Friday, March 26, 2010

Why were American economists jealous about the Euro?

Two economists in the European Commision published a nice paper on "The euro: It can’t happen, It’s a bad idea, It won’t last. US economists on the EMU, 1989-2002" arguing that:

"The study of approximately 170 publications shows (a) that US academic economists concentrated on the question "Is the EMU a good or bad thing?", usually adopting the paradigm of optimum currency areas as their main analytical vehicle, (b) that they displayed considerable scepticism towards the single currency, (c) that economists within the Federal Reserve System had a less analytical and a more pragmatic approach to the single currency than US academic economists, and (e) that US economists adjusted their views and analytical approach as European monetary unification progressed. In particular, the traditional optimum currency approach was gradually put into question"

The Impact of Population Ageing in the EU until 2060

I highly recommend to read the the European Commission's report on "The 2009 Ageing Report : Economic and budgetary projections for the EU-27 Member States (2008-2060)".

Poland is looking good, thanks to the pension reform, but otherwise the picture for the whole EU is pretty gloomy.

Essential reading for all current politicians and future pensioners (like me).

Friday, March 19, 2010

Win-Win Scenario for the Eurozone: Expel Greece, Invite Poland

I am increasingly convinced that it would make a lot of sense for the euro zone to do a quick barter trade and replace Greece with Poland. It would be a pure win-win, a Pareto-efficient solution for everyone:

(i) Greece would have a chance of restoring its competitiveness owing to a new depreciated currency (otherwise it will have to go through a grinding, painful and long-term internal devaluation, which I think the Greeks--unlike Latvians, Estonians, Lithuanians, and Bulgarians--have no stomach for);
(ii) Poland would achieve the macroeconomic stability that it craves and accelerate the speed of convergence (particularly if it joins the euro zone at roughly the current exchange rate)
(iii) euro zone would get a new powerful member, whose low inflation (projected to decline below 2% later this year) and relatively low public debt (at least compared to Western Europe) would not complicate euro zone policy making, while its strong competitive position would provide the much needed stimulus to the sclerotic eurozone economy.

I will give this idea some more thinking and report again soon.

What Old Europe Can Learn from New Europe

This week's The Economist features two articles on Eastern Europe or--as I prefer to call it--New or Central Europe (geographically speaking the notion of Eastern Europe is just plain wrong, given that most countries in the region are smack in the center of the continent. I am also loath to propagate the ill-conceived Western European bias, where any country beyond Germany is considered "Eastern").

Both articles argue that Old Europe, and in particular Spain, Portugal, Italy and Greece, could learn a lot from New Europe as to how to take hard economic decisions and move forward. I could hardly agree more.

The Economist also talks about how quickly the mood about New Europe can change - it was only a year ago when Financial Times ran a famous headline "Eastern European Subprime". Now, New Europe is hardly a problem anymore and some of the countries in the region, primarily Poland, are perceived as unmitigated economic stars.

Back in early 2009 some people saw the irrational hysteria and argued against it. That includes Prof. Rybinski and me, when at the height of the crisis in February of last year we argued that "there was irrational exuberance about Central and Eastern European sovereign risk". As it turned out, we were 100% right.

Interestingly, neither Financial Times nor Wall Street Journal wanted to publish our text then (we ended up publishing it in Eurointelligence). Was it because it was just not in line with the gloomy editorials?

Thursday, March 18, 2010

Global Crisis versus Great Depression: Comparison

Barry Eichengreen and Kevin O’Rourke update their charts until February 2010 comparing the current global crisis with the Great Depression. Interesting read. The conclusion is that "while there is cause for optimism, there is no room for complacency".

Monday, March 15, 2010

IMF on Poland: "Fiscal easing saved Poland"

The IMF has just published its Concluding Statement after a 10 day mission in Warsaw (in which I have also participated on an ad hoc basis).

I was shocked to read in the IMF statement that "A large and timely fiscal stimulus was particularly helpful". This is a very courageous statement on the part of the IMF given the prevailing domestic propaganda maintaning that Poland has done so well in the crisis because it has been "fiscally disciplined" and "resisted other countries' ill-considered policy of fiscal stimuli".

IMF knows better: it says that "Discretionary fiscal relaxation of an estimated 1¾ percent of GDP in 2008 and 2½ percent of GDP in 2009, together with a fall in revenues due to the economic slowdown, increased the general government deficit from under 2 percent of GDP in 2007 to over 7 percent of GDP in 2009. While the Government initially intended to offset revenue shortfalls to the extent needed to maintain the state budget deficit below the limit of Zloty 18 billion in 2009—through what would have been highly pro-cyclical expenditure cuts—it appropriately changed such plans at mid-year, when it increased the deficit limit to Zloty 27 billion. Thus, fiscal policy—through a combination of discretionary relaxation and the work of automatic stabilizers—has provided a much welcomed counter-cyclical stimulus in 2008-09."

It concludes that "fiscal relaxation was was one of the key factors preventing Poland from falling into recession"

Wow, that's impressive!

The IMF stance is very much in line with what I (co-) wrote more than a year ago in a series of articles in the Polish press (, here, , here , here , here and here), arguing that fiscal relaxation is needed to prevent Poland from falling into a recession. At that time the Ministry of Finance was still arguing, as the IMF documents above, that Poland needed to keep general government deficit below 3 percent of GDP to enter the ERMII and then euro zone in 2012. This amounted to conducting a very pro-cyclical policy. Had the MoF kept its position, Poland would have not escaped a recession for sure.

Luckily, the MoF changed its mind later in the year (allowing a deficit of almost 7% of GDP in 2009 and 2010), albeit it did not change its rhetoric.

Interestingly, the Polish press has not picked up ANY of this in their review of the IMF statement. Just see this and this text in Wyborcza and this one in Rzeczpospolita...

IMF is courageous not only in its fiscal assessment. For the first time ever it talks about FX intervention and reduction in interest rates to stop excessive FX appreciation (sic!), argues against cutting contributions to OFE, recommends against too fast fiscal tightening ("reducing the deficit to 3 percent already by 2012 would, in our view, be too ambitious, considering that the economic recovery is incipient and still uncertain"), and talks about a forceful action by the government to prevent too rapid increase in FX lending. Finally, in a stark reversal of its earlier position, the IMF recommends to delay Euro adoption.

Friday, March 5, 2010

Are real estate prices in Poland too high?

Hungarian Central Bank published an interesting paper showing that while real estate prices in practically all EU countries have decreased since the onset of the crisis in 3Q 2008, sometimes drastically, real estate prices in Poland have actually increased.

I am not sure whether this is true that real estate prices in Poland have recently increased - all other data show they they actually declined by about 10-15%, at least in large cities - but it is surely true that they have declined much less than elsewhere.

Importantly, real estate prices in Poland have increased the most among all new EU member states since 2000, as shown in this World Bank's focus note, which I have co-authored (p. 52) and in a paper by other Polish economists talking about a real estate price bubble here

Time for a correction in real estate prices? Probably so, although it will most likely happen through real price correction, with nominal prices staying more or less where they are now (alas and paradoxically, declining inflation will not help the process and markets will clear later than needed).

Overvalued property prices also beg a question whether the state should continue to support real estate purchases for middle income families, which in effect contribute to the real estate bubble (in Warsaw state support is available for property prices of up to some 7,500 PLN per square meter, which pretty much covers most of the market, except for high-end apartments).

Wednesday, March 3, 2010

The fallacy of the American Dream?

OECD in its news study on social mobility argues that "It is easier to climb the social ladder and earn more than one’s parents in the Nordic countries, Australia and Canada than in France, Italy, Britain and the United States, according to a new OECD study. Intergenerational Social Mobility: a family affair? says weak social mobility can signal a lack of equal opportunities, constrain productivity and curb economic growth.

It also says that "social mobility between generations tends to be lower in more unequal societies. It says redistributive tax and benefit policies aimed at providing income support or access to education for disadvantaged families may reduce the handicaps of a poorer or less well educated background. However, any growth-enhancing impact of redistributive policies via increased social mobility would need to be weighed against other, well-established negative effects on growth via reduced labour utilisation".

More progressive taxation anyone?

Monday, March 1, 2010

Does financial innovation boost economic growth?

The Economist provides a forum for an interesting debate on the above question between Ross Levine and Joseph Stiglitz. I tend to agree more with the latter based on the belief that traditional banking seems to provide much higher social returns than most forms of innovation. It is much less risky too.