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Current challenges with EMU Economic differences, euro area enlargement and the revised Stability and Growth pact. Dr. Jürgen Kröger The 12th Dubrovnik Economic Conference Dubrovnik, June 28 – July 1 2006. CUMULATED GDP GROWTH IN THE EURO AREA Total period : 1999 – 2006. 23. 14. 50. 17.

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Current challenges with EMU Economic differences, euro area enlargement and the revised Stability and Growth pact

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Current challenges with emu economic differences euro area enlargement and the revised stability and growth pact

Current challenges with EMUEconomic differences,euro area enlargement and the revised Stability and Growth pact

Dr. Jürgen Kröger

The 12th DubrovnikEconomic Conference

Dubrovnik, June 28 – July 1 2006


Current challenges with emu economic differences euro area enlargement and the revised stability and growth pact

CUMULATED GDP GROWTH IN THE EURO AREATotal period : 1999 – 2006

23

14

50

17

10

17

16

10

12

30

33


Current challenges with emu economic differences euro area enlargement and the revised stability and growth pact

CUMULATED HICP GROWTH IN THE EURO AREATotal period : 1999 – 2006

13

21

27

16

12

14

15

19

24

25

25


Current challenges with emu economic differences euro area enlargement and the revised stability and growth pact

CONTRIBUTIONS TO POTENTIAL GROWTHTotal period - 1999-2006

Growth rate ( in % )


Current challenges with emu economic differences euro area enlargement and the revised stability and growth pact

CONTRIBUTION TO THE INCREASE OF GDP OF DOMESTIC DEMAND EXCLUDING STOCKS

Source: EU Commission, AMECO database


Contribution to the increase of gdp exports of goods and services including intra eu trade

CONTRIBUTION TO THE INCREASE OF GDPExports of goods and services including intra-EU trade

Source: EU Commission, AMECO database


Total period 1999 2006 of gdp of preceding year

(Total period : 1999 – 2006, % of GDP of preceding year)

Source: EU Commission, AMECO database


Real short term interest rates

Growth rate ( in % )

REAL SHORT-TERM INTEREST RATES

Average 2002 – 2005, 3 Month rate

Deflator of private consumption

Source: EU Commission, AMECO database


Intra euro area real effective exchange rates

Portugal

Netherlands

INTRA-EURO AREA REAL EFFECTIVE EXCHANGE RATES

Italy

Greece

Spain

Ireland

Finland

Bel / Lux

France

Austria

Germany


Current challenges with emu economic differences euro area enlargement and the revised stability and growth pact

SPAIN

MCI AND ITS CONTRIBUTORS

Inverted scale


Spain

Balance on current transactions with the rest of the world

(in % of GDP)

SPAIN

Source: EU Commission, AMECO database


Current challenges with emu economic differences euro area enlargement and the revised stability and growth pact

SPAIN COMPETITIVENESS

(ULC Total Economy, Index 1988 = 100)

Real Effective Exchange Rates vs (rest of) EUR12


Current account balance

CURRENT ACCOUNT BALANCE

Cumulative 1999 – 2006, % of GDP

Growth rate ( in % )

Current account balance

Source: EU Commission, AMECO database


Stylized facts of successful real catching up

Phase 1 : Upswing

  • Initially real expected rate of upturn has to be high

  • In order to avoid overheating monetary policy has to be used, not fiscal policy

  • Tight money in the upswing is necessary to

    • Contain inflation

    • Establish demand supply equilibrium

    • Help establishing inter temporal equilibrium

  • Appreciation reduces import costs

  • Current account deficit, covered by FDI, is a counterpart to fill the supply-demand gap.

Stylized facts of successful real catching-up


Stylized facts of successful real catching up1

Phase 2 : Consolidation

  • Higher investment increases the capital stock : Potential output rises

  • Domestic supply approaches domestic demand

  • The marginal real rate of return shrinks to the level of partner countries

  • Monetary policy is gradually easing

  • Net exports rising as exchange rate depreciates

  • Current account moving towards a sustainable level

Stylized facts of successful real catching-up


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