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Surveillance of macroeconomic imbalances: The excessive ... · PDF file The excessive imbalances procedure (EIP) Adja A. SiSSOKO European Commission Directorate General for Economic

Jul 21, 2020

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  • Surveillance of macroeconomic imbalances:

    The excessive imbalances procedure (EIP)

    Adja A. SiSSOKO European Commission

    Directorate General for Economic and Financial Affairs

    Conference on « Role of statistics in managing economic imbalances »

    Radenci 7.-9 November 2011

    European Commission

  • Outline

    • A description of the EIP

    • The scoreboard

    • Developing analytical tools/frameworks

  • Part I

    A description of surveillance under the preventive and corrective

    arms of the EIP

  • Overall changes to economic governance

    European Systemic Risk Board

    financial stability and

    macro & micro level

    Excessive Imbalances Procedure

    external and internal

    imbalances

    European semester and the 2020

    strategy

    growth enhancing

    structural reforms

    Stability and Growth Pact

    fiscal policy

    AND …. the ongoing debate on EFSF/ESM and Eurogroup goverance

  • Diagnosis of problematic imbalances

    • A framework for enhanced and broader macro-economic surveillance for all Member States focussing on imbalances.

    – preventive arm to avoid the build-up of imbalances

    – corrective arm with strong enforcement mechanisms for euro area members where spill-overs are stronger.

    European Commission

  • Broad scope of surveillance

    • External positions (e.g. current accounts, net international investment positions)

    • Competitiveness developments (e.g. REERs, ULCs)Export performance (e.g. export market shares)

    • Private sector indebtedness (e.g. credit, debt)

    • Assets markets (e.g. housing)

    E x te

    rn a l

    im b

    a la

    n c e s

    In te

    rn a l

    im b

    a la

    n c e s

  • Alert

    mechanism

    Economic reading of early warning scoreboard indicators to identify Member States with potential risks

    In-depth review

    Analysis to distinguish between benign and harmful macroeconomic developments and to identify policy options

    No problem Procedure stops.

    Imbalance exists

    Commission/Council recommendations under Article 121.2

    Severe imbalance

    Commission/Council recommendation under Article 121.4

    The preventive arm of the EIP

    Policy response

  • The Corrective Arm

    Member State is placed in “Excessive Imbalance Position”

    Corrective Action Plan

    Surveillance of compliance with

    reform commitments

    Sufficient abeyance

    Insufficient: interest bearing deposit

    Insufficient: Fine

    0.1% of GDP

    Insufficient fine 0.1% of

    GDP

  • The Corrective Arm is INTRUSIVE and FOCUSSED

    Member State is placed in

    an Excessive Imbalance Position

    Corrective Action Plan

    Surveillance of compliance with

    reform commitments

    Sufficient abeyance

    Insufficient: interest bearing deposit

    Insufficient: Fine

    0.1% of GDP

    Fine 0.1% of GDP

  • … and works by reverse Qualified Majority Voting

    Member State is placed in

    an Excessive Imbalance Position

    Corrective Action Plan

    Surveillance of compliance with

    reform commitments

    Sufficient abeyance

    Insufficient: interest bearing deposit

    Insufficient: Fine

    0.1% of GDP

    Fine 0.1% of GDP

  • Challenges in applying the EIP

    • Analytical – large degree of qualitative judgement especially if acting early

    – requires considerable country specific knowledge;

    – data limitations

    – limited consensus on policy responses.

    • Political – Positive : greater awareness of the costs of inaction and spillover

    effects, and not easy to form blocking minorities;

    – Challenge: macro challenges with euro area spillovers that require micro policy responses in areas of national competence

    – … hinge on effectiveness of overall governance package and ongoing discussion to overhaul the Eurogroup

  • Part II

    The scoreboard

  • The alert mecahnism

    • The surveillance begins with an alert mechanism which combines a transparent review of a small set of indicators (i.e. the scoreboard) with economic analysis.

    • The alert mechanism is a trigger device that prompts more in-depth analysis to determine whether observed development are benign or problematic.

  • What role for the scoreboard?

    • Only a trigger for launching in-depth studies are the substantive basis of policy recomendations

    • Scoreboard is nonetheless important – implictly defines the scope of surveillance;

    – a communciation tool.

    • Scoreboard indicators not equivalent to EDP reference values for deficits and debt (more ‘structural indicators in the Lisbon process startegy)

  • The choice of indicators: main considerations

    • Limited SET of indicators that capture external

    and internal imbalances at an early stage, and

    take account of stocks and flows

    • Timely availability (including forecasted data)

    and broad coverage of Member States

    • Aim to respect the principles of the European

    Statistics Code of Practice of the European

    Statistical System (ESS)

  • Example of ‘test’ early warning scoreboard: Portugal 2001-2010

    Scoreboard Analysis: PT

    Thresholds 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

    EXTERNAL

    IMBALANCES

    3 year average of Current Account balance

    as a percent of GDP +6/-4% -9.6 -9.7 -8.4 -7.7 -8.4 -9.8 -10.4 -11.1 -11.2 -11.1

    IIP as % of GDP -35% -48 -55 -57 -63 -68 -79 -88 -96 -109 -108

    % Change (over 3 years) of Real Effective

    Exchange Rate (REER) with HIPC deflators

    +/-5% &

    +/-11% -0.3 2.3 9.6 8.1 5.3 1.4 1.5 2.7 1.3 -2.4

    % change (5 years) in Export Market Shares -6% -15.3 -6.2 1.6 -2.7 -2.9 -4.0 -5.6 -5.4 -13.1 -9.1

    % change (over 3 years) of ULC index

    +9% &

    +12% 11.1 12.0 11.4 8.3 8.6 5.5 5.7 5.6 8.2 5.4

    INTERNAL

    IMBALANCES

    % y-o-y change in House Prices +6% 3.1 1.7 -2.4 -1.9 -2.0 -0.7 -0.6 -1.6 1.3 1.7 0.7

    Private sector Credit flow as percent of GDP 15% 23.1 22.5 12.7 9.8 10.7 14.5 17.2 24.9 21.0 7.1 2.9

    Private sector debt as percent of GDP 160% 173 187 192 197 198 206 210 223 240 251 248

    Public sector debt as percent of GDP 60% 49 51 54 56 58 63 64 68 72 83 93

    3 year average of unemployment rate 10% 4.2 4.4 5.2 6.1 6.9 7.4 7.9 7.9 8.5 9.4

  • Approach to thresholds

    • Distribution (freq.) – over time and across

    countries (in excluding the current crisis years).

    • Identify quartiles (25% of observations) – Upper threshold: the value

    of X for which only 25% of obs. is above.

    – Lower threshold: and the value of X for which only 25% is below.

    • “generous thresholds” followed by investigation

    0 .0

    2 .0

    4 .0

    6 .0

    8 D

    e n

    s it

    y

    -67.5 -52.5 -37.5 -22.5 -7.5 7.5 22.5 37.5 52.5 67.5 % difference from Long Term average reer_gdp 35% change (over 3 years of the RRER_ULC

  • The scoreboard indicators and the indicative thresholds

    External imbalances and competitiveness Internal imbalances

    Year 2010 3 year average of

    Current Account

    balance as a

    percent of GDP

    IIP as %

    of GDP

    % change (5 years) in

    Export

    Market

    Shares

    % Change (over 3 years) of Real Effective

    Exchange Rate

    (REER) with HIPC

    deflators

    % change (over 3 years) of ULC index

    Private sector

    Credit flow as

    percent of

    GDP

    Private

    sector debt

    as percent

    of GDP

    Public

    sector debt

    as percent

    of GDP

    % y-o-y change in

    House Prices

    3 year average of

    unemployment rate

    Threshold +6/-4% -35% -6% +/-5% & +/-11% +9% & +12% 15% 160% 60% 6% 10%

    BE -0.11 65.33 -20.72 0.01 0.08 13.27 234 97 0.17 8.3

    DE 5.83 42.45 -8.36 -0.03 0.07 1.60 127 84 0.73 6.8

    IE -3.14 -12.48 -0.05 -0.02 -4.53 341 95 -9.73 13.7

    EL -12.04 -19.89 0.04 0.10 -0.66 123 143 -5.10 12.6

    ES -6.45 -87.11 -11.47 0.00 0.04 1.40 225 60 -3.86 20.1

    FR -1.66 -19.49 -0.01 0.07 82 4.96 9.7

    IT -2.77 -19.00 -0.01 0.09 119 -1.32 8.4

    CY -2.58 -10.16 15.55 0.01 0.07 61 -7.51 6.5

    LU 6.65 96.12 4.53 0.02 0.12 254 18 2.69 4.5

    MT -6.10 9.17 4.78 -0.01 0.07 69 -1.91 6.8

    NL 5.46 29.43 -6.47 -0.01 0.07 -0.73 223 63 -2.85 4.5

    AT 3.57 -5.15 -17.47 -0.01 0.08 10.62 274 72 -0.99 4.4

    PT -11.13 -107.55 -8.47 -0.02 0.05 2.98 248 93 0.72 11.0

    SI -3.01 -35.74 -6.94 0.02 0.16 2.37 127 39 0.74 7.3

    SK -4.29 -66.40 38.16 0.12 0.09 41 -4.67 14.4

    FI 2.76 6.89 -22.00 0.12 6.80 178 48 7.23 8.4

    BG -10.98 -97.65 16.75 0.10 0.28 -0.18 169 16 -10.69 10.2

    CZ -2.56 -49.38

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