Sustainability of EU convergence based on exchange rate anchor during crisis and post crisis period

Boskov, Tatjana (2015) Sustainability of EU convergence based on exchange rate anchor during crisis and post crisis period. In: Economic recovery in the post-crisis period, 29-30 May 2015, Skopje, Macedonia.


Download (3704Kb) | Preview


To cope with competitive pressures and market forces within the EU in the medium-term, the SEE6 needs to address important challenges through determined implementation of structural reforms. Progress with structural reforms can help for macroeconomic stability, for example, by reducing the structural external deficits. Also it helps nominal convergence, as the productivity realizes the improvement of competitiveness and helps disinflation by maintaining low unit cost. So in terms of macroeconomic convergence for SEE6 countries and the case of Macedonia, EU membership requires convergence of the Macedonian economy with that of the EU in realistic conditions, indicating income per capita and economic structure, and in nominal terms, meaning convergence of prices, inflation and interest rates. Because of the fact that Southeastern European countries rely mainly on exchange rate anchors to reduce inflation, the appreciation of the real exchange rate among countries in the region is significant, although it is slightly lower when compared to countries in the EU member states. As a result, these countries suffer from loss of competitiveness. This can be clearly seen from the movements of the deficit on their current account, which are important in all these countries. Using the exchange rate as anchor for inflationary expectations, on long run have been effective so far, producing a low and stable inflation rates. However, in periods of low inflation and deflationary pressures, exchange rate anchors do not allow sufficient space for fiscal and monetary stimulus. In this respect, policy makers are under following dilemma: to deviate from exchange rate anchor and increase the space for fiscal and monetary stimulus; to accelerate structural reforms and competitiveness and on short run deepen the recessionary pressures; and to increase foreign debt and thus increase scope for fiscal and monetary stimulus while preserving the exchange rate anchor. All three scenarios are analyzed in this paper. Economic policies can be instrumental for growth in the near- and the medium-term in SEE6. On the fiscal side, sustained reform effort is needed to address structural rigidities in the budgets of SEE6. Priorities include: changes in the composition of public expenditure toward investment and away from wages, public expenditure targeting and prioritization as well as improvements in revenue collection and the broadening of the tax base, among others. On the monetary policy side, with regional inflation at a very low 1.2 percent and big output gaps remaining, some scope for short-term easing of monetary conditions exist, especially in those countries where deficits have begun to decline. Above facts and real situations are our challenges for making analysis and contribution in this area.

Item Type: Conference or Workshop Item (Paper)
Subjects: Social Sciences > Economics and business
Divisions: Faculty of Tourism and Business Logistics
Depositing User: Tatjana Boskov
Date Deposited: 26 Jan 2016 15:01
Last Modified: 26 Jan 2016 15:01

Actions (login required)

View Item View Item