Reviewing adjustment dynamics in EMU: from overheating to overcooling

This paper analyses how adjustment dynamics, in an environment with some degree of price and wage rigidity, may create and strengthen asymmetric developments in a monetary union. It presents a simple illustrative model of adjustment dynamics that reproduces quite nicely actual developments in the first years of EMU. The model is used to analyse adjustments to two types of shocksrelative competitiveness shifts and demand disturbances. It is shown that the interaction between real exchange rate adjustment and real interest rate developments may contribute to periods of overheating and overcooling during which output might be for a number of years either above or below potential.Furthermore, the paper looks at the circumstances in which smooth adjustment to shocks can be expected and, on the other hand, when a cycle with greater amplitude is more likely. Finally, the paper examines policy options that could improve the functioning of EMU. The analysis provides another strong argument for pressing ahead with reforms that increase flexibility in labour and product markets and further integrate the economies of the euro area.economic and monetary union, EMU, adjustment dynamics, demand disturbances, relative competitiveness shifts, overheating, overcooling, Deroose, Langedijk, Roeger

Assessing the factors of resilience of private consumption in the euro area

Understanding the behaviour of private consumption is crucial for the assessment of the economic situation in the short and the medium term. As the largest expenditure component of GDP, household spending plays a central role in the cyclical fluctuations of activity around its long-term growth path. According to consumption theory, households endeavour to smooth their spending over the life-cycle, a behaviour which should contribute to dampen the strength of cyclical downswings. However, recent developments in private consumption in the euro area have been disappointing. Since 2001, growth in private consumption has been persistently sluggish and has been much weaker than in some other EU countries or in the USA. Furthermore, after years of a declining trend, households have responded to deteriorating growth conditions with a rise in their saving rate in 2001-02. Since then their saving rate has remained broadly constant.private consumption, euro area, household spending, households, saving, Deroose

The euro after its first decade: Weathering the financial storm and enlarging the euro area

The first decade of economic and monetary union in Europe (EMU) has been a huge success. EMU has significantly benefited its member countries and accelerated the European integration process. Imbalances within EMU - differences in growth, inflation, competitiveness, current account and budget balances - have, however, increased in the last 10 years and, with their economic implications, have become more evident in the global economic crisis. The euro has served as a shield during the crisis, and arguments that the crisis would lead to a breakup of the monetary union are neither new nor convincing. But there are lessons to be learned. Policies should be better coordinated among EMU members and structural reforms accelerated, the framework for the supervision of financial markets strengthened, and external representation streamlined. The crisis has also made the euro more attractive, and most EU countries that are not yet members of EMU are expected to join during the next decade

Finances publiques et soutenabilité

: E62, E65, G28European union, financial crisis, Growth and Stability Pact, budgetary policy

The Short-Term Budgetary Implications of Structural Reforms. Evidence from a Panel of EU Countries

The EU fiscal framework has often been criticized for neglecting a possible trade-off between short-term budgetary objectives and the implementation of reforms that could improve public finances in the long term This concern was reflected in the recent reform of the Stability and Growth Pact, which acknowledges that under certain conditions structural reforms can be taken into account both in the preventive and in the corrective arm of the Pact. The aim of the paper is that of making a step forward on the understanding of the empirical relevance of the trade-off between structural reforms in EU countries. The analysis will focus on product and labour market reforms and pension reforms. The main issue investigated will be as follow: which impact do reforms have on budgets in the short term? Results show that, in the aftermath of reforms, budgets do not worsen significantly compared with cases where no reforms occur. However, when the short-term budgetary impact of reforms is evaluated controlling for the response of fiscal authorities to the cycle and debt developments via the estimation of “fiscal reaction functions”, there is evidence that product and market reforms and pension reforms are associated with a deterioration in budgets. The impact appears rather weak (a primary CAB reduced by few decimal GDP points depending on the specific reform considered) and not always statistically significant.deficits; Stability and Growth Pact; structural reforms

Constricted, lame and pro-cyclical? Fiscal policy in the euro area revisited

It is often argued that fiscal stabilisation in the euro area compares unfavourably with the USA, not least because of the perceived limitations of the stability and growth pact. This paper qualifies this perception. It examines a number of elements which are generally overlooked or not considered in the analysis of fiscal stabilisation. On top of discretionary fiscal policy, which is generally at the core of existing studies, it also takes into account the size of automatic stabilisers. Moreover, it considers the difference between policy intentions, as formulated or perceived in real time, and actual outturns, and possible reasons for the gap between the two. On the basis of such an analysis, fiscal stabilisation in the euro area appears less dire than commonly assumed. This paper also advances a number of points on how to improve the track record of fiscal policy making in the euro area, in particular on how to make is less pro-cyclical and, in the end, more sustainable.fiscal policy; fiscal stabilisation; euro area; automatic stabilisers; output gap; sustainability; sustainable development.

The Euro After Its First Decade : Weathering the Financial Storm and Enlarging the Euro Area

The first decade of economic and monetary union in Europe (EMU) has been a huge success. EMU has significantly benefited its member countries and accelerated the European integration process. Imbalances within EMUdifferences in growth, inflation, competitiveness, current account and budget balanceshave, however, increased in the last 10 years and, with their economic implications, have become more evident in the global economic crisis. The euro has served as a shield during the crisis, and arguments that the crisis would lead to a breakup of the monetary union are neither new nor convincing. But there are lessons to be learned. Policies should be better coordinated among EMU members and structural reforms accelerated, the framework for the supervision of financial markets strengthened, and external representation streamlined. The crisis has also made the euro more attractive, and most EU countries that are not yet members of EMU are expected to join during the next decade.Europe monetary union, economic integration, financial crisis, reform

The Euro After Its First Decade: Weathering the Financial Storm and Enlarging the Euro Area

The first decade of economic and monetary union in Europe (EMU) has been a huge success. EMU has significantly benefited its member countries and accelerated the European integration process. Imbalances within EMU-differences in growth, inflation, competitiveness, current account and budget balances-have, however, increased in the last 10 years and, with their economic implications, have become more evident in the global economic crisis. The euro has served as a shield during the crisis, and arguments that the crisis would lead to a breakup of the monetary union are neither new nor convincing. But there are lessons to be learned. Policies should be better coordinated among EMU members and structural reforms accelerated, the framework for the supervision of financial markets strengthened, and external representation streamlined. The crisis has also made the euro more attractive, and most EU countries that are not yet members of EMU are expected to join during the next decade.european monetary union; first decade; enlarging euro area; financial storm