EU Economic governance European Commission Directorate-General for Economic and Financial Affairs Communication Alexis Yamajako Information and Communication Officer
Jan 18, 2016
EU Economic governance
European CommissionDirectorate-General for Economic and Financial AffairsCommunicationAlexis YamajakoInformation and Communication Officer
2015: The €
4
Growth backed by tailwinds
• lower oil price
• euro depreciation
• supportive macroeconomic policies(Accomodative monetary and broadly neutral fiscal)
5
Growth decomposition 2015 (from the spring forecast)
6
Table 1:Euro area GDP growth decomposition
2015
Euro area GDP growth 1.5
- Potential output growth 0.8- Oil price decline 0.5- Monetary conditions 0.8- Geopolitical tensions -0.2- Residual -0.4
Major new elements since Spring: - Slowdown of world trade- Arrival of asylum-seekers
External environment (2)
7
China's trade volumes fell in 2015-H1…
…but also other EMEs matter for EU export growth
The EA/EU outlook
8
EU: 1.9% (2015), 2.0% (2016), 2.1% (2017)
Euro area GDP forecast growth decomposition 2016
…only a moderate increase in equipment investment
9
Investment recovery weak by historical standards and…
Investment still weak
979899
100101102103104105106107
0 1 2 3 4 5 6 7 8
Past recoveries Current recovery 2009-11
Quarters
index
Note: Past recoveries included are those from the mid-1970s, early-1980s and early-1990s.
10
Real disposable income …
Private consumption robust
EA private consumption: 1.7% (2015), 1.7% (2016), 1.5% (2017)EU private consumption: 2.1% (2015), 2.0% (2016), 1.8% (2017)
…supports private consumption
Real GDP growth in 2016 (%)
Growth differences persist
Gradual normalisation of inflation
-2
-1
0
1
2
3
4
5
08 09 10 11 12 13 14 15 16 17
y-o-y %Energy andunprocessedfood [pps.]
Othercomponents(core inflation)[pps.]
HICP, allitems
forecast
13
Risks to growth:Tilted to the downside
Risks on the upside
• Larger / longer impact of "tailwinds"
• Stronger rebound in global growth
• Impact of structural reforms
Risks on the downside
• Stronger or more protracted slowdown in emerging markets
• Uncertainty, financial market instability
• Geopolitical tensions
• Fading tailwinds not replaced
• Volkswagen
Risks
Demographic factors
Asylum seekers are catching the news
14
Migration more generally on the rise
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Asylum applicants
2015 projection
Source: Eurostat, DG ECFIN extrapolation; Member State projections
15
Arrival of asylum-seekers
1. How many people expected in 2015-2017?
2. Fiscal impact (immediate)• Costs/head differ accross "transit" and "destination" countries• Indications from MS so far: between 0.1 and 0.3% of GDP
2014 2015 2014 2015 2014 2015
Non-EU national arrivals
170,000 165,000 40,000 500,000 20,000 250,000
Asylum applicants 65,000 80,000 7,500 12,000 40,000 330,000
Asylum applicants (% of population)
0.11% 0.13% 0.07% 0.11% 0.40% 3.35%
Italy Greece Hungary(1)
Refugee inflows for main transit countries
2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015
Asylum applicants 550,000 1,200,000 173,000 700,000 75,000 165,000 60,000 61,000 32,000 40,000 25,675 46,000 15,000 37,000 22,000 40,000
Asylum applicants (% of population)
0.11% 0.24% 0.21% 0.86% 0.78% 1.69% 0.09% 0.09% 0.05% 0.06% 0.30% 0.54% 0.13% 0.33% 0.13% 0.24%
Refugee inflows for main destination countries
EU 28 Germany Sweden France UK Austria Belgium Netherlands
16
Arrival of asylum-seekers (2)
3. Labour supply impact (medium-term) Depends on rate of recognition as refugee, working age,
skills, integration policies
4. Simulations suggest positive but small impact on EU; larger for major destination countries EU no more than ¼% (cumulated) by 2017 DE up to 0.6% (cumulated) by 2017
•Programme countriesIreland: Economic Adjustment Programme agreed in December 2010 >> a joint financing package of €85 billion for 2010-2013. Exit end 2013. Now post-Programme surveillance
Spain: for bank recapitalisation agreed by the Eurogroup in July 2012 for 18 months > up to €100 billion >> € 38.9 billion actually used. Exit January 2014. Now post-Programme surveillance
Portugal: Programme adopted by Eurogroup 17 May 2011 for 2011 to mid-2014 with package of €78 billion. € 76.9 paid out. Now post-Programme surveillance
Cyprus: agreed by May 2013 for 2013-2016 and up to €10 billion (ESM up to € 9bn, IMF expected € 1bn). ESM paid out so far € 5.7bn, last in Q1/2015; IMF €0.5bn) Greece: Two programmes. First paid out €73bn (EAMS 52.9 + IMF 20.1) May 2010 – December 2011. Second paid out since March 2012: €153.6bn (EFSF 141.9 + IMF 11.74). Last payment made in August 2014 of € 1bn. Total: €226.6bn. Max: € 240bn.
Crisis timeline
2007 - Subprime crisis
2008 – Financial crisis
2009 – Economic crisis
2010 – Sovereign debt crisis
2011 – 2012 systemic crisis of the euro?
Excess credit + prolonged upswing + expectations
Defaults cause bank losses, distrust rises
Credit crunch; high risk aversion hits trade & investment
Recession hits tax revenues; welfare spending rises; GDP denominator falls
Contagion spreads crisis through financial and economic links; speculation on exit & breakup
Bank recapitalizations + guarantees
2013 – 2015 further reforms, investment, fiscal responsibility
Assistance programmes +EA financial backstop
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 – Observed trend vs. "sustainable" levelEU-28, in 2013 prices, € bn
•Crisis: What went wrong? Macroeconomic perspective
• Fundamental (Structural) issue of misallocation of resources• Bubbles • Pro-cyclical (excessive) government spending• Excessive external deficits (excessive consumption) • Excessive leverage (borrowing) of the financial sector• Aid to banks, loss of tax revenue due to recession + fiscal stimulus > public
debt
Economic and Monetary Union
Economic Monetary
Common monetary
policy (ECB): money
supply and interest rates
Economic coordination
and governance
Deteriorating competitiveness in the run-up to the crisis
Source: AMECO
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 201490
100
110
120
130
140
150
DE IE EL ES FRIT AT PT EA-18
Unit Labour Cost, year 2000 = 100
Did we have tools to monitor ULC developments previously?
Do we have them now?
•EU economic governance: Macroeconomic Imbalance Procedure
•Since 2011, to monitor and correct emerging imbalances
o Asset bubbles, excessive private sector indebtedness, deteriorating competitiveness in real economy
o Preventive Alert Mechanism Report In-Depth Reviews MIP-related recommendationso Corrective Excessive Imbalance Procedure Possibility of fines
•… but the need for improvement goes even further
• Labour market segmentation• Ineffective taxation• Barriers to entry for professional services• Lack of competitive pressures in product markets• Inefficient judicial systems
• What is setting back the growth of the economy & job creation in your country?
• What do we do to ensure the implementation of reforms?
15th October
November
15th April
May/July
Country-Specific Recommendations (CSRs)
Including fiscal, Imbalances, Structural Reforms & Europe 2020 targets
Whole Year Surveillance & Implementation of Reforms cycle
Autumn Forecast
Winter Forecast
Spring Forecast
Commission's opinion on draft budgetary plans
Stability and Convergence Programmes (SCPs)National Reform Programmes (NPRs)
• European Semester
•Major reform priorities addressed in the current Semester
Fiscal Consolidation
Long-term sustainability
Taxation
Banking
Housing
Access to finance
ALMP & participation
Wage setting
Education
Social polices
Health care
Childcare
Innov. & competitiveness
Competition
Energy, networks
Public administration
Fina
ncia
l sec
tor
Hum
an c
apit
al a
nd so
cial
pol
icie
s.
0 5 10 15 20 25 30
2014
2013
Number of CSRs in 2013 and 2014, by policy area
Source: Commission services
BG CZ LU IT HU SK BE SI DE RO*
MT FR SE LT UK PL AT LV EE DK NL ES FI0%
10%
20%
30%
40%
50%
60%
70%
Average implementation of 2013 CSRs by policy area and by country (100% = full implementation score)
The percentages are based on an unweighted average of implementation scores across CSRs, building on 5 progress categories.
Public administration
Human capital and social policies
Labour market reforms
Product market reforms
Public finance
Financial sector
0% 5% 10%15%20%25%30%35%40%45%50%
The implementation of the reforms so far has been mixedwide divergences between the sectors/priorities, even wider divergences between MS
27
•The two arms: Stability and Growth Pact • to safeguard sound public finances • Was there all the time• Each Member State required to stay within the limits of
(defined in the TFEU): government deficit (3% of GDP) & debt (60% of GDP)
Preventive Arm– Submission of Annual Stability and Convergence Programmes– Country-Specific Medium-Term Budgetary Objectives – MTO Corrective ('Dissuasive') Arm– Excessive Deficit Procedure – EDP– Sanctions
•Six Pack, Two Pack & Fiscal Compact - enhanced fiscal surveillance & coordination
•
• Preventive armo Expenditure benchmark to prevent that spending rises faster than medium-term potential GDPo Balanced Budget Rule - structural deficit must not exceed 0.5% of GDP (or 1.0% of GDP if debt significantly <
60% of GDP)
• Corrective armo Debt criterion became enforceable
→ EDP can be launched on deficit and debt criterion→ 1/20th target - debt must decrease by 1/20th of GDP annually if > 60%
• Strengthened budgetary surveillanceo Draft budgetary plans submitted to the Commissiono Common budgetary timeline for an enhanced coordinationo Independent Fiscal Councils established in the Member States
• Strengthened enforcemento For MS in EDP the deposits and fines kick in earliero Reverse QMV for graduated financial sanctions 30 of 53
SGP flexibility
Preventive arm Corrective arm
Investment Allowed deviation from the MTO or the adjustment path towards it
EFSI contribution SGP-neutral
Structural reform
Allowed deviation from the MTO or the adjustment path towards it
Whether to open or not an EDP (relevant factors)-Deficit (if breach is close and temporary)-Debt
EDP recommendation-Setting the deadline and length of poss. Extension
Cyclical conditions
Modulation of fiscal effort with economic conditions (and sustainability risks)
Effective action methodology
Severe economic downturn clause: redefining fiscal effort
Cyclical conditions – preventive arm• Modulation of fiscal effort with economic conditions and sustainability
risk
• Avoiding discontinuities Required annual fiscal adjustment*
ConditionDebt below 60% and no sustainability risk
Debt above 60% or sustainability risk
Exceptionally bad times
Real growth <0 or output gap <-4
No adjustment needed
Very bad times-4 ≤ output
gap <-30 0.25
Bad times-3 ≤ output gap < -1.5
0 if growth below potential, 0.25 if growth
above potential
0.25 if growth below potential, 0.5 if growth
above potential
Normal times-1.5 ≤ output
gap < 1.50.5 > 0.5
Good timesoutput gap
≥ 1.5%
> 0.5 if growth below potential, ≥ 0.75 if growth
above potential
≥ 0.75 if growth below potential, ≥ 1 if growth
above potential
Capital Markets Union, Energy Union Tax transparency
Other issues and questions Trade-off or complementarity fiscal adjustment and structural reforms? What incentives for structural reforms? (contractual arrangements?) How to strengthen policy integration in labour market and taxation? Democratic legitimacy: roles of the European and National Parliaments? Commissioner be able to veto national budgets? Establishment of European Minister of Economy and Finance? What about Eurobonds? EU / euro area?
A blueprint for a deep and genuine EMU
Launching a European debateSecondary
lawTreatychange
ALL ALONG
THE PROCESS
SHORT TERM
Within the next 18 months
1. Full implementation of European Semester and six-pack and quick agreement on and implementation of two-pack
2. Banking Union: Financial regulation and supervision: quick agreement on proposals for a Single Rulebook and Single Supervisory Mechanism
3. Banking Union: Single Resolution Mechanism
4. Quick decision on the next Multi-annual Financial Framework 5. Ex-ante coordination of major reforms and the creation of a Convergence and
Competitiveness Instrument (CCI)
6. Promoting investment in the Euro Area in line with the Stability and Growth Pact
7. External representation of the Euro Area
MEDIUM TERM
18 months to 5 years
1. Further reinforcement of budgetary and economic integration
2. Proper fiscal capacity for the Euro Area building on the CCI
3. Redemption fund
4. Eurobills
LONGER
TERM
Beyond 5 years
1. Full Banking Union
2. Full fiscal and economic union
Political union: Commensurate progress on democratic legitimacy and accountability
36
Flash EB 405, October 2014
Flash EB 405, October 2014
High agreement with the implementation of various economic reforms, except for the increase of retirement age (27%)
Majority in all euro area countries disagree with increase of the retirement age
Thank you for your attention !