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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 50 17 14 10 17 16 10 12 30 33 CUMULATED HICP GROWTH IN THE EURO AREA Total period : 1999 – 2006 13 27 21 16 12 14 15 19 24 25 25 CONTRIBUTIONS TO POTENTIAL GROWTH Total period - 1999-2006 25 20 Growth rate ( in % ) 15 10 5 0 BE DE EL ES FR IE IT LU NL AT PT -5 Labour (persons) Total Factor Productivity Capital Accumulation FI CONTRIBUTION TO THE INCREASE OF GDP OF DOMESTIC DEMAND EXCLUDING STOCKS 8 6 DE ES FR IT 4 2 0 -2 1998 2000 2002 Source: EU Commission, AMECO database 2004 2006 CONTRIBUTION TO THE INCREASE OF GDP Exports of goods and services including intra-EU trade 4 2 DE ES FR IT 0 -2 1998 2000 2002 Source: EU Commission, AMECO database 2004 2006 (Total period : 1999 – 2006, % of GDP of preceding year) GDP GROWTH Contribution to the increase of GDP of Domestic Demand Exports of goods and services Imports of goods and services Germany 10 5 18 -12 Spain 29 38 9 -17 France 17 20 7 -10 Italy 10 12 2 -4 Source: EU Commission, AMECO database REAL SHORT-TERM INTEREST RATES 2 FI Growth rate ( in % ) FR DE 1 AT NL BE IT 0 PT IE -1 ES EL -2 Source: EU Commission, AMECO database Average 2002 – 2005, 3 Month rate Deflator of private consumption INTRA-EURO AREA REAL EFFECTIVE EXCHANGE RATES 120 Portugal 115 Netherlands 110 Italy 105 Spain Greece Ireland Bel / Lux 100 Finland France 95 Austria 90 Index 1998 = 100, ULC Total Germany 85 1998 1999 2000 2001 2002 2003 2004 2005 2006 SPAIN MCI AND ITS CONTRIBUTORS Inverted scale -2 Lo o sening -1 0 1 REER-34 RIR Tightening 2 1999 2000 M CI 2001 Source: Commission services 2002 2003 2004 2005 2006 SPAIN Balance on current transactions with the rest of the world 0 -1 -2 -3 -4 -5 -6 -7 -8 -9 (in % of GDP) 1998 1999 2000 2001 2002 2003 2004 2005 Source: EU Commission, AMECO database 2006 SPAIN COMPETITIVENESS (ULC Total Economy, Index 1988 = 100) 130 Real Effective Exchange Rates vs (rest of) EUR12 120 110 100 90 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 CURRENT ACCOUNT BALANCE 75 Cumulative 1999 – 2006, % of GDP Growth rate ( in % ) 50 FI BE Current account balance 25 DE FR 0 IE AT IT -25 ES -50 EL -75 PT Source: EU Commission, AMECO database NL 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 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