Volume 7 N° 3 (2008)
Quarterly Report on the Euro Area. October 2008

The Quarterly Report on the Euro Area (QREA) first assesses recent economic developments and short-term prospects in the euro area. It highlights the fact that conditions in the international financial system have deteriorated significantly since the summer and the financial crisis is now the most serious since 1929. The financial turmoil, but also high commodity prices and significant housing market corrections in some euro-area countries are taking their toll on economic activity as well as on business and consumer confidence.

In its focus section, the QREA examines long-run patterns in income inequality and labour income shares. It discusses the determinants of the distribution of income and the links between income distribution, wage inequality and the unemployment rate. It also highlights the complexity of the interplay between the various factors influencing income inequality in the euro area, which include global factors but also labour market institutions and redistribution policies.

The report also proposes three shorter analytical sections. The first assesses the causes of the sluggishness of consumption which can, in part, be explained by adverse financial wealth effects but may also reflect an adjustment process to excessive mortgage debt accumulation. The second reviews the repeated episodes of pro-cyclical fiscal policy in the euro area and assesses the extent to which they can be explained by over-optimistic appraisals of medium-term growth prospects and errors in the assessment of cyclical conditions. The third section analyses hedging strategies of euro-area exporters against exchange rate fluctuations. It argues that euro-area exporters make ample use of a range of instruments to protect themselves from exchange rate variations and that such a behaviour has probably contributed to the resilience of euro-area exports to the appreciation of the euro over the past few years.