ECONOMIC COMMISSION FOR
EUROPE OPENS FIFTY-THIRD SESSION
22 April 1998
Discusses Vulnerability of Transition
Economies to External Shocks,
Challenges of Globalization and Effects of European
Monetary Union
The Economic Commission for Europe (ECE) has a
role to play in strengthening the unity of Europe and its
region-wide integration, the ECE's Chairman said this morning.
Speaking as the ECE began in earnest its
fifty-third session, Chairman Peter Naray of Hungary said
the year 1997-1998 was a turning point for European Union
countries which worked at the deepening of institutions and
enlargement of the organization. The activities of ECE could not
be determined without a vision of Europe for the future. The ECE
would promote this vision and assist European countries in
strengthening cooperation, he added.
In his introductory remarks, Yves Berthelot,
Executive Secretary of the ECE, said the work of the Commission
at this session would focus on a real dialogue, particularly
through a new format of the intergovernmental debate, making it
more focused and lively. The ECE was unique by its geographical
composition, extensive network, experience and exceptional
efficiency. But this was insufficiently well-known and this
potential should be more utilized at a time when the security and
cohesion of the region need to be strengthened by a harmonization
of economic interests and establishment of a balanced dialogue,
the Executive Secretary said.
In the morning, the economic debate was
introduced by panel discussions on the vulnerability of
transition economies to external shocks and on the challenges of
globalization.
In an afternoon meeting, Commission members
discussed the opportunities and challenges of the Euro for
non-members of the European Union.
The fifty-third session of the ECE will
reconvene at 10 a.m., Wednesday 22 April, to discuss
implementation of the group's reform and preparations for the
Economic and Social Council's upcoming review of the work of the
United Nations regional commissions.
Statements
In introductory remarks this morning, PETER
NARAY (Hungary), Chairman of the Commission, recalling that the
ECE had celebrated its fiftieth anniversary last year, said
1997-1998 had marked a turning point for European Union (EU)
countries which worked for the deepening of institutions and
enlargement: the Union had decided to include 11 new countries.
In the last months the relics of the Yalta era had been disposed
of, divisions in Europe have been eliminated and steps have been
taken towards a common future. New camps had emerged, however:
the developed countries integrated in the EU on the one hand, and
countries still dealing with the past and difficult economic
situations, on the other.
The ECE region had been divided for many years,
Mr. Naray continued. In recent years it developed a specific
identity that had overcome forces of division. Market reform in
eastern and central Europe would strengthen the development of a
unified region. The activities of ECE could not be determined
without a vision of Europe for the future. The ECE would promote
this vision and assist European countries in strengthening
cooperation. The ECE had a role to play in strengthening the
unity of Europe through a region-wide integration of its
countries.
YVES BERTHELOT, Executive Secretary of the ECE,
said the work of the Commission, in accordance with the plan of
action, would focus on a real dialogue, particularly through a
new format of the intergovernmental debate, making it more
focused and lively.
Mr. Berthelot said the ECE was unique by its
geographical composition, extensive network, experience and
exceptional efficiency. That potential was particularly useful at
a time when the security and cohesion of the region need to be
strengthened by a harmonization of economic interests and the
establishment of a balanced dialogue. This should be better known
and all persons present are well placed to promote a larger
utilization of the assets of the Commission.
Vulnerability of Transition Economies to
External Shocks: Strategies for Restructuring Enterprise and Bank
Sector
MAREK BELKA, Former Minister of Finance and
currently Adviser to the President of Poland, said for a
successful transition to take place one must look at the pace of
microeconomic adjustment in the light of the macroeconomic
position. Experience showed that a healthy macroeconomic position
was essential during structural reform. Transition economies had
huge modernization needs. To ensure macroeconomic stability,
transition economies needed savings, investors and a good
financial system.
Mr. Belka said lessons could be drawn from the
Polish experience. In the last period there had been a change
from a current account surplus in 1994-95 to a deficit due, in
part, to prolonged high growth. Poland had responded by a
tightening of monetary policy reflected by a growth in real
interest rates; a reorientation of the exchange rate policy, and
a tightening of the budget. That had resulted in a
current-account deficit of 3.2 per cent of GDP, lower than
predicted. Foreign reserves increased and maintained the relative
stability of the polish currency. This should be considered on
the background of minimum dependence on foreign financial
capital; Poland was not overly attractive to foreign investors
and discouraged foreign investment.
BERNARD MOLITOR, Chairman of the Organization
for Economic Cooperation and Development's Economic Development
and Review Committee, said the Asian crisis showed no country
could be ensured from financial shocks of any kind, although much
could be done to prevent them. Governments had to set the right
framework, political institutions and macroeconomic criteria;
what was needed now was the spirit of entrepreneurship, the will
to innovate and invest, the capacity to organise and use
marketing techniques, incentives to work, and wage levels that
corresponded to the level of productivity.
Public ownership was a problem because, among
other things it made restructuring of companies more difficult,
Mr. Molitor continued; full privatisation was therefore
essential. Transition economies had to prevent exposure to
foreign currency and needed to take full advantage of the global
society. They needed reliable policies, clear competencies,
including the enforcement of law, corporate governance,
legislation and bankruptcy legislation. The four key words were:
credibility, stability, transparency and fairness.
MARJAN SENJUR, Minister of Economic Relations
and Development of Slovenia, said an important limitation, often
discarded when discussing the free movement of capital in
transition economies, was the regional component of capital
flows. Usually one took the point of view of the owner of the
capital, however, one should also look at the national policy
maker. Capital which had its root in the country was more
valuable to the country as it was less mobile and stayed during
the good and bad times. Foreign investment often took part in
prosperous countries, as they did in the Asian countries. When
the crisis hit those countries, however, all the foreign
investment fled. It was important to consider investment in
distressed countries or countries in crisis and see how the free
movement of capital could increase such financial crisis.
International solutions and schemes should be examined to avoid
victimisation. Moreover, the countries themselves should also
rely on themselves and enstore safeguards. Mr. Senjur said
Slovenia, as of 1996, took restrictive measures to reduce the
inflow of foreign capital, so as to limit the influences of a
potential crisis on the domestic economy.
BERNARD SNOY, Director at the European Bank for
Reconstruction and Development (EBRD), said bank and enterprise
restructuring were more difficult than liberalisation and
stabilisation. In this new phase of the transition process,
public and private institutions needed to be strengthened. The
role of the State in social and other areas also needed to be
more clearly defined. Privatization was the only way to cut the
umbilical cord and induce a market behaviour. The way in which it
was done, however, had an influence on corporate governance. Key
issues were the overcoming of insiders control and imposition of
hard budget constraints.
Mr. Snoy said, in the case of the Asian
turmoil, capital flows were reversed as a result of lack of
confidence in the local private markets; that was a new
phenomenon. The generalized shift in portfolio allocations had an
impact on other countries; Estonia, Romania, Russia and Ukraine,
showed signs of stress. The relative stability of the region left
no room for complacency, he added. It was important to work on
the framework, on institutions, and on the corporate and
financial sector.
Responding to questions and comments from
delegates, a member of the panel said there was a ink between the
foreign investment in financial assets and financial reserves.
The new foreign exchange law in Poland was being revised as part
of a tendency to introduce more safeguards. This law would only
provide partial capital liberalisation and would introduce more
emergency measures. He stressed that the transition economies
were vulnerable prior to the Asian crisis and the problems they
faced had little to do with the Asian crisis. During
microeconomic structural reform transition should be very
cautious macroeconomic variables as they would always be
vulnerable to volatility of foreign capital.
Another panel member said Slovenia had
privatized its social property, although restructuring was not
over. Slovenia was an extremely open country -- the measures
adopted to restrict portfolio investment were temporary.
The shift in investment for countries in
transition remained a problem, another panel member said. As one
could not forecast a financial crisis, it was important to work
on prevention. In particular transition economies should
concentrate efforts on macroeconomic stability, on structural
reform, and on strengthening the framework that was sportive of
long term finances. Concerning the time scale, it was important
to focus on those aspects that took the most time and establish a
sound legal culture. If this was done transition countries would
receive the assistance of international institutions.
Extensions and Conclusions: Challenges of
Globalization
RUBENS RICUPERO, Secretary General, UNCTAD,
said that a major paradox of globalization was the fact ECE
countries, the major centres of decision-making, were also the
source of the most serious reactions to globalization, which was
not the case for developing countries. Moreover, that was not
restricted to the intellectual debate, but had already been seen
in the streets.
Mr. Ricupero said that could be explained by a
number of reasons. One of them was the overselling, in ECE
countries, of the concept of globalization to the public by the
'missionaries of globalization'. Although the phenomenon itself
was too incipient and incomplete, it was judged as though it was
already completed. But there were also the consequences of the
major macroeconomic imbalance between the three major economies
of the world and the realization that globalization had not
brought them to the promised land. Finally, the coincidence
between the emergence of globalization and mass unemployment and
growing job insecurity had resulted in anguish, fear and lack of
touch with the public sentiment. A wide gap existed, therefore,
between the economic debate and the perception of the public.
MILIJOVE PANIC, of the University of Cambridge,
United Kingdom, said high levels of globalization were more
challenging for decision-makers. At either end of the
international integration spectrum, globalization could only be
successful if it achieved results superior to those acquired with
protectionist barriers. At the root of all economic cooperation
was the increasing inability to realize economic and social
objectives without cooperation with other countries.
Mr. Panic noted only national institutions
dealt with international crises. That elicited hesitation on the
part of policymakers in transferring sovereignty to outside
institutions. There was a difference between an outward-looking
strategy and open economies. It was important for EU countries to
help others reach their economic levels and facilitate
integration.
Opportunities and Challenges of European
Monetary Union for Non-European Union Members
A four-member panel led a discussion on
opportunities and challenges of the Euro for non-members of the
European Union.
BERNHARD MOLITOR, Director of International
Economic and Financial Affairs, DGII, European Commission, said
he welcomed the opportunity to discuss the challenges of the Euro
for non-members of the EU, as debates until now had focused on EU
members not participating in the first round. He suggested
discussions should focus on the consequences of the Euro for
transition countries. Fears regarding the Euro included, among
other things, whether it would be used by EU members as an
instrument of trade policy. There were also the questions
regarding capital markets, and the high volatility of the new
currency.
MARJAN SENJUR, Minister of Economic Relations
and Development, Slovenia, said one should not limit the question
of the Euro to financial considerations only; the nominal and
real side of the economy should also be considered. In the
context of EU integration, Slovenia was working towards economic
development, market freedom and stability of the economy. The
question was, then Which goal should be given priority?
To continue structural reform and prevent
appreciation, Slovenia had adopted a moderate reform, Mr. Senjur
continued. Slovenia's main goals at present were to restructure
the economy and reduce inflation. Participation in the European
Monetary Union (EMU) was therefore a distant goal. According to
estimates, it was predicted that Slovenia would fulfil the
criteria to integrate the EU in 2002; it would be ready to accede
to the EMU in ten years.
Joly DIXON, Director of international Economic
and Financial Affairs, DGII, European Commission, said the EMU
would be of immense significance to European countries and to the
rest of the world. Economic and monetary union was only another
step to closer union between peoples, as called for by the Treaty
of Rome. There would be important economic benefits on the micro
and macroeconomic level: the economic and monetary union would
help foster a more prosperous and dynamic economy; be a logical
complement to the internal market, and lead to the creation of a
large and highly liquid financial market.
Sceptics argued that the EMU would not
constitute an optimum currency area and that it would be
difficult to react to real shocks, Mr. Dixon said. To those
contentions he responded country-specific real shocks were very
rare within Europe and would be further reduced by the Euro.
Europe had worked with a de facto monetary policy for years with
the German mark. With the Euro, the EU was simply building common
institutional structures to manage such a monetary system.
Moreover, structural changes were necessary, irrespective of the
Euro, to meet the challenges of enlargement and globalization.
The EMU would have enormous effects on the rest
of the world, Mr. Dixon continued. With EMU the Euro would become
a major world currency and influence the international monetary
system. It was mentioned that the Euro would have the same
sizable influence on the international monetary system as the
Bretton Wood Agreements. On the issue of exchange rate stability,
there was no evidence that volatility would increase. The Union
would become more competitive and an ensuing synchronization of
cycles would have important influences abroad. It was not likely,
however, that it would influence foreign direct investment.
MASSIMO RUSSO, Special Adviser to the Managing
Director of the International Monetary Fund (IMF), said that if
the EMU was managed well it would be beneficial to everybody. It
would influence transition economies through exchange rate
channels, financial linkages and institutional considerations.
The growth effect would have a very important impact on non-EU
countries. A 1 per cent faster growth would produce an
acceleration of exports in transition countries from 4-5 per
cent. Influences on exchange rates would depend on the regimes of
transition economies; if attached to a Euro currency their
currency would be affected by appreciation and depreciation of
the Euro. Foreign direct investment, portfolio flows and exchange
rate movements would all affect transition economies as would
interest rate movements. All countries wishing to join the Union
had to satisfy the economic criteria and countries would had to
make the required adjustments. The exchange rate to be put in
place would provide enough flexibility to avoid financial crisis.
Responding to questions raised by delegates,
Mr. Russo said the mark and the Euro would have a similar value,
so there was not particular need to change savings from one
currency to another. One should expect some fall in the exchange
rate with the dollar, however, it was difficult to make
projections. The IMF would intensify surveillance on both
European members and non-European members. Membership of the EU
members in the IMF would not change.
Mr. Senjur said full stability of prices and a
fixed exchange rate regime were necessary in transition
countries. But at this stage, Slovenia was not ready to accede to
a fixed exchange rate system. It was for Slovenia to adjust to
the Euro and not vice versa.
Mr. Dixon said applicant countries would not be
required to fix their exchange rate to the Euro before accession
to the EU. All countries joining the EU would be part of the EMU
from accession, but would not have to fix their exchange rates.
There would be no possibility to opt-out of the Euro. The
economic benefits of the internal market were already being felt,
and the Euro would enhance those benefits.
Mr. Molitor underlined that the introduction of
the Euro would involve important policy decisions in the part of
the non-Euro countries. These decisions would have to cover
exchange rate policies, financial policies, the position in
convergence criteria and the behaviour for restructuring and
increasing competitiveness. The Euro will introduce a new
situation, marked by the existence of two major currencies and
two major financial markets. The debate was extremely useful for
providing good information and sound analyses, a prerequisite for
making good and free choice on such a key issue for the economic
prosperity of the continent and the economic stability
world-wide.
For further information
please contact:
Information Unit
United Nations Economic Commission for
Europe (UN/ECE)
Palais des Nations, Room 370
CH - 1211 GENEVA 10, Switzerland
Tel: +41 22 917 44 44
Fax: +41 22 917 05 05
E-mail: [email protected]
Website: http://www.unece.org