Advanced Search
MyIDEAS: Login to save this paper or follow this series

Moderate upswing in Euroland

Contents:

Author Info

  • Gern, Klaus-Jürgen
  • Kamps, Christophe
  • Meier, Carsten-Patrick
  • Scheide, Joachim
Registered author(s):

    Abstract

    Economic activity in the euro area is recovering. In the second half of 2003, real GDP grew at an annualized rate of roughly 1½ percent. In contrast with other large industrialized countries, economy-wide capacity utilization has not yet increased. Private consumption has remained the major weak point. However, private investment has increased for the first time since 2½ years and exports have risen rapidly, stimulated by the strong upswing in the rest of the world. A number of leading indicators suggest that the recovery in Euroland has gained some momentum since the turn of the year. Despite an expansionary monetary policy and the dynamic world economy, real GDP in the euro area will rise only moderately in comparison with earlier upswings. This is due to two factors. First, potential output growth in the euro area has apparently decelerated. Second, fiscal policy especially in the large euro-area economies is not sustainable. As governments do not have a credible consolidation strategy, the tax burden is likely to increase in the coming years. Against this background private households? income prospects are subdued and, as a consequence, private consumption will remain comparatively weak. The appreciation of the euro has had a considerable effect on economic activity, but it will not stop recovery. The results of our macroeconometric model imply also that the effects will be small in 2005 if, as we assume, the euro/ dollar exchange rate remains unchanged. Some observers urge the ECB to react to the strength of the euro by cutting interest rates. Whether the ECB should do so depends solely on the way in which the appreciation of the euro impacts the targets embedded in its monetary policy strategy. The main issue is whether the appreciation of the euro will push the inflation rate considerably below the target value. Past experience suggests that it would be unwise to assume it will have a strong dampening effect on consumer prices. Since the beginning of monetary union inflation forecasts have usually been too optimistic. All in all, the ECB is well advised not to cut interest rates in response to recent exchange rate developments. Interest rates in the euro area are already unusually low and stimulate economic activity. The Stability and Growth Pact requires the governments in euro-area countries to achieve a balanced budget or a budget surplus in the medium run. The main problem at present is not that budget deficit to GDP ratios are higher than 3 percent in some countries, but that structural deficits are also very high. Seven years after the adoption of the Pact the large countries still have made no progress on the way to a balanced budget. In Germany and France the structural deficits are even higher than before the monetary union. The recent Stability Programs of these countries suggest that the balanced- budget target has been given up altogether. This is eroding the credibility of fiscal policy and constitutes a heavy blow to economic stability in the euro area. Unsound fiscal policy negatively affects expectations in the private sector and is likely to result in a further deceleration of potential output growth. --

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://econstor.eu/bitstream/10419/3383/1/kd410.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Kiel Institute for the World Economy (IfW) in its series Kiel Discussion Papers with number 410.

    as in new window
    Length:
    Date of creation: 2004
    Date of revision:
    Handle: RePEc:zbw:ifwkdp:410

    Contact details of provider:
    Postal: Kiellinie 66, D-24105 Kiel
    Phone: +49 431 8814-1
    Fax: +49 431 8814528
    Email:
    Web page: http://www.ifw-kiel.de/
    More information through EDIRC

    Related research

    Keywords:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Benner, Joachim & Gern, Klaus-Jürgen & Kamps, Christophe & Kamps, Annette & Sander, Birgit & Scheide, Joachim, 2004. "Weltwirtschaft im Aufschwung," Open Access Publications from Kiel Institute for the World Economy 3213, Kiel Institute for the World Economy (IfW).
    2. Carstensen, Kai & Gern, Klaus-Jürgen & Kamps, Christophe & Scheide, Joachim, 2003. "Gradual recovery in Euroland," Kiel Discussion Papers 405, Kiel Institute for the World Economy (IfW).
    3. Luca Buldorini & Stelios Makrydakis & Christian Thimann, 2002. "The effective exchange rates of the euro," Occasional Paper Series 02, European Central Bank.
    4. Lehment, Harmen & Oskamp, Frank, 2004. "Gesamtwirtschaftliche Bedingungen für einen Anstieg des Arbeitsvolumens in Deutschland," Open Access Publications from Kiel Institute for the World Economy 3216, Kiel Institute for the World Economy (IfW).
    5. Fatum, Rasmus, 2000. "On the effectiveness of sterilized foreign exchange intervention," Working Paper Series 0010, European Central Bank.
    6. Gern, Klaus-Jürgen, 2000. "Euroland: peak of the upswing - little evidence of a new economy," Kiel Discussion Papers 369, Kiel Institute for the World Economy (IfW).
    7. Fox, Kevin J & Kohli, Ulrich & Warren, Ronald S, Jr, 2002. "Accounting for Growth and Output Gaps: Evidence from New Zealand," The Economic Record, The Economic Society of Australia, vol. 78(242), pages 312-26, September.
    8. David Rae & David Turner, 2001. "A Small Global Forecasting Model," OECD Economics Department Working Papers 286, OECD Publishing.
    9. Schweickert, Rainer & Thiele, Rainer & Wiebelt, Manfred, 2003. "Makroökonomische Reformen und Armutsbekämpfung in Bolivien: ebnet die HIPC-Initiative den Weg zu sozialverträglicher Anpassung?," Kiel Discussion Papers 398, Kiel Institute for the World Economy (IfW).
    10. Gern, Klaus-Jürgen & Kamps, Christophe & Meier, Carsten-Patrick & Oskamp, Frank & Scheide, Joachim, 2003. "Euroland: recovery will slowly gain momentum," Kiel Discussion Papers 403, Kiel Institute for the World Economy (IfW).
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:zbw:ifwkdp:410. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.