Monetary policy in the euro area: a tale of multiple jurisdictions, - - PowerPoint PPT Presentation

Monetary policy in the euro area: a tale of multiple jurisdictions, one currency, and a zero lower bound

Presentation by Governor Klaas Knot at the Bank of Israel, 18 July 2017

Policy not without side effects

18 July 2017 Klaas Knot 2

European high yield spreads (rh axis in basis points), versus corporate defaults rates (lh axis)

Source: Citigroup

Recovery is firming

18 July 2017 Klaas Knot 3

Lack of convergence in the euro area (EMU)

18 July 2017 Klaas Knot 4

Note: the WEF index has been refined over time. Values in earlier years are therefore not 100% comparable to those in later years.

0.3 0.4 0.5 0.6 0.7

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

• a. Structural differences between E(MU) members

Standard deviation global competitiveness index WEF

Initial EMU members Rest of the EU

BE DE IE GR ES FR IT NL AT PT FI BG CZ DK EE HR CY LV LT HU MT PL RO SI SK SE UK

• 1

1 2 3 4 5 6

20 40 60 80 100 120 140

Average growth rate GDP per capita, 1999-2015 GDP per capita in 1999 (PPP, EU28 = 100)

• b. Income convergence, EMU vs EU

Initial EMU members Rest of the EU

0,3 0,4 0,5 0,6 0,7

• a. Structural differences between EMU members

Standard deviation global competitiveness index WEF

Initial EMU members Rest of EU

Balance between liability and control in EMU

18 July 2017 Klaas Knot 5

No public risk sharing, strong coordination Public risk sharing, strong coordination ("breach of sovereignity") ("political and fiscal union") No public risk sharing, mild coordination Public risk sharing, mild coordination ("no bail-out") ("transfer union")

Degree of control Degree of liability

Note: red = combination is politically and economically unstable; green = combination is politically stable and economically efficient ; orange = politically stable, economically less efficient.