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

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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  1. 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

  2. CUMULATED GDP GROWTH IN THE EURO AREATotal period : 1999 – 2006 23 14 50 17 10 17 16 10 12 30 33

  3. CUMULATED HICP GROWTH IN THE EURO AREATotal period : 1999 – 2006 13 21 27 16 12 14 15 19 24 25 25

  4. CONTRIBUTIONS TO POTENTIAL GROWTHTotal period - 1999-2006 Growth rate ( in % )

  5. CONTRIBUTION TO THE INCREASE OF GDP OF DOMESTIC DEMAND EXCLUDING STOCKS Source: EU Commission, AMECO database

  6. CONTRIBUTION TO THE INCREASE OF GDPExports of goods and services including intra-EU trade Source: EU Commission, AMECO database

  7. (Total period : 1999 – 2006, % of GDP of preceding year) Source: EU Commission, AMECO database

  8. Growth rate ( in % ) REAL SHORT-TERM INTEREST RATES Average 2002 – 2005, 3 Month rate Deflator of private consumption Source: EU Commission, AMECO database

  9. Portugal Netherlands INTRA-EURO AREA REAL EFFECTIVE EXCHANGE RATES Italy Greece Spain Ireland Finland Bel / Lux France Austria Germany

  10. SPAIN MCI AND ITS CONTRIBUTORS Inverted scale

  11. Balance on current transactions with the rest of the world (in % of GDP) SPAIN Source: EU Commission, AMECO database

  12. SPAIN COMPETITIVENESS (ULC Total Economy, Index 1988 = 100) Real Effective Exchange Rates vs (rest of) EUR12

  13. CURRENT ACCOUNT BALANCE Cumulative 1999 – 2006, % of GDP Growth rate ( in % ) Current account balance Source: EU Commission, AMECO database

  14. 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

  15. 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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