Adjusting to the Euro and Catching-Up

May 31 - June 1, May 31 - June 1, 20072007

““Global adjustment and EMU”Global adjustment and EMU” 11

Adjusting to the Euro and Catching-Up.

Vitor GasparVitor Gaspar

Bureau of European Policy Advisers Bureau of European Policy Advisers (BEPA)(BEPA)

Prepared for Universidade de VerPrepared for Universidade de Verão, ão, Castelo de Vide, 28 de Agosto 2008Castelo de Vide, 28 de Agosto 2008The views expressed are the author’s own and do not necessarily reflect those of the European Commission

May 31 – June 1, May 31 – June 1, 20072007


1.1. Is the EU a convergence club?Is the EU a convergence club?

2.2. Portugal and Spain 1960-2000Portugal and Spain 1960-2000

3.3. Post-2000. What has Post-2000. What has happened? Why?happened? Why?

4. 4. Challenges for Challenges for Catching-Up.Catching-Up.

OUTLINE

May 31 – June 1, May 31 – June 1, 20072007


1. IS THE EU A CONVERGENCE CLUB ?

GDP per capita in PPS

0

20

40

60

80

100

120

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

PP

S

EU15 EU10

May 31 – June 1, May 31 – June 1, 20072007


1. IS THE EU A CONVERGENCE CLUB ?

Real GDP Growth (% per year)

-10

-8

-6

-4

-2

0

2

4

6

8

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

pe

rce

nta

ge

po

ints

EU15 EU10

Current Account Balance (% GDP)

-10

-8

-6

-4

-2

0

2

4

6

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

pe

rce

nta

ge

po

ints

EU15 EU10

Net Foreign Assets (% of GDP)

-40

-30

-20

-10

0

1990 1992 1994 1996 1998 2000 2002 2004

% G

DP

EU15 EU10

Relative Consumer Prices

2030405060708090

100110

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Per

cen

tag

e P

oin

ts

EU15 EU10

May 31 – June 1, May 31 – June 1, 20072007


2. PORTUGAL AND SPAIN

1960-2000


40,0

50,0

60,0

70,0

80,0

90,0

100,0

110,0

120,0

1960 1965 1970 1975 1980 1985 1990 1995 2000

PP

S

EU15 Portugal Spain

Annual Real GDP Growth

-6

-4

-2

0

2

4

6

8

10

12

14

1961 1966 1971 1976 1981 1986 1991 1996

Perc

en

tag

e P

oin

ts

EU15 Portugal Spain

May 31 – June 1, May 31 – June 1, 20072007


2. PORTUGAL AND SPAIN

1960-2000

May 31 – June 1, May 31 – June 1, 20072007


Performance of Portugal and Spain. What has happened? Why did it Happen?

3. POST-2000

History of integration of Portugal and Spain in the EU bears many similarities. Both countries:

joined Union in 1986. entered the ERM of the European Monetary System a few

years later opened and liberalised their financial systems in the late

80s and early 90s. underwent a disinflation process stsarting in the early 90s

and continuing until the adoption of the euro. had relatively high short and long term interest rates in the

first half of the 90s. experiences a parallel easing of financing conditions. made efforts aimed at budgetary consolidation and at

fulfilling the budgetary discipline criteria set out in the Maastricht Treaty.

adopted the euro on 1 January, 1999 and were among the first countries to do it.

May 31 – June 1, May 31 – June 1, 20072007



3. POST-2000

3 Month Interbank Rate

0

2

4

6

8

10

12

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Pe

rce

nta

ge

Po

ints

Spain Portugal Germany

May 31 – June 1, May 31 – June 1, 20072007



3. POST-2000

GDP per capita (PPS; EU15=100)

20

40

60

80

100

120

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

PP

S

EU15 Portugal Spain

May 31 – June 1, May 31 – June 1, 20072007



3. POST-2000

GDP growth per annum

-8

-4

0

4

8

12

16

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

% G

DP

EU15 Portugal Spain

May 31 – June 1, May 31 – June 1, 20072007


Why?Why?Gaspar and St. Aubyn (2007)Gaspar and St. Aubyn (2007) Adjustment path is determined to a large extent,

by the adjustment of the private sector, particularly the housing sector

Expansionary fiscal policy, as followed by Portugal, exacerbates the initial expansion of aggregate expenditure and the subsequent slowdown. The difference is visibile relative to both the unchanged expenditure case and the Spanish case.

Fiscal policy can directly explain a little (but not much) of the contrast between Portugal and Spain.

Explaning the contrasting experiences of Portugal and Spain is still an open issue.


3. POST-2000

May 31 – June 1, May 31 – June 1, 20072007


Analyzing structural transformation, nominal stabilization and financial stability, at the same time, is a very demanding exercise.Policy options are fraught with the burdens of judgement.Coordination of social agents on new habits, customs, and conventions is hard.

4.CHALLENGES FOR SUCCESSFUL CATCHING-UP

May 31 – June 1, May 31 – June 1, 20072007


Difficult to predict the growth prospects Hard to estimate equilibrium exchange rates Structural Change and Rapid Transformation Stability and Sustainability

4.CHALLENGES FOR SUCCESSFUL CATCHING-UP

May 31 - June 1, May 31 - June 1, 20072007


CATCHING UP: EXPERIENCE AND CHALLENGES

Vitor GasparVitor GasparBureau of European Policy Advisers (BEPA)Bureau of European Policy Advisers (BEPA)

Prepared for the European Economic Prepared for the European Economic Forum,Forum,“Global Adjustment and EMU”“Global Adjustment and EMU”Brussels, 31 May – June 1 2007Brussels, 31 May – June 1 2007The views expressed are the authors’ own and do not necessarily reflect those of the European Commission

May 31 – June 1, May 31 – June 1, 20072007



40

50

60

70

80

90

100

110

120

1960 1965 1970 1975 1980 1985 1990 1995 2000

PP

S

EU15 Portugal Spain

May 31 – June 1, May 31 – June 1, 20072007


Real GDP growth (% per year)

-6

-4

-2

0

2

4

6

8

10

12

14

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

% G

DP

EU15 Portugal Spain

May 31 – June 1, May 31 – June 1, 20072007


Real GDP Growth (% per year)

-10

-8

-6

-4

-2

0

2

4

6

8

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

pe

rce

nta

ge

po

ints

EU15 EU10

May 31 – June 1, May 31 – June 1, 20072007


Current Account Balance (% GDP)

-10

-8

-6

-4

-2

0

2

4

6

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

pe

rce

nta

ge

po

ints

EU15 EU10

May 31 – June 1, May 31 – June 1, 20072007


Net Foreign Assets (% of GDP)

-40

-30

-20

-10

0

1990 1992 1994 1996 1998 2000 2002 2004

% G

DP

EU15 EU10

May 31 – June 1, May 31 – June 1, 20072007


Relative Consumer Prices

20

30

40

50

60

70

80

90

100

110

1995 1997 1999 2001 2003 2005

Pe

rce

nta

ge

Po

ints

EU15 EU10

May 31 – June 1, May 31 – June 1, 20072007


Chart 9. Aggregate domestic demand (% of GDP)

90

94

98

102

106

-2 0 2 4 6 8 10 12 14 16 18 20

% o

f GD

P

Spanish policy

Portuguese policyinvariant policy

Chart 10. Current account balance (% of GDP)

-10

-8

-6

-4

-2

0

% o

f GD

PSpanish policyPortuguese policyinvariant policy

May 31 – June 1, May 31 – June 1, 20072007


Potential Output Growth

Quadro ?? Decomposição do crescimento para Portugal, Espanha e Área do Euro

1998 e 2006 PIB

potencial PTF capital por

unidade de trabalho

horas médias de trabalho por trabalhador

população em idade de trabalhar

participação desemprego

1998 3.2 1.1 1.5 -0.4 0.5 0.5 0.1

2006 1.3 0.5 0.5 -0.2 0.3 0.5 -0.3 PT

diferença -1.9 -0.6 -0.9 0.2 -0.2 0.0 -0.4

1998 2.9 0.3 0.6 -0.1 0.4 1.2 0.6

2006 3.8 0.2 0.6 -0.5 1.2 1.4 0.8 ES

diferença 0.8 0.0 0.0 -0.3 0.8 0.1 0.2

1998 2.2 1.0 0.6 -0.4 0.2 0.6 0.1

2006 2.1 0.9 0.5 -0.4 0.1 0.6 0.3 Área

do Euro diferença -0.1 -0.2 -0.1 0.0 -0.1 0.0 0.2

May 31 – June 1, May 31 – June 1, 20072007


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

PT

ES

Euro 12

Potential Output Growth

May 31 – June 1, May 31 – June 1, 20072007


-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

Potential GDP TFP capital deepening average hours worked working age population participation unemployment

PT

ES

Euro 12

DECOMPOSITION OF THE VARIATION IN ECONOMICGROWTH: 1998-2006

Documents

Adjusting to the Euro and Catching-Up