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 !