ANNUAL REPORT 2008 - Polymer Bank Notes of the World

in competitiveness of around 5-10% between1999 and 2008, according to both real andnominal EERs. Thus, there is a high degree ofco-movement between nominal and real EERs,reflecting similarities in price developments inthe euro area and its trading partners. The overalldecline in competitiveness for the euro area istherefore explained primarily by movements inthe nominal exchange rate, which can be splitinto several episodes. The first episode saw anincrease in competitiveness between 1999 and2001, reflecting the depreciation of the euroaround this time. This was followed by decreasesin competitiveness driven primarily by theappreciation of the euro in the period 2002-04and again from 2006. More recently, the euroarea has registered a rise in competitivenessowing to the depreciation of the euro during thesecond half of 2008.The evolution of price competitiveness for theeuro area as a whole can mask quite differentdevelopments across the individual countries.For an analysis of the latter, the ECB employsa consistent methodology by compiling foreach euro area country a set of harmonisedcompetitiveness indicators against the othereuro area countries and a set of extra-euro areatrading partners. 2 There are three harmonisedcompetitiveness indicators that are calculatedas a weighted average of bilateral exchangerates based on trade weights – which reflect therelative importance of the individual country’smajor competitors – deflated by either theCPI, GDP or unit labour cost deflator. Amongthese harmonised competitiveness indicators,the CPI-based indicator seems to be the mostwidely used, partly because of the relativelyhomogeneous definition of the CPI acrosscountries, as well as the absence of significantdata revisions and the relatively short delayin availability. Meanwhile, the GDP deflatorsand unit labour cost-based indicators providealternative measures of competitivenessChart B Changes in harmonised competitivenessindicators 1) across euro area countries(in percentage points; quarterly data)403020100-10CPIGDPULCQ1 1999 to Q4 2008-20-20DE AT FR FI BE IT SI NL PT GRLUCY MT ES IE403020100-10Q1 2006 to Q4 2008-20-20AT NL DE CY PT FR LU FI IT BE ES SI GRMT IESource: ECB calculations.1) Based on the CPI, GDP or total unit labour cost (ULC)deflators, including intra- and extra-euro area trade.Notes: A negative (positive) number signifies a gain (loss) in pricecompetitiveness. The last observation refers to the fourth quarterof 2008 (based on the CPI deflator) and the third quarter of 2008(based on GDP and ULC deflators). For the period from the firstquarter of 2006 to the fourth quarter of 2008 the harmonisedcompetitiveness indicators were rescaled to Q1 2006 = 100. TheGDP deflator-based harmonised competitiveness indicator forMalta is not published by the ECB.403020100-10403020100-102 For a more detailed analysis of the harmonised competitiveness indicators, see F. di Mauro and K. Forster, “Globalisation and thecompetitiveness of the euro area”, Occasional Paper Series, No 97, ECB, September 2008, and the article entitled “Monitoring labourcost developments across euro area countries” in the November 2008 issue of the ECB’s Monthly Bulletin.82 ECBAnnual Report2008