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Section 4. Adjustment within the
euro area
References:
1. The 2006 EU Economy Review:
adjustment dynamics in the euro area
2. Bruegel Policy No. 3
3. P. Lane, “The Real Effects of EMU”, IIIS
Discussion Paper No. 115
4. Ahearne, Schmitz and von Hagen (2007)
Preliminaries




Real effective exchange rate
Real GDP growth and contributions
The “competitiveness” channel of
adjustment
The “real interest rate” channel of
adjustment
Actua l Infla tion
E xpecta tion
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
4
1
2
3
4
1
2
3
4
1
2
3
4
1
20
20
20
20
20
20
20
20
20
20
19
19
19
19
06
06
05
04
03
03
02
01
00
00
99
98
97
97
Inflation
%
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Ap
r-
06
20
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
25
Ap
r-
Ap
r-
Ap
r-
Ap
r-
Ap
r-
Ap
r-
Ap
r-
Ap
r-
Ap
r-
Ap
r-
Ap
r-
Ap
r-
Ap
r-
Ap
r-
Ap
r-
Ap
r-
Long-term interest rates
%
30
Germany
Spain
Greece
Italy
Portugal
15
10
5
0
Euro-dollar
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
GDP growth
%
5
4
3
2
1
0
Average GDP growth
%
1992-1998
1999-2006
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Euro Area
Euro Area
(unw eighted)
United States
Japan
UK/Sw e/DK
(unw eighted)
Aus/NZ/Can
(unw eighted)
Employment rate
%
80
1992
1998
2006
75
70
65
60
55
50
45
40
Euro Area
Euro Area
(unw eighted)
US
Japan
UK/Sw e/DK
(unw eighted)
Aus/NZ/Can
(unw eighted)
Labour productivity
%
4
1992-1998
1999-2006
3
2
1
0
Euro Area
Euro Area
(unweighted)
United States
Japan
UK/Swe/DK
(unweighted)
Aus/NZ/Can
(unweighted)
Relative export performance
Cumulative change since 1999 to 2006
Change in Real Exchange Rate %
15
Belgium
10
Germany
Greece
5
Spain
France
0
-35
-25
-15
-5
Ireland
5
15
25
35
Italy
-5
Netherlands
Austria
-10
Portugal
Finland
-15
Export Growth
Excess over euro area average
Bruegel policy brief 3


What are the policy implications for
current members?
What are the policy implications for new
EMU applicants?
Policy implications for current
members




Make sure divergence does not get any
worse
Boost the “competitiveness channel”
Don’t do procyclical fiscal policy
Enhance prudential and regulatory policies
Race to the euro
Euro
Country
EU
ERM II
Official Date
Slovenia
2004
2004
2007
Cyprus
2004
2005
2008
Malta
2004
2005
2008
Slovakia
2004
2005
2009
Bulgaria
2007
n. a.
n. a.
Czech Republic
2004
2008*
2011*
Estonia
2004
2004
2010**
Hungary
2004
2011*
2014*
Latvia
2004
2005
2008**
Lithuania
2004
2004
2010***
Poland
2004
2009*
2012*
Romania
2007
n. a.
n. a.
Maastricht criteria


Price stability criterion: inflation does not exceed
by more than 1½ percentage points that of the
three best-performing EU members
The exchange rate criterion: requires the
observance of the normal fluctuation margins of
the exchange rate mechanism (ERM II) for at
least two years without severe tensions
Maastricht criteria


Long-run interest rate criterion: nominal
interest rate do not exceed by more than 2
percentage points that of the three bestperforming EU members
General government budget deficit must not
exceed 3 percent of GDP; Gross government
debt must not exceed 60 percent of GDP.
GDP growth
Implications for new EMU
applicants

Maastricht criteria might be too strict
(Balassa-Samuelson)