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Bundesministerium der Finanzen
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1
Crisis response in the euro area * * *
Main elements, guiding principles and results
Reinhard Felke*
Federal Ministry of Finance How to get out of the crisis?
Different approaches in Japan and the EU towards growth
2nd JEF-DGAP International Symposium
Berlin, 3 June 2014 * The opinion expressed in this presentation are those of the author and
do not necessarily reflect official government positions.
Bundesministerium der Finanzen
Berlin
The euro area economy in 2014
2
The good news first…
• Confidence has returned… • Convergence of risk spreads; stabilising credit flows; gradual
normalisation in financial markets; investment is picking up
…thanks to collective action by Member States; ECB; EU/Eurogroup (programmes; differentiated fiscal strategy; accomodative monetary policy; ESM; governance reform of EMU; Banking Union etc.)
• Economic recovery is broadening • GDP forecast to expand in 2014 (1.2%) and 2015 (1.7%), including
in vulnerable countries; intra-area adjustment is progressing
• Supply side reforms show results
Bundesministerium der Finanzen
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…the challenges and risks:
• Recovery to remain weak – unfinished deleveraging, competitiveness adjustment; lingering financial
market fragmentation and uncertainty – too weak for strong employment creation and swift recovery of lost output – High unemployment could persist and affect long-term growth („hysteresis“)
• Legacy of high level of public debt
• Limited policy space
• Bank asset quality review and stress test in 2014
• New risks from external environment 3
The euro area economy in 2014
Bundesministerium der Finanzen
Berlin
„‘This time is different‘. It almost never is“. (Reinhardt & Rogoff)
but „EMU sui generis“ (Barry Eichengreen)
So, anything special about the euro area crisis ?
4
The challenge
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Euro area idiosyncracies: • deep economic and financial integration of 18 Member States (=>
spillovers) • single monetary policy + rules-bound decentralised fiscal and
economic policies • Common rules and institutions (Commission; fiscal surveillance)… • …but initial gaps in EMU architecture
– E.g. No national „lender of last resort“ (=> cannot issue own debt); no significant central budget; no financial stability tool; no single supervisor
• Different macro-financial starting positions across euro area Member States, including large external/macro-structural imbalances and deeply exposed banks in some (=> vulnerabilities)
5
The challenge
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• Vulnerable starting conditions when the crisis struck:
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The challenge
90
100
110
120
130
140
150
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Nominal Unit Labour Cost (Index, 1999=100)
Eurozone DEU IRL GRC ESP FRA ITA PRT
• Accumulated loss of competitiveness
Bundesministerium der Finanzen
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• Vulnerable starting conditions when the crisis struck:
7
The challenge
-20
-15
-10
-5
0
5
2003 2004 2005 2006 2007 2008
% G
DP
Current Account Balance
Greece Portugal Spain Italy France Ireland Euro area
• Accumulated external imbalances
• Risk of sudden
stop
Bundesministerium der Finanzen
Berlin
8
The crisis impact
EFSF
↓
Debt Restructuring
↓
Bankruptcy Lehman Brothers
↓
0
5
10
15
20
25
30
35
40
45
02.01.2008 02.01.2009 02.01.2010 02.01.2011 02.01.2012 02.01.2013 02.01.2014
%
Interest Rates on Government Bonds
DEU GRC PRT IRL ESP ITA FRA
• Confidence evaporated
• Default risk rose • Financing costs
soared
• Bank lending reversed
Bundesministerium der Finanzen
Berlin
9
The crisis impact
• Growth slumped
• Unemployment increased
• Consumption fell and investment stopped
0
500
1.000
1.500
2.000
2.500
3.000
3.500
4.000
4.500
5.000
-8
-6
-4
-2
0
2
4
6
2007 2008 2009 2010 2011 2012 2013 2014 2015E
uros
toxx
50
Pric
e In
dex
% c
ahng
e G
DP
Real GDP Growth and Eurostoxx 50
Euro area United States Japan DJ Eurostoxx 50
Bundesministerium der Finanzen
Berlin
10
The crisis impact
• Public debt jumped
• Feeding fears of debt sustainability
40 44
72
106 113
94
124 129 133
175
0
20
40
60
80
100
120
140
160
180
200
Spain Ireland Portugal Italy Greece
Public Debt % GDP
2008
2013
Bundesministerium der Finanzen
Berlin
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The crisis impact
FINANCIAL STABILITY
SOVEREIGN DEBT
ECONOMIC GROWTH
Negative confidence
shock
Bundesministerium der Finanzen
Berlin
• safeguarding the stability of the euro area as a whole • restoring confidence via credible measures and sustainable
solutions
• addressing fundamental weaknesses via deep structural reform • combining solidarity with conditionality, setting incentives for
structural adjustment in Member States concerned • Country-specific differentiation 12
The crisis response – guiding principles
Bundesministerium der Finanzen
Berlin
• Macro response at euro area level – Accommodative monetary policy + unconventional measures – Differentiated and time-consistent fiscal policy strategy
• Country-specific – Adjustment programmes (guided by Troika = Commission + ECB + IMF) – Wage constrains and structural reforms to restore competitiveness and
build new foundations for sustainable growth – Shoring up troubled banks within EU state-aid regime
• Institutional – EFSF/ESM – Economic governance reform (stronger fiscal rules; new macro-imbalances
tool; better economic coordination via enhanced European Semester) – Single Supervisory + Resolution Mechanism; Single Rule Book – European System of Financial Supervisors; Macro-Systemic Risk Board
13
The crisis response – main elements
Bundesministerium der Finanzen
Berlin
A broad-based recovery is taking place
Data: AMECO Spring 2014
-8
-6
-4
-2
0
2
4
2009 2010 2011 2012 2013 2014 2015
% C
hang
e
Real GDP per capita
Italy Spain Greece Portugal Euro area
Bundesministerium der Finanzen
Berlin
Competitiveness is improving
90
100
110
120
130
140
150
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014p 2015p
Nominal Unit Labour Cost (Index, 1999=100)
Eurozone DEU IRL GRC ESP FRA ITA PRT
Data: AMECO Spring 2014
Bundesministerium der Finanzen
Berlin
Exports are growing
17
-3
-2
-1
0
1
2
3
4
5
6
7
8
2012 2013 2014 2015
% C
hang
e
Exports of Goods and Services
Greece Ireland Spain Italy Portugal Euro area
Bundesministerium der Finanzen
Berlin
External imbalances are receding
Data: AMECO Spring 2014
-20
-15
-10
-5
0
5
2008 2009 2010 2011 2012 2013 2014 2015
% G
DP
Current Account Balance
Greece
Portugal
Spain
Italy
Euro area
Bundesministerium der Finanzen
Berlin
Reforms are progressing
19
0
0,2
0,4
0,6
0,8
1
1,2
1,4
1,6
1,8
Responsiveness to Going for Growth recommendations across OECD countries, 2011-12
Responsiveness rate Responsiveness rate adjusted for the difficulty to undertake reform
Deficits decline…
Source: Commission Autumn Forecast, November 2013
-8,0
-7,0
-6,0
-5,0
-4,0
-3,0
-2,0
-1,0
0,0
1,0
2,0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013p 2014p 2015p
Eurozone public sector deficit in % of GDP
Source: Commission Autumn Forecast, November 2013
60
65
70
75
80
85
90
95
100
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013p 2014p 2015p
Eurozone public debt – high but stabilising - in % GDP-
Source: Commission Autumn Forecast, November 2013
0,0
60,0
120,0
180,0
240,0
300,0
DEU FRA UK ESP Eurozone USA IRL PRT ITA GRC Japan
Public debt in international comparison - 2013 in % of GDP -
Bundesministerium der Finanzen
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• Move from recovery to sustained growth
• Maintain twin-strategy of differentiated fiscal consolidation combined with structural reforms to enhance growth and competitiveness and to bring debt levels to safe territory
• Improve the quality of public finances – Improve quality of consolidation – Raise efficiency of social security systems; public administrations etc.
• Implement Banking Union (SSM/SRM); consolidate banks
• Foster the functioning of the EU internal market
23
The challenge ahead
Bundesministerium der Finanzen
Berlin
Thank you… … for your attention!
Reinhard Felke Director - European Economic and Monetary Union; Bilateral Relations, EU Enlargement Federal Ministry of Finance Wilhelmstraße 97, D-10117 Berlin Telefon: +49 30 18 682-1731 Fax: +49 30 18 682-1156 Mail: [email protected] Internet: http://www.bundesfinanzministerium.de