1. Exchange rate and trade dynamics Peter BEKX European Commission Gen è ve, 27 March 2012

2. Outline 1.Global imbalances pose an increasing threat to global economic stability, again 2.Empirical studies show that exchange rates do matter 3.Experiences in advanced and emerging Europe show that policy changes are needed to address imbalances 4.Conclusions

3. Global imbalances are returning

4. XR misalignments

5. Empirical analysis Macroeconomic trade equations for exports and imports Export equation: Import equation: General equilibrium model simulations

6. Euro area current account

7. Real effective exchange rates and catching-up Source: IMF IFS and World Bank GDF

8. Emerging Europe: improving export performance while facing appreciation Source: ECFIN Economic Paper no 366, March 2009

9. Conclusions Exchange rates do matter And should form part of the solution But policy changes in other fields are as much part of the solution Economic integration can support the necessary structural reforms