The Economist on global population ageing

The Economist has a very interesting briefing on the global population ageing. It is worth reading. It says, for instance, that the fiscal cost of the global crisis represents only 10% of the future cost of ageing. There are a number of interesting paper in the sources, too, including an OECD paper on "Trends and Determinants of Fertility Rate in the OECD countries: The Role of Policies.

The impact of ICT on growth in the EU - conference "Cities on the Internet" in Zakopane

I have just come back from a conference on ICT in Zakopane (Polish premier ski resort - really nice), where I presented slides--based on my past research--on the impact of ICT on growth in the old and new Europe.

Let's roll out the euro to the whole Union!

Financial Times on June 11 published my second op-ed (in pdf; in Polish; the first op-ed from December is here), this time co-authored by Krzysztof Rybinski, on "Let's roll out the euro to the whole Union". The text is pretty historical, at least for me:-): we call on the EU leaders to show vision and leadership and allow all the willing eurozone candidate countries to enter the euro zone by 2012.

My interview in Belgian "Forward" business magazine on euro entry criteria

Forward, a Belgian business magazine, published an interview with me on the need to change euro entry criteria. The original text in English is available below ("Forward" is in French and Dutch only).

“It should not be the case that some countries are more equal than others”

Some plead for the softening of Maastricht criteria. What is your position on this matter?
“I am convinced that Maastricht criteria should be made more flexible. The crisis has shown that the criteria do not fully fit the current circumstances. Fiscal policy is a case in point: euro zone members will substantially exceed the 3 percent budget deficit limit this year, which - at least in the short-term - will strengthen, not weaken their economies. Maastricht criteria also need to be applied even-handedly: it should not be the case that some countries are more equal than others. While euro zone members have flexibility in meeting the criteria, new EU member states are made to follow the strict interpretation of the rules. This weakens confidence in the rules.”

Eastern European countries awaiting their adhesion to the Euro argue that current conditions are neither fair nor practicable. What are the problems?
“Maastricht criteria were developed in the early 1990s, when Eastern enlargement was only a fanciful idea. As a result, the criteria do not fit the fast growing new EU member states. What should be done? The inflation criterion should be relaxed, while budget deficit and public debt limits could be tightened. In addition, the requirement to stay at least two years in the ERM2 (the exchange rate mechanism of the Economic and Monetary Union) should be eliminated or made more flexible. This is because exchange rates, nowadays primarily driven by global speculation, can hardly be used as a test of a quality of a country’s economic policies. In addition, it is almost impossible for any country to ensure stability of its exchange rate. Given that the euro itself would not pass the stability test against the US dollar, why demand it from euro zone candidates?”

An accelerated adhesion of Eastern European countries to monetary union might also reduce the effects of global crisis in these countries…
“I agree that putting new EU members states on a fast track to euro accession would limit the impact of the global crisis on their economies by increasing investors’ confidence and providing a reform anchor for policymakers. Strenghtened confidence would have multiple positive implications, from easier refinancing of external debts to increased consumer spending and business investment.”

The benefits of an accession are according to you larger than the costs?
“Yes, since many CEE countries are better prepared to join the euro zone than some founding euro zone members: their trade, financial sector, and labour markets are more integrated with the euro zone, their labour and product markets are more flexible, and their business cycles are fully synchronized with the euro zone, as the crisis has unfortunately shown. In addition, their fiscal policy is more responsible: budget deficits and public debt levels are much lower than in the euro zone. Finally, inflation is projected to be only one percentage point higher. The crisis has made the distinction between benefits and costs even sharper: benefits are higher, while costs such as higher inflation or risks of asset bubbles are lower. That said, new EU member states will have to ensure that such costs are contained in the future.”

In a leaked recent internal report of IMF it has been proposed that Eastern European countries should use Euro as national currency without participating in Euro zone. What was your reaction?
“That’s a good idea for some countries in the region, particularly those that fixed their currencies to the euro, but bad for countries like Poland or the Czech Republic with flexible exchange rates. In general, however, unilateral euroisation should be contemplated only when entering the euro zone on normal terms would prove impossible. New EU members still believe that Western Europe truly wants them to enter the euro zone soon. But they have increasing doubts, which are undermining not only their euro adoption plans, but - more importantly - their faith in the whole European Union project.”

Strategic options for how to use the crisis to Poland's benefit

In this week's edition, The Economist runs two stories on how Indian and Chinese companies use the crisis to expand abroad through acquisitions. These stories dovetail with what I have been saying for a long time (see for instance my article in Rzeczpospolita from September of last year) that Poland's government should take advantage of the crisis to promote foreign expansion of public and private companies. It, of course, can do much more for state-owned entreprises such as PKO BP, KGHM or Orlen. PKO BP is a particularly good example: using the historical weakness of foreign banks, it could cheaply buy banks in Poland, CEE region, and even in Western Europe. The latter option would actually be the best: it would give PKO BP the needed know-how, expertise, brand name, access to markets etc, and serve as a a platform for further expansion.

What needs to be done: first, the government should forgo dividends from large state-owned companies (particularly from PKO BP). second, when profits are not enough, the state should increase equity in selected companies, even if it required increasing budget deficit (although it could be done through BGK, the state-owned bank). third, it should ensure that management boards of the state-owned institutions are as professional as they can be (which is largely the case, but not always). lastly, it should clearly state that it would not punish state-owned companies for being ambitious (it is risky, I know, but there is never a free lunch).

State ownership should not be, however, a long-term option: PKO BP and others should at some point be privatized to long-term domestic investors, such as the pension funds. Let Polish citizens benefit from international expansion of our companies...

Eurobond market would help resolve global imbalances

Barry Eichengreen in his Project Syndicate column talks about what could prevent global imbalances from reemerging in the future. He says the following:

"The other view is that China contributed to global imbalances not through its merchandise exports, but through its capital exports. What China lacked was not demand for consumption goods, but a supply of high-quality financial assets. It found these in the US, mainly in the form of Treasury and other government-backed securities, in turn pushing other investors into more speculative investments. Recent events have not enhanced the stature of the US as a supplier of high-quality assets. And China, for its part, will continue to develop its financial markets and its capacity to generate high-quality financial assets internally. But doing so will take time. Meanwhile, the US still has the most liquid financial markets in the world. This interpretation again implies the re-emergence of global imbalances once the recession ends, and their very gradual unwinding thereafter. One development that could change this forecast is if China comes to view investing in US financial assets as a money-losing proposition. US budget deficits as far as the eye can see might excite fear of losses on US Treasury bonds. A de facto policy of inflating away the debt might stoke such fears further. At that point, China would pull the plug, the dollar would crash, and the Fed would be forced to raise interest rates, plunging the US back into recession."

Should we not try to provide an alternative for Chinese investment. mitigating the risk of continued global imbalance, through developing a eurobond market?

Live debate on TVP1 on the Polish economy

On May 21 I debated the current state and prospects of the Polish economy in a live program on the main channel of the Polish TV - TVP1. There were four other participants: one additional economist and three politicians. I argued that the governments needs to present asap a full fiscal reform plan what would let public finances survive the next 2-3 years of slow growth.