Lessons from the euro zone experiences for the CEE entrants

Lessons from the euro zone experiences for the CEE entrants

 

Andrzej Sławiński

 

Keywords: Real convergence; Lending booms; International competitiveness; Banking supervision

 

Summary The unexpected phenomenon in functioning of the euro zone was relatively rapid competitiveness differentiation among the member countries. In some of the euro zone countries the main factor that contributed to the deterioration of their international competitiveness was the negative feedback loop between low level of real interest rate and unsustainable credit boom. The experiences of Spain and Ireland illustrate that unsustainable credit booms are possible also in case of these monetary union members that are highly advanced in real convergence and succeeded both in liberalizing their labor markets and keeping budgets in balance. In the case of the Central and Eastern European (CEE) catchingup economies the risk of a fall in real interest rates that might trigger unsustainable credit boom is augmented by inflationary pressures stemming from the Balassa-Samuelson effect (BSE) and the convergence of their price levels towards the average euro zone level. The important lesson from the euro zone experiences for the CEE countries is the necessity to tighten banking supervision in order to shield their economies against the risk of an unstable lending boom after joining the euro zone.

 

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