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Prof. dr.

Gheorghe OPRESCU

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INTRODUCTION
WORLD ECONOMIC OUTLOOK: GROWTH
RESUMING, DANGERS REMAIN
ECONOMIC DYNAMICS IN ROMANIA
ROMANIA: PROJECTIONS
MEASURES IN CRISIS
FALL 2012 DYNAMICS IN GLOBAL ECONOMY

Crisis? Sorry Ma'am we havent


seen it coming

PRIVATE AND CONFIDENTIAL


STRICTLY EMBARGOED UNTIL SUNDAY 26 JULY 2009 AT 00:01 HRS
Her Majesty The Queen
Buckingham Palace
London
SW1A 1AA

22 July 2009

MADAM,
When Your Majesty visited the London School of Economics last November, you quite
rightly asked: why had nobody noticed that the credit crunch was on its way? The
British Academy convened a forum on 17 June 2009 to debate your question, with
contributions from a range of experts from business, the City, its regulators, academia, and
government. This letter summarises the views of the participants and the factors that they
cited in our discussion, and we hope that it offers an answer to your question.

Many people did foresee the crisis. However, the exact form that it would take and
the timing of its onset and ferocity were foreseen by nobody. What matters in such
circumstances is not just to predict the nature of the problem but also its timing
[]

So in summary, Your Majesty, the failure to foresee the timing, extent and severity of the
crisis and to head it off, while it had many causes, was principally a failure of the
collective imagination of many bright people, both in this country and
internationally, to understand the risks to the system as a whole.

Given the forecasting failure at the heart of your enquiry, the British Academy is giving
some thought to how your Crown servants in the Treasury, the Cabinet Office and the
Department for Business, Innovation & Skills, as well as the Bank of England and the
Financial Services Authority might develop a new, shared horizon-scanning capability so
that you never need to ask your question again. The Academy will be hosting another
seminar to examine the never again question more widely. We will report the findings to
Your Majesty. The events of the past year have delivered a salutary shock. Whether it will
turn out to have been a beneficial one will depend on the candour with which we dissect
the lessons and apply them in future.
We have the honour to remain, Madam,
Your Majestys most humble and obedient servants

Professor Tim Besley,


Professor Peter Hennessy,

Sorry Ma'am - we just didn't see


it coming
http://www.guardian.co.uk/uk/2009/jul/26/mon
archy-credit-crunch (Luis Garicano at LSE
shows Queen Elizabeth II a chart explaining
how the credit crunch was caused.)
http://royalcello.websitetoolbox.com/post?id=35
91232

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INTRODUCTION
WORLD ECONOMIC OUTLOOK: GROWTH
RESUMING, DANGERS REMAIN
ECONOMIC DYNAMICS IN ROMANIA
ROMANIA: PROJECTIONS
MEASURES IN CRISIS
FALL 2012 DYNAMICS IN GLOBAL ECONOMY

Opinions from one year ago


The toughest global recession since 1930.
The global recovery remains fragile - strong policies to

foster:
internal rebalancing of demand from public to private

sources and
external rebalancing
economies
are not yet in place.

from

deficit

to

surplus

Weak recovery
After suffering a major setback during 2011, global

prospects are gradually strengthening again, but


downside risks remain elevated.
Improved activity in the United States during the
second half of 2011 and better policies in the euro area
- have reduced the threat of a sharp global
slowdown.
Weak recovery will likely resume in the major
advanced economies, and activity is expected to
remain relatively solid in most emerging and
developing economies.

Weak recovery
Global growth - projected to drop from about 4% in

2011 to about 3.5% in 2012.


Reacceleration of activity during the course of 2012 is

expected to return global growth to about 4% in 2013.


The euro area is still projected to go into a mild

recession in 2012 as a result of the sovereign debt crisis


and a general loss of confidence.

Weak recovery
Because of the problems in Europe, activity will

continue to disappoint for the advanced economies


as a group, expanding by only about 1.5% in 2012 and
by 2% in 2013.
Real GDP growth in the emerging and developing

economies is projected to slow from 6% in 2011 to


5.75% in 2012 but then to reaccelerate to 6% in 2013,
helped by easier macroeconomic policies and
strengthening foreign demand.

Weak recovery
The spillovers from the euro area crisis will severely

affect the rest of Europe; other economies will likely


experience further financial volatility but no major
impact on activity unless the euro area crisis intensifies
once again.

Fall 2010 - Policies needed


Policies need to become more proactive to achieve the

required internal and external rebalancing.


Most advanced economies major adjustments:

stabilize and subsequently reduce high public debt,


and repair and reform their financial sectors.

Fall 2010 - Monetary policy


Should stay highly supportive in most of the

advanced economies and should be the first line of


defense against any larger-than-projected weakening
of activity as fiscal support diminishes.
With monetary policy rates already near zero in the

large advanced economies (Euro area 1%, US Fed funds


rate 0.25%), monetary policymakers may have to
resort to further unconventional measures if
private demand weakens unexpectedly as fiscal
support wanes.

Fall 2010 - Fiscal policy


Fiscal adjustment needs to start in 2011. If global

growth threatens to slow appreciably more than


expected, countries with fiscal room could postpone
some of the planned consolidation.
Fiscal

policy tightening will likely prove


contractionary in most economies, although the
extent is difficult to gauge.

Two years later: policies have


helped
Policy has played an important role in lowering

systemic risk, but there can be no pause.


The European Central Banks three-year longer-term

refinancing operations (LTROs), ambitious fiscal


adjustment programs, and labor market reforms
helped stabilize conditions in the euro area, relieving
pressure on banks and sovereign debts.

Two years later: policies have


helped
The February 2012 extension of U.S. payroll tax relief

and unemployment benefits - has forestalled abrupt


fiscal tightening that would have harmed the U.S.
economy. To be discussed again after November
election
Many advanced economies - good progress in

designing and implementing strong medium term


fiscal consolidation programs.

Two years later: policies have


helped
Emerging and developing economies continue to

benefit from past policy improvements.


However - if no further action, problems could easily

appear again in the euro area and fiscal policy could


tighten very abruptly in the United States in 2013.

Risks
A further escalation of the euro area crisis will trigger a

much more generalized flight from risk.


Geopolitical uncertainty could trigger a sharp increase
in oil prices: an increase in these prices by about 50%
would lower global output by 1.25%.
Renewed significant financial volatility and losses in
confidence.
Excessively tight macroeconomic policies.

To-be-done:
More efforts to address the euro area crisis,
A temperate approach to fiscal restraint in response

to weaker activity,
A continuation of very accommodative monetary

policies, and ample liquidity to the financial sector.

Policies in emerging economies


Although many emerging economies are seeing high

growth again, they continue to rely significantly on


demand from advanced economies.
However, demand for imports from the part of the

advanced economies will continue to be below precrisis trends.


Therefore need to rebalance growth further toward

domestic demand.

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INTRODUCTION
WORLD ECONOMIC OUTLOOK: GROWTH
RESUMING, DANGERS REMAIN
ECONOMIC DYNAMICS IN ROMANIA
ROMANIA: PROJECTIONS
MEASURES IN CRISIS
FALL 2012 DYNAMICS IN GLOBAL ECONOMY

Romanias GDP growth


GDP Growth
8
6
7.9

4
2

6.2

4.2

7.3

0
2005
-2

2.5
2006

2007

2008

2009

-4
-6
-8

-6.6

-1.6
2010

2011

Positive factors before crisis


Positive evolution of the world economy.
EU accession (end of negotiations in December 2004,

but no certitude on the exact accession date) and


NATO membership.
Successful finalization of the IMF-supported
program (for the first time; none of the previous 5,
during 1991-99, remained on track).
Only partial liberalization of the capital account
(avoidance of massive inflows/outflows of capital).
Favourable election cycle (elections only in 2000
and 2004).

However
Strong element of overheating and build-up of

unsustainable imbalances, due to FDI and capital


inflows which fueled high investment and
consumption growth:
domestic demand grew much faster than exports (2006-

07);
disinflation became difficult to sustain (NBR missed the
targets under its inflation targeting regime August 05);
real exchange rate appreciated by around 50% (200407);
build-up of vulnerabilities in the banking sector.

However high current


account deficit (% of GDP)
-1

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-3
-3.3

-3.7

-4.2

-5
-5.5

-5.8

-7

-9

-11

-8.4

-8.6

-10.4
-11.6

-13
-13.4
-15

-4.5

-4.2

Main reason: the trade balance

Economics shows that (M1)...


Current account deficit should be financed by:
- Foreign investments
- Foreign loans
- Decrease in the international reserves

However the budget deficit


(% of GDP)... (M7)
0
2000

2001

2002

2003

2004

-1.3
-2

2007

2008

2009

2010

-3.1

-1.4

-2.9

-3.1

-4

-4.1
-4.8

-6
-6.4
-7
-7.3
-8

2011

-1.9

-3

-5

2006

-0.7

-1

-4

2005

Long-term effects on the budget


Loose and pro-cyclical fiscal and budgetary policy:

spending doubled in nominal terms between 2005 and 2008 only;

public employment rose by 24% (2004-08);

2005 2008 increases in both wages and the number of


employees in the public sector public wages increased from 8 to
close to 10% of GDP (supplimentary deficit of 2% of GDP). Wages in
the public sector higher than in the private sector.

before parliamentary elections in 2008 20% increase in pensions,


replacement rate from 31% la 45% (but without financing sources).
Supplimentary structural deficit of 2% of GDP (plus negative
demographic dynamics in the future).

Wages and pensions


16

Percent of GDP

14

wages
pensions

12
10
8
6
4
2
0
2000

2001

2002

Sursa: Ministery of Public Finance, Eurostat

2003

2004

2005

2006

2007

Note:ESA95 methodology

2008

2009 H1

Inflation

However: loans rapid growth...

However: loans in foreign currencies...

However: loans in foreign currencies...

Public debt (% of GDP)


35

30

16.4

25
14.9
20
16.1
15

11.4

16.2

15.7

15.4
13.5
11.1

10

9.8
5

9.9
6.9

8.7

8
15.6

16.9

12.1
8.8
6.1

5.3

4.7

2.6

5.4

0
2000

2001

2002

2003

2004

2005

2006

Domestic

Foreign

2007

2008

2009

2010

2011

Public debt (% of GDP)


160
140
120
100
80
60
40
20
0

33.3

the lowest after:


Estonia (6.1%),
Bulgaria (15.0%) and
Luxembourg (18.5%)

Foreign debt (, bill.) 69% of


GDP
120

100

80

76.4

60
72.5
51.4
40

Short-term

65.7

38.7
28.6

20

24.6
18.3

15

15.9

1.2
2002

3.2

6.3

2003

2004

2005

12.5
2006

19.8

20.6

2007

2008

15.3

18.4

2009

2010

Long-term

22.8

2011

Favouring factors
Relaxation of macroeconomic policies after decision

on EU accession date.
Worsening of the world economy.
Full liberalization of the capital account (Sept. 2006).

Busy election cycle (2007 European Parliament, 2008

local and Parliament - and 2009 European


Parliament and Presidency...).

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INTRODUCTION
WORLD ECONOMIC OUTLOOK: GROWTH
RESUMING, DANGERS REMAIN
ECONOMIC DYNAMICS IN ROMANIA
ROMANIA: PROJECTIONS
MEASURES IN CRISIS
FALL 2012 DYNAMICS IN GLOBAL ECONOMY

About economic forecasts, some


people say...
Q: Why has God created economists?
A: To make weather forecasters to seem professional...

or...
We have two types of specialists in projections: those
who dont know and those who dont know that they
dont know.
John Kenneth Galbraith

Romanias GDP - projections


8

7.3

3.1

3.6

3.9

2.1

0
2008

2009

-1.6

-2

-4

-6
-6.6
-8

2010

2011

2012

2013

2014

2015

Unemployment
ILO unemployed ths.

Unemployment rate - % -

2008

575

5.8

2009

681

6.9

2010

725

7.3

2011

730

7.2

2012

703

7.1

2013

690

6.9

2014

670

6.7

2015

655

6.5

It can be much worse


July 2012:

Spain 25.1%
Greece 24.4%
Latvia 15.9%
Croatia 15.7%
Portugal 15.7%
Ireland 14.9%
Slovakia 14.0%
Lithuania 13.0%
France 10.3%
United States 8.3%
EU 10.4% (22.5 mill.)
Euro area 11.3% (15.6 mill.)

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INTRODUCTION
WORLD ECONOMIC OUTLOOK: GROWTH
RESUMING, DANGERS REMAIN
ECONOMIC DYNAMICS IN ROMANIA
ROMANIA: PROJECTIONS
MEASURES IN CRISIS
FALL 2012 DYNAMICS IN GLOBAL ECONOMY

Measures in crisis
Domestic policies: massive response in Western

Europe and mature in Central and Eastern Europe.


Strong and coordinated international support:
IMF resources increased 3 times, from $250 to $750

billions.
EBRD investments increased by more than 50% in 2009.
EU balance of payments support increased 4 times, from
12.5 to 50 billion.
Up to half-2010, EC approved state aid schemes of more
than 4000 billion.

But, sooner or later...


Measures to cut the fiscal stimulus, based on

principles like:
When choosing the exit moment, take into account

the health of financial system.


Fiscal consolidation (decreasing the budget deficits)

should be a priority.

Strategies

of fiscal exit should be transparent,


comprehensive, communicated in advance, and targeted
towards reducing the public debt during periods known
by everybody.

Coordination between countries, but not necessarily

synchronization.

(http://www.imf.org/external/np/g20/110709.htm)

Estonia

Tota l Sta te a id a s % of GDP; 2009

Slovakia
Italy
Romania
Czech Republic
Lithuania
Poland
Portugal
EU-12
Finland
Spain
Slovenia
Hungary
Malta
Netherlands
Bulgaria
France
Cyprus
Luxembourg
EU-27
Sw eden
EU-15
A ustria
Denmark
Germany
Latvia
Greece
Ireland
United Kingdom
Belgium

0
2
4
6
8
Indus try and s ervices as % of GDP

10

A griculture, f isheries and transport as % of GDP

12

Romania: measures in crisis


At the beginning of 2009, Romania had no room for

manoeuvre; after a budget deficit of 4.8% of GDP in 2008,


there was no room for supplementary stimulus.

Measures:
Support package from IMF (13 bill.), EU (5 bill.), WB

(1 bill) i EBRD and EIB (1 bill.). Successfully


completed in April 2011.
Disbursements from the financing program: MPF (EUR
8.2 billion, from IMF, EC and WB) for deficit financing,
NBR (EUR 9.8 billion, from IMF), last tranche (EUR 1.0
billion) not disbursed, as treated as precautionary.

Romania: measures in crisis


- On March 25, 2011 a new 24-month precautionary

Stand-By Arrangement SBA - (about 3.5 billion) to


support the economic program to boost growth,
continue fiscal adjustment, and cushion the effects of
future shocks, should they materialize.
- Six reviews were completed since then (the last one in
August 2012) around 3 billion are available and can be
disbursed to NBR on demand.
- SBA is in conjunction with the precautionary EU
support of 1.4 billion (Council Decision on May 12,
2011), as well as WB commitments of 400 million.

Romania: measures in crisis


program first house
scrappage program (extended subsequently to agricultural

equipment)
Eximbank guarantees
de minimis state aid of up to 500000 Euro/firm, approved
by EC in autumn 2009 (but not implemented).
Foreign banks have maintained their exposure in Romania.
Cooperation platform Vienna initiative (support for the

financial system).
State aid for young (<35) entrepreneurs.

Vienna commitment of 9 major foreign banks maintain their exposure in Romania for the
period of the IMF, EU and EBRD support package, at least at the March 2009 level. Largely
respected during its two years of operation

RON bill.

September
2008

December
2008

March
2009

September
2009

Own funds level I

14980

17628

17032

17423

Total own funds

19775

23265

22694

23368

Net assets

244983

259633

264890

256496

Net average assets

225815

232479

265805

260780

Source: NBR

Romania: measures in crisis


Ensure sustenability:
Wage Law 2015 - 7% share of public wages in GDP (see
next chart), freezing of high wages, level 1 decoupled
from the minimum wage in order to avoid cascade
effects.
Pension Law decoupling the increase in pensions from

the increase in wages (link with inflation). Retirement


age 65, n 2030.

Romania: measures in crisis


Ensure predictibility:
Fiscal responsibility Law:

multiyear budgeting;
limits on intrayear budget revisions;
fiscal rules on expenditures, public debt and the primary
deficit;
staffing ceilings for ministries and agencies;
an independent Fiscal Council.

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INTRODUCTION
FALL 2010 DYNAMICS IN GLOBAL ECONOMY
ECONOMIC DYNAMICS IN ROMANIA
ROMANIA: PROJECTIONS
MEASURES IN CRISIS
FALL 2012 DYNAMICS IN GLOBAL ECONOMY

A. Much slower recovery


What was going on was the stalling of the two

rebalancing acts.
Internal rebalancing = a shift from fiscal stimulus to

private demand:
Fiscal consolidation is indeed taking place in most

advanced economies (although not in Japan).


But private demand is not taking the relay. Reasons:
-

Tight bank lending (legacy of mortgage boom)


High indebtness of households

A. Much slower recovery


External rebalancing = a shift from deficit to surplus

economies:
Advanced economies would need to compensate for low

domestic demand through an increase in foreign


demand.
This would imply a symmetric shift away from foreign
demand toward domestic demand in emerging market
economies with current account surpluses, most notably
China.
This is not happening; forecast for an increase rather
than a decrease in imbalances.

B. Fiscal and financial uncertainty


Markets - more skeptical about the ability of many

countries to stabilize their public debt.


Their worries have extended to many European
countries and to countries beyond Europe - from Japan
to the United States.
Worries about sovereigns - translated into worries
about the banks holding these sovereign bonds,
mainly in Europe.
Result - a partial freeze of financial flows - banks
keeping high levels of liquidity and tightening lending.

B. Fiscal and financial uncertainty


Other results:
Fear of the unknown is high.
Stock prices have fallen.
Decrease in spending in the months to come.

A and B may feed back on each other!


Low growth makes it more difficult to achieve debt

sustainability and leads markets to worry even more


about fiscal stability.
Low growth also leads to more nonperforming loans

and weakens banks.

A and B may feed back on each other!


Front-loaded fiscal consolidation in turn may lead to

even lower growth.


Weak banks and tight bank lending may have the

same effect lower growth.


Weak banks and the potential need for more capital

lead to more worry about fiscal stability.

What can be done?


1. Fiscal policy.
Fiscal consolidation cannot be too fast or it will kill

growth.
It cannot be too slow or it will kill credibility.
The speed must depend on individual country

circumstances, but the key continues to be credible


medium-term consolidation.

What can be done?


Some countries need substantial outside help to

succeed.
Plus,

measures to prop up domestic demand


(continued low interest rates, increased bank lending,
resolution programs for housing).

What can be done?


2. Financial measures.
Banks have to be made stronger to increase bank

lending.
A number of banks, especially in Europe - likely to

require additional capital buffers, either from private


or from public sources.

What can be done?


3. External rebalancing.
Difficult to see how.
Exports from the US and crisis-hit economies must

increase, and net exports from the rest of the world


must decrease.
A number of Asian economies (China) - large current
account surpluses.
Plans to rebalance from foreign to domestic demand
(currency appreciation, decrease the gap between S
and I). Not possible overnight, but as fast as possible.

The world economic crisis could take 10 years to run its


course, the IMF's chief economist Olivier
Blanchard told Hungarian business news site
Portfolio.hu in an interview published on Wednesday,
October 4th, 2012.