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Transcript
xperience to Date
Paul van den Noord
Economics Department
OECD
1
Monetary union in Europe: progress and
headwinds
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Exchange risk disappeared, financial markets
deepened, interest rates converged, competition
strengthened
The euro system weathered major stress tests (911,
the introduction of the cash euro)
But growth has been sluggish, fiscal policies fared
less well, the Stability and Growth Pact lost credibility
2
The beauty contest
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Inflation must be close to best performers
Fiscal house in order (deficit 3% of GDP, debt 60% of
GDP)
Long term interest rates must be low (close to best
inflation performers)
Two years in ERMII
But convergence stalled when the euro was created
....
3
4
“Start-up shocks” worked out favourably
for the smaller countries
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Interest rate shocks (monetary union meant sharply
lower interest rates in some countries with high
inflation histories)
Exchange rate shocks (initial misallignments, sharp
drop in the euro exchange rate in the first two years)
These shocks produced inflation, low real interest
rates and housing booms in small economies.
5
6
7
Macroeconomic management more
challenging in euro area if ...
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Countries are frequently hit by “asymmetric shocks”
Countries differ in their responses to common shocks
Market adjustment to shocks is slo and automatic
fiscal stabilsiers weak
8
monetary union will reduce asymmetries
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Greater integration of product markets means dilution
of shocks
Greater integration of financial markets and
diversification of portfolios means dilution of shocks
Risk of asymmetric policy shocks diminishes, risk of
asymmetric exchange rate shocks vanishes
9
Fiscal co-ordination is essential
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Spillovers result in high interest rates elsewhere
Automatic stabilisers are sorely needed in the face of
asymmetric shocks
Fiscal sustainability must be safeguarded
10
The longer term: integration will lead to
three possible scenarios
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Concentration (US model, mobile labour and capital
and stong agglomeration effects); implies strong
growth but regional disparity of activity (not income)
Dispersion (Mobile capital, immobile labour, flexible
real wages); implies weaker growth but even
distribution of activity and income
Polarisation (Mobile capital, immobile labour, rigid
real wages); implies strong growth but uneven
distribution of activity and income (motivates
structural funds)
11
12
13
The Irish miracle

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Impressive employment and productivity growth
Massive foreign direct investment inflows helped by
strategic location
EU membership gave US businesses easy access to
European markets
EU aid cleverly used
Wage moderation, pruden fiscal strategy
An ICT front runner
14
15
Decomposing potential output growth in
Ireland
Annual average, percentage points
Potential GDP growth
Potential labour productivity
growth
Potential labour input growth
Contributions from
Working age population
Trend participation rate
Change in structural
unemployment
Hours worked per person
19831993
5.4
4.8
19932003
7.2
4.5
0.5
2.6
1.1
0.1
-0.1
1.8
1.0
0.9
-0.7
-0.9
16
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To sum up
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Start up shocks worked out favourable for the smalls
Loss of policy sovereignity may be offset by greater
flexibility and integration
Investment opportunities open up in a credible low
inflation environment
Integration may carry social adjustment cost due to
specialisation
Benefits will be higher if policy settings are right
(strong human capital and technology, flexible
markets, fiscal prudence)
18