ANNUAL REPORT 2008 - Polymer Bank Notes of the World

pronounced with respect to extra-euro area trade partners, as shown by the regressionline which captures the relationship between the intra- and extra-euro area indicators(see Chart C). This largely reflects the overall nominal appreciation of the exchange rate of the eurobetween 1999 and 2008. Accordingly, countries such as Ireland, which have a relatively large shareof trade with partners outside the euro area, also exhibit a relatively larger decline in extra-euroarea competitiveness. However, for most countries, the high correlation between intra- and extraeuroarea competitiveness also suggests that the relative competitive positions of the individualeuro area countries are determined mainly by the evolution of domestic costs and prices. Overall,Austria is the only country which improved its competitiveness both inside and outside the euroarea. Finland, France and Germany also recorded increases in their intra-euro area competitiveness,but registered declines vis-à-vis their extra-euro area trade partners. The remaining euro areacountries recorded decreases in competitiveness both inside and outside the euro area.In summary, according to various measures of real EERs, the euro area has experienced a declinein price and cost competitiveness over the past ten years or so, owing largely to the nominalappreciation of the euro. However, there is considerable heterogeneity in competitivenessdevelopments among the euro area countries, reflecting mostly differences in the evolution oftheir domestic costs and prices, as well as the geographical specialisation of their foreign trade.Volumes of imported goods decreased in 2008,particularly those of intermediate goods. At thesame time, import prices increased robustly upto the third quarter of 2008 and moderated in thelast quarter of the year. As price developmentsmore than offset the decline in the volumeof imports, overall import values increasednoticeably over the first three quarters of theyear. Price data by category of goods suggestthat the steady increase in import prices up toChart 35 Extra-euro area import prices(indices: Q1 2003 = 100; seasonally adjusted; three-monthmoving average)200180160140120100802003 2004 2005 2006 2007 2008Source: ECB.non-energy commoditiesmanufacturingtotal goodsBrent crude oil (right-hand scale)350300250200150100500the summer and the subsequent decelerationwere driven largely by developments in oil andnon-energy commodity prices (see Chart 35).Nevertheless, despite the fall in oil pricesfrom the summer onwards, in the 12-monthcumulated period up to November 2008, theoil trade deficit stood at €223.6 billion, wellabove the already high level of more than€170 billion registered at the end of 2007.NET INFLOWS IN COMBINED DIRECT ANDPORTFOLIO INVESTMENT INCREASED IN 2008In the financial account, the euro area experiencednet inflows of €128.5 billion in combined directand portfolio investment in 2008, compared withnet inflows of €47.3 billion a year earlier. Thisincrease reflected a rise in net inflows of debtinstruments and equity portfolio investment.The above developments were offset partly byan increase in net outflows in direct investment(see Chart 36).In 2008 the financial turmoil led to heightenedvolatility in all segments of the financial marketsand, given the financial spillovers to the real sideof the economy, to a high degree of uncertaintyover the global outlook. In this context, globalportfolio allocation decisions were influencedby the ensuing drain of liquidity in key market84 ECBAnnual Report2008