Economic policy surveillance in the European Union The Annual Growth Survey 2015 and the Alert Mechanism Report 2015 Servaas DEROOSE Deputy Director-General.

Economic policy surveillance in the European Union

The Annual Growth Survey 2015 and the Alert Mechanism Report 2015

Servaas DEROOSE

Deputy Director-GeneralEuropean Commission, DG Economic and Financial Affairs

Conference "European Semester: Presentation of the New 2015 Cycle"Zagreb, 10 December 2014

Autumn forecast

Winter forecast

Spring forecast

15 October

In-Depth Reviews

May/June

November

Annual Growth Survey

15 April

Stability/Convergence Programmes National Reform

ProgrammesCountry-Specific

Recommendations

Alert Mechanism Report

The European Surveillance Cycle

Commission's opinions on Draft Budgetary Plans

Euro-area Member States:Draft Budgetary Plans

2

The 2015 Annual Growth Survey: A new momentum for jobs, growth and investment

3

INVESTMENT

FISCAL RESPONSIBILITY

STRUCTURAL REFORMS

The investment gap in the EU is sizeable

4

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

3,039

2,5272,543

2,528

2,567

2,6402,717

3,021

2,657

2,714

2,659 2,647

230

370

Gap compared to sustainable trend

2,869

"Sustainable" trend of investment assuming a share in GDP of 21-22%

2,416

2,606

Real gross fixed capital formation EU-28, in 2013 prices, EUR bn

Source: European Commission

Croatia's investment outlook remains unfavourable

5

2008 2009 2010 2011 2012 201318

20

22

24

26

28

30

Peer countries (average of BG, CZ, HU, PL, RO, SI, SK)

EU

Croatia

-15

-10

-5

0

5

10

GFCF

Changes in inven-tories

Net exports

GDP growth

Cons.

Nominal investment (GFCF, % of GDP) Real growth and contributions between 2008 and 2013, Croatia (%)

Source: European Commission Source: European Commission

The Juncker Commission's "Investment Plan for Europe"

6

Strong boost to strategic investments Better access to investment finance

for SMEs and mid-cap companies Strategic use of EU budget Flexibility in the Pact for Member States

contributing to the new Fund Better use of the European Structural

and Investment Funds

MOBILISING FINANCE FOR INVESTMENT

Project pipeline preparation and selection Technical assistance at all levels Strong cooperation between National

Promotional Banks and the EIB Follow-up at global, EU, national and regional

level, including outreach activities

MAKING FINANCE REACH THE REAL ECONOMY

Predictability and quality of regulation Quality of national expenditure, tax systems and

public administration New sources of long-term financing

for the economy Removing non-financial, regulatory barriers in key

sectors within our single market

IMPROVED INVESTMENT ENVIRONMENT

The new European Fund for Strategic Investments (EFSI)

7

EU guarantee

EUR 16 bn*

EUR 16 bn

x 15

Long-term investments circa EUR 240 bn

SMEs and mid-cap firmscirca EUR 75 bn

EUR 5 bn

European Fund for Strategic InvestmentsEUR 21 bn (initially)

Total extra over 2015-17:circa EUR 315 bn**

EUR 5 bn

Possible other public and private

contributions

* 50% guarantee = EUR 8 bn from Connecting Europe Facility (3.3), Horizon 2020 (2.7) and budget margin (2)

** Net of the initial EU contributions used as guarantee: EUR 307 bn

Renewed commitment to complementary structural reforms in the EU

8

Making the Single Market in goods & services a priority

The Digital Single Market: essential for jobs, growth and innovation

A resilient Energy Union with a forward-looking climate change policy

Ensuring an EU regulatory framework supportive of jobs, growth & investment

AT EU LEVEL AT MEMBER STATE LEVEL

Improving labour market dynamics Pursuing pension reforms Modernising social protection Improving the flexibility of

product & services markets Creating better conditions for

business investment Strengthening the quality of R&D

investment Boosting the efficiency of public

administration

Germany France Croatia

• Tax and SSC reduction for low-wage earners

• Cost-effectiveness of renewable energy

• Competition in services & railway markets

• EU-wide public procurement• Retail business restrictions

• Labour cost reduction• Labour market rigidity, ALMP &

vocational training• Efficiency of innovation • Professional services & business

restrictions• Competition in network industries

• Governance of state-owned enterprises

• Efficiency of public administration & EU funds

• Educational outcomes• Employment of young & old,

labour market & wage setting• Property tax base, tax

expenditure & compliance• Portfolio screening of banks

Italy Spain Ireland

• Efficiency of public administration• Labour market and wage setting• Youth employment & vocational

training• Tax shift and compliance• Competition & regulatory

framework• Banking sector resilience & access

to finance

• Labour market segmentation & ALMP

• Youth employment & vocational training

• Market unity & professional services

• Efficiency of public administration• Savings banks & access to finance

• Bank restructuring, NPLs & access to finance

• Long-term & youth unemployment, skill mismatches

• Labour taxes, tax base on property, consumption & environment

• Financial management in healthcare

Country-specific recommendations reflect structural reform priorities

9

Source: European Commission

Synthetic indicator of progress on implementation of 2012 and 2013 CSRs(100 = full implementation score)

The implementation of the CSRs has been mixed so far

10

0

12.5

25

37.5

50

62.5

75

87.5

100

CY BG CZ LU IT HU SK BE SI DE RO MT FR SE LT UK PL AT LV EE DK NL ES FI

2012 CSRs 2013 CSRs EU average (2012 and 2013 CSRs)

Nopr

ogre

ssLim

ited

prog

ress

Som

e pr

ogre

ssSu

bsta

ntial

prog

ress

Fully

impl

.

Fiscal responsibility remains key as government debt is high and fiscal adjustment needs are large

S1 indicator: required fiscal adjustment by 2020 to reach a 60%

debt-to-GDP ratio in 2030

Government debt(% of GDP)

Structural balance and medium-term objectives, 2014

(% of GDP)

11Source: European Commission

-5

-3

-1

1

3

5

7

9

Autumn 2010Autumn 2014

EE BG LV LT CZ SK NL DE HR AT FR BE IE IT0

20

40

60

80

100

120

140

160

180

2009 2014-2009

UK IE FR MT BE ES LT LV PT FI CY CZ DK LU

-5

-4

-3

-2

-1

0

1

2

3

structural deficit MTO

Alert MechanismReport (AMR)

(Scoreboard and thresholds)

November 2014

Programme countriestheir own enhanced

surveillance

No problemProcedure stops

In-Depth Reviews (IDRs)

Commission prepares in-depth country reviews,

using a wide set of indicators and analytical tools

March 2015

No problemProcedure stops

ImbalancesRecommendations integrated

under European SemesterMay 2015

Excessive imbalancesRecommendations and Specific Monitoring or Corrective Action Plan

May 2015 and continuous monitoring

12

The Macroeconomic Imbalances Procedure (MIP) at a glance

The scope of the AMR's scoreboard

+ auxiliary indicators and auxiliary social indicators (no thresholds)

13

External positions: current accounts, net international investment positions

Competitiveness developments : real effective exchange rates, unit labour costs

Export performance: export market shares

Private sector indebtedness: credit, debt

Public sector indebtedness

Assets markets: housing

Financial sector developments: financial sector liabilities

Unemployment

EXTERNAL IMBALANCES

INTERNAL IMBALANCES

14

16 Member States will be analysed in-depth

15

AMR points to large external liabilities and worsening export market shares in Croatia

UK

SE

DK

CZ LT RO PL

HR

BG

HU

EU

28

Non Euro Area

-120

-100

-80

-60

-40

-20

0

20

40

602008 2013 2015MIP threshold

Source: European Commission. Note: 2015 estimated using net lending/borrowing forecasts. DK, BG, HR and EU28 follow ESA95. PL: break in series in 2013.

04 05 06 07 08 09 10 11 12 13-10

-8

-6

-4

-2

0

2

4

6

0.00

0.03

0.05

0.08

0.10

0.13

0.15

Real GDP growthEmploymentExport market share, goods and services (rhs)

An

nu

al g

row

th r

ate

(%)

%

Net International Investment Positions,2008, 2013 and 2015 (projection), non-EA

countries, % of GDP

Export market shares, employment and GDP growth, 2004-2013, Croatia

Source: European Commission

2012 2013 2014Luxembourg

Malta

Denmark

Belgium

Bulgaria

Finland

Germany

Netherlands

Sweden

United Kingdom

France

Hungary

Ireland

Spain

Croatia

Italy

Slovenia

Cyprus

Greece

Romania

IDR concludes no imbalance

IDR concludes the presence of an imbalance    

IDR concludes the presence of (very) serious imbalance and that imbalances requiring decisive policy action or specific monitoring

IDR concludes an excessive imbalance

programme (not subject to MIP)

16

Macro imbalances evolve over time

The 2014 In-Depth Review highlighted five major risks and imbalances for Croatia

External rebalancing is beset by important risks pending the reduction of Croatia's high foreign liabilities. Low competitiveness eroded export market shares even before the crisis.

Weaknesses in the labour market and in the wider business environment have amplified the impact of the crisis and hamper adjustment towards stronger, more sustainable growth and employment.

The non-financial private sector, (esp. non-financial corporations), entered the crisis highly leveraged after rapid credit growth in the preceding years.

The largely foreign-owned banking system has shown resilience. Still, the weak economy has started to interact with the banking sector, and non-performing loans to corporate borrowers have risen to high levels.

Pro-cyclical fiscal policies have led to sustained pressure on the general government deficit and debt.

Low growth before the crisis, delayed recovery and subdued growth outlook. Higher growth and employment, facilitated by competitiveness, would ease the debt burden.

External and internal imbalances reflected in continued, elevated financial market pressure.

Competitiveness

1

Adjustment capacity

2

De-leveraging

3

Financial stability

4

Public finances

5

17

Specific MIP monitoring in Croatia reveals highly uneven progress since June Progress on fiscal structural reforms piecemeal, facing implementation risks Only limited steps to align budgetary projections to ESA standards Expenditure review preparation in motion but no implementation timeframe Recurrent property tax being prepared but timing unclear Measures to improve pension sustainability yet to be outlined Limited ambition of measures to improve cost-effectiveness of health care

Progress in improving the functioning of the labour markets, labour law reform

Further measures to tackle obstacles to job creation still to be defined Plan for social benefit consolidation needs full political endorsement

Business climate likely to benefit from planned enhancements of early rescue framework and reform of regional state administration

Progress on removing para-fiscal levies slower than expected SOE governance improvements limited, restructuring behind plans Public admininstration and anti-corruption reforms risk being delayed

QUALITY AND SUSTAINABILITY OF PUBLIC FINANCES

LABOUR MARKET & EFFECTIVENESS OF SOCIAL PROTECTION

PROMOTING GROWTH & COMPETITIVE-NESS

18

Assessing the effectiveness of the economic governance framework

19

Step 1Backward-looking reviewNovember 2014

Step 2Specific proposals2015

Conclusions of Step 1

Six-pack/two-pack reforms have achieved deepening and widening of economic governance

Progress in fiscal consolidation and correcting macroeconomic imbalances

Room for improvement: complexity, overlapping, transparency

Need for better involvement of stakeholders and parliaments to improve legitimacy and accountability

Recent and next steps in the European Semester

20

November 2014

European Semester resumed with the AGS The AMR identified countries for in-depth review Draft Budgetary Plans were submitted and evaluated EDP implementation was assessed, following the

Autumn Forecast

Spring 2015

Commission publishes In-Depth Reviews (IDRs) Member States present their National Reform

Programmes and Stability/Convergence Programmes Commission proposes Country-Specific

Recommendations