The Impact of the Financial Crisis on the Former Yugoslav Republic - - PowerPoint PPT Presentation

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• European Commission, Economic and Financial Affairs

The Impact of the Financial Crisis

• n the

Former Yugoslav Republic of Macedonia

European Economic and Social Committee Brussel, 25 September 2009

Bernhard Boehm DG ECFIN, European Commission

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• European Commission, Economic and Financial Affairs

Overview

1.

The financial crisis and transmission channels

2.

Impact on the economy

3.

Policy response and Challenges

4.

The role of the Civil Society

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• European Commission, Economic and Financial Affairs

Further information

Background Material:

• EU Spring forecast (excerpt)
• 2008 Progress Reports (Economic Chapters)

Internet sites:

EU Institutions

http://europa.eu/

EU Commission http://ec.europa.eu/ DG ECFIN

http://ec.europa.eu/economy_finance/

Disclaimer

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• European Commission, Economic and Financial Affairs

1. The financial crisis and transmission channels

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• European Commission, Economic and Financial Affairs

The financial and economic crisis

• Crisis started in 2007 already with problems in US

sub-prime mortgage market

• Turned into a major financial crisis in September

2008 (Lehman)

• The following uncertainty (credit squeeze) translated

financial market turbulences into real sector problems

• Risk of feedback effects from real to financial sector

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• European Commission, Economic and Financial Affairs

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• European Commission, Economic and Financial Affairs
• 2. The impact of the crisis

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• European Commission, Economic and Financial Affairs
• 2. Impact on the economy:

What history tells us

4,0

• 1,0
• 3,5

1,6

• 3,8
• 5,5

2,1

• 7,4
• 17,8

Ave 2,4

• 1,3
• 3,2

0,9

• 6,5
• 5,6

2,1

• 5,2
• 11,0

1991 Norway 3,7

• 1,1
• 4,0

1,9

• 4,8
• 9,1

3,3

• 8,1
• 27,1

1991 Finland 7,3

• 0,2
• 1,8

1,6

• 3,2
• 5,0

1,7

• 16,8
• 28,6

1977 Spain 5,2

• 1,0
• 5,4

1,3

• 4,3
• 5,5

1,9

• 6,3
• 11,9

1997 Japan 2,3

• 1,1
• 2,5

1,5

• 1,3
• 2,0

2,1

• 5,0
• 10,5

1988 United States ratio average

• f other

downtur ns in downturn following the crisis Ratio average of

• ther

downturn s in downturn following the crisis ratio average

• f other

downtur ns in downturn following year of banking crisis

maximum fall in housing investment maximum fall in business investment cumulative output gap

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• European Commission, Economic and Financial Affairs

Economic Impact on the former Yugoslav Republic of Macedonia

Key features of the economy

• Small open economy (Malta, Baltic countries)
• Export structure highly specialised
• High structural unemployment
• Weak capital base
• Low economic growth

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• European Commission, Economic and Financial Affairs

How did the country perform so far ?

Real convergence II

Per-capita GDP, PPS, EU-27 = 100 20.0 40.0 60.0 80.0 100.0 120.0 140.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 BG CZ EE IE EL IT CY LV LT PL PT RO SI SK HR MK TR TR MK RO BG CZ SI EL IT IE LV LT HR EE PT PL SK Source: EU Spring 2009 forecast

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• European Commission, Economic and Financial Affairs

Transmission Channels

Countries “import” global crisis through various channels:

• Wealth effects
• Income effects
• Trade channel

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• European Commission, Economic and Financial Affairs

Transmission channel: Wealth

Stock market performance

2005-01-01 = 100

0.0 100.0 200.0 300.0 400.0 500.0 600.0 700.0 800.0 900.0 1000.0 j a n v

• 5

m a r s

• 5

m a i

• 5

j u i l

• 5

s e p t

• 5

n

• v
• 5

j a n v

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m a r s

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m a i

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j u i l

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s e p t

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n

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j a n v

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m a r s

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m a i

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j u i l

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s e p t

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n

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j a n v

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m a r s

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m a i

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j u i l

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s e p t

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n

• v
• 8

j a n v

• 9

m a r s

• 9

m a i

• 9

j u i l

• 9

HR MK* TR

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• European Commission, Economic and Financial Affairs

Transmission channel: Capital flows

Capital Account: Key Inflows

• 50.00
• 40.00
• 30.00
• 20.00
• 10.00

0.00 10.00 20.00 30.00 40.00 50.00 j a n v

• 5

m a r s

• 5

m a i

• 5

j u i l

• 5

s e p t

• 5

n

• v
• 5

j a n v

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m a r s

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m a i

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j u i l

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s e p t

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n

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j a n v

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m a r s

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m a i

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j u i l

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s e p t

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n

• v
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j a n v

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m a r s

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m a i

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j u i l

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s e p t

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n

• v
• 8

j a n v

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m a r s

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m a i

• 9

in % of GDP Private Transfers (Workers remittances, etc.) Direct investment, net Portfolio investment, net Other investment, net

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• European Commission, Economic and Financial Affairs

Transmission channel: Income abroad

Current transfers

0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 j a n v

• 5

m a r s

• 5

m a i

• 5

j u i l

• 5

s e p t

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n

• v
• 5

j a n v

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m a r s

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m a i

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j u i l

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s e p t

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n

• v
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j a n v

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m a r s

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m a i

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j u i l

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s e p t

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n

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• 7

j a n v

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m a r s

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m a i

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j u i l

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s e p t

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n

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j a n v

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m a r s

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m a i

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in % of GDP Private Transfers (Workers remittances, etc.)

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• European Commission, Economic and Financial Affairs

Transmission channel: Trade

Merchandise Export, Jan 2005=100

80 100 120 140 160 180 200 220 240 janv-05 avr-05 juil-05

• ct-05

janv-06 avr-06 juil-06

• ct-06

janv-07 avr-07 juil-07

• ct-07

janv-08 avr-08 juil-08

• ct-08

janv-09 avr-09 juil-09

HR Exp FYROM Exp TR Exp

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• European Commission, Economic and Financial Affairs

Impact on economy

Industrial Production

50.0 60.0 70.0 80.0 90.0 100.0 110.0 120.0 130.0 140.0 150.0

janv- 08 févr- 08 ma rs-08 avr- 08 mai- 08 juin- 08 juil- 08 août- 08 sept- 08

• ct-

08 nov- 08 déc- 08 janv- 09 févr- 09 ma rs-09 avr- 09 mai- 09 juin- 09 juil- 09

Jan 2008 = 100

HR FYROM TR

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• European Commission, Economic and Financial Affairs

Impact on economy

GDP growth

• 15.0
• 10.0
• 5.0

0.0 5.0 10.0 15.0 m a r s

• 6

m a i

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j u i l

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s e p t

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n

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j a n v

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m a r s

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m a i

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j u i l

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s e p t

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n

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j a n v

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m a r s

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m a i

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s e p t

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n

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j a n v

• 9

m a r s

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m a i

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% yoy

HR MK* TR

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• European Commission, Economic and Financial Affairs

Impact on economy

Unemployment

30.0 31.0 32.0 33.0 34.0 35.0 36.0 37.0 38.0 39.0 40.0 j a n v

• 7

f é v r

• 7

m a r s

• 7

a v r

• 7

m a i

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j u i n

• 7

j u i l

• 7

a

• û

t

• 7

s e p t

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• c

t

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n

• v
• 7

d é c

• 7

j a n v

• 8

f é v r

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m a r s

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a v r

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m a i

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j u i n

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j u i l

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a

• û

t

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s e p t

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• c

t

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n

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d é c

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j a n v

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f é v r

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m a r s

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a v r

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m a i

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j u i n

• 9

j u i l

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UR (registered unemployed) UR (actively seeking employment) UR (LFS)

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• European Commission, Economic and Financial Affairs

Impact on economy

Foreign exchange reserves

60.0 80.0 100.0 120.0 140.0 160.0 180.0 200.0 220.0 240.0 j a n v

• 5

m a r s

• 5

m a i

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j u i l

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s e p t

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n

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j a n v

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m a r s

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m a i

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j u i l

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s e p t

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n

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m a r s

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m a i

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j u i l

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n

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m a r s

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m a i

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j u i l

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s e p t

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n

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j a n v

• 9

m a r s

• 9

m a i

• 9

j u i l

• 9

HR FYROM TR Jan 2005 = 100

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• European Commission, Economic and Financial Affairs

Why not hit harder??

• Statistical illusion?
• Export specialisation?
• Built-in “stability”?
• Government activities?

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• European Commission, Economic and Financial Affairs

Export specialisation

Trade structure (SITC 1-digit)

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0 2003 2004 2005 2006 2007 2008 in % of GDP Food Products Bevrage and Tobacco Crude Materials Mineral fuels, lubricants Chemical Products Manufactured goods Machinery and transport Miscelleneous manuf. goods

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• European Commission, Economic and Financial Affairs

Built-in stability ?

Real Convergence (2003-2008)

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 GDP/capita (EU27=100) real GDP growth (in %)

MK IE IT PT DK DE RO LT SK LV BG TR EE PL CR SI HR HU CY MT EL ES EU-27

Source: EU COM services (AMECO database)

FI

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• European Commission, Economic and Financial Affairs

Has the policy response kept growth relatively strong?

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• European Commission, Economic and Financial Affairs

Government Anti-Crisis Measures

• 10 Measures Package (November 2008)
• Updated Investment programme (March 2009)
• Rebalancing budget (April 2009)

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• European Commission, Economic and Financial Affairs

Government Spending

Central Government Revenues and Expenditures

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 06 06 06 06 06 06 06 06 06 06 06 06 07 07 07 07 07 07 07 07 07 07 07 07 08 08 08 08 08 08 08 08 08 08 08 08 09 09 09 09 09 09 09

• 6. Compensation of employees
• 7. Intermediate consumption

Public consumption

• 16. Gross fixed capital formation
• 18. Total government revenue - harmonised (5+15)
• 19. Total government expenditure - harmonised (13-16-17)
• 11. Subsidies

in % of GDP

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• European Commission, Economic and Financial Affairs

Main challenges might still be ahead

• When global recovery will start?
• How it will look like? (V, W, L shape)?
• Consensus increasingly moves towards L shape …
• Next few years could become quite difficult:
• low global growth,
• less capital available,
• lower remittances,
• stronger competition from emerging Asia

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• European Commission, Economic and Financial Affairs

Key challenges ahead

Below potential growth and high unemployment, resulting from:

• Low investment (physical capital)
• small home market
• administrative and regulatory barriers
• low degree of legal certainty
• weak regulatory and supervisory agencies
• outworn infrastructure
• Low education (human capital)
• Weak institutions
• Government
• Public administration (highly politicised)
• Weak communication between main actors (government,

trade unions, consumers)

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• European Commission, Economic and Financial Affairs
• 4. Role of civic society
• Social dialogue limited so far
• Experience in some Member States points to the

importance of well functioning communication between authorities and civic representations. For exampe:

• “Good governance” not possible without dialogue

with citizens and various interest groups

• Positive impact on attractiveness for FDI (social

peace, … )

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• European Commission, Economic and Financial Affairs

Thank you for your attention !