ANNUAL REPORT 2008 - Polymer Bank Notes of the World

(see Table 9). While Denmark and Swedenreported surpluses, all other countries recordeddeficits. For many of the countries that joinedthe EU in 2004 or later, deficits are a normalfeature of the catching-up process, to theextent that they reflect favourable investmentopportunities and inter-temporal consumptionsmoothing. However, the very large current andcapital account deficits in some non-euro areaEU Member States were also driven by buoyantdomestic demand, benign global financingconditions and strong credit growth. The globalfinancial turmoil in 2008 and its spillover tothe real economy led to cooling or contractingdomestic demand, thereby contributing to anarrowing of the deficit in several non-euro areaEU countries.Looking at the high-deficit countries, thecontraction in the current and capital accountdeficit was the most pronounced in Estoniaand Latvia, even though the deficits recordedby those countries remained very large at theend of 2008. In Lithuania the deficit narrowedto a significantly lesser extent and in Romaniait remained broadly unchanged, while Bulgariarecorded a further increase. In all the abovecountries the deficit continued to exceed 10% ofGDP, with the Bulgarian deficit at over 20%.As regards countries with lower external deficits,only the United Kingdom witnessed a contractionin its deficit in 2008. In the Czech Republic andPoland the deficit was broadly unchanged, whilein Hungary and Slovakia it increased somewhat.The external imbalances in most countriesoriginated from a deficit in goods trade, exceptin the Czech Republic, Hungary and Slovakia,where the deficit in the income balance wasthe most important factor. In comparison with2007, net direct investment inflows decreased insome countries in 2008. Most non-euro area EUMember States recorded a deficit in the basicbalance, i.e. the sum of the combined currentand capital account and the direct investmentbalance, which exceeded 4% of GDP in severaleconomies. Net portfolio investment flows werenegative or broadly neutral in all non-euro areaEU Member States in 2008, with the exceptionof the United Kingdom. Net “other investment”flows continued to be largely positive in mostcountries that joined the EU in 2004 or later,reflecting mainly loans from foreign-ownedparent banks to their subsidiaries in the region.EXCHANGE RATE DEVELOPMENTSExchange rate developments in the non-euroarea EU Member States in 2008 were stronglyinfluenced by the exchange rate regimes of theindividual countries.The currencies of Denmark, Estonia, Latvia,Lithuania and Slovakia participated in ERM II.They were subject to a standard fluctuationband of ±15% around their central rates againstthe euro, except for the Danish krone, witha narrower band of ±2.25% (see Chart 38).ERM II participation is, in some cases,accompanied by unilateral commitments onthe part of the countries concerned to maintainnarrower fluctuation bands. These unilateralcommitments place no additional obligationson the ECB. In particular, it was agreed that theChart 38 Developments in ERM II(daily data; deviation from the central rate in percentage points)30-3-6-9-12DKKLVLLTLSKKEEK-15-15Jan. Apr. July Oct. Jan. Apr. July Oct. Jan.2007 2008 2009Source: ECB.Notes: A positive (negative) deviation from the central rateagainst the euro implies that the currency is on the weak (strong)side of the band. For the Danish krone, the fluctuation band is±2.25%; for all other currencies, the standard fluctuation band of±15% applies. However, on the basis of unilateral commitments,the fluctuation band for the Latvian lats is ±1%, and for boththe Lithuanian litas and the Estonian kroon a currency boardarrangement is maintained. The central rate of the Slovak korunawas revalued by 8.5% on 16 March 2007 and by 17.6472% on29 May 2008.30-3-6-9-1290 ECBAnnual Report2008