Spain and the Euro

7/27/2019 Spain and the Euro

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Spain and the euro

The first ten years

Madrid, 27 February 2009


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Edited by Juan F. Jimeno

Spain and the euroThe first ten years

Madrid, 27 February 2009

An international conference sponsored

by the Banco de Espaa


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Banco de Espaa, 2010

Calle Alcal, 48. Tel.: 91 338 50 00; 28014 Madrid

www.bde.es

Legal deposit: M. 22431-2010

Printed in Spain by Artes Grficas Coyve, S.A.

Avenida de Crdoba, 21. 28026 Madrid.

All rights reserved. The contents of this publication are protected by Spanish law,

which imposes prison sentences and/or fines, in addition to the related damages, on

whosoever should reproduce, plagiarise, distribute or publicly communicate, in its en-

tirety or in part, a literary, scientific or artistic work. Such works may not be modified,

interpreted or their performance reproduced or communicated in any medium withoutexpress permission.


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CONTENTS

Foreword ................................................................................................................. 9

Miguel Fernndez Ordez, Governor of the Banco de Espaa

Introduction: conference summary ................................................................... 11

Juan F. Jimeno, Banco de Espaa

INTRODUCTORYREMARKS:ANOVERVIEWOFTHEFIRSTDECADEOFTHEEURO

A decade of the euro ........................................................................................... 21

Miguel Fernndez Ordez, Governor of the Banco de Espaa

Spains membership of EMU: lessons for 2009 ................................................ 27

Luis ngel Rojo, Former Governor of the Banco de Espaa

EMU at 10: coming of age in a global crisis ................................................ 31

Joaqun Almunia, European Commissioner for Economicand Monetary Affairs

EMU:ACHIEVEMENTSANDCHALLENGESAHEAD

Ten years of EMU: successes and puzzles ................................................... 41

Charles Wyplosz, The Graduate Institute, Geneva, and CEPR

Comments

Daniel Gros, Centre for European Policy Studies................................................ 63Jose M. Gonzlez-Pramo, European Central Bank........................................ 73


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THEPERFORMANCEOFTHESPANISHECONOMYINEMU

The performance of the Spanish economy in EMU:

the fisrt ten years .............................................................................................. 83. Estrada, J. F. Jimeno J. L. Malo de Molina, Banco de Espaa

Comments

Jordi Gal, CREI-UPF...................................................................................... 139

EMU ANDFINANCIALMARKETS

The euro as a reserve currency for global investors ................................ 149Luis M. Viceira, Harvard Business School Ricardo Gimeno, Banco de Espaa

Comments

Rafael Repullo, CEMFI.................................................................................. 179Jaume Ventura, CREI-UPF.............................................................................. 185

CHALLENGESFORECONOMICPOLICY

Ageing and real convergence: challenges and proposals ........................ 191

ngel de la Fuente, IAE-CSICRafael Domnech, BBVA

Comments

Juan J. Dolado, Carlos III University of Madrid & CEPR.............................. 275ngel Ubide, Tudor Investment........................................................................ 281


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Foreword

Governor of the Banco de Espaa

Miguel Fernndez Ordez

On 27 February 2009 th Bco d Esp ogisd cofc dth hdig EMU: th fist t s to commmot th doptio ofth o o 1 J 1999. Th cofc ws pt of sis of vts og-isd lst th Spish Ctl Bk to clt th tth ivs ofSpis t ito EMU.

Th ittiol cofc lsd wht mmship of th sigl c-c hd mt fo th o cotis d, i pticl, fo Spi. It wsogisd od fo mi sctios: th chivmts of d chllgs hd

fo EMU; th implictios fo th Spish coom; th impct of th o oficil mkts, d th cosqcs of EMU fo th codct of fiscl policd fo stctl foms.

This volm psts th cofc pocdigs, which will cotit todstdig th mi implictios of th Mot Uio d to idtifigthos lmts tht w to pov ccil fo th smooth implmttio of commo mot polic dig th fist t s of EMU. W ckowldgth cotitio of ll th pticipts, spks d discssts who, thoghthi itvtios, hlpd to shd light o th fctioig of EMU ov thpst dcd d th implictios fo th djstmt to th w mcocoomicscio mgig i th wk of th glol ficil cisis. Fill, lt m covm spcil thks to ll th stff ivolvd i th dsig d ogistio of thcofc.


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Introduction: conference summary

Banco de Espaa

Juan F. Jimeno

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1 The first decade of the euro: an overview

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12 Spain and the euro. The first ten years

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Introduction: conference summary 13

JuanF.Jim

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2 EMU: achievements and challenges ahead

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3 The performance of the Spanish economy in EMU

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d grw, d wr w qfd y, dfyg r d frbd grw w EMU: ry d f py, bg f- p d grr wg fxby.

4 EMU and financial markets

T rd f fr w dd p f r r f rk. I , ppr by Luis Viceiraand Ricardo Gimeno fd r pyd by r rr r-ry, pyg prr dd fr r by gb r. Tr f dd d b rd. Fr, rr p r

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JuanF.Jim

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r d ry py k.Jaume Venturaqd rg p f ppr, y - bw dd by r bk d f fr rrrr d f d f d d fr wg dgg rk. I p, r pr d w dd ppr w f r rgrd w qy gf -p f dd fr rr rry. A fr pr r r-grdg rr f r w r rr d dgr f prk gr, fd ry gg d wry f frr rr

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5 Challenges for economic policy

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d g, br rk rfr d p y d g f gg, y rrd f rgrdg w rfrd b dgd, w r rd pr fg f

d y, br rk d p.Juan J. Dolado prd dg d ppr b wd prfrrd r pf py prp rfr f br rk d d- d p y. H rgd y w pf r, -pd by rf y f r p by, wd b fb -r pp f fr f q. I rgrd, r xp rg rfr f br, d d rk frgd d r: w ddr dy f br rk; w r-fr fd fr ff d rzd gr-d y pb

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Introductory remarks:

an overview of the first

decade of the euro


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Miguel Fernndez Ordez

Governor of the Banco de Espaa

A decade of the euro

Iwould like, first of a, cm y an han y bng h aya h Banc Epaa ha h h vn cmmmang h nhannvay Ecnmc an Mnay Unn (EMU), hch Span ha bna mmb nc ncpn. In paca, I han P Rj ny agng a pa n h pnng n. H a n h mg n h hg pan an cnmc an mnay pcy ac-n hch ma pb Span jn EMU. H a Gvn h Ban

m h m h Maach Tay a gn p n 2000, hn h pjcha bcm a ay an, many pp p, Span cnmy ha cc-y nga h cy a cnvgnc. A cban ay hh pnc mn h ha bn cy n h pjc havbn ncmp. Than y vy mch, ng.

F a cny hch ha n av a a h y vn n m-n hy, h ac havng bn a nng mmb EMU ma a hcmn an mna ha Spana a ng an ab ma an acvcnbn h cncn Ep an h h pn an -a czn. Th pjc Epan ngan, ynamc an pmannyn cncn, ay acng p h chang a gba cnmc -cn an an nnana nanca c nnn ppn.

M han n ya ag, b h ha bn ca, an acamc -ba ang n h hy pma mnay aa qn hh a ngn a, an h a ng mnay pcy, c b ab ch ava gp cn. Tn ya a h bh h , bh h n EMU an many h hav n jn h pjc acng h hg avan-

ag bngng a mnay nn.Tay, h ng cncy cnbn cng ncany cnm-c agn vn. Th nm avanag a ma a nan,


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22 Spain and the euro. The firstten years

n a h a m ang vay, an cmpan hch nhav hn ab h xchang a hn byng an ng n an aa h330 mn cnm a bv. A h man aby, hch cnb

gncany gh, a hav n n h mnay aa ma z,ch a h Un Sa, an gh ma h m .A h am m, h cba h cc h Eym a an n-

n. Th Epan Cna Ban ha h ga n h Ta-y, namy png nan xpcan anch, vn hgh c m,an h Eym a y acnang xpmn. Th h apvg ngh an mng n Fan vy ngh a n- h cc h achvmn, hch q nq n h pc E-pan cncn.

Th Eym ba n a mx cna an cna c-n ha pcy n n h h cmmn Epan pjc. On h nhan, h ECB ma cna cn acng h h hn an hymn czn h ha h a h cmmn cncy, b n h h,h Eym pa n a hghy cna an cpav mann. Na-na cna ban a nvv n many jn pjc, b m mnn nhch I hav xpnc a han n cn ya: h gn an anch Target 2 Securitieshch, ahgh phap y nam, an amb pjchch nab mn c ac Ep. Th pam bng

gn an b by cna ban, namy h Gmany, Fanc, Iayan Span. Any p-Epan a ga aacn m ng h a h cn ban ng gh ay-by-ay n a cmmn pjc.

Th cc, ay a ca mny, a h vgnc n mm-b cn nan an gh a ng h n ya EpanMnay Unn.

B h aa n pp h ca. Ov h n ya h vy nan an gh n h EMU cn ha bn ma cmpa hh an p mnay nn. An cmpa h h gn, hvy, ahgh mha m pn, ha bn h am mag-n a ha bv bn gn an a n h Un Sa, aan xamp a mnay nn appxmay h am z a h aaan h vaby nby qn. Nby hn ha n accn hvgnc Cana h hav a n cncy m N Y In.Mv, h mpca vnc m EMU h ha nana cnmc cychav bcm m ynchn ng cnmc an mnay ngan.

Hv, h b cgn ha gh an nan na hav

p v h p, an ha n c hm. Hv, ng ang ha h can v h pbm; n a ha h hgh h pc na h na, bca mnay


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A decade of the euro 23

MiguelFernndezOrdez

pcy cann anyhng na h nc. Th b ay n hch can cnb bng gh, jb an czn a by png na-n a bay hgh h aa. I, a I a a, a cnvnc h

nm avanag h n j n pca m, b a cnm-cay an cay ha n a ha gvnmn an nana paa-mn can cna h vn h.

An h mch mpan man b n. Th a, hcha n ay n, a ha anng ca pcy. Th Saby anGh Pac, an a h Egp v h ya manan a c-pn an cna ca pcy, hav bn na an cnn b n h . B v h nx ca, a a cnnng n h cn, n c n gnng an apng h ncay ca pc.

I a h h vgnc a pcv n h cn cncn, can gan m ngh n h mpanc mang an cay ca m. Th, n Span, many pp ha h Spanh cnmypbm vgnc n h p a a a ac ynamm n m h cn h aa, h gh pna cnqny mch han . An h . Span ha a ga g pvaan,hch ma cnmy mch m ynamc. Mv, h av gh pbc xpn n h cnmy mch . Th avanc n cmp-n n many c ma ga pna gh n Span han n h

cn n h aa. Th pbm h bngng an aa n hch mcn hav pna gh ha hn h ECB n a -ng h p 2000 2004, hm a a v ha, ahgh pby hgh h h cn, a vy Span. Th ga v b, ng nan an, cnqny, a cmpvn.

B, n a h h vgnc n by h h cn. Th ynamc cn n EMU h pna gh a ha hy bng ma hgh n a han ab hm, b-ca h m ynamc cn m pn nan han hy .An h a . Bh h y a .

Th n h a a m h ha, n h n han, h ynamc cn hav na ca m m pvaan, n-ca cmpn, ga gh h pva c n h cnmy, c. n a h pna gh a an, n h h, h cn mpn nan h, a I a a cp ag n Zaagza, nah n ca m ab nn, h na ppy ma,c. ha nca man, vng m avy n a, n

a nan.Th n-ya annvay ang pac j hn h gba macc-nmc cna ha n pn chang a a h nanca c an


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mna by hgh ncany an p cnay n. Th ha agan a ng mnay pcy a n mphang h nvn mpac chang n h gba cnmc an n h mmb cn h

aa, a h cn ac h maccnmc aban nmn pvby nana mnay pc.Onc agan, h n an agmn agan mnay nn b, agan, n

av png p ca m. B, n h nm bn- mnay nn pcy n h m c. Can anyn magnh h 16 cn h aa mgh hav ah h nnanananca m ha hy p h 16 cnc? Th ca an vy hnanca pbm h cn hav ac hy ha p h c-nc n ch an phava h b ca anyn.

Ca y mn bac h vn h ay nn, hn ahgh hc h cn n h US ma hmv n Ep,hy nay h nn vnc. In h m h maj changp by Gman ncan, h ac cnan amng h mnaypcy pn n h h Aanc mav pcav p nxchang a an a cncy c n a hg ca, an vn hch m p-p n ha b h cap h Epan Mnay Sym. Thpcan n p mpng hg c n a h cn nvv. Tha n happn h m an.

In h m hg ncany, h acn h y nn n hEpan Mnay Unn, h Epan Cna Ban, ha bn xmpay.Fy, ha manag bng n h v-mnh Eb m 5.3% 2%hgh chang n mnay pcy, p h pa ng m hc. Scny, ha ap a pcy nm qy pvn n c-nan h h cna ban, a a by h agmn pvqy n cnc h han h .

Oh Epan cnmc ah hav a ac cvy p-p h nanca ym, aga ncnng an ma h cn-m. Agan h bacgn c, cpan ancnan bn nana ah, pacay n Ep an hMnay Unn, ay m ncay han v. Rpn ba n hapn ma gn m a pmay nana ppcv, a hav bn h ca n h pa, a n a. Th an h cnc bng cnm m Mnay Unn an m E-pan Unn.

L m n by anng h agmn cny n n h p ab h

nvn mpac h c n n cnm. A I a a hn I mn-n h na bv n h pa, h pbm cann b v byh ECB, b m b a by nana gvnmn an paamn, hch


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A decade of the euro 25

MiguelFernndezOrdez

n ap h ca m I hav a . Mv, h c hb an a an ppny mba n a h ca m.

Wa pna gh, pbm cmpvn an pcvy, h

n n h apppa v gan an gvnmn nvnn,ncny xb ab an pc ma ... h a ny m hchang hch man cca h a Epan czn, an h-, h cnn g pmnny n pcy-ma agna. Bynh h m, h a h ac ha mn h av cnmcpmanc h aa cn.

Nana pc hav h a ang h capacy ach nana cn-my aj av hc an ng pcvy an h hva ac pcn. Th ng h ay n apng h ncay na-

na pc, h hgh h pna c av vn. A cna ban, a bacay c n mananng pc aby, h p-vng an apppa am an gh an nca mpymnan a. B a mn h cnmc ah an caagn h mpanc bng y aa h h gam mn-ay nn.

Cay, h annvay ha cm a an xmy cmpx m h n-nana cnmy, an h a g h aa an Span. Th cha-ng a h an ncany abn. B b nj n

cgn ha h pah an v h n ya h cmmn Epanpjc a ba bng anaby pmc ab aby mh chang.


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Luis ngel RojoFormer Governor of the Banco de Espaa

Spains membership of EMU:lessons for 2009

First of all, I wud ke expe my gude he Gven he Bncde Ep hvng nved me ke p n h cneence. Th h -wed me eun pce I cnde hme nd gven me he ppuny dde yu he h emn cmmeme he enh nnvey he cen he Eupen Ecnmc nd Mney Unn nd Spn p-cpn n h pjec.

A numeu ecnm hve equeny emnded u, he hy he Spn-

h ecnmy n he ecnd h he 20h cenuy n exmpe he dvnge penne, ben nd deegun czen ecnmc wee. In hece Spn, hee undmen mene mk h pce penng-up. The w e he 1959 Sbn Pn nd, e he nn demccy,membehp he Eupen Unn n 1986. The hd mene n h pce undubedy Spn jnng EMU n 1999, ne he gup cune be-gnnng he -ced third phase he pjec ecnmc nd mney unn.A me when he dvnge gbn e beng quened n nume-u ecnmc nd pc , nd c e beng hed eun pec-nm, Spn expeence hud eve n exmpe he pge h cn bemde by bhng pecn pcce nd penng up he ude wd.

A hee mene epeened ppune he cuny mdene ecnmy, mpve he quy ecnmc nun nd expnd pb-e gwh. In he w ce, 1959 nd 1986, Spn jned mvng n,nmey he We pd pge e he end he Secnd Wd W. Th w pce n whch he cune Eupe hd enghened he e hugh nge cmmec, ecnmc nd nnc ccd. In 1999, he me,

Spn jned he n bee hd e he n, by becmng undng mem-be he new Ecnmc nd Mney Unn nd dpng he nge Eupencuency h w ceed.


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The juney he eu w n whu dcue. A mny yu wec, he c he Eupen Mney Syem n 1992 hghghed he d-cuy pgeng wd he ecnmc negn Eupe whe e-

nng epe nn cuence. Hweve, he hn deng negn,he EMS c ed he pjec beng gven eh mmenum. In hee ccum-nce, hee w cmmmen mkng me deemned pge wdmney unn, nd bee h ghenng he nk by ceng new cuencywh nge mney pcy wud mke pbe bng he nge mkepjec cumnn.

The chenge w ce cuny ke Spn, whch hd evdeny been n wy wd e cnvegence wh Eupe, be wh me up nd dwnwng ndeque mcecnmc dcpne, whch ed hghe nn

e hn he u pne nd he pedc devun he cuency.We hd bee u he pby hng cuency nd mney pcy whme he cune wh he hghe eve wee nd by n he wd.The n ndependen nn mney pcy w eve, u m mneuve, gven he edehp Gemny execed n mney pcy, wmed. In h epec EMU epeened enbe nun un he ymmee n he wy nn mney pcy hd ended be hndedn he 1980 nd he ey 1990. Meve, Ecnmc nd Mney Unngve nn mke pweu muu mve wd negn, by em-

nng he be he ee ccun gd nd cp whn he e,hu pmng gee npency n pce-eng nd me cmpeve pd-uc mke.

A he he he negn pce hee w ce cnenu h mc-ecnmc by w n een peeque uned ecnmc gwh,nd h hee w need cee he numen gu nd bncedecnmc pce bed n e ucu em ncee he ecencynd exby he membe cune ecnme. F h en, membe-hp EMU equed cune demne he uby he ecnm-c ucue, nun nd ecnmc pcy , nd mee he -cedMch ce. Fny, w necey ecnmc gen, peccyhe nnc mke, peceve Spn beng be mee h chenge n cedbe wy.

The u wh wee n he n ne Spn ecnmc pcy n he yeedng up he cen EMU wee we he dvnge negn,dvnge m whch Spn hd beneed much n he pevu decde.Hweve, we wee we he ence h uch gncn ep mgh

ce. Cey, hugh jnng EMU w n ppuny we cud n e pu by, w n n e gng ve he Spnh ecnmy pbem, ndmny hee pbem e ununey wh u dy.


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Spains membership of EMU: lessons for 2009 29

LuisngelR

ojo

Obvuy, hee wee me bump ng he d. The pee ueed ev-e devun beween 1992 nd 1994, ceng upwd nny peue,whe he pubc nnce wee wekened by he 1993 ecen, whch ed

exemey hgh unempymen. N cud be cmed h he upp mhe nenn phee w unnmu. Spn w vewed evey gecuny whn he Eupen Unn, wh ecuen endency mbnce ppe, hu nvng ce cuny cnddcy uue membe heUnn cee cmmn cuency.

Bu he ppuny w ezed. Vu meue wee dped n nge e n u he mcecnmc mbnce. The Bnc de Ep, wh ndependence enhned n w n 1994, w mde epnbe denng ndexecung mney pcy ndependeny. I bc mn w pce by,

nd embked n egy nn ge whch mnged bng ec-nmc gen expecn wd me mdee pce ncee, whch w necey p meeng he cnvegence ce.

Thee w cndebe budgey cndn dve, nd chnge hw cen mke gd nd he evce ec peed. Thee w ke-we bu mke em, gehe wh muu pvn, whchbugh he Spnh ecnmy ucu behvu up hghe ndd exby nd ben. The gwng c upp negn heped cheve he g h hd been e.

I beeve he e w whwhe. A n exmpe cuny wh ywek dn mcecnmc dcpne, we hve mnged hw h, m he e h puung by-ened pce wud pu bke n ec-nmc gwh, he ppcn h yeded hehy dvdend n em upu,jb nd wee.

N dub, ve he cue dy en mny he peke w n-ye he chevemen EMU h mde pbe n cune ke Spn, we he undng chenge. I wud ke cncude by yng ew wdn h e pn. I ceny he ce h bengng EMU h hepedve cen pbem nd pevened he m ng. I n cncdenceh mny he cune n he EU dy h e n ye membe heeu wud hve peeed cnn he chenge he cuen nncc m whn he nge cuency. Hweve, EMU n pnce ndde n umcy ce he degn ecnmc pcy. T bn u bene necey mke n e n cen e. The gen cn-cened hve gduy dped he new mewk by bugh buby he eu nce 1999, hugh hey need dp pen behvu

me cnen wh w-nn envnmen, mehng whch c chnge bh n mke nd n he nun ngemen. We hud nge h he cnex he nge cuency c me mbu execu-


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n c pcy nd uppy-de pce, hee e he ny v-be nn uhe.

An mbu cmmmen ecnmc pcy mde pbe Spn

jn EMU n 1999. Tdy, nce gn, m cmmmen een ndpehp me cey , gven he unvube ccumnce n whch we ndueve n de m he c he cuen ecen, qucky eume pve gwh nd be be enench unbe gwh e ve he me-dum ng em.


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Thouhou h pod, uo coun h bn hldd fo h kndof nnl cuncy n h w ul fu of p c. Ap fol u nc cud by h hk n food nd ny pc, h uo

h njoyd dcd of low nd bl nflon whch n un h fod ho-clly low n .

L k h oppouny o cond h old cod of h EuopnCnl Bnk, whch cn k l p of h cd fo nchon nflonxpcon n h uo . Th ECB pofcn conduc of ony polcyquckly confd cdbly nd confdnc on h uo n ly .

Sbly lo du o EMU coconoc fwok, ncludn h fclul of h Sbly nd Gowh Pc whch, nc fo n 2005, h hlpdcu nwd con o hlhy publc fnnc. Gonn dfc

w ducd o cod 25 y low n 2007, pun Mb S n oldpoon o confon h cun downun. Th Sbly nd Gowh Pc wlllo po cucl o fud publc fnnc n h fh of h c, bu Iwll un o h u n on.

EMU h dn clo conoc non nd fuhd h coplon ofh nl k. I h d h ll of n-EU d nd FDI, cd offcn k nd oppoun fo bun. Th uo h hd p-cully kn pc on Euopn fnncl k, fon h pd n-on of nbnk ony k, bond nd quy k.

I w xpcd h oll GDP owh nd poducy pfonc wouldb uppod by h dopon of h uo. Th xpcon h no bn fullybon ou, lhouh h owh pfonc of h uo no dppon-n o would cl. An ound 2% o h l dcd, owh hbn l o h of h pou 10 y nd GDP p cp h qulld hof h Und S.

How, u h po owd ucul fo h no dncd uffcn pc nd h h pnd h uo fo fully bnfn foh poducy nf h nw chnoloy could bn. Mo oou foof lbou, poduc nd c k could lo h pnd h dnc- n owh nd nflon h h bn pn pobl on uo b, cud by low djun o conoc hock nd chn n cop-n.

On h oh hnd, EMU h n n p of job con o hl 10 y: 16 llon nw job w cd n h uo dun h uof dcd, wc h of h pou dcd nd o hn h Und S.

In u, EMU h upd nly ll h xpcon h ccopnd

lunch. Fo ho h pdcd bk up nd d fo h uo , h -un h bn dcdd. Th EMU h bouh ulpl conoc bnffo b, nd no o o hn fo Spn.


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EMU at 10: coming of age in a global crisis 33

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unia

Nowhndn h cun chlln, h couny h flouhd oh l 10 y n EMU nonn of bly nd conoc non.Thnk o ffo o h Mch C fo uo dopon, wll

nn nnonl non nd lblon of h doc fnncl c-o, nflon nd n w bouh down dclly hd of nyn EMU nd h bn kp low fo h l dcd. Nonl n , foxpl, fll fo 15% n 1990 o 3% n 1999.

Spn h njoyd pccul owh , oupcn h EU nd pdlyconn wh h of h uo cono. Spnh GDP p cpjupd fo 84% of h uo n 1999 o 95% n 2007. W hn n oundn of job con 5 llon o b pc nc 1999 h on hd of h h uo ol. Spn h lo, n ln wh h Sbly

nd Gowh Pc, ppld ound nn of publc fnnc. Thnko oou fcl conoldon, onn db w dclly ducd ndSpn w bl o po uplu of 2.2% of GDP n 2007.

Ou bckwd n fo EMU nd h Spnh xpnc wh h uo hfo y po.

2 EMU and the global financial crisis

Tody, n h d of h o fnncl nd conoc c nch Scond Wold W, EMU connu o pod bln ncho fo b. Whou h nl cuncy, w would b xpncn hhly ol-l xchn h would pc d nd nn nd n pol-cl non n h poc. EMU hldn ho ll nd o uln-bl cono h would h n pcul ck on h cunc byk. Mny uo coun, Spn ncludd, ldy wnn -n pd on h on db. Whou h cdbly nd bly hEMU bn, h pd would b n hh nd coun would b py-n n n co o fnnc h db.

So dp h doo-onn of cn cono n h p, h chn-c of b ln h uo zo. In fc, h ly ju h oppo-: n n jonn h uo h dncly ncd.

Nhl, h fnncl c h wp n fo h Alnc h uhd n n fo EMU, nd bouh wh nw of chlln fo h uo cono.

Th f of h chlln o conn h d c nd pl-

n polc fo coy. Th w don wh n bou nd coodndEuopn coy pln whch cobn d uppo o h bnknco wh ony nd fcl ulu.


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Th dcon o lunch coodnd budy ulu fo h conoy wno kn lhly. Bu fcd wh collp n nn nd conupon ndwh ll oo lf fo ony n, bc cl h budy

ulu would b h only ffc n of -n dnd.Th h f n EMU hoy h xpnony fcl polc h

bn dd ncy. How, l b cl h h ulu u b df-fnd ccodn o h fcl oo fo nou lbl o ch couny.And u b ly, d nd poy boh o x pc ndo od ln d o publc fnnc.

Th Sbly nd Gowh Pc jo whn co o kn blnc bwn ho con o fh h con, nd du o lon o fud onn bud. O h l wk Th Co-

on h bn n h Sbly nd Connc Po nwhch Mb S dl h budy pln fo h nx 5 y ndnx onh w wll dop condon nd ddln fo h cocon ofxc dfc.

In don o w wll dw on h full flxbly h w noducd n h Pcwhn w fod n 2005. Th n h w wll k no ccoun h co-noc uon, h pc of fcl ulu u nd h ddby Mb S o ny buld up of dfc nd db on owh un.I hould b cl hn h h Pc no bou ncon. I bou udn n

x y fo h c nd nchon h cdbly nd unbly of hEU publc fnnc.

Podd w wf nd connud plnon of h coy pln, hbold fnncl, ony nd fcl con hould bn o cub h fll n cynd pu floo und h downun h y. A ul, w hould dulcoy fo h Euopn conoy h nd of 2009.

3 Priorities for a challenging second decade

How, n conoc coy wll no ncly ply un o bun uul. Th lobl downun wll h ou pcuon fo ou cono,fo ou fnncl odl nd fo h y fbc of ou oc.

In ddon, h fnncl uol h concdd wh ny c nd foodpc h ypoc of bod lobl nd uch cl chnnd own ccy of h wold nul ouc: chlln h wll plyconoc co of h own.

Th uo clly con of n nw nd loh o chllnn .How hn cn w fud nd buld on EMU chn whn hwold conoc nd fnncl lndcp chnn o dclly?


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Th nw nol pon boh h nnl funconn of h uo conoy nd nhnn EMU nnonl ol.

On h nnl d, w nd o bn bydeepening fiscal surveillance. Th

now pcully un n h h c kn oll on onndfc nd db. Cdbl du budy fwok, clo n-on o pon h quly of publc fnnc nd ullnc b do nun budy unbly o h lon wll b cucl no only oncho xpcon of n odly oluon of h c, bu o pp fo lon- chlln ld o n nd cl chn.

W lo nd o broaden economic surveillance n EMU byond fcl po-lcy. Cun nd fuu chlln wll k on dnd on EMU d-jun chn h chnnl houh whch uo coun dju o

conoc hock n h bnc of n xchn ool. W ldy know hh chn h no wokd pfcly o h l dcd, hnc h buld upof coconoc blnc whn h uo , owh nd nflon d-nc nd h cuuld lo n copn uffd by o b.

H, Spn c n pon. Th owh of h Spnh conoy h bnoly ln on boon conucon co nd doc dnd. Th hllowd Spn o connu xpndn dp n dy dcln n x-nl copn. Th owh of pc nd un w co h oupcd hoof h uo , ully uln n zbl cun ccoun dfc. Wh

h on of h fnncl c, uch blnc bcon o cu ndcoun hn o undo pnful poc of djun.

Th cucl lon h h o uo b w bl o ccucun ccoun blnc dp nnn ound publc fnnc. Thfo,lhouh EMU fwok h uccfully dld bly nd fcl dc-pln, h no fully dfud h k n fo h coconoc d.

Th why h Euopn Coon now wokn on xndn h focuof ullnc byond fcl polcy, o dnfy k n fo coco-noc blnc o chn n copn nd o dd h bfo hybco nnchd.

A rigorous implementation of structural reforms wll lo o lon wyo nhnc djun n h uo nd nc copn. Rfok on n ddd uncy n lh of h cun c. A po of ducul u would undpn quck nd ound coy n h uo .Thy would p b o p h owh oppoun h wll n h fh of h c nd boo h oll lnc of EMU n fu-u hock.

In pcul, w nd o xplo h ponl of h ny nd nonn-l co n o dnc Euop copn wll fh clchn. W nd ood-quly ducon y ll, o xpndu on


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R&D, pon of h uloy nonn of SME, nd flxblyn h wy h k fo ood, c nd lbou op. Lbou k -fo hould b cfully dnd n h con nd lkly fll ou fo

ployn. Mu hould boh o nhnc uo djun whllln ocl co.

Fnlly, on h xnl d, w nd o dlop cophn internationalstrategy for the euro nd h uo conoy.

Up o now, h uo h punchd blow wh n h nnonl n.And y ou conoc z nd nnonl cuncy n w h on kn h lobl polcy kn poc. N h h bn o ln hn ody.

Th unfoldn of h fnncl c h hown u ju how ulnbl w o n onn n oh p of h wold. And h hown u h po-

nc of nnonl pnhp fo ocon nnonl chlln: onlyhouh lobl coopon wll w pd h coy of h wold conoy ndpn d of h nud fo hppnn n.

In h pc, I ncoud h h EU h kn ldn ol n buld-n lobl connu ohuln h nnonl uloy nd upoyy fo fnncl k. Th con pln lunchd h G20 Su nWhnon l Nob only flc Euop own po nd pon fon fnncl co.

Wh h follow up u n London on h 2nd Apl f ppochn, h

EU nd o nu h cn connu o b n nflunl pn n h poc.W nd o nn on nd cohn oc on h ky u h wll foh focu of Apl n.

Fo xpl, w nd o puh fo bou fo o h ul-ll o-nnc of h lobl conoy nd fnncl y, wh cnl ol fo h IMF.In h p, h IMF h bn y ffc podn xp n coco-noc uch lobl blnc nd xchn . I now nd o h wh dp nly of fnncl dlopn nd fnncl co ul-lnc.

W nd o nd cl on pocon. Th d con wh n buldn up n h lobl conoy wll only dpn dnd nd n-hb h nnonl fcl ulu ffo. Of cou, h ou own con wllpk loud hn wod nd h EU u ld by xpl n kpn ownk opn o d nd nn.

Th on h d, pn u on ou nd. Bu hy flc bod hf n lobl polcy kn php ccld by h c bu lonodu owd nw, nd o nclu ulll. If h uo o

k hful plc n h poc, w wll nd o dlop n o ycwy, coon poon nd coon polc on h ky quon n nnonlfnnc nd conoc.


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4 Conclusion

A n y old, h nl cuncy ucc. I h dld dcd of

bly nd ployn o h uo nd ody n bhouh h conoc nd fnncl c w h n n ou lf.Th uo n bl of Euopn uny, nd uch, don ju whcn b chd houh h pow of Euopn coopon nd pnhp.

W wll nd o dw on h lu dun h cun dffcul pod ndn h y o co. Th chlln h l hd fo h uo nd fo h Eu-opn conoy wll b xly dndn. Bu by coodnn con hEuopn ll, I bl w h unqu dn o dp nd pp oucono nd oc fo nw .


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EMU: achievements

and challenges ahead


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Charles Wyplosz

The Graduate Institute, Geneva, and CEPR

Ten years of EMU:successes and puzzles

1 Introduction1

When the euro was lcd i Jy 1999, m Ep cmi d p mc im dyig pjc d db i ldk (Wyplz, 1997) b y ccd b pibl dgmim lm (Bgg l., 1998), ymmic mii f my plicy (Dbc l. 1997), Sbiliy Pc (Eicg d Wyplz, 1997), mmbip

(G d Tyg, 1997) d m miig lm, c pp cc-biliy d E-id gly d pviy fmk (Bgg l., 1998).Mil, m -Ep cmi gdd my i i-fibl dmd fil. Fiv y d d, dcld dig cc (Ep Cmmii, 2004; Wyplz, 2006).

T y l, ld m ll bck. Af i y y, mkd by cm b clld G Mdi, E blly i igly bld f G Cii. A l ld cc, vicd d dily igd, fc. I ddii, qi cld b d gdlly bcm cl. F ic, cd f fi ymk i bdly cl iz d fi ll. Pi ifli dif-fil d gig divgc f c cc blc idic E i imm ymmi, Acill l f my ilg idifid by Opimm Ccy A li.

T p pp bifly vy cc f i fi y. I ff ly m f y, mily cig i , il

1 T cii fll m b piv f v li. Ty lf-vig im-ply bc i i ly i dig k d bc, i pg f im, mmi d fd y. I plgiz my c ipiig d f-igd k mid.


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cii cld b icipd, i ly m f im il iiilk ld fc. T mi p f pp i dvd ymmi d qi f bvd vli cld b-

cm ll. T l ci ccld i ci pimim. Ti diibif pc my m fi. Wy fc j y, f ll lglybc f ldid dvlpm? Wy dll difficli d d-mp-iz cc? Y, i i fi d ii i blil iqcivm f igl ccy. B, i cmic i vl, bl imc m iig xmi pli ppi.

2 Nine out of ten

Dig i fi i y f xic, Eym dlivd -il, pic biliy. Expcd ifli mly mid cd 2% mk, bigig l i . T cmm ccy l dlivd xpcd bfi f m d igi, lgly by xpdig gf dd gd (Bldi d Di Ni, 2006), ic gg m cmpiid f m ffciv d lf gi. Ficil igi pgd i m mk gm, lg il gli i pv-ig mk gm fm bfiig f cmm ccy. Ti li

f civm i impiv g dcl igl ccy igcc.

A imp mccmic i i mc cdi f l iflid, m glly, f mccmic biliy ld b ibd d my plicy. Af ll, G Mdi i ldidpm. T d, i C 2.1.1, gg p-fmc i imply i li i dvlpd ci v civd.I i b b f b ifli d cmic g. Opibl ipi i Eym, lg i my clbk, dpd my plicy f pi qliy d b c bf. Glc l. (2009) idd gg my plicy im-pvd gly v l y y, icldig i Ep. Smppig fml vidc i pvidd by Gi l. (2008), b i i di-pd by Gli d Gmbi (2009). Ti cld b civm f , d d pil iii. Alivly, i cld b miimm b xpcd i vi f xpci iiq xpim cd.

I d, ifcy pfmc f fi i y i d gd lck, gd plici b, pd b mbv d pdicd. I picl, Eym cidbl


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Ten years of EMU: successes and puzzles 43

CharlesWyplosz

flxibiliy, dflig f i plicy fmk ld ld mfl ic-iv ci digd civ pi dmid ifli-fig.Mc lik Bdbk, pi i g ii d cc-

flly did, Eym lkd igidly d cd flxibly. Of c, idicc b ciicizd. F ic, G l. (2008) pvid gg-iv vidc i my v dcd plicy ffciv. Y, i db, ilimp, i f cd d f impc.

3 Painful number ten

Md i Amic, G Cii d i 2007 pd i i fi l cllg. Mc i cdi, Eym l im cii pd. I pmply pvidd liqidiy ibk mkd, v m, i diplyd biliy dp i md f pi.H gi, Eym b l mg cl bk i kigfcfl ci i mp biliz ficil mk. I fc, cp-i f mj cl bk b impiv d pbbly lpd c idividlly k pcdd p. T dx ic i izf cl bk blc , i picl, ifi illig f cl

bk f kig i ik.T cii dlivd bigg piz igl ccy idd pvid: cmpl limii f ccy ci. T p i i bd

-5

0

5

10

15

20

25

30

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

UNITED STATES

UNITED KINGDOM

EURO AREA CHANGING COMPOSITION

SWEDEN

OECD AVE TOTAL

SOURCES: OECD, Eurostat and ECB calculations.

INFLATION RATES 1970-2008CHART 2.1.1


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pd clly mk dicimi mg ci. T iz f pd l gg mk vcig. Dici b pibiliy m ci my lv clly migidd d

flc m pic md d lyi. Ti bdg- c b dg. Udbdly, b my i, m ccild v b d i pcliv p d m ld v d b dpcid, pbbly vy dply.

Lik cl bk, Eym bl d ff pg i ifli i k f iig il pic. T, ifli ld dvy f il pic dclid d ci ddd dd p.T pid if i ifli v glly b pdicd, iby cl bk, by fc, diplyig i gp i mpii-

cl l cly vilbl. M imply, cii vld mbf cck i gizi f , ll f ic d b pvilyidifid. Amg m, bc f -id gli d pvi-i, Sbiliy d G Pc d m f id dv -i.

3.1 Regulation and supervision

Bgg l. (1998) : If vl Ep bk imlly i by

dfl y i ld, vy plibl ccc, i piblf cdiig dly k? [...] Ficil ym gli d p-vii d b m clly clizd ii Ep d d b mclly cdid i ECB dq i Fkf. T pp-pi pd f p i v f cii, ECB d b ppd c mpy ld f l .

A xplici p i ig ffd by Pd-Scipp (1999):My p i ciicim i fld. T my mid, ciicim flc i f ld-f-l- pi i lgly dd; i di-m Eym cpciy c; d, filly, i p mciic vi f cii i, d ld b, mgd i pcic. [...] Ndy di idil cmi, my cc mily i xbk. T pbbiliy md bk i lv, b illiqid, d m im lck fficiclll bi gl cl bk fdig, i, i my vi, qi mll.

Wi xcpi f Fi, mj Ep bk i igificc-bd pi b i f. B difficli fcd by Fi c d cimi db mg gvm b dpi

ic v illd dclizd ym f bk gli dpvii i idq i cii im. Of c, c cid fc mj bk i igific c-bd pi


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CharlesWyplosz

fcd c difficli i idici ym k ll. Ti i -cvicig. Svl bk ii v fild, cl idici i imm fm bk fil. Lckily, fild bk

pdmily lcl, plicy p cld b cicmcib m cy ii.T dg f xiig gm v b cgizd.2 F xm-

pl, Ppdm (2009) : Giv icig ficil igi i E-p, d pcilly ii , d bly gig mb dymic lvc f c-bd bkig gp, cl bk i gl, d ECB d Eym i picl, ll plcd m k fmc-pdil pvii. Hv, m b limid pp fi pi, ggig lil cgd ic Bgg l. (1998) : I

i iic il iil ficil cmmiy i gig f ld-id ficil gl, il jli pp pv ESCB fmclizig c pibilii EU lvl.

3.2 Stability and Growth Pact

Db b Sbiliy d G Pc ld pc ilf, .g. Eicg d Wyplz (1997). Fllig fi d f iy, pc ldy pdd c i 2003, ligly mdifid d

id i 2005. Ciicim lg fcd mi pc. Fi, i myb pcyclicl i did f cycl. T li f cicmc dfici limi ld bid iiilly iciv. T xi dmi-d i 2005 pd livly impci, i l i i cl pc mi ic i flxibiliy m ffc-iv dimlig. T 2009 ci m m, if ll, ci illb bl clim xcpil cicmc pc ill b ffcivly -pdd.

T cd ciicim i pc i dicig plicymk y fm cllciv im. I glizd cii ii, i c ml im i m lil ll, ficl plicy cdii bcm pm.Giv ig d igi, bfi f xpiy plici ply, i mc lgly, cc d p. Ti c xliy i likly f-fc lil ci i dk.

Tk g, dbck f Sbiliy d G Pc ly xpcd p mj dg. Idd, Bgg l. (1998) bvd

2 S l Pd-Scipp (2008): T Fc pvi v Fc bidii, Gmpvi v Gm bidii d - fll pic f mj EU-id bkiggp. Ti pvii i i p vii.


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bkig d ficil cii ill qi ddiil gvm b-ig pp ly cmpi d bk ffcd by v cdi cc, qick pi f fdmlly ly p f ficil ym fm f-

dmlly bkp p, dp pck ppc k v bld p,d fldig f ly p i liqidiy, b ipd ff imbcm b gi. [...] I i y imgi dclizd f fi-cl plici my ld c-dii fil.

T i v fcd mg mb f gvmidic f flly jifid. T mi pi i , lg pc i pdd d gviy f cmic ii, m gv-m xmly lc dk izbl ficl plicy xpi im my plicy ffciv i dmid by y f

my bk d by xm pdc f ll bk. Obvily, gvm id pig lg dfici ill mk i difficl cl m c cii bd. I y, cdii f ficl plicy b ffciv i c b giv dfici icly mpy. If ffciv, i ipcily Sbiliy d G Pc ld pvid. T i d m b c i piclly im, pcilly if i ld gvm dpvid bilizi plici.

3.3 Keeping the outsiders outside

T dcii pply Mic y cii mmb b ci bjc. I i dply d i li db, vid .g. i Wyplz (2006), b i i f md cmplicd by fc m ci v igidly id i xcg f x-dd pid f im. A y p ccy bd, Ei d Lvi vffcivly giv p cl f i my plici d f i ifli. Impig cdii i i d ifli , f, i d jify d y cdii v kp ci -id f my y.

Alg i fll cpil mbiliy d Sigl Ac b mk y ic-i, igidly fixd xcg gm f ci v c-gd i ciiz b i . Pdicbly i miv ficil mil, lig ccy mimc ld pcliv p, fcig Lvi pply IMF f mgcy pp d pig Ei i difficl pi-i. Ev g i cci pggd, ccy mimc i pvli my EU ci. Lik Ei, Hgy kd f IMF pp.

Byd lgl picipl, ky y b illig cid liv dmii cii b pcpi mg i-cmb y b ik by kpig Oid f .


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I ffc ik -idd, b i my b c. Ac ficil ibiliy ii EU i clly dibl, if ly b-c bk fm icmb ci v vy lg xp i

mmb ci. Ti ld ECB p p gm i mci d p. O cl g ic ficil biliy pi g xcg . Idd, C 3.3.1 m xcg v dpcid by 10% 30%. Sc mvm bd v b-il ffc liv cmpiiv f ci ii Sigl Mk.Idd, ky mivi f ig p EMS d, l , f dpig cmm ccy pcily vidc f lg xcg flci.A lg ci i dpciig cci mll, p ci i limid b ii my cg pidly.

3.4 The Eurosystem behind the curve?

Alm fm , i b bvd Eym mv mlly d by mll p Fd. T vidc i vlmig C 3.4.1 . Y, cmpi i ly migl f impl -: ii fcd by ECB i lly diff fm fcd by Fd. Idd, C 3.4.2 E cycl v dd fll

i US. Ti jifi impi f dlyd ci by ECB, l l cgi fm US Ep ld b ymic, i icc ECB cld v p-mpd cyclicl flci. Wil i

80

90

100

110

120

130

02-01-08 02-04-08 02-07-08 02-10-08 02-01-09

CZK GBP HUF PLN SEK

SOURCE: ECB.

EURO EXCHANGE RATES OF SOME OUTSIDERS(INDEX: 2.1.2008=100)

CHART 3.3.1


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lik, d f gd giv impc f US cmy f Epd ld i gl, mii i qi ymic g

v libl gid.A diff lk m vidc, i C 3.4.3 d C 3.4.4, c-fim Eym i igificly l civi Fd. I i j

-4

-2

0

2

4

Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan-

99

-

00

-

01

-

02

-

03

-

04

-

05

-

06

-

07

-

08

-

09

SOURCE: Economic Outlook, OECD.

OUTPUT GAPS(% OF GDP)

CHART 3.4.2

US

Euro area

0

1

2

3

4

5

6

7

Jan Jan Jan Jan-

99

-

00

-

01

-

02

-

03

-

04

-

05

-

06

-

07

-

08 09

SOURCES: Federal Reserve Board and ECB.

POLICY INTEREST RATESCHART 3.4.1

ECB

Fed

Jan Jan Jan Jan Jan Jan Jan-


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i lm ly mv i by 25 bi pi il lg pby Fd ifq, b vll mplid f cyclicl ig i m-d. O pibl i p ilf i l vibl i

i US, f mb f g byd cp f p pp.Ti my l p gi diffc i plicymk vi, ypi m ppd by pblic m d i vidc. Ti diffci my b cd bck pl pfc f plicymk iiil p. A pil iii, Eym m c diff pblic pii d my gvm. I ddii, vig by

-4

-3

-2

-1

0

1

2

3

4

0

1

2

3

4

5

6

7

8

Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

SOURCES: Federal Reserve Board, ECB and OECD Economic Outlook.

UNITED STATESCHART 3.4.3

Output gap

Interest rate

-4

-3

-2

-1

0

1

2

3

4

0

1

2

3

4

5

6

7

8

Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

SOURCES: Federal Reserve Board, ECB and OECD Economic Outlook.

EURO AREACHART 3.4.4

Output gap

Interest rate


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US Cg i gbly m dmdig l dilg b Ep Plim d ECB.

T c l bli vi Eym i l c.

T vil impi, ic ld b fmlly did, i i i clly ycizd i p gp il i US i kp mvig i m dici f vl m f p gp cd i pk g.

4 Ten-year old puzzles

A cmm m f pvi ci i m f gd d bd

f fi dcd d b icipd.

4.1 Three puzzles

A xpcd f f fi y i m il c c-c imblc v bcm lg, i b dici, il l mid ly blcd C 4.1.1 . F lg im, mk impd limi xl big, pm clld Fldi-Hik pdx. T i mig vidc (Blcd d Gi-

vzzi, L d Mili-Fi 2004, Cbll l., 2008), pdxi viig ficil glblizi mk i pibl b d ld i-

-20

-15

-10

-5

0

5

10

15

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

GERMANY GREECE SPAIN LUXEMBOURG EURO AREA PORTUGAL

SOURCE: Economic Outlook, OECD.

CURRENT ACCOUNT BALANCES(PERCENT OF GPD)

CHART 4.1.1


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illy lg cl. Mk lg d v b m illig k ik, il 2007 l. T ik pibiliy f db dfl d, db i i b ccy, xcg ik.

Wii i ccy ik, ic ld pdic pm ld b v m pcd l. Tfc c cc mid ppximly blcdidic m ci ld , qi pibly idicly. W cldxpc diffc i cyclicl ii mpily ld m ci b d ld, i li f b d ld vyig vim. T ikig f f C 4.1.1 i i i ly m ci b d m ld. Ev m ikig i impi imblc g i iz ic lc f . D i cllg iz fi ll qim f my plicy? W, cld fcgig, d limly bl diqilibi?

T cd pzzl cc il ifli . I idly blivd cmm my plicy ld dliv imil, if idicl ifli. C 4.1.2 gg i i ppd. N ly v ifl-i diffd qi mkdly b, i c imblc, mci v dd xibi l il ypiclly d f pic ic. Ti f b pd qi ly (H

d L, 2003; Agli d Em, 2004).T id pzzl i i C 4.1.3. G v diffd fmcy cy d, gi, i bil pic i liv p-

0

1

2

3

4

5

1999 2000 2001 2002 2003 2004 2005 2006 2007

GERMANY GREECE SPAIN ITALY PORTUGAL

SOURCE: AMECO, European Commission.

INFLATION RATESCHART 4.1.2


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ii f mmb ci. T p my ild qliz g , i i pzzl. W i pzzlig i pp imiliy i pvi c, ll m y diff-

c. F xmpl, Gmy mg l-ifli, l-g dxl pl cy. A d f pcm, Gc jydf g lgid livly ig ifli d lg c dfici. Timy lk piig b Ily ig ifli d lg dfici ( i C 4.1.1) lg i l g.

4.2 Plausible interpretations

A mb f xpli c lp xpli pzzl. T fi i fcd mb f ymmic xl dmd ck.Sic fi i y mly cicidd i pid ld g pfm-c cid i G Mdi, xl ck ld vk fm f ifig pfc f gd pdcd by m ci.3

Evidc i fv f i ipi ld v icld igific m-k l f ci v dg c cc dfici.Ti i C 4.2.1 gg. Mk v glly dclidb i vidc i vli b ymmic.

-2

0

2

4

6

8

10

1999 2000 2001 2002 2003 2004 2005 2006 2007

GERMANY IRELAND GREECE SPAIN ITALY


GROWTH RATES(REAL GDP PER CAPITA, PERCENT)

CHART 4.1.3

3 Ti ld icld if i liv icm lvl i fig ci v diff pfcf vi Ep gd d vic.


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T cd pibl ipi i mmb ci vdg ymmic dmic dmd ck dicly ffc imp.Dmd ck c igi i piv i pblic c. A pii, i

i qi likly c ymmic ck l f dcd y -pdly cc v c lg pid. Flly ig f i pibiliy ldqi imig ck mlv b C 4.2.2 pvid fi-pvidc i ipi i idd plibl.

A f pibiliy i dfici ci v ffd fm xlcmpiiv l, ic bfid pl ci. Ti ip-i ld imply cg i mk , ic i v i pvi ci. Alivly, giv l b ppximly blcd, i cld b i midcl g i qilibim lvl vvli i big cmp-d by livly l g i , i d b ppld ccp f pd limi.4 Ti ipi i cmpibl i cmbii f il imblc d f vll blc. I ipiciv m pp fm C 4.2.3, ic pl cmld c c-c blc (i pc f GDP) d cmld cg f l x-cg (md liv i lb c) v fi dcd f . Hv i i cmfbly i pvi vidc mk

.

60

80

100

120

140

1990 1994 1998 2002 2006

GREECE SPAIN ITALY PORTUGAL GERMANY


MARKET SHARES(INDEX: 1990=100)

CHART 4.2.1

SHARE OF WORLD GOODS EXPORTS

4 F c m f pd limi, Szkly, Iv P. d Mx W (2007).


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T ccli f i liv cmpiiv mg mlikly, b cmpllig, y c cc v divgd ii .5 Cmpiiv, v, i xg, d xpliy i my v ppd. I xpliig i divgc cci mdifid vi f Wl ciiq c cc f ll pzzllid bv.

-15%

-10%

-5%

0%

5%

10%

-6% -4% -2% 0% 2% 4%

CUMULATEDCURRENTACC

OUNTDEFICIT(%O

FGD)

CUMULATED BUGET BALANCE (% OF GDP)

SOURCE: Mongelli and Wyplosz (2009).

-15%

-10%

-5%

0%

5%

10%

-50% 0% 50% 100% 150% 200%

Y= -0.0837x + 0.0282R = 02556

CUMULATEDCURRENTACCOUNTDEFICIT(%O

FGD)

CUMULATED GPD GROWTH

DOMESTIC PRIVATE AND PUBLIC DEMANDCHART 4.2.2

ATDE

NL

BEFR

IT

PT

ES

GR

IE

FI

2

DEAT

NL

FR

IT

FI

IE

ESPT

GR

BE

Y= -0.7768x - 0.023

R = 0.08062

5 O pibl ipi icld pc f Bl-Sml ffc, dicd i Hfmd Rmpg (2005), d diff impc f flci f xcg , ggd byH d L (2003).


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4.3 The Walters critique

I lg b cgizd , ifid bd mk impli mil

i qlizd, l lg ll ci xpcd -mi i lg pblic db xpcd b flly vicd.Ti bvi f impli l i l iflii ig, d xpcd mi . T Wl ciiq ld cmmmy plicy i bd b m xpiy i ci ifli iig i, d m cciy i ci i iiilly l ifl-i . Ti p p pibiliy f gig diqilibi, i ifliiig i d ig d dcliig i d l.

Svl p f ig v b clly b by x-pic. T i, limii f i- xcg impli ifli divgc l i cg i liv cmpiiv.C 4.3.1 cfim ci ifli v b livly ig,d f l i v b livly l, l ci ffd cmpiiv l, i xc ppi ffc i l-ifli c-i. T c p vg l i v 1999-2008 d cm-ld cg i cmpiiv, ic i cl cmld liv ifli .6

-20%

-10%

0%

10%

20%

-40% -30% -20% -10% 0% 10% 20% 30% 40%

Y= -0.3191x - 0.005

C

UMULATEDCURRENTACCOUNT(RATIOTOGDP)

CUMULATED CHANGE IN REER (ULC)


CURRENT ACCOUNTS AND REAL EXCHANGE RATES (1999-2008)CHART 4.2.3

R = 0.74952

AT

DE

BE

FINL

FR

ES IE

IT

PTGR

6 T ffc i ily mcicl. Rliv cmpiiv i pply md i l ffcivxcg , ic cmp dmic pic pic (cvd i ) i ll dig pci, i ig diff fm cy cy.


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0.00

0.25

0.50

0.75

1.00

Jul-89 Jul-92 Jul-95 Jul-98 Jul-01 Jul-04 Jul-07

EU 12 US 14

COEFFICIENT OF VARIATION


INFLATION DIVERGENCE: THE EURO AND THE US COMPAREDCHART 4.3.2

T lik i qi ig d xpcd. Lkig liv l g dcmpiiv f cfim f g i idd cid i ll i .

Wil i p f Wl ciiq i b by fc b i pi illy mcicl i . T ciiq pdic ifli

0%

1%

1%

2%

2%

3%

3%

4%

-30% -20% -10% 0% 10% 20% 30% 40%

REALINTERESTRATES

REER ULCT


REAL INTEREST RATES AND COMPETITIVENESSCHART 4.3.1

Y=-0.0296x + 0.0235R = 0.6031

2

ES

DE ATFI

BEFR

NL

PT

IE

GR

IT


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cily divg i xpliv m, pi myi ld bcm ibl. Ti ppd. If yig, ifl-i v cvgd v l dcd. A pvily mid, il

ifli v dbly diffd fm vg b i dcid-dly vidc f gig divgc. F xmpl, C 4.3.2 pl, mf m, cffici f vii f ifli md i lvci md p f m f fi y d i 14 -gi f Uid S. T c ifli d diff mii y d ii dll .

Hv, pvily d, ifli b vy pi i , glly ig d glly l ifli ci, il i c ymic divgc i dll . Ti, i , xpli

vli f liv cmpiiv d, , c cc imblc.T x qi i y Wl ciiq ly b ply vifid.

4.4 The revised Walters critique

Wy did divgig ffc f my plicy ld divgig i-fli ? A lgicl , pvily ggd by Agli d Em(2004) d Hfm d Rmpg (2005), i pvidd by c ccymmi. Wi fixd xcg , ig ifli m ppciig

xcg , ic di cmpiiv, idd ppd. T -lig dii f c cc dc dmd. T xpiy

-12

-8

-4

0

4

8

12

0 2 4 6 8 10

Y=-1.9519x + 6.223

R = 0.5577

CURRENTACCOUNT

INFLATION1998

SOURCES: AMECO and IFS.

CURRENT ACCOUNTS AND PRE-EMU INFLATIONCHART 4.4.1

2


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ffc f l l i i ff by cciy ffc f p-pciig l xcg .

T cid y ifml f vid Wl ciiq i c-

cc blc xplid by iiil ifli. Ti ld pp vi liv diibi f iiil ifli lig bc f diibi f l i , ggd by Wl, ic limly f-fc liv c cc g divgig xl cmpiivd. C 4.4.1 pvid m pp f i ipi. T fi i ffm pfc, ic i piig giv my pibl ck likly ffc c cc. T pi i i yvil vidc, clly cgm xpl i qi fmlly ig dil.

5 Conclusions

T Wl ciiq d my i cld ll b bl im-ply bc f divg iiil ifli . D vid vi, ic ccc f pply divgig c cc blc diplyd i 4.1.1,ill imply ibiliy? T i iclly mbig . T pc fm l i ifli i clly dbilizig. T pc

fm l ppcii c dfici i l dbilzig, b likfm c dfici l dmd i clly bilizig. I i ply mpii-cl i ic ffc dmi.

O d, l i i jifid by ig pdciviy gi, c-iig l ppcii i impibl i, b ld big v-l? F pc b bl, d icigly lg c dfi-ci ld dcliig dmd d, vlly, g p f pic (dg) l d d mi bl vg f lg g cmpiiv. I c, igil i f jiig myi i ifli i xc f vg my qi lg pgy pid.Ti my m lik jifici Mic y cdii , mgmy , I v lg j l b l cpdciv.7 Ii , f l. Fi, i m lil diifli c-c bf f jiig my i. Scd, i my b cmiclly(g xpci) d pliiclly i diifl i myplicy i i d f dmic cl bk y m. Filly, lclifliy ck bd cc d f dpi f

, ic ill yy igg Wl pc.7 S .g. Wyplz (1997 d 2006).


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If, v, pc i bl, vid Wl ciiq impli i-cigly lg c cc imblc. If imblc pivly fi-cd, i.. if y flc xl big by piv c, d if

big i mly i , limi i biliy d illig f idividlg b. Ti i midfl f db b glbl imblc d biliy f US g b iilly. T imiliy c b pdf. T pc ivlv l l i , ic c ld picbbbl, icldig i ig c. T imiliy i piclly -ig f i impli cci qi igific fll i dmd, iccld ly b impd by i ficil .


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References

ANGELONI, I., d M. EHRMANN (2004). Euro Area Inflation Differentials, Wkig P-p N. 388, ECB.

BALDWIN, R., d V. DI NINO (2006). Euros and Zeros: the Common Currency Effect onTrade in New Goods, CEPR Dici Pp 5973.

BEGG, D., F. GIAVAZZI, L. SPAVENTA d CH. WYPLOSZ (1991). T Mkig fMy Ui, iMonitoring European Integration, 2, CEPR, Ld.

BEGG, D., P. DE GRAUWE, F. GIAVAZZI, H. UHLIG d CH. WYPLOSZ (1998). TECB: Sf Ay Spd?,Monitoring the European Central Bank,1, CEPR, Ld.

BLANCHARD, O., d F. GIAVAZZI (2003). Mccmic Effc f Rgli dDgli i Gd d Lb Mk, Quarterly Journal of Economics, 118 (3), A-g, pp. 879-907.

DORNBUSCH, R., C. FAVERO d F. GIAVAZZI (1997). Immdi Cllg f Ep Cl Bk, Economic Policy, 26, pp. 17-64.EICHENGREEN, B., d CH. WYPLOSZ (1997). T Sbiliy Pc: Mi Nic,

Mj Divi?, (i B. Eicg), Economic Policy, 26, pp. 65-114.EUROPEAN COMMISSION (2004). EMU Af Fiv Y, European Economy, Spcil

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GERLACH, S., A. GIOVANNINI, C. TILLE d J. VIALS (2009). A gld yf cl bkig v? T Cii d Cllg, Geneva Report on the World Econ-omy, 10, fcmig.

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Comments on Ten years of EMU:successes and puzzles

Centre for European Policy Studies

Daniel Gros

Was the EMU a ucc? Crl Wyploz do no k dircly i quionbu i ppr provid n nwr o i. In fc wofold nwr. T firnin yr of EMU wr ucc o xn Euroym dlivrd ou Crl word nil pric biliy. Tn n yr cm wi crii, n Amricn crii ccording o Crl, nd EMU dlivrd nornil lmn: liminion of currncy rik. Y ucc w only

pril. T crii pu undr polig xinc of dbilizing lmn:inrnl ymmri nd iniuionl wkn.

T min conribuion of ppr coni in inviging nd xplining ymmri. T uor ugg fllowing ylizd fc ummrydcripion of ow EMU workd:

i) Nionl currn ccoun imblnc v bn growing in iz inc lunc of uro, wil Euro Ar (EA) wol i nrly blncd.

ii) Dpi common monry policy, iniil cro-counry diffrnc ininflion, did no dipprd: m counri wi low nd ig in-flion (bu r i no vidnc of divrgnc)

iii) Cro-counry diffrnc in grow r go nd in nd wi diffr-nc in inflion nd currn ccoun imblnc.

A xplnion o puzzling vidnc, ppr propo rviid vr-ion of Wlr criiqu. In or, iniil cro-counry diffrnc, in rmof inflion, r rflcd in diffrn rl inr r, wic roug xpn-

ionry ffc on domic dmnd influnc inflion nd rfor compiiv-n nd currn ccoun. If i i nd of ory, monry union idoomd o b inbl, uggd by Wlr. Bu if currn ccoun dfici ld


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o dclin in domic dmnd, proc could bcom bl (wi cv- rl xcng pprciion i no uinbl for vr). Ti conidrionld o imid opimim in concluion.

T following commn will focu on r min pc. In conr wiWyploz viw, i will b rgud :

i) Ti crii i no md in Amric.ii) T r ymmri rul from ymmri in ouing mrk wic

driv ky vribl: domic dmnd nd crdi grow.iii) T Wlr criiqu i no uppord by d for mjor conomi.

1 Is this crisis really made in America?

T lirur on finncil crii dmonrd lmo ll mjor cri- r prcdd by combinion of wo pnomn: n incr in lvrg(or crdi xpnion) nd n unuul incr in pric.1 T wo lrmignl could b obrvd no only in US bu in Europ wll. Y, unforu-nly, y wr lrgly ignord on bo id of Alnic.

I i inruciv o look mor cloly bo finncil inbiliy indicor p-rly:

) Credit expansion. Gnrlly low ndrd of rik vrion invi finnciliniuion o incr crdi nd i ppnd on lrg cl on bo id of Alnic fding xciv lvl of lvrg. A micro lvl, lvrg i dfind db-o-quiy finncing rio; wn i rio incr cpciy of finn-cil firm o borb lo lowr nd nc i frgiliy incr. In mcroco-nomic rm, lvrg i br dfind rio of crdi o GDP. A crdi x-pnion no followd by conin cng in GDP (in nvironmn wibl pric nominl nd rl GDP mov ogr), impli mny gnv iud promi o py bu do no v ncrily xpcd rgulrc flow (wic i proporionl o GDP) o onor promi. (S Minky(2008) for clicl dcripion of lvrg cm lding ym owrdinbiliy). I i no poibl o bli n bolu rold lvl for lvr-g diffrn finncil ym cn uppor qui diffrn rio of crdi oGDP. Howvr, rpid nd prin incr in i rio coniu lrm ig-nl wic v bn idnifid rlibl prdicor of finncil crii.

1 According o Borio nd Low (2002) low inflion nvironmn incr likliood xc

dmnd prur ow up in form of crdi grow nd pric bubbl rr n in good pric infl-ion. If i i c, inflion-rging cnrl bnk wi myopic bvior could conribu o finn-

cil inbiliy. S d Gruw (2009) nd d Gruw nd Gro (2009).


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Comments on Ten years of EMU: successes and puzzles 65

DanielGros

Ti wrning ignl w crinly fling in Euro Ar bfor 2007/8.T incr in ovrll lvrg, murd by db-o-GDP rio, w brodlyimilr o on xprincd in US, only i diribuion ovr diffrn c-

or w diffrn. In fc, own in Tbl 1.1, incr in conomy-wid lvrg bn igr in EA n in US. Bwn 1999 nd nd of 2007, i rcd 100% of GDP for EA nd only 80% in US.Similrly, in bo rgion, incr in lvrg of nonfinncil corpo-r cor bn rlivly mll, bu lrgr in EA n in US.

T mo rlvn diffrnc bwn US nd EA mrg in lv-rg of ouold nd finncil cor. A on would xpc, lvrg in-crd conidrbly in US ouold cor (40% of GDP) bu vry lilin EA. By conr, finncil cor lvrg i muc igr lvl nd

incrd by muc mor in EA (bou 70% of GDP comprd o 40% in US). No only lvrg of finncil cor (nd conomy wol) in EA incrd by mor n in US, ovr im i lo xibi igr volil-iy ( Cr 1.1 nd 1.2).

Ti i ky undrlying cu of widprd r in Europnbnking ym. T concluion i u clr: crii mig v rd in US, bu i w no md only r: Europn finncil cor w vry frgilnd xpod o lo from US (nd or) .

b) Asset price bubble. Anor ron wy EA w xpod US o i

crii i Europ xprincd m rl pric bubbl US. Cr 1.3provid vidnc of i by owing voluion of prico-rn rio.

a) Economy wide b) Non-Financial corporate sector

EA US EA US

1999 3.51 2.66 0.67 0.46

2007 4.54 3.47 0.92 0.49

2008 4.73 3.46 0.97 0.49

Change 1999-2007 1.03 0.81 0.25 0.03

c) Financial sector d) Households & small business

EA US EA US

1999 1.61 0.79 0.48 0.88

2007 2.32 1.17 0.61 1.28

2008 2.42 1.17 0.61 1.24

Change 1999-2007 0.71 0.38 0.13 0.40

NOTES: Economy wide includes households, non-financial Co., financial sector and government.

Thefinancial sector in the EA is de

fined as MFIs, insurance corporations and pension funds and other

financialintermediaries including financial auxiliaries.

SOURCES: ECB Statistical data Warehouse, Euro Area Accounts & Federal Reserve Z1. March 2009.

DEBT-TO-GDP RATIOTABLE 1.1


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Ti indicor, nlogouly o pric/rning rio for ock, ould b -bl ovr longr priod. I i pprn inc mid 1990, ou pric vincrd by lmo xcly m rliv moun rcing n unprcdndlvl on bo id of Alnic. T min diffrnc bwn US nd EA i only inc 2006/7 ou pric v dclind muc mor in US.

Ovrll i brif rviw of crii indicor ugg , on vrg, EA

diplyd m ympom US in rm of lvrg nd ou pric bubbl.US ub prim lnding mig v coniud riggr, bu ovrll i criiw no md only in USA.

SOURCES: ECB Statistical data Warehouse, balance sheet & Federal Reserve Z1. March 2009.

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

2000 2001 2002 2003 2004 2005 2006 2007 2008

HOUSEHOLDS NON-FINANCIAL SECTOR

DOM. FINANCIAL SECTOR ECONOMY WIDE

US DEBT-TO-GDP RATIO, IN FIRST DIFFERENCECHART 1.1

SOURCES: ECB Statistical data Warehouse, balance sheet & Federal Reserve Z1. March 2009.

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

2000 2001 2002 2003 2004 2005 2006 2007 2008

NON FINANCOAL CORPORATIONS HOUSEHOLDS

FINANCIAL SECTOR ECONOMY

EA DEBT-TO-GDP RATIO, IN FIRST DIFFERENCECHART 1.2


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DanielGros

2 Asymmetries within the EA

Y EA vrg id imporn diffrnc cro counri, bo in rm

of lvrg nd ou pric. Cr 2.1 ow , wiin EA, normou dif-frnc xi in rm of voluion of ou pric (rliv o rn): y vbn bl in Grmny, bu incrd by ovr 80% (nd u mor n in US) in Frnc nd Spin.

T voluion of crdi grow (Cr 2.2) xibi imilr diffrnc: lvr-g ( murd by MFI db rliv o GDP) w ig, bu bl in Grmny,wr i incrd conidrbly in o counri wr ou pric incrd(mo in Frnc nd Spin).

3 Is the Walters critique confirmed by the data?

T convnionl viw of : Wlr criiqu (o wic Crl. ubcribprilly) cn b ily ummrid: n iniilly ig inflion in ny on mmbrcounry of currncy r impli lowr rl inr r wic in urn fuldomic dmnd nd nc driv inflion vn igr, u lowring rl r.Ti fd bck loop i lf mplifying nd xploiv. Crl obrv i

did no ppn, iniil (mll) inr r diffrnc in wr no mgnifidpoibly bcu of inrcion of bilizing link running from currn c-coun dfici o dmnd.

NOTE: Euro Area index is defined as the weighted average (by GDP) of Germany, France, Italy, Spain, Finland,

Ireland and Netherlands.

SOURCE: OECD, May 2009, and own computation.

0.80

0.90

1.00

1.10

1.20

1.30

1.40

II

70

II

71

II

72

II

73

II

74

II

75

II

76

II

77

II

78

II

79

II

80

II

81

II

82

II

83

II

84

II

85

II

86

II

87

II

88

II

89

II

90

II

91

II

92

II

93

II

94

II

95

II

96

II

97

II

98

II

99

II

00

II

01

II

02

II

03

II

04

II

05

II

06

II

07

II

08

EURO AREA USA

HOUSE PRICES: PRICE-TO-RENT RATIOCHART 1.3


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Hr I ll ry o rgu Wlr criiqu (in rm of inr r dif-frnil), ppli mor o ouing mrk n o ovrll conomy.

Sinc Grmny i uully kn o b bncmrk i mig b uful o

mk om pir wi comprion wi mjor EA mmbr.Frnc nd Grmny diply lmo m inflion r, bu divrgnou pric, wil Spin nd Grmny v lrg inflion diffrnil nd di-

NOTE: MFIs debt is computed as liabilities other than capital and reserves.

SOURCES: OECD, May 2009 and ECB Statistical data Warehouse, MFIs Accounts.

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

I

95

III

95

I

96

III

96

I

97

III

97

I

98

III

98

I

99

III

99

I

00

III

00

I

01

III

01

I

02

III

02

I

03

III

03

I

04

III

04

I

05

III

05

I

06

III

06

I

07

III

07

I

08

III

08

DEU

DEU

FRA

FRA

ITA

ITA

SPA

SPA

HOUSE PRICES: PRICE-TO-RENT RATIOCHART 2.1

NOTE: MFIs debt is computed as liabilities other than capital and reserves.

SOURCES: OECD, May 2009 and ECB Statistical data Warehouse, MFIs Accounts.

0.0

1.0

2.0

3.0

4.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

TOTAL MFI's DEBT (RELATIVE TO GDP)CHART 2.2

GERMANY

FRANCE

SPAIN

ITALY


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DanielGros

vrging ou pric. A comprion of Spin v. Frnc yild rvr picur:imilr ou pric bu diffrn inflion. Finlly, Spin nd Ily xibi imilrrl inr r bu r w no conrucion boom in Ily.

T l wo rul r no compibl wi Wlr criiqu. If infl-ion r i ky vribl o xplin ovrll conomic dvlopmn (in-cluding ou pric, wic driv dmnd) on ould obrv m impcof inflion on ou pric nd ouing invmn in ll counri.

In fc, rl morgg r v bn diffrn for or ron n diffr-nc in CPI inflion. Fir of ll, morgg r wr lowr in Spin bcuy wr or rm or indxd on or rm r. Ti ffc lon (-1.1%, Tbl 3.1) i lmo imporn diffrnc in CPI inflion. Y mo rlvn diffrnc bwn Grmny nd r of EA w in

bviour of ou pric: ou pric incrd by 10% mor in Frnc ndSpin (on vrg for n yr, Tbl 3.1) n in Grmny. Ti i kyron wy rl prcivd co of morgg w o muc lowr in Spinnd Frnc n in Grmny. Undr circumnc i i no urpriing morgg db xplodd in Spin ( documnd bov).

T fc ugg n lrniv viw of prin divrgnc wiin EA: rl bubbl dvlopd in om counri. During 1990 mocounri ouid Grmny d ig rl inr r, dprd conomynd dclining rl mrk. Joining EMU condiion rvrd

nd bubbl dvlopd in ouing mrk of counri. By conr, inGrmny ou pric (nd conrucion) coninud o dclin fr xc ofconrucion cud by po unificion boom nd gnrou ubidi govrnmn d for om yr lvid on cor.

T viw ou pric coniu min drivr of inr r divrgnci lo uppord by fc diffrnc in xpnion of bnking c-or corrl wll wi diffrnc in voluion of ou pric. A own r-lir in Cr 2.2, Grmny ig ring lvl in rm of lvrg ndlmo no incr ovr EMU dcd. T or EA mmbr counri ll x-

Differential w.r.t.Germany average

1999-2007

HCPI

Inflation

Mortgage

Rates

Real house prices

(Growth rate)

Residentialmortgage debt

as % of GDP

France 0.2 -0.5 10.3 17.8

Spain 1.6 -1.1 10.4 31.2

Italy 0.7 -0.2 5.8 14.3

SOURCES: ECB, OECD and European Mortgage Federation.

DIVERGENCES WITHIN EUROPE. WALTERS CRITIQUE?TABLE 3.1


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princ lrg incr. Ily low ring lvl bu big boo. Spin,wic xprincd bigg rl boom lo bigg incr inlvrg nd ovrk Grmny.

4 Concluding remarks

W do i lrniv viw ugg?Fir of ll: Wiin monry union nionl rl mrk cn (y

do no v o) go on diffrn rjcori. W o do, wn i ppn? Tgnrl prcripion i qui clr: Inrvn wn pric/conrucion civiyg ou of nd. Ti inrvnion could k vrl form:

1 Limi lon o vlu rio for morgg.2 Aucion off building prmi.3 Dynmic proviioning for bnk (wll don BdE!).

Unforunly fir wo mur wr no kn nd l on (ud by Bnco dEpn o i crdi) i no ufficin o void rong nd lingdclin in dmnd i unvoidbl if prviou conrucion boom ldo lrg ouing ovrng. Dling wi lgcy of nionl rl bub-

bl nd bu will rmin cllng for EMU for om im o com.


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DanielGros

References

BORIO C. nd PHILIP LOWE (2002) Asset prices, financial and monetary stability: explor-ing the nexus, BIS Working Ppr 114.

DE GRAUWE, PAUL (2009) Keynes savings paradox, Fishers Debt Deflation and the Bank-ing Crisis, Cnr for Europn Policy Sudi (CEPS) d Gruw nd Gro (2009).

MINSKY, HYMA (2008) Stabilizing an unstable economy, McGrw Hill.


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Jos Manuel Gonzlez-Pramo

European Central Bank

Comments on Ten years of EMU:successes and puzzles

1 Introduction

Iam very grateful to h bn inid discss h pp b Chs Wpsz his cnnc nisd n h ccsin h 10h nnis h S S Th Epn Mn Unin (EMU). Pss Wpszs pppids n insin iw h is n s h ECB, idniis sk cnic s in which siniicn css-cn hni cn b b-

sd wihin h nd sssss whh sch hni hs h pn-i ndin h n nin.

Whi iwin h is dcd h Esss n pic, PssWpsz ssss h disincin bwn h is nin hpp nd s s n pic-ks (n n h ECB) nd n in innschns sin h innci cisis sd in h s 2007. A kcnnin h h is h, whi h is n s h h bnkd b n sccsss (ciid b h G Mdin h innin- ), h s ccnic s in which h xpinc h isdcd hs bn ss b. In ddiin, h innci cisis hs xpsd sinsiin wknsss h (.. spisin nd in css-bd bnks) h h bn s sid din h s s.

M spciic, h h is cncnd b h psisnc s ndhni css cnis in k s ccnic pnc: (1) in-in dinis; (2) wh dinis; nd (3) cn ccn ibncs.Th h bs h pzzs nd s h h cn b xpind xn b h win h cs:

Th indic ipc h s-cd Ws Ciiq (bsic, h di-in n siz ds n i n);


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ss cpiinss (p s s ssind inin dinisnd h inbii d cncis cpii ppss); nd

sic dnd cs (s ccnic picis).

Th h cncds h h n- ipicins h sbii hEMU sin h psisnc wh nd inin dinis s ws cn ccn ibncs bis. Ths cs wd c hcnis h cnis in din nd, sis, ppsi dicins ( insnc, in cnis wih i hih inin, h dpninc n wh ss cpiinss cn s xn s hinsin xcssi pi dnd), kin i diic pdic whhhi n c wi b dsbiisin n.

2 The first ten years: many successes

L s skin sip qsin h h: Were the first fewyears really so easy?

Th sccss h ss h d s h is nch ind nb j chns. A nw spnin insiin ws ndd k h sk cndcin n pic in in (inii) d p

n din cnis. Th ECB nd h NCBs h Ess hd dsin nd qick ipn n ci wk cb ci in nb pic-d, pin nd chnic sks.

As nw insiin, h ECB hd n ck cd n n in hd isnd, b cns, i cd h sk qick sbishin is wn cdibii ndinin h cnidnc h pbic nd h innci ks. Bsids, h ch-cisics h w b cphnsi sdid ndsd.Th ws iid knwd hw h bhi ns nd k scs h (.. h n nsissin chnis) ih nc-in nc ind in n nin. Thins w d ws b h ck ib hnisd d sd h sc nd ncinin h nwcnic .

In pcic, h EMU wk wkd sh h is w dsnd ci hndd h sbsqn nn bh h ndh EU.1 Th insiin sin nd inscs (nb, h pinwk nd pns sss inscs) w ncin h s 1999. Th n pic s h Ess ws pid ndsd

1 S ECB (2008) nd Epn Cissin (2008) did ccn h is n s

h .


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nd cdib, hh is n pi pd inii cnsi. Th E-ss dcisin-kin pcss ws p nd nnin ih w.

Wih hindsih, w cn h h EMU wk wkd w nd pd

bs nb shcks (9/11, h nw chn bbb h s h dcd, h b in cdi pics sinc 2003, c.) nd j inncisss. Hw, w shd c h h ws inii d scepticismn pinn cniss (.. Min Fdsin, 1997) b h pspcs h . F insnc, i ws n d h h cndiins n OpiCnc A --Mnd w n in pc nd h nin bsinss ccsw n sicin snchnisd cnis s hi bii s n- pic s sbiisin .

Ain wih hindsih, w nw knw h h indcin h hd b-

nin cs in n ccnic s. In pic, inin s indn w nd i sb, whi n- inin xpcin ww nchd. Bsids, ins s cnd h s h bs p-EMUps. Finnci inin s dncd, hh din pcs cssh is ks. Td inin dpnd, wih n xpnsin in in- d in ds, b s pid wh in d in sics. A h s i,FDI nd M&As siniicn incsd h s n s. Rkb, h ws b chi his, whi s ccdin n xpndinnb cnis nd incsin is pnnss wd h s h wd.

3 and some mixed developments

O cs, h s s pic, in h ids s tructural reformsndfiscal consolidation in which pss ws n ni sisc hps dcd.

B h indcin h , n cns wndd whhnin h EMU wd nc hind sc s nd h ibi-sin pdc nd c ks. Th w h i w ppsin iws:n h n hnd, i ws d h n nin wd hind -scs b pcdin nin hiis sin n sis ii- h sh-n pin h is pic sscid wih djsns s;n h h hnd, i ws piisic d h h ss ninn picis nd h nin xchn chnis wd in cinc h nd sc s.

A n s, s piic idnc sss h, n , h inn-

si structural reforms 1994-2004 ws in h cnishn in h s h OECD (D nd Esk, 2006). Hw, h ssss-n is n ni psii. Th d sss h n cnis nd in


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s h s d: s EMU cnis w n h p s,whi s b EMU cnis w iid. In ddiin, -s s h n dcind h nch h .

Anh in which h ssssn h is s is i ixd -ds isc pic. B h nch h , h ws ch discssin hw h cbinin cnisd n pic wih dcnisd iscpic hh cdind wihin h insiin wk pidd b hSbii nd Gwh Pc wd wk. Wih hindsih, h isc psi-in h siniicn ipd in h w s pcdin h s h innci cisis. On h h hnd, s cnis id chind inin snd isc psiins nd dc nn db is ssinb s. This ns h h nd h cn cisis in i-

wk isc psiin nd i iid n c hshp cnic cncin.

4 The puzzles

As nind b, h h ns h h is dcd h wschcisd b h psisnc inin nd wh dinis css cn-is s w s win nin cn ccn ibncs.

Accdin h h, n h in cs bhind sch dpns ish d n siz ds n i n (bd h Ws ciiq An Ws, wh sd i xnsi cpin in h 1980s ins UKbship h Exchn R Mchnis). As is w knwn, his ciiqpss h cnis inqishin h bii indpndn s ninins s nd p wih h inpppi ins s hicnis, hb ccin ibncs nd disqiibi h wi pdsbiisin h nin cnis nd i ndin h nss.

A cci pdicin h ciiq is h in cnis wih cpihih s inin, ins s wi b w, which in n sish cn nd s inin, sin in in s-incin chnish ks h cn n dnic nsb ph. I his dscipin h dsbiisin c h sin pic is cc, h shd b incsindinc ins s wihin h n nin.

Hw, s Tb 4.1 shws h i s cnis, h is nidnc h h indcin h hs d incsin din

ins s. T h cn, h dispsin bh h x-ps sh- nd n- ins s c dcind in h scnd h h dcd. Enwhn w cnsid x-n s (i.. dd b xpcd insd isd in-


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in), h dispsin h s did n incs i. In c, i indsb n- s, whi sih dcinin sh- s. Ths,

h d n ins s ds n spp h pdicin h sin n- pic hs d ps cs s h i cnis cnsid-d.

A h s i, inin dinis ns in dincs in xchn s nd cnib cpiinss sss nd cn ccn di-cis. T is his pin, Ch 4.1 ps h cn ccn dicis nd hnisd cpiinss indic (cncp sii ci x-chn ). Th xpinc h s n s sss h, in s cnis, h is c inship bwn dpns in cpiinssnd in cn ccn bncs.

Cpiinss sss ik b hih in cnis chcisd bsiniicn icins. In pic, h w ps iidiis h nd-in h ncinin h cpiinss chnn: (1) w nd pic iidi-is; nd (2) bis css-bd d (nb, sics). W nd piciidiis hind h djsn i pics shcks nd chns in cciccndiins. Bis d ii h spns xn dnd nd spp i pic chns nd s ip h cs/pic dinis ndd

in d cs p ps.O, iidiis cn p cs h cnis, spci is cnic dwnn, whn icins d nd n pn djsn

Short-term real interest rates (a) Long-term real interest rates (b)

Ex-ante Ex-post Ex-ante Ex-post

Nominal interest rates

deflated by:

Inflation

forecasts for

the following

year

Current HICP

annual

inflation rate

Long-term

(6 to 10

years ahead)

inflation

forecasts

Current HICP

annual

inflation rate

STANDARD DEVIATION

1999-July 2004 unweighted 0.53 0.80 0.26 0.62

weighted (c) 0.45 0.70 0.23 0.57

1999-2008 unweighted 0.46 0.61 0.26 0.48

weighted (c) 0.40 0.54 0.23 0.45

DISPERSION OF REAL INTEREST RATES IN THE FIVE LARGEST EURO AREA

COUNTRIES

TABLE 4.1

SOURCES: BIS, ECB, ECB calculations, Eurostat, Consensus Economics.

a. 3-month money market interest rates (EURIBOR for the period 1999-2004). All euro area countries excluding

Luxembourg.

b. Figures refer to the dispersion between Germany, France, Italy, Spain and the Netherlands.

c. Based on 2002 GDP weights at PPP exchange rates.


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in nin ws nd pics nd pis cpiinss sss, i

din sc pn nd p sss.

5 The euro area and the financial crisis

A i s innci cisis nd cnic cncin, h hspn j sbii, spci h s cnis nd hs wihdiin ss sn cncis. Th shid pd h s - Lhns d in Spb 2008, whn w winssd s d-iin cndiins in innin innci ks nd bnkin scs.

Th innci cisis hs sinc spid h cnis css hwd, s cin h cnis wh cnic cii is cn-cin, whi npn iss. Ains his bcknd, i is n nc-n h s nsic ks b h d d ds in which cn-is cd d hi w his cssin. B wd cpiidin b sib in h cn cndiins?

Th cs ssin h his wd n b h cs. Indd, c-

nic h s s h h pn cnis , h ss ci ni- nin dins . Ains h bcknd incsd d ndinnci inin, i is ii xpc h n ipc dins

-25

-20

-15

-10

-5

0

5

10

15

-30

-25

-20

-15

-10

-5

0

5

10

DE AT FI BE FR NL IT PT LU ES IE GR

NOTE: 2000 in Greece as an initial period for CA and HCI, negative value implies a loss in

competitiveness. HCI calculated on the basis of weighted averages of bilateral exchange rates

vis--vis the other 15 euro area countries and the group of 21 trading partners and are

deflated by unit labour costs. Weights are based on bilateral data on trade in manufactured

goods for the periods 1995-1997 and 1999-2001.

SOURCES: European Commission and ECB calculations.-1997 and 1999-2001.

CURRENT ACCOUNT BALANCES AND COMPETITIVENESSCHART 4.1

CA AS A % OF GDP 1998

CA AS A % OF GDP 2007

CHANGE IN HCI (ULC-BASED),1999Q1-2007Q4 (SIGN CHANGED),

(Right-hand s cale)


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wd b hs ds ch dcd. In ddiin, in h b n hcisis, i cnis nd in cpii dins, his wd n bin bnis, b sip s c wds incsin s nin xchn

s nd hih inin, i din wk n- wh. Bcns, spci is cisis, i is cci ps nin sbii ndinin n- inin xpcins nd ins s w nd sb -s. In ddiin, i is pic ipn k s h sc s psd nd isc ssinbii is psd in d ddss n-chns.

6 Concluding remarks

Whi i is h cnic nd innci scs k i , i isc h h cs h psii. Ths n s h shwnh h ndins EMU w snd nd h hih d cniccnnc hd bn chid b hs cnis h dpd h .

Th cbinin cnisd n pic wih dcnisd hhcdind isc nd sc picis hs wkd in bd siscshin. Th n pic s h ECB is nw w ndsd nd hsind cdibii. In pic, in s cnis inin hs bn si-

niicn bw h s xpincd in h dcds pcdin h nch hcnc nd s pn ss i, whi n- inin xpcins hind nchd s cnsisn wih h ECBs dinin pic sbii.

F n cnis, his is siniicn bni nd wd n hbn pssib sid h Ess. Th bnis bnin ndcdib n nin h bc h idn din h psnb cisis. A h s i, h hs pn cpb hndin n-n sccss.

In ddiin, h ps dcd h Ess hs ci cnibd pin innci inin nd hs bn ci in snhnin h in-siin nns dsind ps innci sbii.

Ths sccsss nwihsndin, n chns in. K n his h nd ps h nd dp s pdc nd b ks. In d inin pic sbii, i is cci cnin nc-in spnsib bhi sci pns, whi psin h n-ssinbii pbic inncs. This is s ncss ddss h chn-s isin ds dphic dpns. Th innci cisis hs s

shwn h i is n snhn nd spis wks bhin Ep nd h innin in d cc k nd is h w h h cn cisis.


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References

DUVAL, R., nd J. ELMESKOV (2006). The Effects of EMU on Structural Reforms in Labourand Product Markets, ECB Wkin Pp N. 596.

EUROPEAN CENTRAL BANK (2008). Mnh Bin 10h Annis h ECB,ECB Monthly Bulletin, Spci iss, M.

EUROPEAN COMMISSION (2008). EMU@10 Sccsss nd chns n s Epn Mn Unin, European Economy, 2/2008.

FELDSTEIN, M. (1997). EMU nd innin cnic, Foreign Affairs, Nb/D-cb.


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The performance

of the Spanish economy

in EMU


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Banco de Espaa

. Estrada, J. F. Jimeno and J. L. Malo de Molina

The perfomance of the Spanisheconomy in EMU: the first ten years

1 Introduction

The opening decade of t 21st tury wll rbbly uy tbll t stry t Eur my. T rly yrs t wt t tl yrs t ulmt t rss m mtry trt, llw t lu t mm mtry ly

t sl urry 1999. A ts ls yrs r wtss t trtlm rss mmtus s tsty.

T Ss my s m ts tt v mst bt rm Em Mtry U (EMU) mmbrs. But t l utur w t btsmtrls s rss justmt mrkly vrs stt

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Spain and the Euro