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Report
Czech Republic
Eurostrategy, state of play VIII, 2007
Sofia, September 2007
Ludek Niedermayer, CNB, Prague
www.
.cz
Czech economy in 2007: Good
growth, bad fiscal
30
25
10,0
GDP
Investment
Consumption
Exports
8,0
6,0
4,0
20
2,0
15
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
0,0
-2,0
10
-4,0
5
-6,0
-8,0
0
02/I II III IV 03/I II III IV 04/I II III IV 05/I II III IV 06/I II III IV 07/I
-5
-10,0
Conv. Prog. XI/05
Budget
Result
Result adj.
GDP
… low inflation as well as nominal
interest rates…
7.0
Meziroční inflace v %
6
5
6.0
4
3
5.0
2
1
4.0
14.6.2006
2.3.2005
18.11.2003
2.8.2002
3.0
17.4.2001
3.1.2000
0
Swap rates (1,5,10 Y)
2.0
6
5
1.0
4
3
0.0
2
1
-1.0
V.07
III.07
I.07
XI.06
IX.06
VII.06
V.06
I.06
III.06
XI.05
IX.05
V.05
VII.05
I.05
III.05
XI.04
IX.04
V.04
VII.04
I.04
1/01 5 9 1/02 5 9 1/03 5 9 1/04 5 9 1/05 5 9 1/06 5 9 1/07 5 9
III.04
0
Turnover in external balance despite
appreciation of CZK...
Current account and its components / GDP ratios (moving annual cumulations in %)
Euro Fx rate
I/98 III I/99 III I/00 III I/01 III I/02 III I/03 III I/04 III I/05 III I/06 III I/07
6
37
4
35
2
33
0
31
%
-2
29
-4
27
-6
25
-8
X IV X IV X IV X IV X IV X IV X IV
-0 0 01 01 02 02 03 03 04 04 05 05 06 06 07
-10
-12
trade balance
income balance
current account
balance of services
current transfers
Risks for Economy
• Problems in the field of public finance are getting more urgent;
• Problems in structural sphere are not solved so far:
 Pension reform
 Changes in health care;
• Problems of too much regulation, limited flexibility of labour
market. Non-solving of this problem, despite compensating openess
of market, has adverse effects on future growth of economy.
• On the contrary, competitive environment in some spheres of
economy could contribute more to low price growth and prosperity.
Czech Republic and Euro
Czech Republic X Euro
Discussion on Implementation of
Euro in CR …
• … in CR dominated by (un) willingness to do the fiscal
tightening and influenced by general attitude to EU matters.
Very limited discussion on costs and benefits of Euro
adoption;
• New member countries do not have „opt out“, now more
„outs“ than „ins“; from 10 new member countries, 7
originally planed to adopt Euro till the end of decade, first
already in 2007, followed by two in 2008;
• The difference of CR situation:



Crown does not suffer from the lack of credibility and is stable in last
years,
interest rates are not higher than in Eurozone
Financial market offers different types of short-term FX risk
management tools
• On corporate sector, there is more demand for Euro adoption,
but exact arguments for or against could be hard to find.
Nominal Convergence :
CR vs. Maastricht
• Stable and safe observance of 3 % limit of public deficit
requires more changes in public finances (pension reform
will increase deficits too, now not accounted for);
• Recent rigid interpretation of inflation criterion could be
source of concerns too and requires certain level of
preparation (see Baltic states);
• Capability to limit FX rate volatility, and pass
„successfully“ ERM II and „correctly fix FX rate“, could
be a challenge for macro policies (see Slovakia);
• Other two conditions (public debt and long term interest
rates) seem to be easier to fulfil.
“ Real Convergence “
• Correlation of macro indicators
growing up but still “moderate“
at maximum;
• Structure of economy different
from economies of most EU
members;
• Limited improvement of the
labour market;
• Members of Eurozone grow
more slowly than „outs“;
• To fulfil the criteria can be
difficult or expensive.
• EU growth is a very strong
determinant of our economic
growth;
• Very high proportion of foreign
trade with EU (FDI as well);
• Reduction of costs on foreign
trade will accelerate economic
growth;
• Problems of countries in EMU
are the result of their domestic
policies and not the
consequence of Euro adoption.
If anything matters, than it is flexibility of economy ...
…but it should be demanded also without EMU entry…
… but the rate of flexibility is always difficult to measure …
Strategy – broad view
• Base to access nominal convergence is the fulfillment of Maastricht
conditions;
• Real convergence is relevant for future development (cost / benefits) of
a new member of Eurozone;
• „Outs“ have various strategies – in some cases the „first attempt“ has
failed;
• For countries in our region, adoption of Euro means more significant
change of monetary and FX rate policy;
• Fiscal policies in these countries face bigger problems too;
• Very difficult situation in north currency board countries, facing „very
hot“ economy, huge CA deficits and balanced fiscal budget;
• In general, economic situation and rate of convergence of 10 new
members differs from the situation of most countries that have created
monetary union.
CR :
New Facts
• „Rule book“ for Euro in CR set shortest possible „transition period“ (2
years in ERM II.) and minimum 3 years of preparation;
• First strategy (adopted by previous government) of entering Eurozone
assumed implementation of Euro 01/01/2010 but failed on fiscal
grounds;
• New strategy approved in VIII 2007, but no substancial new message
there, date is not indicated, yearly evaluation continues (autumn);
• High economic growth caused cyclical decline of deficits (in practice
close to 3% limit) in recent years and creates impression of „lower
urgency of the action;
• Since 2008, some fiscal reform will be efective (VAT increase, direct
tax cuts, partial reversal of large increase of social transfers from
2006). But it is not expected to bring large fiscal saving. Other large
reforms, that will increase fiscal costs, are even scheduled so far;
www.cnb.cz

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