1. 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

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

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

7. Growth rate ( in % ) CONTRIBUTIONS TO POTENTIAL GROWTH Total period - 1999-2006

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

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

10. (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 10518-12 Spain 29389-17 France 17207-10 Italy 10122-4

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

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

16. SPAIN MCI AND ITS CONTRIBUTORS Inverted scale

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

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

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

21. 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.

22. 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