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

Surveillance of macroeconomic imbalances:

The excessive imbalances procedure (EIP)

Adja A. SiSSOKOEuropean 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 broadermacro-economic surveillance for allMember States focussing on imbalances.

– preventive arm to avoid the build-up ofimbalances

– corrective arm with strong enforcementmechanisms for euro area members wherespill-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)

Exte

rnal

imb

ala

nces

Inte

rnal

imb

ala

nces

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 problemProcedure 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

Sufficientabeyance

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

Sufficientabeyance

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

Sufficientabeyance

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

8D

en

sit

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 12.72 0.13 0.09 39 -8.49 7.3

DK 3.90 9.57 -15.43 0.01 0.10 6.65 245 44 0.54 7.4

EE -0.50 -72.81 -0.58 0.06 0.09 7 -1.07 16.9

LV -0.29 -81.33 13.30 0.09 0.00 -8.77 141 69 -4.82 18.7

LT -2.33 -55.75 14.45 0.09 -0.01 81 38 -13.03 17.8

HU -1.61 -115.31 2.91 0.06 -18.72 155 80 -8.00 11.2

PL -4.98 -63.24 18.03 0.15 3.39 74 55 9.6

RO -6.61 -64.31 25.37 -0.10 0.22 31 -10.83 7.3

SE -22.46 -12.03 -0.03 0.06 0.54 230 40 -4.77 8.4

UK -2.13 -12.98 -25.20 -0.20 0.11 2.70 215 80 -0.19 7.8

Additional indicators for the “economic reading”

European parliament

External imbalances and competitiveness Internal imbalances

Headline

Scoreboard Indicators

3 year average of

current account

balance

as a %

of GDP

Net International

Investment

Position as

a %

of GDP

% change

(3 years) of

Real Effective

Exchange

Rate, HICP

deflators

relative within

35 industrial

countries (a)

% change

(5 years) in

export

market

shares

% change

(3 years) in

nominal

unit

labour cost (b)

y-o-y %

change in

deflated

house

prices (c)

private

sector

credit

flow

as %

of GDP

(d), (e)

private

sector debt

as %

of GDP (d),

(e)

general

government

debt

as %

of GDP

(f)

3 year

average of

unemploy-

ment rate

Additional

indicators to be used

in economic

reading

Net

lending/borrowing

vis-à-vis ROW

(CA+KA) as % of

GDP

Net External

Debt as %

GDP

REER vis-à-vis

rest of the euro

area

Export market

shares based

on volumes of

goods; Labour

productivity;

Trend TFP

growth

Nominal

ULCs

(changes

over 1, 5,

10 years);

Effective

ULC

relative to

the rest of

euro-area

House

prices

(changes

over 3

years);

Residential

construction

Change

in

private

credit

Private

sector debt

based on

consolidated

data

Three year average of Current Account balance as % of GDP

• Rationale: Flow external Imbalances indicator.

• Thresholds: -4/+6% applies to deficit and surplus countries

- Data series:

- Headline indicator: “Current account balance” (annual BOP data) as a share of GDP; source EUROSTAT. The series includes all the available observations between 1960 – 2007.

- Additional indicator: Net lending/borrowing vis-à-vis ROW (% GDP); source EUROSTAT.

Net International Investment Positions as a share of GDP

• Rationale: Stock counterpart of CA/GDP (the stock of debt of the domestic sector of the economy)

• Threshold: -35% (only left tail as large external ASSET positions are not a threat for the functioning of EMU).

• Data series:

– Headline indicator: "Net IIP; total economy" as a share of GDP;

source EURSOTAT (annual BOP data). The series includes all

the available observations between 1980 and 2007.

– Additional indicator: Net external debt (% GDP)

Change (over 3 y.) in Real Effective Exchange Rate HICP deflator

• Rationale: competitiveness indicator: losses and gains in global price competitiveness relative to the major trading partners (35),

• Thresholds: -/+ 5% & -/+ 11% (upper and lower quartile of EA -/+ s.d. of EA)

• Data series:

– Headline indicator: “REER based on HICP deflators; performance relative to 35 trade partners, double export weights”; source DG ECFIN (1995 – 2007).

– Additional indicator: REER vis-à-vis the rest of EA; source DG

ECFIN

Change (over 5 y.) in Export Market Shares (in goods and services)

• Rationale: competitiveness indicator capturing non price competitiveness or the ability of exploiting new sales opportunities (i.e. from emergent countries)

• Thresholds: -6% (lower quartile)

• Data series:

– Headline indicator: “Current account for goods and services”, position: credit, partner: World (annual BOP data); source: EUROSTAT. The series includes all the available observations between 1995-2007.

– Additional indicator: Export market shares based on volumes of goods, labour productivity, trend TFP growth; sources: EUROSTAT, ECFIN

Change (over 3 y.) in Nominal Unit Labour Cost

• Rationale: Measure of cost competitiveness indicator providing a direct link between cost and productivity.

• Thresholds: -/+ 9% & -/+ 12% ( upper quartile EA +3pp)

• Data series:

– Headline indicator: “Nominal ULC”, ratio of nominal compensation per employee to real GDP per person employed; sources: EURSTAT, DG ECFIN. The series includes all the available observations between 1995-2007.

– Additional indicator: Changes (over 1,5, 10 years) of nominal ULCs, effective ULC relative to the rest of EA; source: ECFIN.

Y-O-Y change in Real house prices

• Rationale: recent experiences of asset bubbles

• Threshold: 6% annual increase (only right tail).– The threshold is chosen from the results of Agnello

and Schuknecht (2010):

• Data series:

– Headline indicator: Harmonised houses price index; source EURSOTAT (completed with ECB, OECD and BIS data). The series includes all the available observations till 2007.

– Additional indicator: House price (changes over 1, 3 years), Residential construction development; sources: EUROSTAT, ECFIN.

The private sector credit as a % of GDP

• Rationale: indicator of risks for growth and financial stability (early warning)

• Threshold: 15% (only right tail)

• Data series:

– Headline indicator: Sum of “loans and securities other than shares” for non financial corporations and households, non consolidated N.A. data; source EURSOTAT. The series includes all the available observations between 1995-2007.

– Additional indicator: Change in private credit.

The private sector Debt as a % of GDP

• Rationale: indicator of risks for growth and financial stability.

• Threshold: 160% (only right tail)

• Data series:

– Headline indicator: Sum of “loans and securities other than shares” for non financial corporations and households, non consolidated N.A. data; source EURSOTAT. The series includes all the available observations between 1995-2007.

– Additional indicator: Private sector debt based on consolidated data; source: EURSOTAT.

Government debt ratio

• Rationale: indicator of potential contribution of the government public sector debt to macroeconomic imbalances

• Threshold: 60% (only right tail)

• Data series: "Gross debt of Government Sector" as a share of GDP; source: EUROSTAT EDP (ESA95).

3 year average of Unemployment rate

• Rationale: Indicator of potential misallocation of resources and adjustment capacity.

• Threshold: 10% (only right tail)

• Data series: Labour force survey annual data from EUROSTAT. The series includes all the available observations between 1994-2007.

Excel spreadsheet

How the EIP fits into the European semester

(indicative based on timing of 1st year)

Forthcoming web plate-form

How the EIP fits into the European semester

(indicative based on timing of 1st year)

Example of standardised graph:

Current account vs capital account (2010, 3-year MA)

-15

-10

-5

0

5

10

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

new Member States old Member States

CA

CA+KA

Example of standardised graph:

NIIP and NED (2009, % GDP)

-250

-200

-150

-100

-50

0

50

100

150

200

250

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

-250

-200

-150

-100

-50

0

50

100

150

200

250

NIIP

NED

Part III

Developing analytical tools and frameworks to support

surveillance

Spillovers

• Trade linkages

• Financial linkages

EIP

Adjustment capacity

• Price and wage flexibility

• Labour market flexibility

• Financial market intermediation

• Balance sheet adjustment

Policy options

• Wage bargaining system

• Financial market regulation

• Fiscal policy

• Growth and structural reforms

Sustainability of macro-trends

• Early warning

• Deviation from equilibrium (competitiveness, credit

growth, housing prices)

• Other factors (GDP growth, demography, catching-up,

global imbalances, saving and investment imbalances, housing and other asset markets, shocks)

• Policy determinants (fiscal policy, financial regulation, labour market institutions)

Identification

of

problematic

imbalances

Policy

Response

What is required

• Shared understanding on the analytical:

– the diagnosis of problematic imbalances– the design of appropriate policy responses

� Approach involves literature surveys, event analysis, modelling exercises and cases studies leading to guidance on the approach/principles to be used in multilateral surveillance

• Indicators/tools

– statistical datasets– development of conceptual indicators– information sets on institutional settings at Member State level,

e.g. wage bargaining systems, housing markets

• analytical frameworks or dedicated analysis to identify problematic imbalances, e.g. progress in deleveraging or external positions of catching up countries

• statistical datasets, e.g. the EIP database

• development of conceptual indicators, e.g. CA norms, equilibrium REERs or equilibrium credit

• information sets on institutional settings at Member State level, e.g. wage bargaining systems, housing markets

• analytical frameworks useful for identifying policy responses to imbalances

• training programme

Types of tools/frameworks needed to conduct surveillance on macroeconomic imbalances

40

External imbalances: main issues to address

European Commission

• The anatomy of intra-/extra-EU external imbalances and their drivers

• External debt sustainability

• Channels of adjustment and their functioning

• The role of policies in stimulating adjustment of external imbalances

• External positions of catching up countries

• The role of surplus countries in the adjustment of divergences

• Assessment of competitiveness and export performance and their determinants

External imbalances: indicators, tools and databases

European Commission

Main outputs Project Description of the project

Analytical indicators,

tools or

databases

External DSA

Standardised tool with debt projections and

robustness analysis (e.g. different types of

shocks)

CA/IIP normsIndicators of CA/IIP norms based on different

approaches

Flow of Funds analysis

Standardised tool with F-o-F tables (different level

of detail depending on the purpose of the

analysis)

Stock-flow analysisAnalytical tool to do the stock-flow analysis and

assess the importance of valuation effects

BoP/IIP datasetDataset with BoP/IIP data allowing for detailed

analysis of external positions of countries

42

Internal imbalances: main issues to address

European Commission

Examination of private sector balance sheets to detectunsustainable positions: granular approach

• developments in households, non-financial corporations, MFIs.

• examine stocks, flows and sustainability/vulnerability

• policy factors, e.g. financial regulation, taxation

Asset markets, starting with housing

• assessment of house price developments: event analysis,equilibrium price estimation, supply responsiveness,complementary indicators (affordability ratios)

• examine structural features of housing and mortgage market

• transmission channels: through C, I, credit

Thank you

Additional slides

How EIP fits into the European semester (preventive arm only)

Nov Dec Jan Feb Mar Apr May Jun

EU semster

deliverables AGS

SCPs and

NRPs

Commission

Recommend

ations

Council

adopts

Recomme

ndations

Alert

mechanism Finalise

scoreboard

design AMR

ECOFIN

and

Eurogroup

discussion

In-depth

studies

Preventive

arm:

recommenda

tions under

Article 121,2

included as

part of June

packageCorrective

Surveillance

under the EIP

(preventive

Recommendat

ions

Commission undertakes in-depth

reviews to provide analytical basis

for recommendationss, can

include missions

in liason with the ECB

In-depth

reviews

released