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Emerging markets in Europe: Real and financial integration with the European Union

Emerging markets in Europe: Real and financial integration with the European Union. IADB, Washington April 10, 2003 Fabrizio Coricelli University of Siena, CEU and CEPR. Sudden stops in CEECs: exception. Two cases of sudden stops. Czech Republic in 1997 and Bulgaria in 1996-97

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Emerging markets in Europe: Real and financial integration with the European Union

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  1. Emerging markets in Europe:Real and financial integration with the European Union IADB, Washington April 10, 2003 Fabrizio Coricelli University of Siena, CEU and CEPR

  2. Sudden stops in CEECs: exception • Two cases of sudden stops. Czech Republic in 1997 and Bulgaria in 1996-97 • It would be interesting to compare with experience of LAC to highlight the causes and effects of sudden stops

  3. Czech Republic

  4. Bulgaria

  5. Other CEECs • CEECs were able to ride smoothly through the Russian crisis and the current slowdown of major industrial economies. • Gdp growth resumed rather quickly after 1998 • Current account deficit remained large • Foreign bank loans were cut also to CEECs, but only temporarily, and less than for other EMs. • FDIs remained strong

  6. Growth and current account in CEECs

  7. The fall in bank loans

  8. Much smaller in CEECs

  9. Czech Republic

  10. Poland

  11. Hungary

  12. CEECs not very different from other EMs • High volatility of main macroeconomic variables • Debt to Gdp indicators • High share of foreign debt in total debt

  13. Macroeconomic volatility

  14. …..volatility • Not due to terms of trade volatility (trade diversified) • Real exchange rate more volatile: massive reallocation from tradable to non-tradable sectors • Financial sector (still underdeveloped)?

  15. Small capital markets (2001)

  16. Debt indicators

  17. Key favourable factors • Parallel growth of trade and financial integration • High degree of trade openness, and especially trade integration with the EU • Relatively large tax base • “Anchor” of EU accession (political economy factors as well)

  18. Trade and financial opening hand in hand

  19. Trade integration and financial flows • Parallel growth of trade and financial links with EU. • Bulow and Rogoff (1989) channel: trade openness increases incentives of borrowers to service their debt. • Plus, better information flows. • A recent paper by the Bundesbank finds a significant effect on bank loans of German banks of the trade integration with Germany

  20. Trade openness

  21. Integration with Eurozone Trade with Eurozone/GDP

  22. Example: Hungary • Hungary, the country with the highest ratio of debt to GDP inherited from the pre-reform regime, that did not restructure the debt. • Debt to GDP declined slightly, but debt to exports was sharply reduced. • Spectacular increase in trade openness. Ratio of exports to GDP more than doubled in 7 years.

  23. Hungary cont….

  24. Intra-industry trade • Trade openness tends to increase specialization and output volatility. • Much less true if trade is intra-industry (Smithian division of labor, and “external” economies of scale) • Implication: dependence on the EU business cycle more and more important, but • More diversified industrial structure

  25. Intra-industry trade with Eurozone/GDP

  26. Output co-movement with EU

  27. Large tax base:Government revenue/Gdp

  28. EU “anchor” and Institutional reforms • Importing institutions (against Rodrik’s view) • May not be optimal, but more credible • “Credibility bonus” • Accession: anchor for market expectations • Interest rate convergence • Expectations are of a fast entry in Eurozone

  29. Interest rate spreadsshort-term rates CEECs-Euribor

  30. Risks ahead and open research agenda • So far underdeveloped capital markets • After entry in EU (next year): • Full liberalization of K-flows • Short term K-flows bound to increase? • Exchange rate policy? • Fiscal rules?

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