Note that, in both cases, aggregate consumption is slightly higher once the infection risk has gone because, having been saving more, the consumer has greater net wealth by that point. Chart 5b: Sharper response when infection rates  Chart 5c: Response smaller when there are  less persistent  close substitutes for risky spending  Finally, Chart 5(c) demonstrates what happens to aggregate spending when the two categories of spending are assumed to be closer substitutes3. Both lines use the shorter-lived spike in infection rates (the red line in 3  The degree of substitutability between two goods corresponds to the sensitivity of their relative demand to a change in their relative price (i.e. the slope of the demand curve). Chart 5(b) and the red line in Chart 5(c) assume that, in normal circumstances, a 1% rise in its relative price would reduce demand for the risky good by 1½%. The grey line in Chart 5(c) doubles this assumed response to -3%. 8  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  8  5(a)). When it’s easier to find a reasonable substitute for the risky spending then, unsurprisingly, that’s what the consumer does. The drop in aggregate spending is also smaller in this case. How do these points square against the real-world experience? It’s hard to test them definitively, with less than a year’s experience to go on. It’s also quite possible that some of these parameters have changed through time.
Stronger competition stimulates a more efficient use and allocation of resources thereby increasing allocative efficiency, exerting downward pressure on costs and triggering price reductions. The extension and deepening of the EU internal market is among the policies that are needed to further improve the functioning of product markets. With service-related activities representing around 70% of value added and employment in the euro area (against almost 80% in the US), more competition in EU service markets is required. The gap between the euro area and the United States in labour productivity has widened considerably since the 1990s and some services sector, such as retail and wholesale trade, account indeed for a large part of this gap: labour productivity growth per person employed was 0.7% in the euro area in 1996-2002 compared to 5.5% in the US in 1996-2001. The euro area should step up measures to boost services market competition in order to increase economic efficiency and economies of scale. This would support a higher level and growth rate of labour productivity in the services sector and promote a more dynamic economy. Moreover, measures aimed at increasing services market competition may have a dampening impact on relative price  7  See Blanchard, O. (2004): “The economic future of Europe”, The Journal of Economic Perspectives, vol. 18, pp. 3-26; and also Gordon, R. J. (2004): “Two centuries of economic growth: Europe chasing the American frontier”, CEPR Discussion Paper, No. 4415.