Transcript Countries with CA deficit

______________________________________________________________________
The ECB and its Watchers
Frankfurt, 9 July 2010
Imbalances and Sustainability
in the euro area
Lorenzo Bini Smaghi
European Central Bank
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EUROPEAN CENTRAL BANK
Up
until
6
months
ago
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The euro was celebrated for its successes
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EUROPEAN CENTRAL BANK
In
particular,
over
its
first
11
years
and
a
half
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The euro delivered price stability
The average inflation rate has been 1.98%
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EUROPEAN CENTRAL BANK
Euro
area
growth
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Has been slightly slower than in the US
125
US
120
EA
115
110
105
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
100
Real GDP (1999=100). Source: IMF and IMF projections (WEO, April 2010)
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EUROPEAN CENTRAL BANK
But
in
per
capita
term
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Growth has been similar to the US
114
112
US
110
EA
108
106
104
102
100
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Per capita GDP (1999=100). Source: IMF and IMF projections (WEO, April 2010)
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EUROPEAN CENTRAL BANK
Strong convergence
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Of most lower income euro area countries
100
ES
90
GR
CY
80
SI
MT
70
PT
SK
60
50
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Per capita GDP in PPS (euro area = 100) Source: EC.
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But
there
have
been
divergences
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In the performance of euro area countries
These divergences have been pointed out on
various occasions by the ECB
e.g.:
Monthly Bulletin, April 2007, “Output growth differentials in
the
euro area: sources and implications”, pages 73 - 86
Monthly Bulletin, November 2008, “Monitoring labour cost
developments in the euro area countries”, pages 76-86
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EUROPEAN CENTRAL BANK
Divergences
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In the rate of growth of GDP
160
IE
GR
150
ES
140
FI
FR
130
DE
120
PT
IT
110
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
100
Real GDP Developments (1999=100) Source: IMF and IMF projections (WEO, May 2010) for real GDP.
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Which
were
not
aligned
with
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The rate of growth of domestic demand
Net trade
Domestic demand
Stocks
GDP
FI
ES
6
5
4
3
2
1
0
-1
-2
IT
DE
PT
EA
FR
BE
AT
NL
GR
LU
IE
Real GDP and demand composition (average 1999-2008) Source: EC
Notes: countries ranked in ascending order according to real GDP growth.
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Fuelled
by
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Excessive credit growth in some countries…and
very slow in others
19
17
15
13
11
9
7
5
3
1
DE
BE
AT
EA
FR
IT
NL
LU
FI
PT
ES
GR
IE
Loans to the private sector (average 1999-2008) Source: ECB
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In
particular
in
the
housing
market
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Of some countries
Construction investment in % of GDP
Cumulated changes in real house prices
100
21
90
Ireland
19
80
17
70
Spain
60
Spain
15
Ire land
50
40
13
30
11
2008
2006
2004
2002
2000
2008
2002
2004
2006
2000
1994
1996
1998
1992
0
1988
1990
7
1982
1984
1986
10
1980
9
1998
20
Source: Own computation on EC, ECB. Real house prices deflated with HICP
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EUROPEAN CENTRAL BANK
And
divergences
in
cost
competitiveness
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Driven by excess growth of wages with
respect to productivity
135
GR
130
IT
125
ES
IE
PT
120
115
EA
110
105
DE
100
95
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Competitiveness calculated on the basis of Unit Labour Costs, relative to Germany. 2000Q4= 100 Source: Eurostat.
Note: Quarterly data up to 2010 Q1 for Germany and Spain, 2009Q3 for Ireland and 2009Q4 for the other countries, except for Portugal which is based on
annual data (up to 2009). Note: The ULC indices are set to 100 in the last quarter before the euro area accession of Greece. The ULC developments presented
for Greece and Portugal might differ from the calculations made by the National Central Banks. The quarterly pattern in Greek ULC is affected by substantial
volatility in quarterly compensation of employees figures.
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Producing
deficits
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In the current account positions of some countries
5
0
IE
ES
-5
PT
-10
GR
-15
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Current account in % of GDP. Source: EC. Note: 2010 is forecast (EC May 2010)
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And
surpluses
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In the current account position of other countries
10
NL
DE
5
AT
FI
0
-5
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
-10
Current account in % of GDP. Source: EC. Note: 2010 is forecast (EC May 2010)
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Producing divergent net asset positions
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And significant external indebtedness in
persistent deficit countries
40
20
0
-20
-40
-60
-80
-100
BE NL DE FI
FR AT EA IT
SI
SK IE
ES GR PT
Net foreign assets / liabilities in % of GDP (2008). Source: EC.
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As
a
result
of
the
global
crisis
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The imbalances accumulated within the euro
area have given rise to broader divergences,
affecting the relative price of various risks
prevailing in the member states, in particular
sovereign risk but also bank solvency
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The
challenge
going
forward
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For all euro area countries is to:
• Regain control over budgetary policy
• Achieve stronger and more balanced growth
For the euro area as a whole:
• Achieve a better institutional framework that
ensures a better prevention and crisis
management for the future
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EUROPEAN CENTRAL BANK
The
fiscal
adjustment
has
started
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In all euro area countries
160
GR
140
IT
120
PT
100
FR
IE
80
DE
60
ES
40
FI
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
20
Public Debt in % of GDP
Source: EC and 2010 Stability Programmes targets for Government debt. For IT available up to 2012, for IE up to 2014 and for the remaining
countries up to 2013. For GR EC/ECB/IMF programme
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The
task
will
be
daunting
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not only in the euro area….
Over 5 years
Adjustment
25
20
15
10
5
0
IT
DE
AT
NL
PT
GR
FR
ES
US
JP
UK
IE
Adjustment of the primary balance required to stabilise the public debt/GDP ratio at the 2007 level
Source: Cecchetti, Mohanty and Zampolli (2010), “The future of public debt: prospects and implications” BIS working paper n.300. Notes: The
purple bars indicate the average primary balance required to stabilise the public debt/GDP ratio at the 2007 level over 5 years. The yellow bars
indicate the adjustment from primary balance in 2011 to the target average primary balance. Starting point: 2011; consolidation from 2012.
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And
can
hardly
be
achieved
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Unless euro area (and other) countries
implement strategies aimed at stronger and
more balanced growth
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EUROPEAN CENTRAL BANK
Given
the
existing
imbalances
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The recipe differs across countries
Low growth
CA Surplus
CA Deficit
High growth
DE
FI, LU, NL,
BE, AT
IT, PT
ES, GR, IE
(SL,SK,CY)
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EUROPEAN CENTRAL BANK
Countries
with
CA
deficits
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Countries with persistent and deteriorating
external deficits should adopt measures to:
1. Become more competitive
2. Increase net private savings
3. Rebalance sources of growth towards
tradable
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Countries
with
CA
deficits
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The strategy requires:
- Wages increasing less than productivity
- Labour market reforms (contracts at firm level)
- Strengthening of the financial sector (to allow for
de-leveraging)
- Reallocation of resources to the high productivity
growth sectors leading to a change of the
structure of the export sector
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Countries
with
CA
deficit
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Need to upgrade the technological content of
exports
50%
45%
40%
35%
30%
25%
20%
15%
PT
ES
IT
GR
AT
EA
FI
DE
IE
BE
NL
FR
Trade structure - Degree of overlap in export specialisation between selected economies and China (average
overlap over 2005-2008). Source: CHELEM and ECB calculations.
Note: The degree of overlap in export specialisation is determined by comparing Balassa Indices for 72 industries.
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Countries
with
CA
surplus
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For countries with persistent and external
surplus, the recipe cannot be doing the opposite
of what the countries with CA deficit are expected
to do i.e.:
- Become less competitive
- Reduce domestic savings
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EUROPEAN CENTRAL BANK
Impact
of
other
countries’
adjustment
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As countries with CA deficit are expected to grow less
over the next few years and will aim at regaining
competitiveness, there is a risk that demand for net
exports for countries with a CA surplus will decrease:
“Germany will be less German if the other euro area
countries start behaving like Germany”
However, markets outside the euro area are likely to grow
more than within the euro area.
Competitiveness with the rest of the world is essential
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Germany
Directions
of
trade
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Growing trade with Emerging economies
12.0
Intra
10.0
Extra
8.0
6.0
4.0
Russia
China
DK/SE
CH
US
EU-8
Emerg. countries
IE
GR
PT
ES
BE
AT
IT
NL
FR
0.0
UK
2.0
German exports towards larger trading partners in % of total exports in 2008. Source: IMF. Emerging and developing countries
excludes EU8, China and Russia. It includes other Eastern Europe, other CIS, other developing Asia, Middle East and North Africa, Western Hemisphere.
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EUROPEAN CENTRAL BANK
Countries
with
CA
surplus
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On the other hand, having a successful export sector and
a trade surplus is not necessarily a guarantee of high
growth of GDP, employment and income
Why?
• The tradable sector might not be sufficiently large to
pull the rest of the economy
• The tradable sector absorbs a relatively minor share
of employment
• Limited spillovers to the non tradable sector due to
excessive regulation/protection in the domestic
market
• Lack of incentives for private domestic investment
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Strong
export
growth
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Does not necessarily imply strong GDP growth
Exports growth
8
GDP growth
7
6
5
4
3
2
1
0
IE
DE
FI
AT
GR
NL
EA
ES
BE
PT
FR
IT
Export and GDP growth (average growth 1999-2008). Source: EC
Notes: countries ranked in ascending order according to exports growth.
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Strong
export
growth
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Does not necessarily imply strong investment
growth
Exports growth
8
Investment growth
7
6
5
4
3
2
1
0
IE
DE
FI
AT
GR
NL
EA
ES
BE
PT
FR
IT
Export and investment growth (average growth 1999-2008). Source: EC
Notes: countries ranked in ascending order according to exports growth.
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Strong
export
growth
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Does not necessarily imply strong employment
growth
Exports growth
Employment growth
8
7
6
5
4
3
2
1
0
IE
DE
FI
AT
GR
NL
EA
ES
BE
PT
FR
IT
Export and employment growth (average growth 1999-2008). Source: EC
Notes: countries ranked in ascending order according to exports growth.
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Strong
export
growth
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Does not necessarily imply strong income growth
Exports growth
Real compensation growth in manufacturing
8
7
6
5
4
3
2
1
0
IE
DE
FI
AT
GR
NL
EA
ES
BE
PT
FR
IT
Export and investment growth (average growth 1999-2008). Source: EC Notes: countries ranked in ascending order according to exports
growth. Real compensation deflated with HICP. For PT and EA, 1999-2006 average is shown for real compensation growth
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Strong
export
growth
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Is achieved through high productivity growth, but
is not sufficient to deliver employment growth
Employment
Productivity
GDP
6
5
4
3
2
1
0
-1
-2
IT
DE
PT
EA
FR
BE
AT
NL
FI
ES
GR
LU
IE
Real GDP and supply composition (average growth 1999-2008). Source: EC
Notes: countries ranked in ascending order according to real GDP growth.
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Employment
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Is bound to grow mainly in the services sector
Germany: Sector shares in total employment (in percent)
Manufacturing
Services
21
Construction
74
8
73
20
7
72
71
19
6
70
5
69
18
68
4
67
17
66
2000
2007
2009
3
2000
2007
2009
2000
2007
2009
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Source: Eurostat.
34
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But
the
Service
sector
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Is highly regulated (professional services)
3.5
3
2.5
2
1.5
1
0.5
0
IT
DE
GR
AT
PT
EA
BE
FR
ES
NL
US
FI
IE
UK
Product Market Regulation (PMR) index in professional services (the professional services indicators cover entry and
conduct regulations in the legal, accounting, engineering, and architecture professions, 2008). Source: OECD . Note: A
higher figure means higher regulation. PMR index ranges from 0 to 6.
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Countries
with
CA
surplus
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Stronger and sustainable growth cannot be
achieved only through continuous improvements
in the competitiveness of the tradable sector but
requires increasing growth potential in the non
tradable sector, in particular services
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The
above
tasks
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Are mainly the responsibility of the member states,
because they involve competences which are still national
(taxation policy, labour markets, product markets,
education, research and development…)
We should avoid repeating the mistakes of the Lisbon
Agenda, which creates EU objectives without providing
the EU the instruments to achieve these objectives
But the EU/EA institutional framework needs to be
strengthen because problems in some member states may
affect the other member states
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Principles
for
reform:
“three
don’t”
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1. Don’t assume that all (agents/governments/markets)
have learned the lesson from this crisis:
Stronger surveillance and crisis prevention
2. Don’t assume that there will be no more crises:
Crisis management
3. Don’t assume that there are “easy solutions” to
complex problems (“orderly debt restructuring”;
“expulsion”…)
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ECB
contribution
to
the
Van
Rompuy
TF:
______________________________________________________________________
1. strengthening surveillance over budgetary policies
and more effective prevention/correction of excessive
deficits and debts
2. improving framework for competitiveness surveillance
and the correction of economic imbalances via a traffic
light system
3. designing an appropriate euro area framework for crisis
management
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Differences with Commission proposals
______________________________________________________________________
ECB thinks the Commission should go further:

Clear and agreed triggers to detect vulnerabilities
and define surveillance needs
Surveillance missions by COM, ECB
Adoption of a “corrective policy programme”

Strengthening fiscal surveillance
Quasi-automatic initiation of EDP procedure
Independent national fiscal institutions

Relying more on incentives and sanctions
Reversal of voting majorities in EDP
Introduce sanctions for persistent imbalances
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Strengthen
the
E
of
EMU
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Complete the Single Market (Monti report):
• Removing barriers to trade and to cross-border
activities, especially in the service sector (full
implementation of the service directive)
• Accelerating the uptake of new technologies – foster
a Digital single market
• Promoting a common energy market
green growth)
(competition,
• Fostering a single market for capital and financial
services
• Eliminating business investment restrictions
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A
priority:
the
service
directive
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The service provisions in the EU is badly
fragmented
(only 20% of services provided in the EU have a
cross-border dimension)
A full implementation of the services directive
would result in an increase in growth potential
of 0.6-1.5% of EU GDP
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42
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Conclusions
______________________________________________________________________
Will it work?
The crisis has triggered a mood for change. Many
governments
are
now embarking on fiscal
consolidation strategies
There is awareness that fiscal discipline has to be
supported by ambitious programmes of structural
reforms to strengthen growth potential
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43
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Example (I): labour market reform in Spain
______________________________________________________________________
In June 2010, the Spanish government has approved a
reform of the labour market:
- Two main objectives: reduce the large proportion
of temporary contracts (so called duality of the
labour market) and improve the flexibility of firms’
labour conditions to economic circumstances
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Example (II): structural reforms in Greece
______________________________________________________________________
• The
law on the Financial Stability Fund (FSF) was
submitted to Parliament in June. The FSF will
contribute to safeguarding financial sector stability by
providing equity support to Greek banks should they
face solvency problems.
• Newly-created independent Hellenic
Authority (strengthening data reliability)
Statistics
• Labour market reforms include changes to the
framework for wage bargaining, new legislation on
minimum wages, reduced severance payments and
legislation to increase the flexibility of working hours
and part-time work
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The experience of the last few months
______________________________________________________________________
Shows that
Countries reacted late, and under the
pressure of markets
But they reacted
Showing the willingness to do what is
needed to overcome the crisis, being full
members of the euro area
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46
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Indeed
______________________________________________________________________
This is not a crisis of the euro, it’s a crisis of
advanced countries’ ability to adapt to a
changing global economy
Membership of the euro has for long delayed the
recognition of the problem
But the euro exposed countries earlier to the
need to adjust
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Ultimately
______________________________________________________________________
The challenges for advanced countries can be
addressed only through:
- budgetary policies
- structural policies
The earlier countries recognize this, the sooner
they will implement the right policies
And the stronger they will get out of the crisis
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48
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______________________________________________________________________
Thank you for your attention
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49
EUROPEAN CENTRAL BANK
______________________________________________________________________
Background slides
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50
EUROPEAN CENTRAL BANK
Competitiveness surveillance
______________________________________________________________________
Traffic light system
Focus:
Differentiate intensity of problems
competitiveness surveillance
and
Elements: Small number of indicators in order to
assess which Member States would require
 no specific surveillance (green),

standard surveillance (yellow) or

intense surveillance (red)
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51
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Fiscal
framework
(I):
Euro
area
dimension
______________________________________________________________________
Enhancing the euro area dimension of fiscal
policy surveillance by:
 strengthening ex ante discussions in the Eurogroup
(early review of national budgetary plans by Eurogroup; issuance of precise
fiscal policy guidelines)
 making the Eurogroup the guardian of fiscal sustainability
(Eurogroup to review how common guidelines have been incorporated into
national budgets; deviations from guidelines to engender warnings from
Commission, triggering comply-or-explain approach)
52
Fiscal
framework
(II):
Better
implementation
______________________________________________________________________
Strengthening the implementation of rules and
procedures by:
 increasing the quasi-automaticity of the EDP procedures
and steps
(initiation of EDP quasi-automatically once the 3% deficit or the 60% debt
criterion are breached: reverses ‘burden of proof’ - Council needs to decide
explicitly to stop escalation of procedure)
 the quasi-automatic initiation of sanctions
(sanctions/means to encourage compliance to be applied earlier, or if country
fails to correct excessive deficit by the given deadline)
53
Fiscal
framework
(III):
Make
use
of
sanctions
______________________________________________________________________
Strengthening the implementation of sanctions
in case of non-compliance by:
 earlier application of sanctions, already under the
preventive arm, and in any case for excessive deficits
(already under the preventive arm, and in any case for excessive deficits; with
increasing severity and duration of fiscal imbalance, scale of sanctions to be
increased)
 broadening the scope of application of sanctions
(including for excessive debt ratios and in cases where progress towards the
medium-term budgetary objective is insufficient)
54
Fiscal
framework
(IV):
Broader
set
of
sanctions
______________________________________________________________________
A wider spectrum of sanctions and creation of
new types of means to encourage compliance:
 financial sanctions
(e.g. reduced access to EU funds and transfers)
 non-financial sanctions
(limitation or suspension of voting rights)
 procedural sanctions
(detailed specific adjustment programmes; more stringent reporting
requirements; on-site monitoring via special missions by Commission, in liaison
with the ECB; requirement to seek prior Council consent for national
budgetary measures or borrowing)
55
Fiscal
framework
(V):
Leaner
surveillance
______________________________________________________________________
Leaner and more effective fiscal surveillance by:
 differentiating the surveillance processes applied to
Member States according to their fiscal performance
(focus on most critical cases; lighter surveillance for well-performers)
 assigning greater responsibilities to the Commission in
making recommendations/proposals
(reversal of voting majorities in the Council (e.g. sanction deemed adopted
unless opposed by the qualified majority); Commission to make proposals
rather than recommendations; strengthening Economics Commissioner inside
the collège; Commission to assess individual fiscal policy measures and possibly
publish assessment)
 measures to enhance the quality of statistics
(enhance powers of Eurostat, e.g. to conduct audits)
56
Fiscal framework (VI): national link
______________________________________________________________________
Enhancing national fiscal frameworks by:
 a strengthening of national legislation related to national
fiscal rules and institutions
(consistent with the provisions of the EU fiscal framework, to anchor SGP rules
in national law)
 establishment in all Member States of independent budget
offices or fiscal monitoring institutions
(with the task of monitoring that objectives of SGP and national rules are fully
respected)
57
The
euro
area
has
started
the
adjustment
______________________________________________________________________
On the fiscal side
100
US
90
EA
80
70
60
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
50
Public debt in % of GDP
Sources: IMF and IMF projections (WEO, April 2010) for US and aggregation of Stability Programmes for EA. The US projections are based on the 2010
administration’s budget and the U.S. Congressional Budget Office’s budget outlook for 2010–19. These projections include the $787 billion stimulus package
under the American Recovery and Reinvestment Act of 2009. They are adjusted for differences in forecasts of (1) macroeconomic and financial variables, (2)
the timing of stimulus disbursements, (3) additional costs to support financial institutions and government-sponsored enterprises, and (4) the effect of financial
sector support on government-owned financial assets.
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