Miroslav Singer: Our rising savings are not ‘normal’ | E15.cz

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Miroslav Singer: Our rising savings are not ‘normal’

Miroslav Singer: Our rising savings are not ‘normal’
Guvernér České národní banky Miroslav Singer
ZDROJ: Anna Vackova, E15

Pavel Páral

Saving has brought us close to losing our competitiveness, says Miroslav Singer, Governor of the Czech National Bank.

Would you agree with the assertion that the impact of the food war with Russia and of sanctions that in any way affect the Czech economy won’t be substantial?

Russia represents slightly over four percent of our export volume and in a European context that is quite a lot.

The Baltic States are more dependent but for us the export loss is also not particularly trifling. More importantly, however, is that our exports have not been hit to this extent by the sanctions.

And, besides, as the Russian economy had been weakening anyway, certain items had already previously registered a downturn. So we are indeed talking about something that will not have a substantial macroeconomic effect.

Although this does not mean, of course, that what we are seeing can’t have a serious impact on some specific companies, these types of sanctions are nevertheless not a serious threat to us on the macroeconomic level. However, if the sanctions escalate then the situation could become unpleasant.

Russia has been experiencing problems even without sanctions and the Ukrainian crisis…

Yes, there is high inflation, a strongly declining rouble and capital outflows. This is indeed very unpleasant for Russia. Moreover, commodities, which are of key importance to the Russian economy, are most probably past their peak prices.

Leaving the difficulties with Russia aside, the European economy still doesn’t look terribly good, yet only recently it seemed that the recessions were finally gone. What do you think?

I wouldn’t attach too much importance to this. These are assessments based on one single quarter. On top of that, these are merely estimations so it is difficult to draw any dramatic conclusions. But it is a fact that large economies which have had difficulties in the past are still experiencing difficulties. Also the German figures are a disappointment.

Is Germany at all capable of generating better figures?

It is, provided it sells more to the Germans themselves. Domestic demand continues to lag and this is a very significant aspect in terms of growth contributions in such a large economy. With its current account surplus Germany can afford to boost domestic demand without risking anything or destabilising its competitiveness. And the Germans are very competitive indeed.

On the other hand, however, I’m not so sure whether increased domestic demand in Germany will help problematic marginal [European] economies as is sometimes claimed.

The eurozone’s problem is that its monetary policy is still too strict. The European Central Bank’s two-percent inflation objective requires inflation to be above two percent in some areas and less than two percent in others. You won’t find a country with more than two-percent inflation in the eurozone. And Germany definitely should be above two percent.

How could the ECB further relax its monetary policy?

The ECB can prevent a strengthening of the euro and it is contemplating quantitative easing. The problem is, however, that compared to the US, Europe’s capital markets do not include such a significant non-banking share. Buying assets as part of quantitative easing thus affects a much smaller part of the economy. Apart from this, a significant part of the economy here consists of small and medium sized companies who would of course benefit from a weaker euro, but it is a truly huge monetary zone we are talking about and such a step would undoubtedly have some geopolitical consequences.

Why exactly would small companies be interested in exchange rates?

They, after all, tend to operate on the domestic market. Not at all, actually. Also in this country small companies are strong exporters and make up a significant part of our exports. That is also clear from the reactions to our interventions which we receive. If, say, you produce pianos amounting to CZK 200-300 million then you can’t sell all of them here.

After the slump in domestic demand in Spain, for example, small and medium sized companies were strongly pushed into exporting, something they previously practically ignored as there was no need for it. They benefit from a weaker euro and that is why the ECB stresses that if the euro strengthens it would be forced to take additional action.

Isn’t the problem that is really behind European economic growth the fact that it is not just states but also companies and households that are quite heavily indebted?

That makes the fact that inflation is below its target an even bigger issue. Credits are retaining their nominal value but wages aren’t increasing. Europe needs growth and nominal wage increases. Clearly this is a difficult task for Europe but it is even more difficult to find solutions in fiscal policies. To allow yourself to become indebted during stagnating inflation or even decreasing prices is devastating.

In the Czech Republic, the situation is quite different. Both companies and households have to a considerable extent rid themselves of debt. Thus they have maybe slashed growth but today they are ready to take on loans and to invest.

We are, of course, in a better situation but that still doesn’t mean that Europe is doing itself a favour by taking chances with momentum that is only slightly above deflation. That is why a relaxed monetary policy should be counterbalanced with strict fiscal policies which, alas, many countries are not conducting.

Once again there are countries warning that they are failing to meet their fiscal targets. That’s what the whole problem is about. The way out goes hand in hand with less debt and more money in the economy. And of course this has also to be tackled with regard to the situation in the banking sector.

You have pointed out in your blog that the Czech economy will not be driven anymore by foreign demand and exports since we are growing as fast, or even faster, than our trading partners. What should the new engine of our economy be in that case?

I think we even have two engines. We’re getting our domestic demand back, and that’s something which can last for a longer period of time. There are reasons for this. Above all, we are doing well as far as the budget deficit and the government debt are concerned. The second engine stems from the fact that export prices are growing much faster than import prices. This is due to a situation in the eurozone where demand continues to be poor. A pleasant consequence for us is that import prices have not increased by the near five percent that the crown was weakened by as a result of our interventions, they only rose by roughly two and a half percent. This generates company profits and enables companies to invest. We are therefore making good progress.

Investment levels, however, still don’t seem all too convincing.

But they’re coming back. You must realise that it is not entirely ‘normal’ for savings to grow by roughly one-third in five years. The foreign trade surplus over the past few years has been increasingly the result of the fact that we simply haven’t invested and that investments were declining. We found ourselves in the position of a company with a perfect cash flow because of a lack of investment into research and development or new machinery. By the way, we were in a similar situation prior to 1989.

The last time we interviewed you you complained about how pessimistic and stingy the Czechs are and that pessimism damages the economy. Aren’t we now in danger of the extreme opposite?

I can’t recall any enthusiastic optimism in the Czech Republic during my lifetime. We simply display slightly different consumer behaviour. We will probably never be as indebted as the Italians are, which is nothing bad in itself. But this should not mean that in bad times we’re should aggravate the situation ourselves.

The average Czech family – which, of course, is a rather deceptive phrase – has savings that equal 11 months of consumption. That is not an eternity. We cannot just live off our savings. We need to make money to live and for that we need to be competitive.

We have already come quite close to the point where we would have been losing our competitiveness. Last year’s wage increases were the lowest since the fall of the regime and inflation is still very low.

The job market is improving, so are wages, but there is undoubtedly still plenty of room for improvement.

Miroslav Singer (46)
After graduating from the University of Economics, Prague (VŠE) in 1991, he obtained a grant to study at the University of Pittsburgh where he earned a Ph.D. From 1993 he worked as a researcher and lecturer and later on as deputy director of research at the Economics Institute of the Academy of Sciences of the Czech Republic and of the Centre for Economic Research and Graduate Education – Economics Institute of Charles University (CERGE).
From 1995 he was chief economist of Expandia Finance, in 1998 and 1999 director of Investiční společnost Expandia and in 2000 and 2001 director of Expandia Holding. In 2001 he took on the post of director of Company Services of PricewaterhouseCoopers, Czech Republic.
He has been a member of the supervisory board and the board of directors of Česká spořitelna, Expandia Finance, Expandia Banka, Expandia Holding and Chemofond and also of the industrial companies Jitona, Vigona, and Vlnap. He has given lectures on preparatory mathematical analysis, statistics, advanced econometrics and the economy of labour at CERGE and he provides a course in information economics at VŠE. In February, he became a member of the board and vice governor of the Czech National Bank. The president of the Czech Republic named him governor of the bank on 1 July 2010 for a term of office of six years. He is married with two children.
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