Current challenges with EMU
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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 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


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

23

14

50

17

10

17

16

10

12

30

33


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

13

21

27

16

12

14

15

19

24

25

25


CONTRIBUTIONS TO POTENTIAL GROWTHTotal period - 1999-2006

Growth rate ( in % )


CONTRIBUTION TO THE INCREASE OF GDP OF DOMESTIC DEMAND EXCLUDING STOCKS

Source: EU Commission, AMECO database


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)

Source: EU Commission, AMECO database


Growth rate ( in % )

REAL SHORT-TERM INTEREST RATES

Average 2002 – 2005, 3 Month rate

Deflator of private consumption

Source: EU Commission, AMECO database


Portugal

Netherlands

INTRA-EURO AREA REAL EFFECTIVE EXCHANGE RATES

Italy

Greece

Spain

Ireland

Finland

Bel / Lux

France

Austria

Germany


SPAIN

MCI AND ITS CONTRIBUTORS

Inverted scale


Balance on current transactions with the rest of the world

(in % of GDP)

SPAIN

Source: EU Commission, AMECO database


SPAIN COMPETITIVENESS

(ULC Total Economy, Index 1988 = 100)

Real Effective Exchange Rates vs (rest of) EUR12


CURRENT ACCOUNT BALANCE

Cumulative 1999 – 2006, % of GDP

Growth rate ( in % )

Current account balance

Source: EU Commission, AMECO database


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


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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