√ Oesterreichische Nationalbank Eurosystem F ocus on European Economic Integration 1/04 The OeNBs semiannual publication Focus on European Economic Integration (the successor of Focus on Transition) provides a wide range of CEEC- and SEE- related material — country analyses and data, studies on economic topics as well as descriptions of events hosted by the OeNB. Editor in chief: Peter Mooslechner, Doris Ritzberger-Gru‹nwald Scientific coordinator: Jarko Fidrmuc Editing: Rena Mu‹hldorf, Susanne Steinacher Technical production: Peter Buchegger (design) OeNB Printing Office (layout, typesetting, printing and production) Inquiries: Oesterreichische Nationalbank, Secretariat of the Governing Board and Public Relations 1090 Vienna, Otto-Wagner-Platz 3 Postal address: PO Box 61, 1011 Vienna, Austria Phone: (+43-1) 404 20-6666 Fax: (+43-1) 404 20-6698 E-mail: [email protected] Internet: www.oenb.at Orders/address management: Oesterreichische Nationalbank, Documentation Management and Communications Services 1090 Vienna, Otto-Wagner-Platz 3 Phone: (+43-1) 404 20-2345 Fax: (+43-1) 404 20-2398 E-mail: [email protected] Internet: http://www.oenb.at Imprint: Publisher and editor: Oesterreichische Nationalbank 1090 Vienna, Otto-Wagner-Platz 3 Gu‹nther Thonabauer, Secretariat of the Governing Board and Public Relations Internet: www.oenb.at Printed by: Oesterreichische Nationalbank, 1090 Vienna ' Oesterreichische Nationalbank 2004 All rights reserved. May be reproduced for noncommercial and educational purposes with appropriate credit. DVR 0031577 Contents Imprint 2 Editorial 5 Recent Economic Developments Developments in Selected Countries 10 compiled by Antje Hildebrandt Studies Nonlinear Exchange Rate Dynamics in Target Zones: A Bumpy Road Toward a Honeymoon Some Evidence from the ERM, ERM II and Selected New EU Member States 46 Jesu«s Crespo-Cuaresma, Bala«zs E«gert and Ronald MacDonald Determinants of Geographical Concentration Patterns in Central and Eastern European Countries 70 Antje Hildebrandt and Julia Wo‹rz Employment and Labor Market Flexibility in the New EU Member States 96 Thomas Gruber Distorted Incentives Fading? The Evolution of the Russian Banking Sector since Perestroika 122 Stephan Barisitz Oil Prices and the World Economy 153 Ray Barrell and Olga Pomerantz Highlights WhatÕs New on the CEEC Website Silvia Kirova 180 Selected Abstracts 182 The Transformation of the Romanian Financial and Banking Sector — Stephan Barisitz Central and Eastern Europe — The Growth Market for Austrian Banks — Peter Breyer The East Jour Fixe of the Oesterreichische Nationalbank 183 Financial Systems in CEECs — compiled by Jarko Fidrmuc The Oil Price: Prospects and Macroeconomic Implications — compiled by Jarko Fidrmuc and Antje Hildebrandt Focus 1/04 × ceec.oenb.at 3 Contents Statistical Annex Compiled by Andreas Nader, Maria Dienst and Angelika Knollmayer Gross Domestic Product 190 Industrial Production 190 Average Gross Wages 190 Unemployment Rate 191 Industrial Producer Price Index 191 Consumer Price Index 191 Trade Balance 191 Current Account Balance 192 Net Foreign Direct Investment 192 Reserve Assets excluding Gold 192 Gross External Debt 192 Central Government Balance 193 Gross General Government Debt 193 Broad Money 193 Official Key Interest Rate 194 Three-Month Interbank Rate 194 Exchange Rate 194 Notes Legend, Abbreviations and Definitions 196 Comprehensive List of Studies and Special Reports Published in Focus on Transition 199 Periodical Publications of the Oesterreichische Nationalbank 204 Addresses of the Oesterreichische Nationalbank 206 The views expressed are those of the authors and need not necessarily coincide with the views of the Oesterreichische Nationalbank. 4 ceec.oenb.at × Focus 1/04 Editorial Dear reader, The transition process that has transformed the Central and Eastern Euro- pean Countries (CEECs) from centrally planned economies into market econo- mies began some 15 years ago; from the very outset, the OeNBs Foreign Research Division has attentively tracked and analyzed its evolution. To keep the interested public informed about these activities, the Foreign Research Divi- sion has published the semiannual Focus on Transition and has hosted the annual East-West-Conference. Some of these countries have now completed transition and became new Member States of the European Union on May 1, 2004, marking a moving and historical moment for Europe. The OeNBs products thus had to be renamed: a publication by the name of Focus on Transition is no longer in tune with the times. Moreover, the title East-West Conference implied a European split which is no longer relevant. As Europe is overcoming its geographical and economic polarization, both designations had to be adapted to emphasize European unity. The Foreign Research Division used the opportunity to extend its geograph- ical research focus to Southeastern Europe, as some of the countries in this region are currently at the preparatory and negotiation stage for EU accession, and others are in the midst of transition. In addition, this economic area is of particular economic importance to Austria and thus to the OeNB: Austrian companies and above all the banking sector are doing more and more business in the region. Hand in hand with this geographical shift, the structure and the content of the Focus have also been revamped, an effort that was greatly aided by the results of a reader survey conducted a few months ago. I would like to thank all readers who participated in the survey for their effort and their suggestions. We hope that we have met your needs with this adaptation of the Focus on Transition. In the new Focus on European Economic Integration, the Recent Economic Developments section will cover more countries, for the first time including Bulgaria, Romania and Croatia. The Highlights section will inform you about the most recent changes on our CEEC Research Platform at ceec.oenb.at. In addition, abstracts of contri- butions in other OeNB publications will point readers of the Focus to CEEC- and SEE-related information. Finally, we will continue to provide brief summa- ries of East Jour Fixe meetings. The Statistical Annex has been expanded to include key economic indicators for Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Former Yugoslav Republic of Macedonia, Romania, Russia, Serbia and Montenegro, Turkey, and Ukraine. Statistics for an even broader set of indicators will be provided on the CEEC Research Platform. Studies still represent the main part of the Focus. This issue contains studies on the following topics: Nonlinear Exchange Rate Dynamics in Target Zones: A Bumpy Road Toward a Honeymoon, by Jesu«s Crespo-Cuaresma, Bala«zs E«gert and Ronald MacDonald, rounds out the special topic of the Focus on Transition 2/2003 Focus 1/04 × ceec.oenb.at 5 Editorial on exchange rates with an analysis of exchange rate movements in the exchange rate mechanism of the European Monetary System and in the exchange rate mechanism II. Determinants of Geographical Concentration Patterns in Central and Eastern European Countries, by Antje Hildebrandt and Julia Wo‹rz, investi- gates the determinants of the location of industries in Central and Eastern European countries. Using output and employment data for 13 manufacturing industries in the 1990s, they find the concentration of industrial activity to have increased in 10 CEECs in contrast to the general trend prevailing in Western Europe in the same period. Employment and Labor Market Flexibility in the New EU Member States, authored by Thomas Gruber, deals with labor market flexibility, a topic that is important also from a central bankers view. The analysis shows that on the one hand, labor cost flexibility is higher in the new Member States than in the EU in general. On the other hand, supply side flexibility, notably occupational and regional mobility, seems to be lower. However, overall flexibility seems to be small or even insignificant. The next two studies were written even before the subjects they treat had become highly topical. Distorted Incentives Fading? The Evolution of the Russian Banking Sector since Perestroika, written by Stephan Barisitz, analyzes the development of the Russian banking sector since the final years of Soviet rule. It deals with legal foundations, banking supervision, banks major sources of assets, liabilities, earnings and related changes, bank restructuring, rehabil- itation programs, the role of foreign credit institutions and FDI. Although it is a historical overview, it may be interesting for the interpretation of current developments, which appear to give some cause for concern. Overall, though, the study draws an optimistic picture for the future, based on the knowledge that authorities have undertaken impressive efforts to intensify reforms and based on the assumption that their implementation will be relatively rapid. Oil Prices and the World Economy,Ó by Ray Barrell and Olga Pomerantz, is the study behind the presentation at the East Jour Fixe meeting held in June 2004. Historically, oil prices have been associated with bouts of inflation and economic instability, and they have been rising in recent months. In this paper, oil market developments are discussed. A survey provides results of previous studies on the impacts of oil price increases. In addition, the NiGEM forecasting model is used to evaluate the impact of temporary and permanent rises in oil prices on the world economy under various policy responses, and the impact of a decline in the speed