Monday, June 30, 2008

Where is Romania?

Countries like Poland, Slovakia and Russia frequently make the headlines. Their growth impresses western analysts and journalists, their domestic events provide for enough (yet not too much) excitement and their names are recognized by most, if not all, spell-checkers and individuals.

But what about Romania? Had there not been high growth? Does it find itself in a "development trap"? Judging by the news coverage, one would never guess that Romania had made enormous advances in recent years. (In fact, I am not sure I have heard the country mentioned since I saw a flood of posters at major European airports in early 2007, announcing/promoting the latest EU enlargement).

And today, my news feed claims that Romania has been "hard hit" by the global financial turmoil. But when I looked up IMF's most recent "consultation with Romania," most of what I saw was praise. The kind that sounds genuine, supportive and substance-based.

Unemployment is falling, growth is well above 5%, fiscal balance is certainly EU-worthy (despite rapidly rising government expenditures) and the growth of external debt appears to have stopped. National Bank of Romania is also praised by the IMF: "Directors welcomed the NBR's commitment to price stability in a challenging environment, and stressed the need to firmly anchor inflation expectations. The NBR has appropriately tightened the monetary stance since mid-2007 ..."

While Romania may not have quite "shined" as much as other emerging markets, at least by the high standards and expectations of the media, the numbers show that it has been successful and is bound to do well in the future. This is a country that should be watched and talked about more - there is clearly much more to it than Dracula-jokes.

Saturday, June 28, 2008

Is inflation in Europe too high already?

Some people are now talking about the possibility of stagflation in Europe, as Germany's inflation estimates have risen to 3.3 percent. Inflation needs to be watched closely, of course, and it is never encouraging when its levels move above the official comfort zone. But, from a historical perspective, when EU countries like Portugal, Spain and Sweden all stay below 4 percent and EU-27 projections are well below 3 percent (2.4), sounding the alarm bell might well be premature.

Just recall Ken Rogoff's speech documenting that "globalization and de-regulation have been powerful forces supporting the political economy of low inflation." There might be more regulation in the coming years and some countries will grow less than had been expected. But how does the situation today look when compared with the 1990s?

Some seem to forget that world inflation was around 30% in 1990-4. Between 2000 and 2007, by contrast, prices around the world rose no more than 3.8% per annum on average. That is, inflation fell EIGHT FOLD. The industrial economies will probably not venture far from the 3% benchmark. Rising prices in the developing world should, by all means, be a source of concern. But the European Union, including Central Europe, seems to be in a reasonably good shape. Even Hungary, in spite of having a bad year, will probably do well in 2009.