ANNUAL REPORT 2008 - Polymer Bank Notes of the World

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warranted because of the need to cope with theexpenditure pressure resulting from an ageingpopulation in the decades ahead. A bindingmedium-term fiscal framework at the nationallevel, if properly designed and rigorouslyimplemented, can complement the Europeanfiscal framework enshrined in the Stability andGrowth Pact in assisting a quick return to themedium-term budgetary objectives (see alsoBox 8).Box 8THE FINANCIAL CRISIS AND FISCAL POLICYA key policy challenge is to prevent the financial crisis and the subsequent economic downturn fromundermining the credibility and sustainability of public finances. In the EU, the Stability and GrowthPact provides the appropriate framework for the conduct and coordination of fiscal policies, in goodas well as bad times. While compliance with the Pact in the initial ten years was somewhat uneven,the EU’s overall fiscal performance in terms of avoiding high budget deficits and the build-up ofgovernment debt was much better than in the decades preceding the Pact. 1A missed opportunity making the fiscal challenge unnecessarily onerousMany euro area countries entered the financial crisis and the economic downturn with weakfiscal positions. Governments had not used the opportunity presented by past years’ revenuewindfalls to consolidate their budgets. In this regard, the arguments set out in the ECB’s AnnualReport 2007 still hold and, indeed, their relevance is now magnified. 2 At the time, the ECBemphasised an important fiscal lesson to be learnt from the period 2000-01, namely that therevenue outlook can change dramatically in a short period of time. Indeed, experience shows thatthe volatility of government revenues is greater than that of the spending side and also exceedsthat of the business cycle. Taken together with the difficulty of predicting turning points forGDP growth, this presents a strong reason to increase caution in good times, i.e. to use revenuewindfalls for faster deficit and debt reduction rather than for extra spending. 3 This would allowcountries to create budgetary room for manoeuvre to absorb revenue shortfalls and deal withextra spending should conditions change. One of the fiscal policy errors prior to and during2000-01 was to mistakenly interpret budgetary improvements in good times as evidence ofstructural improvements, which were often used to motivate spending increases or tax cuts.The role of automatic stabilisersThe fiscal adjustment in response to the economic downturn reflects to a large extent the operation ofautomatic fiscal stabilisers, which contribute to smoothing economic fluctuations. This is appropriate,since this type of fiscal reaction is timely and shielded from political economy risks that can underminethe effectiveness of discretionary fiscal measures. In particular, automatic stabilisers are not subjectto time lags in the identification of measures or in the political decision-making and implemenationprocesses. Moreover, the automatic reaction of revenues and, to a lesser extent, expenditures to thecycle makes automatic stabilisers self-reversing. Finally, the impact of particular interest groups in1 See the article “Ten years of the Stability and Growth Pact” in the October 2008 issue of the ECB’s Monthly Bulletin.2 See in particular the box entitled “Learning from the fiscal policy experience of 2000-01” in the ECB’s Annual Report 2007.3 For a review of forecasting accuracy and the difficulties with turning points, see M. Blix, J. Wadefjord, U. Wienecke and M. Ådahl,“How good is the forecasting performance of major institutions?”, Economic Review, 2001:3, Sveriges Riksbank, pp. 38-68.ECBAnnual Report200877
achieving group-specific benefits is low. Countries in the euro area that comply with the Stability andGrowth Pact can take advantage of their relatively large automatic stabilisers.The risks of fiscal activism in times of financial crisisRegarding the use of discretionary fiscal policy measures to stimulate demand, a consensus hasemerged that such measures should be timely and targeted to ensure effectiveness, and temporary toavoid additional risks for fiscal sustainability. In particular, unless a reversal of deficit-increasing fiscalmeasures is expected, such measures may undermine public confidence in the sustainability of publicfinances and lead to higher precautionary savings or negative financial market reactions and higherinterest rates – thus counteracting the intended expansionary effect. In this regard, the experience offiscal activism during the oil crisis of the 1970s stands out as a warning: instead of boosting demand,it ultimately contributed towards destabilising the real economy and increasing inflationary pressuresand government debt – with little, if any, net gain.Regarding targeting, actions should be taken where elasticities are the highest and where thedistortions to incentives are the least onerous. In this regard, consideration should be given tothe quality of the fiscal stimulus so that action can be taken that is most conducive to a soundfoundation for recovery and long-term growth. Timeliness is essential, since past experienceshows that discretionary policy measures frequently end up being pro-cyclical, because theybecome effective only after a considerable time lag.The quality of fiscal policy is important in many ways. While the issue of the optimal size ofgovernment is a matter for debate, 4 the citizens of euro area countries could be at least as well offas they are today, but pay less in taxes, if the quality of public spending were better. Moreover,there is some evidence that past increases in government size have come at the cost of lowereconomic growth. 5 If euro area governments comply with the Stability and Growth Pact, theireconomies are more likely to reap long-term benefits and their citizens to enjoy greater welfare. 64 There is evidence to suggest that, in many industrialised countries, governments have grown in size beyond what is warranted to attaincore objectives. See, for example, A. Afonso, L. Schuknecht and V. Tanzi, “Public sector efficiency: an international comparison”,Public Choice, Vol. 123 (No 3-4), 2005, pp. 321-347, and A. Afonso and D. Furceri, “Government size, composition, volatility andeconomic growth”, Working Paper Series, No 849, ECB, 2008.5 See A. Afonso, W. Ebert, L. Schuknecht and M. Thöne, “Quality of public finances and growth”, Working Paper Series, No 438, ECB, 2005.6 The costs of downsizing governments may be rather limited if appropriately designed and implemented; see for example S. Hauptmeier,M. Heipertz and L. Schuknecht, “Expenditure reform in industrialised countries: a case study approach”, Working Paper Series,No 364, ECB, 2006.2.6 EXCHANGE RATES AND BALANCE OFPAYMENTS DEVELOPMENTSTHE EURO APPRECIATED MODERATELY IN 2008 INEFFECTIVE TERMSThe financial turmoil in money andcredit markets which started in August 2007and its ensuing spillovers into the realeconomy worldwide significantly influenceddevelopments in foreign exchange markets in2008. More precisely, the first four months of2008 saw the euro continue its strengtheningtrend established in late 2000, supported byfairly upbeat market expectations about therelative economic prospects of the euro area.After reaching a historical peak in April, thenominal EER broadly stabilised until August.Thereafter the euro experienced a sharpdepreciation which, in just three months, broughtit to the level prevailing around mid-2007. The78 ECBAnnual Report2008
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EN2008EUROPEAN CENTRAL BANK ANNUAL
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© European Central Bank, 2009Addre
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CHAPTER 4FINANCIAL STABILITY AND IN
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7 Statistical accounting consequenc
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ABBREVIATIONSCOUNTRIESOTHERSBE Belg
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in the course of the year, in line
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currencies, T2S will be a major ste
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CHAPTER 1ECONOMICDEVELOPMENTS ANDMO
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Chart 1 ECB interest rates and mone
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Despite moderating, the annual grow
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substantial downward revisions in r
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in July, annual inflation in the OE
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As regards the Chinese economy, rea
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Page 46 and 47: Chart C Trading volumes for governm
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Page 50 and 51: The annual growth rate of consumer
Page 52 and 53: end of 2007. By December 2008 this
Page 54 and 55: calculated as the balance between g
Page 56 and 57: commodity prices (see Box 4). Conve
Page 58 and 59: Chart D Longer-term inflation expec
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Page 62 and 63: productivity slowed to 0.2% in the
Page 64 and 65: Table 3 Composition of real GDP gro
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Page 68 and 69: Box 5LABOUR MARKET DEVELOPMENTS IN
Page 70 and 71: Chart C Breakdown of employment gro
Page 72 and 73: Box 6DEVELOPMENTS IN THE ISSUANCE A
Page 74 and 75: Chart B Government bond yield sprea
Page 76 and 77: Box 7STATISTICAL ACCOUNTING CONSEQU
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Page 82 and 83: prices in the first eight months of
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Page 86 and 87: segments and, in turn, affected eur
Page 88 and 89: and Bulgaria registered robust grow
Page 90 and 91: In the remaining non-euro area EU c
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Page 94 and 95: Table 10 Official monetary policy s
Page 96 and 97: the Bank of England and Sveriges Ri
Page 98 and 99: CHAPTER 2CENTRAL BANKOPERATIONSAND
Page 100 and 101: Box 10MONETARY POLICY OPERATIONS DU
Page 102 and 103: Chart A Liquidity supply through op
Page 104 and 105: franc funding needs of banks with n
Page 106 and 107: MINIMUM RESERVE SYSTEMCredit instit
Page 108 and 109: with the ample allotments in the fi
Page 110 and 111: 2008. By contrast, the average shar
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Page 114 and 115: and the ECB). As a result of carefu
Page 116 and 117: cross-CSD settlement. T2S will thus
Page 118 and 119: ELIGIBLE LINKS BETWEEN NATIONAL SEC
Page 120 and 121: Chart 48 Number of euro banknotes i
Page 122 and 123: 3.3 BANKNOTE PRODUCTION AND ISSUANC
Page 124 and 125: 4 STATISTICSThe ECB, assisted by th
Page 126 and 127: iii) payments statistics and iv) de
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5 ECONOMIC RESEARCHThe main functio
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were organised to disseminate resea
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the Financial Collateral Directive,
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on the Banque centrale du Luxembour
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standards by individual Eurosystem
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CHAPTER 3ENTRY OF SLOVAKIAINTO THE
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Table 13 Main economic indicators f
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As of January 2009 Slovakia is thus
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3 OPERATIONAL ASPECTS OF THE INTEGR
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4 THE CASH CHANGEOVER IN SLOVAKIATH
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Willem F. Duisenberg accepting the
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1 FINANCIAL STABILITYThe Eurosystem
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With regard to merger and acquisiti
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with the principles set out in Octo
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2.2 BANKINGCAPITAL REQUIREMENTS DIR
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3 FINANCIAL INTEGRATIONThe Eurosyst
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The market for short-term paper in
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de France and the Banca d’Italia.
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and the Eurosystem’s business con
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4.2 RETAIL PAYMENT SYSTEMS ANDINSTR
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for Clearing and Settlement, and th
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Willem F. Duisenberg at his farewel
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1 EUROPEAN ISSUESIn 2008 the ECB co
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for financial institutions, to faci
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1.3 DEVELOPMENTS IN AND RELATIONS W
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On a number of occasions in 2008, t
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countries have voiced support for t
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Former Italian President Carlo Azeg
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1 ACCOUNTABILITY VIS-À-VIS THE GEN
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implementation of the steps foresee
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CHAPTER 7EXTERNALCOMMUNICATION
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2 COMMUNICATION ACTIVITIESThe ECB a
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Panel at the Fifth ECB Central Bank
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1 DECISION-MAKING BODIES AND CORPOR
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Council decided on the main aspects
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1.3 THE EXECUTIVE BOARDThe Executiv
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1.4 THE GENERAL COUNCILThe General
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The Eurosystem/ESCB committees have
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members of the Executive Board. 13
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for their current position. On the
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statistical office (Statistisches B
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4 ANNUAL ACCOUNTS OF THE ECB212 ECB
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function, and by the Governing Coun
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BALANCE SHEET AS AT 31 DECEMBER 200
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PROFIT AND LOSS ACCOUNT FOR THE YEA
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mid-market prices on 30 December 20
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The defined benefit obligation is c
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NOTES ON THE BALANCE SHEET1 GOLD AN
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Eurosystem (see “Banknotes in cir
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(see “Banknotes in circulation”
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values at which the transactions we
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15 CAPITAL AND RESERVESCAPITALPursu
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epresenting the remainder of its ca
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NOTES ON THE PROFIT AND LOSS ACCOUN
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individual circumstances. Basic sal
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5 CONSOLIDATED BALANCE SHEET OF THE
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ANNEXES
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Number Title OJ referenceECB/2008/1
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Number Title OJ referenceECB/2009/1
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Number 2 Originator SubjectCON/2008
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Number 4 Originator Subject OJ refe
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oth the marginal lending facility a
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OVERVIEW OF THE ECB’S COMMUNICATI
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y the respective NCBs will also be
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OPEN MARKET OPERATIONS BY CURRENCYE
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USD operationsType oftransaction 1)
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DOCUMENTS PUBLISHED BY THEEUROPEAN
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95 “Financial stability challenge
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1012 “Petrodollars and imports of
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GLOSSARYThis glossary contains sele
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Economic analysis: one pillar of th
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Financial stability: condition in w
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MFIs (monetary financial institutio
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Reserve base: the sum of the eligib
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