Transcript Choosing the pace of consolidation

FISCAL POLICY
AND
FINANCIAL STABILIZATION
Jean-Luc Schneider
Outline
• The fiscal-financial nexus
• The fiscal trade-offs
• The medium-term challenges
2
The fiscal-financial nexus:
three adverse feedback loops
• Banks balance sheet  Higher sovereign spreads
– Stress test + recognition of non-performing loans (SSM)
– Recapitalisation
– Backstop funding
• Euro exit risk  Impaired monetary transmission
– OMT
– Structural reforms to address the sources of imbalances
• Lower growth  Higher consolidation needs
– Monetary policy
– Medium-term consolidation plan + choice of instruments
– Structural reforms to foster potential growth
3
The fiscal trade-offs: gross debt
110
100
• Debt stabilisation can be
more or less frontloaded
90
80
• To meet a long-term taget,
debt must be curbed
relatively early
70
60
50
2
4
6
8
10 12
14 16 18 20
22 24
Source: Rawdanowicz, L. (2012), “Choosing the Pace of Fiscal Consolidation”, OECD Economics Department Working Papers, No. 992.
4
The fiscal trade-offs: structural primary balance
10
8
• Over-consolidation is needed
to reduce debt
6
• Backloading involves higher
total (and over-) consolidation
4
2
• Framework stability concerns
suggest frontloading
0
-2
-4
2
4
6
8
10 12 14 16 18 20 22 24
Source: Rawdanowicz, L. (2012), “Choosing the Pace of Fiscal Consolidation”, OECD Economics Department Working Papers, No. 992.
5
The fiscal trade-offs: output gap
4
2
• Frontloading involves high
short-term costs
0
• Backloading becomes costlier
after some years
-2
• Unemployment concerns
suggest “middle-loading”
-4
-6
-8
2
4
6
8
10
12
14
16
18
20
22
24
Source: Rawdanowicz, L. (2012), “Choosing the Pace of Fiscal Consolidation”, OECD Economics Department Working Papers, No. 992.
6
Fiscal requirements across countries
16
Average tightening required over 2011-2030 to reach 60% gross debt
(as a share of GDP)
14
12
10
8
6
4
Source: OECD calculations
DEU
DNK
CHE
AUT
KOR
SWE
BEL
ISR
EST
LUX
ISL
EA15
ITA
CAN
FRA
FIN
NLD
CZE
HUN
AUS
NZL
SVK
SVN
POL
IRL
GBR
ESP
USA
PRT
GRC
JPN
0
OE…
2
7
The usual cost of high debt
Spread between long-term and short-term interest rates versus gross government debt in % of GDP
(average 1994-2007)
Source: OECD calculations
8
The current cost of high debt
Sovereign bond spreads compared to benchmarks
(basis points over German bonds, September 2012)
2500
2500
Expected spread based on historical
norms
2000
2000
Observed spreads
1500
1500
1000
1000
500
500
0
0
-500
-500
Spain
Source: OECD calculations
France
Greece
Ireland
Italy
Portugal
9
The medium-term challenges:
a diversity of imbalances
(as a share of GDP, average 2002-07)
Source: OECD calculations
10
The medium-term challenges:
competitiveness adjustment
Relative unit labour costs
(changes from 1998 to 2007 and from 2007 to 2011, percentage points)
Source: OECD calculations
11
The medium-term challenges:
Fiscal consolidation and structural reforms
1
0.9
GRC
0.8
0.7
ESP
IRL
0.6
NZL
0.5
AUT
SWE
GBR
DNK
KOR
JPN
0.3
0.2
CHE
NOR
0.1
ITA
CZE
USA
NLD
CAN
BEL
DEU
LUX
HUN
AUS
FIN
0.4
PRT
POL
FRA
ISL
0
-4
-2
0
2
4
6
8
10
Note: Horizontal axis: variation in the underlying primary balance as a percentage of potential GDP from 2010 to 2012;
vertical axis: responsiveness rate to Going for Growth reform priorities, 2010-2011. Correlation coefficient: 0.57;
statistically significant at the 1% confidence level.
12
12
FISCAL POLICY
AND
STABILIZATION
Jean-Luc Schneider