Speech by Hubert Fromlet on the ”Baltic Sea Region, China and India Day” of the Baltic Business School (BBS) in Kalmar on November 10, 2009.
Summary / key points:
One day after the 20th anniversary of the fall of the Berlin Wall: It makes sense to come to the conclusion that the peaceful revolution in Central and Eastern Europe two decades ago not only brought democracy and a better economic system to the countries in the region but also major stimuli to the whole globalization process. Even – or rather particularly – emerging countries like China and India received substantial benefits from the acceleration of world trade and globalization of investment.
Until recently, emerging markets were very much regionalized (“Asian countries”, “Eastern European countries”, etc). The still ongoing global financial and economic crisis, however, has shown that such an accumulated analytical and strategic approach no longer can be regarded as appropriate. More or less all emerging market countries have their own strengths and weaknesses.
This leads us “automatically” to the conclusion that financial and exporting/importing companies in the future more ambitiously should analyze emerging markets country by country and case by case. Thus, more skills in emerging markets are needed on all official and corporate levels – also due to the fact that the share of emerging economies in global production will increase further.
Another ex post conclusion: Fundamental macroeconomics still matter. Looking, for example, at the severe economic problems in three Baltic states makes very clear that supervision/central banks and certain Swedish/Baltic bankers had obvious shortcomings in their macrofinancial and macroeconomic fundamental knowledge. Academia should pay more attention to macrofinancial research, too.
The ongoing economic crisis – hopefully we are right now going through the turning point – has also demonstrated that exchange rate policy still can play a major role for a country’s economy. I have been warning for a premature joining of the ERM II/EMU by New (EU)Member States since 2002. I feel more convinced than ever that these warnings were motivated. And I repeat my warnings today: It could again become a strategic mistake if the Baltic states already in a few years time again seriously tried to join the euro. Even Poland should be cautious about such a step.
An application for an EMU entry should be taken from a position of strength – and not as a kind of safety anchor against future crises. It remains to be seen whether the balances of current account will show a structural improvement once the economies in Estonia, Latvia and Lithuania start to recover. The current improvements of the current accounts are rather the result of the economic depression.
China’s problems during the global became obviously less severe than most experts expected a year ago. It should, however, be added that China still regulates its cross-border capital flows and its currency. Time has come that China again starts its (cautious) appreciation process. The currently more or less stable exchange rate vis-à-vis the U.S. dollar is simply not sustainable anymore – and does harm to the Chinese economy as well.
The short-term outlook for India may be affected by poor harvests. But India still achieved quite reasonable rates of GDP growth during the global meltdown. There is no reason to change my previous forecasts of quite a good trend growth in the future. However, the continuous big public fiscal deficits still make me (somewhat) concerned as a mostly fundamentally analyzing economist.
