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Section 4. Adjustment within the euro area

Section 4. Adjustment within the euro area. References: The 2006 EU Economy Review: adjustment dynamics in the euro area Bruegel Policy No. 3 P. Lane, “ The Real Effects of EMU”, IIIS Discussion Paper No. 115 Ahearne, Schmitz and von Hagen (2007). Preliminaries. Real effective exchange rate

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Section 4. Adjustment within the euro area

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  1. Section 4. Adjustment within the euro area References: • The 2006 EU Economy Review: adjustment dynamics in the euro area • Bruegel Policy No. 3 • P. Lane, “The Real Effects of EMU”, IIIS Discussion Paper No. 115 • Ahearne, Schmitz and von Hagen (2007)

  2. Preliminaries • Real effective exchange rate • Real GDP growth and contributions • The “competitiveness” channel of adjustment • The “real interest rate” channel of adjustment

  3. Inflation

  4. Long-term interest rates

  5. Euro-dollar

  6. GDP growth

  7. Average GDP growth

  8. Employment rate

  9. Labour productivity

  10. Relative export performance

  11. Bruegel policy brief 3 • What are the policy implications for current members? • What are the policy implications for new EMU applicants?

  12. Policy implications for current members • Make sure divergence does not get any worse • Boost the “competitiveness channel” • Don’t do procyclical fiscal policy • Enhance prudential and regulatory policies

  13. Race to the euro

  14. Maastricht criteria • Price stability criterion: inflation does not exceed by more than 1½ percentage points that of the three best-performing EU members • The exchange rate criterion: requires the observance of the normal fluctuation margins of the exchange rate mechanism (ERM II) for at least two years without severe tensions

  15. Maastricht criteria • Long-run interest rate criterion: nominal interest rate do not exceed by more than 2 percentage points that of the three best-performing EU members • General government budget deficit must not exceed 3 percent of GDP; Gross government debt must not exceed 60 percent of GDP.

  16. GDP growth

  17. Implications for new EMU applicants • Maastricht criteria might be too strict (Balassa-Samuelson)

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