Globalisation, regionalism and economic interdependence

A euro area perspective

Filippo di MauroEuropean Central Bank

Asian Development Bank7 April 2008

2

A new book…

3

QUESTIONS

• How is the Euro Area affected by the external environment, by how much and in what circumstances?

• What was the impact of monetary union and how the latter interacts with globalisation forces?

4

How much does the international environment matter for the

Euro Area?

5

Globalisation is associated with higher trade and imports

Imports in the industrialised countries(Volume index, 1991=100)

Source: IMF World Economic Outlook.

90

130

170

210

250

290

330

1991 1993 1995 1997 1999 2001 2003 2005

90

130

170

210

250

290

330

U nited Kingdom

Euro area

U nited States

Japan90

130

170

210

250

290

330

1991 1993 1995 1997 1999 2001 2003 2005

90

130

170

210

250

290

330

U nited Kingdom

Euro area

U nited States

Japan

6

Euro area is more open than other major economies …

Openness of the euro area, the United States and Japan(as percentage of GDP, in %)

Source: ECB calculations.Note: The degree of openness is measured as exports plus imports as a percentage of GDP, average 1997-2006. Euro area based on extra euro area trade.

0%

5%

10%

15%

20%

25%

30%

35%

40%

euro area(1997-2000)

euro area(2001-2006)

U nited States(1997-2000)

U nited States(2001-2006)

Japan (1997-2000)

Japan (2001-2006)

perc

enta

ge o

f GD

P

goods services

0%

5%

10%

15%

20%

25%

30%

35%

40%

euro area(1997-2000)

euro area(2001-2006)

U nited States(1997-2000)

U nited States(2001-2006)

Japan (1997-2000)

Japan (2001-2006)

perc

enta

ge o

f GD

P

goods services

7

Interaction with foreign environment is lately higher than average

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1984 1986 1989 1992 1995 1997 2000 2003

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Full sample 5-year rolling sample

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1984 1986 1989 1992 1995 1997 2000 2003

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Full sample 5-year rolling sample

Correlation between euro area and foreign real GDP growth

(Correlation coefficients)

Source :ECB. Source: ECB

Euro Area

USA

0

0.5

1

1.5

2

2.5

3

3.5

4

1974 1979 1984 1989 1994 1999 2004

Euro Area

USA

0

0.5

1

1.5

2

2.5

3

3.5

4

1974 1979 1984 1989 1994 1999 2004

The growth rate of GDP per-head (5 yrs moving average, in %)

8

EA GDP

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006-20

-15

-10

-5

0

5

10

15

20

EA GDP

World imports

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006-20

-15

-10

-5

0

5

10

15

20

net trade contribution to EA GDP

EA GDP

World imports

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006-20

-15

-10

-5

0

5

10

15

20

Net trade contributions to EA GDP (index: 1980=100; 4-quarter moving average; year-on-year growth rate)

II. Global downturn

Transmission channels are different across episodes

Source: ECB staff calculations.Latest observation refers to 2006 Q4.

I. Asian crisis

III. Sluggish growth

9

US idiosyncratic shocks have rather low impacts….

Effects of a US domestic demand shock (1 p.p. of GDP) on GDP of other countries/regions (in percent)

Source: Dées, Vansteenkiste: The transmission of US cyclical developments to the rest of the world, ECB Working Paper Series.

0

0.2

0.4

0.6

0.8

1

1.2

Euro area Japan LatinAmerica

ODE EmergingAsia

Rest ofEurope

U K U S

Direct trade effect Trade effect incl. echo effect GVAR

0

0.2

0.4

0.6

0.8

1

1.2

Euro area Japan LatinAmerica

ODE EmergingAsia

Rest ofEurope

U K U S

Direct trade effect Trade effect incl. echo effect GVAR

10

Source: NiGEM simulations.

The impacts become larger when the shocks turn global.

Simulation results of housing turmoil(percentage point deviation from baseline growth rate)

2007 2008 2009 cumulated loss

US real GDP growth -0.1 -0.8 -0.4 -1.3EA real GDP growth 0.0 -0.3 -0.3 -0.6

0.5

US real GDP -0.5 -1.9 -1.0 -3.4EA real GDP -0.2 -1.3 -1.2 -2.7

0.8

Scenario 1

Scenario 2Elasticity EA growth to US shock

Elasticity EA growth to US shock

11

For the current episode….it translates in a shallower downturn

US real GDP growth(in %, quarterly (lhs), annual (rhs))

Source: ECB Staff.

-2-1.5

-1-0.5

00.5

11.5

22.5

3

-4 -3 -2 -1 1 2 3 4 5 6 7 8 9 10 11 12

Current

Average past recessions(95% confidence)

12

…with much less impacts on Euro area trade

April outlook H istor ical data

March 2008 MPE

-3

-2

-1

0

1

2

3

4

5

-4 -3 -2 -1 1 2 3 4 5 6 7 8 9 10 11 12

-3

-2

-1

0

1

2

3

4

5

2000 Q3

2008 Q1

13

How globalisation interacted with monetary union

14

Trade channel: Interaction, globalisation, regional integration

X A, ex

GDP A

M A, ex M A, in X B, in

GDP B

M B, in M B, exX A, in

GDP AGDP EA = GDP A + GDP B + …

1. “China effect”

2. Growth of extra-M

3. Import content

II) DAMPENING FACTORS

World imports

I. USUAL TRANSMISSION MECHANISM

Source: Filippo di Mauro, Warwick McKibbin, Stephane Dées (ed.): Globalisation, Regionalism and Economic Interdependence, CUP (forthcoming).

15

China seems to explain losses in market share

Taking world imports from China out of foreign demand explains part of the loss in euro areamarket share

Euro area export market shares(In volumes; index 1992=100)

Source: ECB computations.Note: The last observation is for 2006 Q1.

90

95

100

105

110

115

1992 1994 1996 1998 2000 2002 2004 2006

Total

Excluding China

90

95

100

105

110

115

1992 1994 1996 1998 2000 2002 2004 2006

Total

Excluding China

16

… but extra - imports are displacing intra-EA imports

Change in EA manufacturing import shares by country of origin

Source: Eurostat and ECB calculations. Note: Percentage point change in import shares in total (intra+extra) euro area imports between 1995 and 2005.

-4 -3 -2 -1 0 1 2 3 4 5

China

N MS

Candidate countries

OPEC

ASEAN

Lat in America

CIS

Canada

Denmark

N orway

Sweden

Switzerland

U S

Japan

U K

Int ra-EA

% points-4 -3 -2 -1 0 1 2 3 4 5

China

N MS

Candidate countries

OPEC

ASEAN

Lat in America

CIS

Canada

Denmark

N orway

Sweden

Switzerland

U S

Japan

U K

Int ra-EA

% points

17

Net trade contribution declining

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007-15

-12

-9

-6

-3

0

3

6

9

12

15

net trade contribution to EA GDP (quarter-on-quarter growth rate; lhs)EA exports (year-on-year growth rate)EA imports (year-on-year growth rate)

Net trade contribution to EA real GDP (4-quarter moving average)

1995 2000Euro area 37.6 44.2Germany 34.7 42.8France 34 40.6Italy 31.6 35.4Netherlands 52.3 58.7

1995 2000Euro area 37.6 44.2Germany 34.7 42.8France 34 40.6Italy 31.6 35.4Netherlands 52.3 58.7

import content of exports increasing

18

Trade among euro area countries has increased since 1998, faster than for EU not EA

-10

-5

0

5

10

15

20

1997 1999 2001 2003 2005 2007

Euro area exports of goods to DK, SE, U K

Intra-euro area exports of goods

-10

-5

0

5

10

15

20

1997 1999 2001 2003 2005 2007

Euro area exports of goods to DK, SE, U K

Intra-euro area exports of goods

Euro area trade with EU, 1996-2007(values; year on year growth)

Exports Imports

Sources: Eurostat and ECB calculationsNotes: Estimates for 2007 are based on data for the first half of 2007.

-10

-5

0

5

10

15

20

1997 1999 2001 2003 2005 2007

Intra-euro area imports of goods

Euro area imports of goods from DK, SE, U K

-10

-5

0

5

10

15

20

1997 1999 2001 2003 2005 2007

Intra-euro area imports of goods

Euro area imports of goods from DK, SE, U K

19

Lower home bias in the EA

Home bias in bond portfolio assets, 1997-2006(in %)

Sources: BIS, IMF, Thomson DataStream, ECB calculations.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Euro area U nited States Japan

1997 2001 2002 2003 2004 2005 2006

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Euro area U nited States Japan

1997 2001 2002 2003 2004 2005 2006

20

Euro area asset holdings have increased with EMU

Share of euro area portfolio assets (bonds) (in %)

Sources: BIS, IMF, Thomson DataStream, ECB calculations.

0%

10%

20%

30%

40%

50%

60%

70%

12 EM Ucountries

3 non-EM U EU 10 non-EUdevelopedcountries

7 emergingmarkets

Grand Total

1997 2001 2002 2003 2004 2005 2006

0%

10%

20%

30%

40%

50%

60%

70%

12 EM Ucountries

3 non-EM U EU 10 non-EUdevelopedcountries

7 emergingmarkets

Grand Total

1997 2001 2002 2003 2004 2005 2006

21

Euro area asset holdings have increased with EMU

Share of euro area portfolio assets (equities) (in %)

Sources: BIS, IMF, Thomson DataStream, ECB calculations.

0%

5%

10%

15%

20%

25%

30%

35%

12 EM Ucountries

3 non-EM U EU 10 non-EUdevelopedcountries

7 emergingmarkets

Grand Total

1997 2001 2002 2003 2004 2005 2006

0%

5%

10%

15%

20%

25%

30%

35%

12 EM Ucountries

3 non-EM U EU 10 non-EUdevelopedcountries

7 emergingmarkets

Grand Total

1997 2001 2002 2003 2004 2005 2006

22

Conclusions

• The impact of shocks on the Euro Area is dependent on their origin and nature

• Regional integration impacts have been as expected, driving up intra-trade, favoring lower home bias and increasing holdings euro assets

• … but impacts have been dampened in the case of trade by the strength of the globalisation forces (entrance of China)

23

The end