. Bárta first explained why to date, the Czech National Bank (CNB) abstained from issuing an official Euro entry strategy. Apart from some leading officials in the CNB, there is still reservation in the Bank and the Ministry of Finance about the timing to adopt the Euro. However, a "fast-track"-solution, an earliest possible adoption in 2007 seems to be possible, if three sources of risks can be eliminated: Business cycles, public deficit, and labour market developments.
To Mr. Bárta, economic transformation in terms of shadowing the business cycles of industrialised countries (mainly Germany) is far from complete and cyclical correlation insufficient. The structural similarity of the Czech economy vis-à-vis Germany is substantially smaller than that of Hungary for instance. Second, public finances have to carry a heavy burden in terms of high mandatory expenditures and a structurally driven deficit. Because of the mostly expansionary fiscal polic in recent years, the fiscal performance today is probably much worse than in other accession countries and for Mr. Bárta the biggest macroeconomic risk. If the Czech Republic would like to fulfil the Maastricht budget deficit criterion and comply with the Stability and Growth Pact today, a huge fiscal correction of up to five per cent might be necessary. Third, persistant rigidities in the labour markets could justify some reservations towards an early Euro entry. Flexibility is rather limited, since, for instance the share of long-term unemployment of the total amounts to 50 per cent. With downwards inflexible wages, an early takeover of the common currency may bear adjustment risks.
Last but not least, the correct determination of the equilibrium level of the Czech koruna is not yet at sight. At last, as long as the current real appreciation is not fully understood, Mr. Bárta argues for a slightly more reserved approach towards an early entry into the eurozone.
Mr. Jakub Borowski (National Bank of Poland): "The Impact of Poland's EMU Accession on Foreign Trade" download paper
In his presentation Mr. Borowski tried to assess the positive welfare effect on trade stemming from the Euro adoption. First of all, the unified currency will bring about dynamic efficiency gains, leading to an increased capital stock and expansion of trade, thus, resulting in output rise. However, it is difficult to assess the impact of current exchange-rate volatility on trade, but since only three per cent of all Polish firms do some sort of exchange-rate hedging, the majority will profit from the volatility abolition due to EMU enlargement. The results of empirical studies do not provide an unequivocal answer to the question about the direction and scale of this impact. Still, using and expanding a gravity model from Andrew Rose (2000), Mr. Borowski estimates trade to possibly rise threefold (!) in a longterm perspective. Finally, the banker stressed to distinguish analytically the mere elimination of exchange-rate risk and the introduction of a common currency.
Prof. Dr. Karel Zeman (Institute of Integration of the Czech Republic into the European and World Economy): "The Basic Features of the Proceeding Discussion about the Czech Republic Preparation for Joining the Eurozone" download paper
First, Prof. Dr. Zeman described growing understanding between the Czech government and the National Bank, which should raise the possibility of entering the eurozone between 2006-10. "A new quality of a dialogue between the Central Bank and the Government has improved the conditions for forming a desirable mix of monetary and fiscal policy. Consensus of the Government, the Central Bank and other entities, including trade unions, increases the credibility of announced inflation targets. This also has a favourable effect on inflation expectations and reduces the costs of anti-inflationary policy."
Although he mainly advocated a fast-track solution, Prof. Zeman confirmed Mr. Bártas comments on the lack of fiscal prudence in the Czech Republic. Additionally to a lot of non-performing assets, lasting problems of the health care and pension system should continue to keep the share of mandatory state expenditures worryingly high.
Hereafter, a lively discussion emerged from a remark from Mr. Borowski claiming to see no real differences between the two countries monetary and exchange-rate policies. To him, of course fiscal consolidation is crucial before entering the Exchange-rate mechanism II, however, one should use the positive pressure stemming from an as-fast-as-possible entry strategy. This pressure could enable a country to encourage still necessary adjustment processes, e.g. in the labour market. Mr. Bárta in contrast, highlighted the fear of real appreciation and evoked the image that entering ERM II too early would be similar to entering the subway albeit with the train still moving. Despite that the Polish expert Mr. Marek Rozkrut (NBP) claimed in line with Mr. Borowski that waiting for compliance with the so-called OCA-criteria may prove to become an infinite venture. In this context Mr. Bárta and Prof. Dr. Zeman both admitted the influence of a typical Czech form of "Euroscepticism", which in part is still present in the Czech government.
Mr. Rafal Wieladek (Warsaw School of Economics): "The exchange rates and capital flows. The case of Central European countries in transition."
Mr. Thomas Meyer (Freie Universität Berlin): "The shaping of capital markets"
Mr. Rafal Wieladek discussed the link-age between exchange rates and capital flows, whereas Mr. Thomas Meyer looked more precisely at the transiton mechanisms driving capital markets, thus, revealing the impact the Euro already had on western financial markets and how the currency is about to influence the financial sphere in the applicant states. Both researchers pointed at the importance of complete liberalisation of capital flows prior to EU-membership. Being the main source of future efficiency gains, such liberalisation may come at a cost if inflows would overshoot a sustainable level. Eventually, this money may be withdrawn all of a sudden undershooting the long-run level and depriving the applicant states of financial resources leading to crisis.
Prof. Dr. hab. Katarzyna Zukrowska (Warsaw School of Economics) presented two papers: "Interest rates and capital flows" as well as "FDI flows and Trade with East"
, albeit concentrating on the fiscal stance and fiscal policy of Poland. In that respect the professor stated that the main concern about an early inclusion into the eurozone stems from the Polish budget deficit. It grew substantially throughout the last two years (in 2002 it was twice as high as in 2000) and "… the roots of it can be strongly linked to structural deficiencies". Moreover, although there are strict rules concerning the deficit, "…Poland does not have any law regulations stating about the size of it." Regarding the eventual EMU accession, the key question is to what extent the trend of increasing the budget deficit will possibly rise. Fortunately, according to Prof. Zukrowska, the Polish government did not use a traditional remedy: "As the problem is studied and remedies are available, Poland did not increase its debt in order to stimulate the economic growth but to reform its pension, health, education sytems - there is a prospect that in short prescribed treatment based on tax reform will be introduced."
Quite similar to the Czech Republic, privatisation helps Poland to finance the budget. However, authorities there prefer a somewhat slower path because: "If privatisation is slow this forces reductions of some of the state expenditures from the beginning of transformation. At the same time slow privatisation helps to smooth changes in exchange-rate values as all transforming economies face a deficit on current account as a result of limited competetiveness of their products".
Prof. Dr. hab. Stanislaw Swadzba (University of Economics in Katowice): "Social support for the integration of Poland with the EU and acceptance of democracy and market economy".
This presentation offered a detailed picture about Polish expectations with regards to the country's entrance into the European Union. Many Poles still have rather mixed perceptions of what market economy is actually about and how diminished state interference into economic activity has to be, compared with the former planned system. Although public sentiment towords EU-accession currently declines, the referendum should pose no overwhelming obstacle to political authorities. However, in terms of a common understanding and improving people's expectations the Polish government has still a long way to go.
Mr. Marcin Zogala (National Bank of Poland): "Maastricht exchange rate criterion. What do we know - what do we need to know?"
The economist from the NBP presented the rationale of the exchange-rate criterion and its technical aspects as laid down in the Treaty and the protocol on ERM II from 1998. What the Treaty requires then is a) observence of normal fluctuations margins, b) no devaluations, c) no severe tensions during a period of two years. However, the EU wording offers some scope of interpretation. For instance, "normal fluctuations" nowadays are +-15 per cent but originally meant 2.25 per cent. Thus, for Mr. Zogala it seems possible that the European Commission will consider the narrower band as an indicator for assessing "severe tensions", as done so implicitely in its Convergence Report 2000. Last but not least member states are only "expected" to stay within ERM II for two or more years. Inspite of this the case of Italy and Finland shows that this time span may be open to discussion.
In sum, the fastest track towards the euro would mean for Poland: compliance with three Maastricht criteria at the end of 2005, fulfilling ERM II in June 2006 and adopting the European currency on the first of January 2007.
Furthermore, doc. Ing. Ingeborg Nemcová (University of Economics, VSE) presented "FDI and Eurozone enlargement - the Czech View" and showed empirically the huge capital inflows especially into the Czech Republic., which to date enjoys the highest per head FDI inflows within the eastern European countries. Additional presentations were given by Ms. Anna Pochylczuk (Warsaw School of Economics) "Evolving structure - constructing agency: the political euro", Mr. Dominik Sobczak (Warsaw School of Economics): "Capital markets and stock exchanges" and Mr. Pjotr Banbula (Warsaw School of Economics): "Ways of opening markets for capital flows".
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