Why are Current Accounts diverging in the Euro-Area?

Transcription

1 Why are Current Accounts diverging in the Euro-Area? Learning from a Two-Sector Model with FDI Nicos Christodoulakis Athens University of Economics and Business February 21 1

2 Alarming spreads in the Eurozone! 3 25 SPREAD OF 1Y BOND OVER THE BUND (monthly data in BPS) EL IE IT PT SP BE 5-5 Global crisis But not just for highly indebted countries 2

3 Correlation between CA and Spreads (1y bond yield over the Bund, ) 6 5 CA deficit 4 CA surplus S P R E A D S CURRENT ACCOUNT The cost of borrowing increases with CA Deficits 3

4 Correlation between CA and Public Deficits 4 EUROZONE SOUTH CA_BAL -4-8 CORR=.4-12 SGP RULE GOVT_BAL Current Account Deficits in IT-FR-EL-PT-SP are only weakly correlated with public deficits! 4

5 Should we worry about CAD in a Monetary Union? Some say : No, or Not so much! No fear of devaluation within EMU CAD not mentioned in the Maastricht Treaty No alert from economic policy debates 5

6 Blanchard O. and Giavazzi F., 22 we discuss whether the current attitude of benign neglect vis-àvis the CA in the Euro-area is appropriate, or whether countries such as Portugal or Greece should worry and take measures to reduce their deficits. We conclude, to a first order, that they should not. but attitudes change (better late than never) Blanchard O., 26, IMF CAD steadily increase within the Euro: Portugal, Spain. Reason to worry. Deficits are too large. Implications can be bad. Gros D., 26 current trend could continue leading to an ever increasing loss of competitiveness Italy s participation in EMU would be in doubt as the country would need a massive devaluation. 6

7 The global crisis hit most the countries with Public and/or CA Deficits R. Zoellick (World Bank, 1 Oct. 28) Emerging economies with large CA Deficits will be hit by scarcity of international capital UN (R. Shelbourne, June 28) the tightening of credit can turn the problem of illiquidity into a problem of insolvency.. Look at the Eurozone economies now 7

8 Why CAD are widening after EMU? Early theory: Demand-induced Fall in interest rates Higher consumption CA Deficits, only temporary but S&GP would reduce deficits Investment would rise too, and CA deficits would shrink. 8

9 AS % OF THE MEAN DIVERGENCE OF GDP AND GNI IN THE EZ-11 (In constant prices, per capita) EMU GDP GNI 9

10 Q: Why GDP and GNI are different? A: Net Factor Income is different Expect different patterns in: INWARD and/or OUTWARD FDI Risk-Sharing CA Balances 1

11 TWO GROUPS IN EUROZONE External Surplus, more FDI : AT, BE, LX, FI, IE, NE, GE NORTH External Deficit, less FDI: SP, PT, EL, FR, IT SOUTH 11

12 Trade Balances Current Accounts Countries CHANGE CHANGE AT BE FI GE NL IE NORTH IT FR PT SP EL SOUTH Trade balances and Current Accounts in the Eurozone as % of GDP. Simple averages, no weights. Source: IMF World Economic Outlook, and Eurostat. 12

13 16 CURRENT ACCOUNT AS % GDP EMU CA_AT CA_BE CA_FI CA_GE CA_LX CA_NE CURRENT ACCOUNT AS % GDP -1 EMU CA_EL CA_FR CA_IR CA_IT CA_PT CA_SP 13

14 CA continued to fall apart Investment has risen, but (i) Intensity differs: Inward FDI much more in the NORTH (ii) Composition differs In the NORTH mainly productive sector In the SOUTH mainly housing sector CA deficits have supply-side causes 14

15 In the SOUTH : During the last decade, enormous increases in housing and rental prices 18 RENTAL PRICES INDEX (1996=1) (Eurostat, annual data HICP) Greece, Spain Germany, Belgium R_EL R_SP R_GE R_BE 15

16 FDI in the housing sector: In the NORTH : About 2% of total FDI In the SOUTH : Around 15% of total 16 SHARE OF REAL ESTATE IN TOTAL FDI Source: OECD, ESDS 27. P E RCE NT OF T OT A L NORTH SOUTH EMU

17 RATIO (%) OF FDI IN REAL-ESTATE TO FDI IN MANUFACTURING & ENERGY-WATER. (OECD,27) NORTH SOUTH EMU P E R C E N T NORTH : FDI in Real estate = 15% of FDI in Mfacturing+Energy SOUTH : FDI in Real estate around 5% of FDI in Mf+Energy Source: OECD, FDI indicators,

18 Investment in an open economy with traded and non-traded goods e.g. Brock (1989), Turnovsky(1996) Traded Sector Non traded Sector Y T f ( K T, L T, H T ) Y N h ( K N, L LT, H N ) K : FDI capital stock, Internationally traded H : Non traded, e. g. real estate L : Labour fixed 18

19 1 T T T T Y A K H K K K T T T N Y C I NX The two-sector model Y A K H 1 N N N N H H H T Y C H cost( I) Perfect capital mobility between traded and non-traded production Rental prices of each factor equalized across sectors. N N N Y Y Y Y RK R p p K K H H T N T N H T N T N Installing investment in traded capital entails costs paid in terms of non-traded goods: I cost( I) ( ) K, K I K (), '() 19

20 Y T (1 ) RK RH (1 ) RK RH K H YN K H ( ) p ( ) p If If Y K Y K T N and Y T Y K Y K T N and YT Y N Y N Rybsczyncski Theorem (1955): An increase in a country s endowment of a specific factor, will increase the output of the sector that is intensive in that factor and decrease the output in the other sector. 2

21 Under what circumstances can we have β >α? Suppose that there are impediments in productive expansion due to regulatory uncertainties, scarcity of industrial land, etc Obstruction factor in the Traded-Sector T HT K x x Y A K K H A K H T 1 x 1 x T T T T T T T HT If x is large enough, then we may have β >α-x 21

22 In EZ-South countries the quality of the Regulatory Environment is inferior to EZ-North countries Impediments obstruct productive expansion higher x SCORE IN REGULATORY QUALITY Average , Source: World Bank, WGI, 28 SP PT IT FR EL NL IE GE FI BE AT,2,4,6,8 1 1,2 1,4 1,6 1,8 2 Consider: Euro -North: x = and α >β Euro-South: x > and β >α = α -x 22

23 Solving the two-sector model Choose : C, C, I T N v t T N 1 max U [ C ( t v) C ( t v)] e dv Trade balance: NX YT CT I Wealth abroad (B) with an exogenous world interest rate (r) B rb NX rb Y C I Current Account: CA B T T 23

24 Hamiltonian: 1 C C rb Y C I [ T N ] [ T T ] ( q) I ( p) [ Y C ( I, H )] N N First-order conditions: I I ( q) ( q) q rq R p ( ) ( ) K ( K K K I K ) ( p ) ( p ) H p rp R H B r 24

25 Equilibrium and Response to Shocks (I) K I I I I I I For small gk ( ) () ( ) ( ) ( ) K K K K K K K First-order conditions are simplified as: International Arbitrage q rq R K Sectoral Adjustment p rp R H 25

26 Equilibrium and Response to Shocks (I) q q p q 1 E 1 E' A permanent fall in interest rates q E p 1 p p Productive sector intensive in Foreign Direct Investment α > β 26

27 q p q 2 E 2 q A permanent fall in interest rates q E p p2 p Housing sector Intensive in Foreign Direct Investment α < β 27

28 Equilibrium and Response to Shocks (II) Stock-adjustment processes for stocks B and H K 1 H 2 2 * 1 * H B rb C I B K C I r( ) r( ) r ( ) p ( ) p 1 2 Recall: YN K H and H YN CN cost( I) I K 1 H* K ( ) (1 ) C ( ) K 2 1 1/ where: zr, zz( AT, AN,, ) 2 28

29 Equilibrium and Response to Shocks (II) B H B 1 E 1 B A permanent fall in interest rates B E H H 1 H α>β, Productive sector intensive in FDI, 29

30 B B H A permanent fall in interest rates B E B 2 E 1 H H 2 H α<β, Non-traded sector intensive in FDI 3

31 Stylised Facts of the Model Fact 1: Prices of non-traded Goods: If productive sector FDI intensive: DOWN If non-traded sector FDI intensive: UP p p 2 p productivity gap=p2-p1 p 1 to time 31

32 Post-EMU Inflation Rates higher in the SOUTH INFLATION RATES AFTER EMU (HICP, Eurostat) AVG NORTH AVG SOUTH Productivity Gap is accumulated 32

33 Fact 2: Asset Price of traded Capital: If productive sector FDI intensive: UP gradually If housing sector FDI intensive: UP at the peak q q 2 q 1 q to time 33

34 European Stock-Market Indices Austria Belgium France Germany Greece Ireland Italy Netherlands Portugal Spain Finland ATX BEL-2 CAC 4 DAX ATHEX ISEQ Overall MIBTEL AEX PSI 2 IBEX 35 OMXH25 34

35 15 AVERAGE STOCK MARKET INDEX (Monthly Data, 1998 DEC=1, Source: GFD) Asset Prices after an EMU-caused permanent fall in interest rates M1 1999M7 2M1 2M7 NORTH SOUTH AVERAGE STOCK MARKET INDEX (Monthly Data, 1998 DEC=1, Source: GFD) 14 Incl. Finland and Greece Excl. Finland and Greece M1 1999M7 2M1 2M7 NORTH(exl FIN) SOUTH(exl ELL) 35

36 Fact 3: Current Account If productive sector FDI intensive: UP If non-traded sector FDI intensive: DOWN B B 1 B CA gap=b1-b2 B 2 to time 36

37 8 CURRENT ACCOUNTS AND TRADE BALANCES PERCENT OF GDP 4-4 EMU NFI to abroad NFI from abroad CANORTH CASOUTH TBNORTH TBSOUTH North : TB exceeds CA NFI is an outflow Inward FDI exceeds Outward FDI South : CA exceeds TB NFI is an inflow Outward FDI exceeds Inward FDI 37

38 Estimates: Pool data from 11 Eurozone countries ARDL(1,1) model: Y X X Y it 1 it 11 it1 it it1 it (1) With X i the vector of regressors for group i, μ i the fixed effects and δ i the vector of coefficients. Given the relatively short time dimension of our panel, we set only one lag to to preserve sufficient degrees of freedom. The Pooled Mean Group (PMG) model specification in error-correction form: Y ( Y X ) (2) it i it1 i 1i it 11i it it where θ i =μ i /(1- λ i ), θ 1i = (δ 1i + δ 11i )/(1- λ i ) and φ i =-(1-λ i ) The error-correction speed of adjustment parameter, φ i, and the long-run coefficient θ1 are of primary interest; the δ-regressor capture short-term dynamics and ε is the usual error term. Τhe PMG estimator allows short-run coefficients and the speed of adjustment and to differ across countries, but imposes homogeneity on long-run coefficients 38

39 DATA DEFINITIONS north : Austria, Belgium(incl. Lux), Finland, Germany, Ireland, Netherlands south : France, Greece, Italy, Portugal, Spain tradebal: Net trade in goods and services (% GDP) ), source: WDI cabal: Current account balance (% GDP) ), source: WDI fdi : Foreign Direct Investment (% GDP) growth : Growth rate of real output), source: WDI. reer : Real Effective Exchange Rate (2=1) ), source: WDI t statistics in parentheses * p <.1, ** p <.5, *** p <.1 39

40 N Log lik. (6.85) (2.6) (7.13) (2.78) 4.853*** 3.182*** 2.825*** 3.3*** _constant (1.72) (2.22) (1.59) (.92).194*.164**.15.5 D.growth (1.19) (.81) (-.74) (.33) D.reer (.18) (.1) (.67) (-.83) D.fdi (-5.9) (-2.41) (-8.77) (-2.27) -.141*** -.248** -.17*** -.237** speed Short Run (-2.41) (-.89) (-2.66) (-.61) ** *** growth (-2.37) (-3.25) (-1.74) (-3.) -.283** -.131*** -.129* -.115*** reer (-2.63) (6.48) (-2.58) (7.47) -.266***.155*** -.171***.18*** fdi D.cabal D.cabal D.tradebal D.tradebal SOUTH NORTH SOUTH NORTH

41 Conclusion: Eurozone faces three challenges Divergence process in incomes (pressure to increase EU Budget) Large external imbalances (pressure to increase competitiveness) Recession in Eastern Europe (pressure to help their economies and bail out lending banks in the EZ) 41

42 IN SEARCH OF A POLICY RE-FOCUSING 1. Focus on the New Asymmetries in EMU e.g. Current Account Deficits Openness/Competitiveness, FDI, SMEs 2. Issuing Eurobonds: Temporary measure 3. The real issue: Upgrade productivity (how?) 4. Time for fiscal federalism? Still premature, but started debated First step: Increase Policy Coordination in EZ 42

43 Thank you for your attention! 43