Deputy Governor of the Bank of Greece presents Europe’s future at UNYP

This month we were thankful and privileged to have had Professor John (Iannis) Mourmouras, Deputy Governor of the Bank of Greece, present his lecture entitled “Recent developments in the European Union: a look to the East” to our graduate and undergraduate students. We are delighted to offer you a summary of this lecture. 

Professor Mourmouras opened his lecture with a few thoughts on some of the key issues on the political and economic agenda, looking into the major risks for the global economy and then turning to the current state of the eurozone economy and architecture, as the euro turns 20 this year. He also focuses on the Central and Eastern European (CEE) states 15 years after their entry into the European Union, and points out the macroeconomic situation of the Czech Republic, with its potential entry into the eurozone.

Professor Mourmouras continued: “As global growth is starting to lose momentum, there are two major short-term risks to the global growth outlook. The first concerns the escalating trade conflict threatening the world’s economy and, more particularly, the question of how the US President Trump’s trade war against China will pan out and whether steps will be taken to solve existing trade tensions. The second is the uncertainty over global monetary policies and tightening financial conditions.”

Mourmouras comments on the massive defeat of PM May’s EU Withdrawal Agreement at the House of Commons mid-January 2019: “There are now four possible Brexit scenarios: a delayed Brexit; a hard Brexit; a second referendum; and a general election. We are only weeks away from the 29 March deadline, and PM May’s attempts to renegotiate the withdrawal agreement do not seem to be successful. … I expect that we will have a delayed Brexit. I hope that common sense will prevail and we will avoid a hard Brexit.”

The euro at 20

“This year we celebrate the 20th anniversary of the European single currency and the eurozone. In 1999, Stage III of the Economic and Monetary Union (EMU) irrevocably fixed exchange rates among eurozone member states and transferred authority over monetary policy to a centralized pan-European institution, the European Central Bank. The first decade of a prolonged cycle of economic expansion and prosperity was followed by the 2010-12 sovereign debt crisis, resulting in high levels of unemployment and weak growth performance. This was a very severe debt crisis, which hit countries at the periphery of the eurozone the hardest. Four of these countries (Greece, Ireland, Portugal, and Cyprus) had to follow adjustment programs to bring their economies back on track (including my own country, Greece). Despite the continuing divergence between Northern and Southern Europe with regard to real wages and productivity, overall the single currency has been a success. Nevertheless, it would be naive to attribute the debt crisis solely to the failings of certain European Union member states without recognizing the shortcomings of the monetary union’s architecture.”

According to Professor Mourmouras, “Central and Eastern European countries are expected for the most part to continue to record solid growth rates in 2019 (in the area of 3% or higher in some cases)… The Czech economy has a high degree of openness and continues its shift towards more knowledge-intensive activities. The inflation rate is expected to reach 2.3% year-on-year in 2019, according to the IMF. However, labor market conditions coupled with demographic constraints may be seen as potential downside risks for the country. Employment growth remained low (1.6%) in 2018, and it is estimated to further decrease in the following years, whereas the population continues to age and there is a shortage of skilled employees.”

The debate in the Czech Republic on eurozone entry

“The unfinished process of long-term convergence towards the advanced eurozone countries remains a barrier to early adoption of the euro. Although this process has resumed across all key indicators in recent years, the distance of the Czech Republic from the eurozone average remains significant in most indicators.” He points out that the Czech Republic is more advanced than other non-eurozone Central European countries, but still lags well behind core eurozone countries such as Austria and Germany, and suggests that “The balance of the costs and benefits of introducing the euro will depend mainly on the timing of entry – and a hard Brexit will weigh on that decision. The undoubted benefits which will arise from the adoption of the euro have remained broadly unchanged, in the form of a reduction in transaction costs and the elimination of exchange rate risk, given the Czech economy’s strong links with the eurozone economy. However, the costs and potential risks depend on several parameters, including convergence with the eurozone in terms of economy and prices, which affects the long-term outlook of the Czech economy. The degree of alignment with the eurozone over the business cycle is also a crucial factor since it determines the appropriateness of the single monetary policy conditions for the Czech economy.”

Prof. Mourmouras concluded his lecture with a discussion of the slowing of the globalization trend (referred to as “slowbalisation” in the Economist last month) and the subsequent gradual rise of regional poles.  In his opinion, “whatever the outcome of the current trade conflicts triggered by the US’s protectionist turn for the past two years, the bottom line is that regional poles will continue to thrive. The European Union is a major regional trade block. It is the world’s largest trading bloc, a single market of 500 million consumers and 21 million small and medium-sized enterprises (SMEs). Therefore, it is important to ensure that we can compete as a united European entity against other regional poles. Unity is our force.”

You can read the full lecture here: 

“Recent developments in the European Union: a look to the East”

Download: 2019_prague_recent_developments_in_the_european_union_11022019.pdf