Effective exchange rates of the euro and harmonised competitiveness indicators for euro area countries updated

The trade weights used in the calculation of the effective exchange rates (EERs) of the euro and harmonised competitiveness indicators (HCIs) of the euro area countries have been updated to reflect recent developments in the pattern of international trade. As a consequence, the increase in the euro’s EER since 1999 has been somewhat less pronounced than suggested by previous figures. This is mainly due to the higher weight given to China and the lower weights assigned to the United Kingdom and Japan in the new calculation.

New trade weights have been calculated on the basis of data for trade in manufactured goods for the periods 1998-2000, 2001-03 and 2004-06. Within the group of 41 trading partners of the euro area, the most significant changes in the weighting scheme between 1995-97 and 2004-06 are the reduction of the weights for the United Kingdom (-4.0 percentage points), Japan (-3.1 percentage points) and the United States (-1.7 percentage points) and the increase in the weight of China (+6.9 percentage points), which replaced Japan as the euro area’s third-largest trading partner (after the United States and the United Kingdom). The weights of non-euro area EU countries in central and eastern Europe have also risen, in particular those for Poland (+1.5 percentage points) and the Czech Republic (+1.1 percentage points). With regard to the emerging economies, the importance of China stands out, with a weight of 11.1%, while the weights of India (1.8%) and Brazil (1.2%) are far smaller than those of euro area neighbouring countries such as Switzerland (5.3%), Poland (3.9%), Sweden (3.9%), the Czech Republic (3.4%) and Turkey (3.0%). ^[1]

The updated nominal EER of the euro vis-à-vis the group of 41 trading partners appreciated by 8.8%, year on year, in November 2009, whereas the previously published series registered an annual rate of change of 8.7% in the same period. The updated real EER of the euro vis-à-vis the same group of trading partners deflated by consumer prices appreciated by 7.3% in the same period. Using the previous weighting structure, this appreciation equalled 7.4%.

In the same period, the updated non-deflated and consumer prices-deflated HCI registered positive annual rates of change for all euro area countries. According to the new figures, in October 2009, the annual rate of increase of these indicators varied from 2.3% in Portugal to 6.2% in Ireland. In real terms, this ranged from 0.5% in Portugal to 4.5% in the Netherlands.

Background

EERs reflect changes in the weighted average of the exchange rates of the euro vis-à-vis the currencies of the euro area’s main trading partners (US dollar, pound sterling, Chinese renminbi, Japanese yen, etc.). They are expressed as an index number which has been set equal to 100 in the first quarter of 1999. An increase in the EER means that the euro has appreciated. The EERs have been constructed with trade weights that combine information on exports and imports, also accounting for the so-called third-market effects. For more details, see the methodological note on [link].

The ECB compiles and publishes EERs of the euro vis-à-vis three groups of trading partners: the EER-12, consisting of 12 industrialised and newly industrialised trading partners of the euro area; the EER-21, comprising the EER-12 plus China and the other eight non-euro area EU Member States; and the EER-41, comprising the EER-21 plus 20 other relevant trading partners. The ECB publishes nominal and real EERs of the euro; the latter are deflated by consumer price indices, producer price indices, GDP deflators and unit labour cost indices (the latter for the total economy, as well as for manufacturing only).

The ECB also publishes HCIs for all individual euro area countries based on consumer price indices, GDP deflators and unit labour costs for the total economy. These indicators are constructed using the same methodology and data sources as those employed in the calculation of the real EERs of the euro. Consistent with the interpretation of the real EER, an increase in the HCI implies that, on average, costs and prices have risen in the domestic economy relative to foreign markets, leading to a decline in cost and price competitiveness of the country concerned.

All these statistics can be found on the statistics pages and/or in the Statistical Data Warehouse on the ECB’s website.