Monetary Consolidation and Public Investment: Friends, Foes, or Neutral Partners A Look at Bulgaria and Romania

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Universal Seminar for Experts "The coming expansion of the EU" Cicero Foundation October 12-13, 2006 Fiscal Consolidation and Public Investment:  Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank

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Outline 1. Motivation – EIB premium 2. General perceptions (EU 27) Public obligation maintainability (the long run) Macroeconomic requirements to financial approach (the short run) 3. Fiscal combination and open speculation Bulgaria Romania 4. Conclusion

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Outline 1. Motivation – EIB premium 2. General perceptions (EU 27) Public obligation supportability (the long run) Macroeconomic limitations to monetary arrangement (the short run) 3. Fiscal union and open venture Bulgaria Romania 4. Conclusion

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Outline 1. Motivation – EIB premium 2. General perceptions (EU 27) Public obligation manageability (the long run) Macroeconomic imperatives to monetary strategy (the short run) 3. Fiscal solidification and open speculation Bulgaria Romania 4. Conclusion

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Public obligation in EU-27 (% of GDP), 2006 Maastricht 60% rule Source: European Commission, Economic Forecast, Spring 2006

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Fiscal adjust in EU-27 (% of GDP), 2006 Maastricht 3% foundation Source: European Commission, Economic Forecast, Spring 2006

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Debt progression Change owing debtors/GDP proportion = monetary shortfall/GDP proportion – ostensible GDP development • obligation/GDP proportion

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Debt elements Change in the red/GDP proportion = financial shortage/GDP proportion – ostensible GDP development • obligation/GDP proportion Key message: obligation amassing the slower, the smaller the deficiency higher financial development

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Real GDP development (in %), 2000-05 Source: European Commission, Economic Forecast, Spring 2006

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Fiscal shortage that makes obligation/GDP unite to 60% (Maastricht criteria)

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Fiscal shortage that makes obligation/GDP join to 60% (Maastricht criteria)

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Fiscal shortage that makes obligation/GDP focalize to 60% (Maastricht criteria)

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Fiscal shortfall that makes obligation/GDP merge to 60% (Maastricht criteria)

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Bulgaria : monetary adjust and open obligation (in % of GDP) Public obligation ( right scale ) Fiscal adjust ( left scale ) Source: National Statistical Institute (NSI) of Bulgaria; *Projected

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Romania : financial adjust and open obligation (in % of GDP) Pubic obligation ( right scale ) Fiscal adjust ( left scale ) Source: IMF; *based on approach measures (1.8% of GDP) in respect to beginning spending plan

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Outline 1. Motivation – EIB premium 2. General perceptions (EU 27) Public obligation maintainability (the long run) Macroeconomic limitations to monetary arrangement (the short run) 3. Fiscal union and open speculation Bulgaria Romania 4. Conclusion

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Outline 1. Motivation – EIB premium 2. General perceptions (EU 27) Public obligation maintainability (the long run) Macroeconomic requirements to monetary approach (the short run) 3. Fiscal union and open venture Bulgaria Romania 4. Conclusion

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Macroeconomic requirements Concerns about Inflation  internal uneven characters External current account  outer irregular characteristics

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Macroeconomic limitations Concerns about Inflation  internal lopsided characteristics External current account  outside awkward nature

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External current record (in % of GDP) Current record adjust = Trade adjust + … Current record adjust = Savings – Investment

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External current record (in % of GDP) Current record adjust = Trade adjust + … Current record adjust = Savings – Investment Saving Current record adjust Current record adjust =

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External current record (in % of GDP) Current record adjust = Trade adjust + … Current record adjust = Savings – Investment Saving Current record adjust (Savings – Investment) of private division + monetary adjust Current record adjust =

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Outline 1. Motivation – EIB premium 2. General perceptions (EU 27) Public obligation manageability (the long run) Macroeconomic imperatives to monetary approach (the short run) 3. Fiscal union and open venture Bulgaria Romania 4. Conclusion

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Outline 1. Motivation – EIB premium 2. General perceptions (EU 27) Public obligation manageability (the long run) Macroeconomic imperatives to financial arrangement (the short run) 3. Fiscal union and open venture Bulgaria Romania 4. Conclusion

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Bulgaria : commitments to change in financial adjust (in % of GDP), 2001-05 Change in monetary adjust 3.8 % Decline in broad daylight speculation 0.2 % Decline in premium installments on open obligation 2.1 % Increase in income 3.1 % Change in financial adjust Increase in current use (excl. premium installments) – 1.6 % Source: Bulgarian National Bank

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Romania : commitments to change in financial adjust (in % of GDP), 2001-05 Change in monetary adjust 3.3 % Decline out in the open venture 0.3 % Decline in premium installments on open obligation 3.7 % Change in monetary adjust Decline in current consumption (excl. premium installments) 1.5 % Decline in income 2.2 % Source: IMF

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Public venture (% of GDP) Eurozone nations 2005 Source: AMECO (European Commission)

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Conclusion Fiscal arrangement in BU & RO: macroeconomic soundness as opposed to obligation maintainability Fiscal solidification has not come at cost of open speculation  " nonpartisan accomplices" Public interest in BU & RO low contrasted with NMS-8, yet increment conceivable without breaking down monetary adjust

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International Seminar for Experts "The coming growth of the EU" Cicero Foundation October 12-13, 2006 Fiscal union and public investment: friends, adversaries, or unbiased accomplices? A glance at Bulgaria and Romania Armin Riess (a.riess@eib.org) European Investment Bank

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