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 European high yield spreads (rh axis in basis points), versus corporate defaults rates (lh axis) Source: Citigroup 2 Klaas Knot 18 July 2017

Recovery is firming 3 Klaas Knot 18 July 2017

Lack of convergence in the euro area (EMU) a. Structural differences between E(MU) members b. Income convergence, EMU vs EU a. Structural differences between EMU members Standard deviation global competitiveness index WEF Standard deviation global competitiveness index WEF 0.7 6 Average growth rate GDP per capita, 1999-2015 LT 0,7 LV 5 RO EE 0.6 0,6 4 BG SK PL 3 0,5 HU 0.5 IE CZ MT UK SE 2 SI HR 0,4 AT FI DE NL 1 ES 0.4 PT BE FR 0,3 CY DK GR 0 IT 20 40 60 80 100 120 140 0.3 -1 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 GDP per capita in 1999 (PPP, EU28 = 100) Initial EMU members Rest of the EU Initial EMU members Rest of EU Initial EMU members Rest of the EU Note: the WEF index has been refined over time. Values in earlier years are therefore not 100% comparable to those in later years. 4 Klaas Knot 18 July 2017

Balance between liability and control in EMU No public risk sharing, strong coordination Public risk sharing, strong coordination ("breach of sovereignity") ("political and fiscal union") Degree of control No public risk sharing, mild coordination Public risk sharing, mild coordination ("no bail-out") ("transfer union") 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. 5 Klaas Knot 18 July 2017