Economic Developments in the Euro Area

2006 was characterized by increased economic growth for the Member States of the euro area in a world economy that continued to show strong growth, with an overall growth rate projected to be about 5 per cent of world Gross Domestic Product (GDP) (IMF, 2006). Whereas 2005 was dominated by the reform of the Stability and Growth Pact (SGP), in 2006 the pact played a very minor role due to the stronger economic outlook of countries of the euro area. Whether the revised SGP will ‘bite’ will only be tested in the years to come, most likely following a downturn in the economy. The euro area’s growth did not occur during a calm time, however. Oil prices continued to increase in the first half of 2006, reaching a peak in early August. A number of factors contributed to a sense of uneasiness about the world economy: continued uncertainty about the state of the United States’ (US) economy, particularly its current account deficit and mounting public debt, a risk of a rapid cooling of its housing market and the onset of economic slowdown; continuing unrest in the Middle East and US foreign policy in the region; and continued strong growth of the economies of China and India. In 2006 there was a concern about rising inflation rates as a result of these developments and central banks (including the European Central Bank, ECB) responded by raising interest rates. In currency markets the real effective exchange rate of the euro strengthened by 2.8 per cent vis-a-vis other currencies as a whole, but appreciated more JCMS 2007 Volume 45 Annual Review pp. 213–230