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Competitiveness and Imbalances in the Euro Area

This presentation provides an overview of the pre-crisis trends and findings on competitiveness in the Euro Area from 1998-2007. It also explores the impact of the crisis on competitiveness and underlying imbalances, as well as the competitiveness adjustment mechanism. The policy implications of these findings are discussed.

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Competitiveness and Imbalances in the Euro Area

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  1. Intra-Euro-Area Competitiveness and Imbalances Guntram Wolff DG ECFIN, European Commission 11 June 2010 The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.

  2. Overview of presentation • Competitiveness in the euro area: pre-crisis-trends and findings (1998-2007) • Impact of the crisis on competitiveness and underlying imbalances • Impact of the crisis on the competitiveness adjustment mechanism • Policy implications

  3. Pre-crisis trends I Price competitiveness: Changes in REER (1) 1998-07 in % Substantial divergence of prices has gone hand in hand with …. (1) Based on GDP deflator

  4. Pre-crisis trends II Changes in current accounts (in % of GDP, 1998-07) (1) …significant divergence in current accounts. (1) Net lending and borrowing, except LU (balance of current transactions).

  5. Impact of the crisis I Changes in REER, 2007-2009 in % The divergence in price-based measures of competitiveness has continued (except IE), but… (1) Intra-area REER, based on GDP deflator

  6. Impact of the crisis II Current account positions, euro area surplus and deficit countries. (in % of GDP) …current account differences have narrowed. Surplus countries include DE, LU, NL, AT, FI. Deficit countries include EL, ES, PT, CY, IE, MT, SI and SK.

  7. Drivers of current-account convergence • Fall in domestic demand stronger in current-account deficit countries. • Demand substitution effects in deficit countries. • Surplus countries more exposed to global trade slump due to greater openness and product specialisation.

  8. Underlying imbalances - unemployment Changes in current account (in % of GDP) and in unemployment (in pp) Observed reductions in current account deficits have often been associated with a build-up of unemployment.

  9. Underlying imbalances – housing markets Real house prices (growth in %) Price adjustments in housing markets have been limited (except IE). *data for 2008; **data for 2007; ***data for 2005-2007

  10. Underlying imbalances – net foreign asset positions Net foreign asset positions (in % of GDP) Debtor countries have seen a continuing deterioration of net foreign asset positions. * data refer to 2001 for first bar

  11. Competitiveness adjustment Micro evidence on nominal and real wage rigidities, euro area countries Price and wage rigidities hamper necessary adjustment. (1) Dickens et al (2008) and ECB updates.

  12. Summary assessment • Crisis did not fundamentally alter competitiveness divergence. • Countries with large current-account deficits still face substantial competitiveness adjustment needs (ES, PT, and in particular EL). • Much of the observed rebalancing in surplus countries might be cyclical (DE, NL, LU, AT). • IE has significant imbalances but a proven adjustment capacity.

  13. Policy implications • Need for price adjustment in deficit countries. • Reallocation of production across sectors and regions.  Labour market reforms key for both • Sources of persistent weakness in domestic demand need to be addressed in surplus countries. • Effect of fiscal consolidation on competitiveness adjustment key. • Financial intermediation • Measures to boost growth and productivity • Overall, governance reform imperative for future of EMU

  14. Annex: External debt Gross external debt - sector decomposition (in % of GDP) 2004 2007 2008

  15. Links • European Commission, Quarterly Report on the Euro Area, 1/2010 http://ec.europa.eu/economy_finance/publications/qr_euro_area/2010/qrea1_en.htm • European Commission, Surveillance of macroeconomic imbalances and competitiveness, European Economy 1/2010. http://ec.europa.eu/economy_finance/publications/european_economy/2010/ee1_en.htm • European Commission, Reinforcing economic policy coordination, communication of 12 May 2010. http://ec.europa.eu/economy_finance/articles/euro/2010-05-12-reinforcing-economic-policy-coordination_en.htm • Eurogroup, Surveillance of intra-euro-area competitivness and imbalances, 15 March 2010 http://www.consilium.europa.eu/uedocs/NewsWord/en/ecofin/113375.doc

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