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

CUMULATED GDP GROWTH IN THE EURO AREA Total period : 1999 –

CUMULATED HICP GROWTH IN THE EURO AREA Total period : 1999 –

Growth rate ( in % ) CONTRIBUTIONS TO POTENTIAL GROWTH Total period

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

CONTRIBUTION TO THE INCREASE OF GDP Exports 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 GDP GROWTH Contribution to the increase of GDP of Domestic Demand Exports of goods and services Imports of goods and services Germany Spain France Italy

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

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

SPAIN MCI AND ITS CONTRIBUTORS Inverted scale

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

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

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

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