May 31 - June 1, 2007 “Global adjustment and EMU” 1 Adjusting to the Euro and Catching-Up. Vitor Gaspar Bureau of European Policy Advisers (BEPA) Prepared.

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Presentation transcript:

May 31 - June 1, 2007 “Global adjustment and EMU” 1 Adjusting to the Euro and Catching-Up. Vitor Gaspar Bureau of European Policy Advisers (BEPA) Prepared for Universidade de Verão, Castelo de Vide, 28 de Agosto 2008 The views expressed are the author’s own and do not necessarily reflect those of the European Commission

May 31 – June 1, 2007 “Global adjustment and EMU” 2 1.Is the EU a convergence club? 2.Portugal and Spain Post What has happened? Why? 4. Challenges for Catching-Up. OUTLINE

May 31 – June 1, 2007 “Global adjustment and EMU” 3 1. IS THE EU A CONVERGENCE CLUB ?

May 31 – June 1, 2007 “Global adjustment and EMU” 4 1. IS THE EU A CONVERGENCE CLUB ?

May 31 – June 1, 2007 “Global adjustment and EMU” 5 2. PORTUGAL AND SPAIN

May 31 – June 1, 2007 “Global adjustment and EMU” 6 2. PORTUGAL AND SPAIN

May 31 – June 1, 2007 “Global adjustment and EMU” 7 Performance of Portugal and Spain. What has happened? Why did it Happen? 3. POST-2000 History of integration of Portugal and Spain in the EU bears many similarities. Both countries: joined Union in entered the ERM of the European Monetary System a few years later opened and liberalised their financial systems in the late 80s and early 90s. underwent a disinflation process stsarting in the early 90s and continuing until the adoption of the euro. had relatively high short and long term interest rates in the first half of the 90s. experiences a parallel easing of financing conditions. made efforts aimed at budgetary consolidation and at fulfilling the budgetary discipline criteria set out in the Maastricht Treaty. adopted the euro on 1 January, 1999 and were among the first countries to do it.

May 31 – June 1, 2007 “Global adjustment and EMU” 8 Performance of Portugal and Spain. What has happened? Why did it Happen? 3. POST-2000

May 31 – June 1, 2007 “Global adjustment and EMU” 9 Performance of Portugal and Spain. What has happened? Why did it Happen? 3. POST-2000

May 31 – June 1, 2007 “Global adjustment and EMU” 10 Performance of Portugal and Spain. What has happened? Why did it Happen? 3. POST-2000

May 31 – June 1, 2007 “Global adjustment and EMU” 11 Why? Gaspar and St. Aubyn (2007) Adjustment path is determined to a large extent, by the adjustment of the private sector, particularly the housing sector Expansionary fiscal policy, as followed by Portugal, exacerbates the initial expansion of aggregate expenditure and the subsequent slowdown. The difference is visibile relative to both the unchanged expenditure case and the Spanish case. Fiscal policy can directly explain a little (but not much) of the contrast between Portugal and Spain. Explaning the contrasting experiences of Portugal and Spain is still an open issue. Performance of Portugal and Spain. What has happened? Why did it Happen? 3. POST-2000

May 31 – June 1, 2007 “Global adjustment and EMU” 12 Analyzing structural transformation, nominal stabilization and financial stability, at the same time, is a very demanding exercise. Policy options are fraught with the burdens of judgement. Coordination of social agents on new habits, customs, and conventions is hard. 4.CHALLENGES FOR SUCCESSFUL CATCHING-UP

May 31 – June 1, 2007 “Global adjustment and EMU” 13 Difficult to predict the growth prospects Hard to estimate equilibrium exchange rates Structural Change and Rapid Transformation Stability and Sustainability 4.CHALLENGES FOR SUCCESSFUL CATCHING-UP

May 31 - June 1, 2007 “Global adjustment and EMU” 14 CATCHING UP: EXPERIENCE AND CHALLENGES Vitor Gaspar Bureau of European Policy Advisers (BEPA) Prepared for the European Economic Forum, “Global Adjustment and EMU” Brussels, 31 May – June The views expressed are the authors’ own and do not necessarily reflect those of the European Commission

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May 31 – June 1, 2007 “Global adjustment and EMU” 22 Potential Output Growth

May 31 – June 1, 2007 “Global adjustment and EMU” 23 Potential Output Growth

May 31 – June 1, 2007 “Global adjustment and EMU” 24 DECOMPOSITION OF THE VARIATION IN ECONOMIC GROWTH: