M. Singer – Economic developments globally and in Europe: the CNB view 1M. Singer – Waiting with the Euro Adoption: The Czech case 1M. Singer – Sound money: Czech experience 1M. Singer – Czech Republic: Current Situation and Outlook 1M. Singer – Inside or Outside the Euro Area 1M. Singer – Recent Developments in the Czech Economy, Risks and Outlook 1M. Singer – Macroeconomic developments, monetary policy and financial sector 1M. Singer – The Czech economy and crisis in Eurozone: CNB view 1M. Singer – Czech economy and development in Europe: Outlook and Challenges 1M. Singer – Czech Republic: Can record low rates be sustained? 1M. Singer – Czech Republic: Future challenges and opportunities 1M. Singer – Present Conditions, Monetary Policy and Outlook in Czech Republic 1M. Singer - Czech Republic: Staying Ahead of the Curve with Regard to Monetary Policy 1M. Singer: The economic and financial crisis from the point of view of the Czech banks 1M. Singer: Financial Crisis: Impacts on the CR and Lessons for the Supervisors 1M. Singer: Financial Crisis: Likely Impacts on the CR and Lessons for the SupervisorsM. Singer: Present Conditions, Monetary Policy and Outlook for CR 1M. Singer: Consumer protection in financial services: CNB approach 1

Economic developments Economic developments globally and in Europe: globally and in Europe:

The CNB viewThe CNB view

2012 Israel Business Conference

Tel Aviv, 9 December 2012

Miroslav SingerMiroslav Singer Governor, Czech National BankGovernor, Czech National Bank

M. Singer – Economic developments globally and in Europe: The CNB view 2

OverviewOverview

• Global macroeconomic developments

• Debt crisis in euro area

• Some adjustments and policies adopted recently in euro area

• Risks in euro area

M. Singer – Economic developments globally and in Europe: The CNB view 3

Recent developments in advanced Recent developments in advanced economieseconomies

• Growth in advanced economies is low and slowing in most countries (negative feedback through foreign trade)

• Unemployment remains high in advanced economies• Domestic demand is weak (uncertainty among households and

investors)• Simultaneous fiscal consolidation is going on in many countries• Households, banks and sovereigns are reducing their leverage • Some imbalances are decreasing (current account) • Persisting tensions on financial markets – banks are maintaining

strict credit standards (partly due to regulatory pressures)• Central banks do not have much scope for stimulation

Advanced economies are vulnerable and remain a brake on, and the main uncertainty for, global growth

M. Singer – Economic developments globally and in Europe: The CNB view 4

GDP forecasts: USAGDP forecasts: USA

The USA will grow at approximately the same pace in 2013 as this year

Source: Consensus Forecasts, IMF, OECD, European Commission, Federal Reserve System

2,2

1,9

2,22,1

2,3

2,1

2,3

1,9

2,8

0,0

0,5

1,0

1,5

2,0

2,5

3,0

2012 2013

y-o

-y g

row

th in

%

CF IMF OECD EC Fed

M. Singer – Economic developments globally and in Europe: The CNB view 5

Risks to global economyRisks to global economy• USA

Fall off fiscal cliff in USA (major automatic budget cuts) Insufficiently credible medium-term fiscal consolidation framework

• Asia and Japan Imbalances in China Under-ambitious medium-term fiscal consolidation in Japan Fading of post-earthquake stimulus and new taxes in Japan in 2014

• EMU Spread of recession from periphery to core of EMU Excessive fiscal consolidation in some countries slowing growth

(high fiscal multipliers)

The financial risks have decreased slightly in recent weeks but remain high; the risks to growth are on the downside

M. Singer – Economic developments globally and in Europe: The CNB view 6

• Some countries were living “beyond their means” before crisis (Greece in long term!)

• Others (e.g. Spain, Ireland) were living within their means, but 1) bank bailouts, 2) demand stimulus during crisis, and 3) recession then worsened their fiscal situation significantly

• Market financing of public debt became too expensive (or impossible) for some countries at some point in time

• Greece’s debts escalated out of control in 2010

• Peripheral EMU economies are on verge of debt spiral

• Debt crisis: budget consolidation took priority over stabilising effect of public finances procyclical fiscal policy

In many EMU countries, fiscal policy became an additional source of shocks rather than a shock absorber

Debt crisis in euro areaDebt crisis in euro area

M. Singer – Economic developments globally and in Europe: The CNB view 7

Financial fragmentation in euro areaFinancial fragmentation in euro area

• Financial fragmentation strengthened in 2012 H1, when capital flowed out of peripheral countries into core countries and outside EMU

• Cross-border bank loans shrank in volume• Financial fragmentation manifested itself in growth in CDS

spreads• Capital outflow fostered growth in imbalances in TARGET2• After introduction of outright monetary transactions (OMTs),

signs are that financial fragmentation has stopped deepening

Financial fragmentation is reducing the effectiveness of ECB monetary policy and reducing/eliminating the benefits of low interest rates

M. Singer – Economic developments globally and in Europe: The CNB view 8

Bank deposits in Greece, Ireland and Spain have fallen recently price of loans is ceteris paribus higher than in core countries (further disintegration)

Source: ECB, Eurostat

Bank deposits in selected EMU Bank deposits in selected EMU countries countries (as % of GDP)(as % of GDP)

Note: GDP data for Greece start in 2011 Q2: Eurostat estimate

0,4

0,6

0,8

1,0

1,2

1,4

1,6

1,8

201220112010200920082007200620052004200320022001200019991998

Greece

Ireland

Italy

Portugal

Spain

M. Singer – Economic developments globally and in Europe: The CNB view 9

• Reduction of CA deficits due not only to slowing economic growth, but also to modest improvement in competitiveness

• Imbalances in TARGET2 (main creditor – Germany; main debtors – southern countries): imbalances within EMU turning into less apparent form

• Partial structural reforms: reduction of structural imbalances• Continuing fiscal consolidation focused on reducing budget

deficits: desirable solution to debt crisis• BoE quantitative easing introduced to boost economy (July)• Creation of EFSF and ESM: distribution of impacts to other

countries (+ IMF) through fiscal transfers

Some adjustments and policies Some adjustments and policies recently adopted in EU recently adopted in EU 1/21/2

M. Singer – Economic developments globally and in Europe: The CNB view 10

• Activation of Outright Monetary Transactions (government bond purchases on secondary markets) in September; aim:

to enhance functioning of monetary policy transmission mechanism to reduce high government bond yields

distribution of impacts of crisis via ECB balance sheet• Entry into force of European Stability Mechanism (ESM) (Oct.) • Progress towards establishing Banking Union timetable for

establishment of Single Supervisory Mechanism (SSM) • Since September, tensions on financial markets have eased and

yields on gov. bonds of southern countries have fallen slightly

While fiscal consolidation is the solution to the causes of the debt crisis, other policies are distributing the load of the debt crisis to others and are “buying time”

Some adjustments and policies Some adjustments and policies recently adopted in EUrecently adopted in EU 2/22/2

M. Singer – Economic developments globally and in Europe: The CNB view 11

GDP in EU in 2012 Q3 GDP in EU in 2012 Q3 (seasonally adjusted data)(seasonally adjusted data)

The situation in the EU paints a very mixed picture of growth patterns (the EU contracted by 0.6% yoy)

Source: EurostatNote: Data for Ireland, Luxembourg and Malta are for 2012 Q2

5,3

3,4 3,3

2,51,9

0,9 0,9 0,8 0,7 0,5 0,40,1

-0,1 -0,3 -0,5 -0,6 -0,8-1,1

-1,4 -1,5 -1,6 -1,6

-2,3 -2,4-2,9

-3,4

-7,2-8

-6

-4

-2

0

2

4

6

LATEST

LIT SKPOL D

MAL*

LUX* SBUL AT F

UK BIR

L*DK

ROMFIN NL

CRESP

HUNCYP I

SLO PTGR

y-o

-y c

ha

ng

e i

n %

M. Singer – Economic developments globally and in Europe: The CNB view 12

GDP forecasts: EMUGDP forecasts: EMU

This year’s contraction in the euro area will be replaced by a slow recovery next year

Source: Consensus Forecasts, IMF, OECD, European Commission, European Central Bank

-0,5

0,0

-0,4

0,2

-0,1

0,9

-0,4

0,1

-0,4

0,5

-0,6

-0,4

-0,2

0,0

0,2

0,4

0,6

0,8

1,0

2012 2013

y-o

-y g

row

th in

%

CF IMF OECD EC ECB

M. Singer – Economic developments globally and in Europe: The CNB view 13

• Negative feedback between: 1) vulnerable financial system 2) slowly growing economies and 3) indebted public finance – fragile equilibrium persists

• Fiscal consolidation is strongly procyclical pressures to ease fiscal restriction are growing

• Some countries’ debts will stabilise only in a few years’ time and at high level – with economic growth slowing there is growing risk of debt spiral in some countries

• Persisting problems in following areas: lack of structural cohesion (slow introduction of structural reforms) unsatisfactory institutional framework (some changes happening,

but not always in right direction) inadequate functioning of (and compliance with) regulations

Risks in euro area Risks in euro area 1/21/2

M. Singer – Economic developments globally and in Europe: The CNB view 14

• ECB single monetary policy is fostering widening differences between southern countries and core countries:

interest rates are still too high for southern periphery exchange rate of euro is weak for core but strong for periphery

• Absence of exchange rate adjustment mechanism within EMU is leading to adjustment via:

economic growth wages and prices (competitive disinflation) unemployment and outflow of labour force (brain drain)

• Survival of euro area in its current form is conditional on: non-standard policies of ECB loans and fiscal transfers between countries political “solidarity” between member countries (and others)

Risks in euro area Risks in euro area 2/22/2

The threat of collapse of the euro area, with potentially catastrophic consequences, has decreased recently

M. Singer – Economic developments globally and in Europe: The CNB view 15

Thank youThank you

Miroslav SingerMiroslav.Singer@cnb.czTel: +420 224 412 000

Česká národní banka Na Příkopě 28 115 03 Praha 1

M. Singer – Economic developments globally and in Europe: The CNB view 16

Additional slides Additional slides

M. Singer – Economic developments globally and in Europe: The CNB view 17

Czech Republic and euroCzech Republic and euro• Any escalation of debt crisis can be expected, ceteris paribus,

to increase projected costs of euro area membership• Situation in euro area is developing extremely quickly • It is very uncertain how euro area will look in two or three

years balance of costs and benefits of euro adoption is subject to exceptionally high uncertainty; this uncertainty has increased compared to last year

• Delaying euro adoption seems to be most sensible response to future uncertainties and unknown distribution of costs and benefits

Given the current uncertainties about the future form of the euro area, a commitment to adopt the euro would be tantamount to a blank cheque