PERSPECTIVES. The Eurozone: solid popular support despite the problems. Introduction. By Ruth Lea, Economic Adviser to the Arbuthnot Banking Group

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1 PERSPECTIVES By Ruth Lea, Economic Adviser to the Arbuthnot Banking Group The Eurozone: solid popular support despite the problems Ruth Lea Economic Adviser Arbuthnot Banking Group Introduction The next European Summit will be held on June. Topics for discussion could include the future of the euro as well as Brexit (more below). Whilst Brexit is, understandably, the key focus of interest in the UK, it is, nonetheless, a good opportunity to catch up with developments in the Eurozone. In a recent Perspective, we discussed the lack of convergence of key Eurozone economies, not least of all the very disparate growth performances since the Great Recession. 1 Italian GDP in 2017 was still 5.5% lower than it was in 2007 and Greece s GDP, hampered by extraordinarily tough austerity policies as conditions for its bail-outs, is currently over 25% lower than in Debt/GDP ratios were also very divergent. In 2017 Greece s was 178.6% and Italy s was 131.8%, whilst Germany s was 64.1% and falling. We also touched on the very disparate balances the 19 Eurozone members national central banks (NCBs) had with the ECB. Using data from TARGET2, the Eurozone s settlement system, Germany was running a huge surplus ( 902.4bn) with the ECB, whilst Italy had a very sizeable deficit ( 426.1bn). 2 Other major surplus countries were Luxembourg and the Netherlands, whilst Spain ran a sizeable deficit. But, disparities or no disparities, there appears to be no overwhelming desire in the EU19 member countries to break up the Eurozone or even, less dramatically, leave it unilaterally. There remain doubts about the new Italian Government, of course. But Giovanni Tria, Italy s new Minister of Finance, recently confirmed that the coalition was committed to staying in the European single currency. 3 Tria also claimed that the government would not allow debt levels to go out of control, though how this can be reconciled with their fiscally expansionary tax and spending policies remains to be seen. 4 The Italian government and the European Commission, custodians of fiscal discipline, may clash in September when the coalition announces its budget plans. 5 If they do clash, it may be the first of many. 1

2 Popular support for the euro in the Eurozone The latest polling from the European Commission confirmed that there was very solid popular support for the euro in the Eurozone member states. See chart 1a below and annex table 1 (for the detailed figures). 6 Indeed support was at record high levels. 7 Even in Italy, the least supportive country, the balance of those for exceeded those against by 32%. And in still beleaguered Greece, the balance of those for exceeded those against by 42%. Doubtless there are several explanations for relatively high levels of support in the EU19, including a failure to link the currency with the economic policies damaging their economies as well as a general wish to appear modern and European. Under these circumstances it is difficult to see a major popular movement, even in Italy, pushing for withdrawal from the Eurozone in the near to medium-term. Chart 1b below shows Eurobarometer s survey results for countries outside the Eurozone. Suffice to say attitudes in the Czech Republic, Sweden, Denmark (which has a de facto opt-out) and the departing UK remained strongly negative. Poland and Bulgaria were also unsupportive. Romania and Hungary showed varying degrees of enthusiasm for the single currency. Chart 1b also showed that for the EU as a whole, support for the euro was, on balance, strongly positive. Chart 1a Support for euro, % balance ( for minus against ): Eurozone Balance (for minus against) Chart 1b Support for euro, % balance ( for minus against ): non-eurozone and EU Balance (for minus against) Source: European Commission, Standard Eurobarometer 89, Spring 2018, June 2018, see annex table 1. 2

3 Deepening Europe s Economic and Monetary Union It is widely accepted that the EU s Economic and Monetary Union (EMU) is far from being completed. There is no common Eurozone budget (no fiscal union) and there are no common European bonds (in which sovereign bonds in euros would be issued jointly by Eurozone member states). Proposals to complete EMU, therefore, remain very relevant, though it is noticeable that the Commission now tends to use the term deepening rather than completing, as if it has given up on completion. Separately, French President Macron and German Chancellor Merkel have discussed reform, with Macron especially enthusiastic about further integration. At their recent meeting in Meseberg, they agreed a reform plan for the euro, which included a Eurozone budget. 8 Crucially, however, the details of the budget were left vague. 9 They also agreed reform of the European Stability Mechanism (ESM), which provides financial assistance for Eurozone member states in financial difficulty. It will be interesting to see how the Macron-Merkel reform plan is received by other Eurozone members and how/if it influences future developments in EMU. The Commission s last update of its roadmap for deepening EMU, which concentrated on more obviously achievable and uncontroversial goals, was in December It did not tackle the major deficiencies. As the Commission then explained: Building on the vision set out in the Five Presidents Report of June 2015, and the Reflection Papers on the Deepening of the Economic and Monetary Union and on the Future of EU Finances of spring 2017, the European Commission sets out a Roadmap to further deepen Europe s Economic and Monetary Union, with concrete steps to be taken over the next 18 months Annex table 2 outlines the Commission s December roadmap. Plans included adopting the outstanding proposals for Banking Union this year and implementation of the European Deposit Insurance Scheme (EDIS) next. On a more specific note, the Commission recently announced a couple of measures as part of the broader agenda to deepen EMU and make use of the EU budget to strengthen the performance and resilience of Eurozone economies. 15 They were: 16 The Reform Support Programme. This will support priority reforms in all EU member states, with an overall budget of 25bn. It comprises three elements: a Reform Delivery Tool, to provide financial support for reforms; a Technical Support Instrument, to offer and share technical expertise; and a Convergence Facility, to help member states on their way to joining the euro. The European Investment Stabilisation Function. This will help stabilise public investment levels and facilitate rapid economic recovery in cases of significant economic shocks in Eurozone member states and those participating in the European Exchange Rate Mechanism (ERM II). This Function will complement the role of existing national automatic stabilisers. Subject to strict criteria of sound macroeconomic and fiscal policies, loans of up to 30bn can be rapidly mobilised, together with an interest rate subsidy to cover their cost. 3

4 The ECB s June meeting: follow-up As previously reported the ECB announced the ending of its extended asset purchase programme (APP) after its June meeting (14 June). 17 The ECB stated its Governing Council: 18 will continue to make net purchases under the asset purchase programme (APP) at the current monthly pace of 30bn until end-september expects that, after September 2018, the monthly pace of the net asset purchases will be reduced to 15bn until end-december 2018 and that net purchases will then end. The APP has proved to be a very extensive programme of QE (see table 1 below), amounting to over 2.4tn. By providing liquidity and supporting prices (thus driving down yields) the APP has worked to achieve the objective of addressing the risks of too prolonged a period of low inflation. Technically, the assets are purchased by the Eurosystem, which comprises the ECB and the 19 National Central Banks (NCBs). The ECB currently has four asset purchase programmes (table 1): The asset-backed securities purchase programme (ABSPP), which began in November It is relatively small, accounting for just over 1% of holdings at end-may The third covered bond purchase programme (CBPP3), which began in October 2014, accounting for 10.5% of current holdings. The corporate sector purchase programme (CSPP), which began in June 2016, accounting for 6.4% of current holdings. The public sector purchase programme (PSPP), which began in March 2015 and is, by far, the most significant, accounting for 82% of current holdings. Securities include, firstly, nominal and inflation-linked central government bonds and, secondly, bonds issued by recognised agencies, regional and local governments, international organisations and multilateral development banks located in the Eurozone. Most of the sovereign bonds are held by the NCBs. The Eurosystem now holds very substantial holdings of Eurozone public sector debt securities, nearly 2tn (table 1, and see annex table 3 and annex chart 1 for details). Table 1 Eurosystem holdings under the expanded asset purchase programme (APP), bn bn (% of total) Asset-backed securities purchase programme (ABSPP) 27.4 (1.1%) Third covered bond purchase programme (CBPP3) (10.5%) Corporate sector purchase programme (CSPP) (6.4%) Public sector purchase programme (PSPP) 1,992.9 (82.0%) Total 2,431.4 (100.0%) Source: ECB website. Holdings, amortised cost, end-may Specifically concerning sovereign bonds, Bruegel, the Brussels-based research institute, has calculated the main holding groups (including central banks) for such bonds for some key countries. 21 They concluded that central banks hold nearly 18% of French bonds, nearly 16% of German bonds, 19% of Italian bonds and over 18% of Spanish bonds (see table 2). By comparison, the Bank of England holds nearly a quarter of UK sovereign bonds, whilst the Fed only holds just over 12% of US bonds. 4

5 Table 2 Sovereign bonds holdings Total Residents Non-residents Total of which: central bank Eurozone, bn: France (2017Q3) 1, (44.5%) (17.7%) (55.5%) Germany 1,771.7 Na (15.9%) Na (2017Q3) Italy (2017Q4) 1, ,226.0 (64.1%) (19.0%) (35.9%) Spain (2017Q3) 1, (58.5%) (18.2%) (41.5%) UK (2017Q1), bn 1, ,429.0 (72.7%) (24.9%) (27.3%) US (2017Q3), $bn 20, , ,465.4 (12.2%) 6,323.0 (31.2%) (68.8%) Source: Brueghel, Sovereign bond holdings, database, last updated 22 March Specifically concerning Italy, Brueghel s estimates are close to recent independent estimates by Deutsche Bank. 22 Deutsche Bank concluded recently that the Italian central bank (as part of the Eurosystem) held about 18% of total Italian government debt, with foreign investors accounting for 35%. Italian financial institutions held 41%. One implication is that Italy could face serious difficulties in marketing its sovereign bonds after the ending of the ECB s asset purchase programme (APP), especially if the government did pursue significant fiscal expansion. Eurozone: Greece s support programme due to end in August 2018 Greece has been receiving financial support from Eurozone countries and the IMF to cope with its financial difficulties and economic challenges since May In August 2015 a new stability support programme (the third) was launched under the European Stability Mechanism (ESM) framework, which is scheduled to end on 20 August The Eurogroup (finance ministers of the Eurozone) agreed to Greece s final pay-out of 15bn of the 2015 programme on 21 June. This agreement has paved the way to Greece s technical exit from the programme in August. 25 Athens is expected to use some of its new cash to pay back expensive and short-term loans to the IMF. Greece was also granted some debt relief by extending loan maturities due from 2023 by 10 years to help ease the country s repayment burden over the next two decades. Athens will also be able to issue debt in financial markets to fund its policies, supported by a 24.1bn backstop intended to protect Greece from any economic and financial shocks until Greece will, however, continue to be heavily scrutinised by the Commission and its Eurozone creditors. According to the Eurogroup s statement following the June meeting: 26 The implementation of an ambitious growth strategy and of prudent fiscal policies will be the key ingredients for debt sustainability. In this context the Eurogroup welcomes the commitment of Greece to maintain a primary surplus of 3.5% of GDP until 2022 and, thereafter to continue to ensure that its fiscal commitments are in line with the EU fiscal framework. 5

6 According to the Commission, a total of 241.6bn in financial support has been disbursed by Greece s European partners since the first financial assistance programme in Of this, 46.9bn in financial assistance has been disbursed since the beginning of the current programme in The IMF disbursed an additional 32.1bn in the first two programmes ( ). The total adds to 273.7bn since The MPC: a rate rise in August? The MPC voted by a majority of 6-3 to maintain Bank Rate at 0.5% at its June meeting (ending 20 June). 28 Significantly, BoE Chief Economist Andy Haldane joined Ian McCafferty and Michael Saunders in calling for a 0.25% rise. In addition, the MPC voted unanimously to maintain, firstly, the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at 10bn and, secondly, the stock of UK government bond purchases, financed by the issuance of central bank reserves, at 435bn. The MPC also announced a change in its guidance on the unwinding of its stock of government debt. The MPC now intends not to reduce the current stock of purchased assets until Bank Rate reaches around 1.5%, earlier than the previous guidance of 2.0%. The decision by Andy Haldane to support a Bank Rate rise has been widely interpreted as a signal that an August hike is more likely than previously judged. At this stage, it is reasonable to judge there is 50:50 chance of a hike, but much will depend on economic developments in the meantime. A much-signalled rise for May was postponed because of economic weakness in 2018Q1. As we discussed recently, economic activity is picking up in 2018Q2, but evidence is mixed. 29 The MPC minutes summed up their assessment of economic developments as follows: 30 A key assumption in the MPC s May projections was that the dip in output growth in the first quarter would prove temporary, with momentum recovering in the second quarter. This judgement appears broadly on track. Inflation is expected to pick up by slightly more than projected in May in the near term, reflecting higher dollar oil prices and a weaker sterling exchange rate. Most indicators of pay growth have picked up over the past year and the labour market remains tight, suggesting that domestic cost pressures will continue to firm gradually, as expected The Committee s best collective judgement remains that an ongoing tightening of monetary policy over the forecast period would be appropriate. All members agree that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent. Better public finances The public finances seem to be improving faster than anticipated by the OBR in the March Spring Statement just three months ago. The ONS recently revised the PSNB (public sector net borrowing, excluding public sector banks) for FY2017 down to 39.5bn, compared with 45.7bn recorded for FY2016 (chart 2). 31 This was the lowest annual net borrowing since the financial year ending March 2007 (FY2006). At the time of the Spring Statement (March 2018) the OBR forecast 45.2bn ( 5.7bn higher) and at the time of the Autumn 2017 Budget the OBR forecast a PSNB for FY2017 of 49.9bn ( 10.4bn higher). 32 6

7 These wide disparities should serve as health warnings when analysing the OBR s forecasts. The OBR s forecasts, as all economic forecasts, can be highly inaccurate and should be treated with extreme caution Forecasting the PSNB, the difference between two very large numbers, is especially tricky. Of the 39.5bn borrowing, 40.7bn was on capital spending (or net investment), such as on infrastructure, whilst the cost of the day-to-day activities of the public sector (the current budget deficit) was in surplus by 1.2bn. This current budget surplus was the first annual surplus since the financial year ending March Chart 2 PSNB ( bn), OBR forecasts for November 2017, March 2018; ONS out-turns FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 Nov-17 Mar-18 ONS, June 2018 Sources: (i) OBR, Economic and fiscal outlook, November 2017, March 2018; (ii) ONS, Public sector finances, UK: May 2018, 21 June Turning to the PSNB for May, a deficit of 5.0bn was recorded, lower than expected, compared with 7.0bn in May 2017 (see also annex table 4, the economic data tracker). It was the lowest May net borrowing since The PSNB for the first two months of FY2018 was 11.8bn, compared with 16.0bn for the first two months of FY2017, some 4.2bn lower (chart 3). The OBR forecast public borrowing of 37.1bn for FY2018 for the Spring Statement, just 2.4bn lower than the ONS s latest estimate for FY2017. This implies that, if the OBR s forecast is to be met, borrowing for the remaining 10 months of FY2018 will have to be 1.8bn higher than in the equivalent 10 months for FY2017. This does not seem credible. 7

8 Chart 3 Public Sector Net Borrowing (PSNB), FY2018 compared with FY2017 ( bn) Apr-May Full year Implied June-Mar FY2017 (ONS) FY2018 (full year, OBR) FY2018-FY2018 Sources: (i) ONS, UK public sector finances: May 2018, 21 June 2018; (ii) OBR, Economic and fiscal outlook, March 2018, for the forecast for FY2018. Brexit update The main Brexit event over the past week has been the passing of the EU (Withdrawal) Bill through Parliament: On 18 June, the House of Lords voted 354 to 235 votes in favour of the amendment tabled by Viscount Hailsham, which would give Parliament a meaningful vote on the final Brexit deal under three scenarios. They were: if MPs voted down the UK-EU Brexit deal; or if the PM announced before 21 January 2019 that no deal had been reached; or if 21 January 2019 passed with no deal being struck. The Bill returned to the Commons. On 20 June, the Government won the vote on an amendment on the meaningful vote by 319 to 303. The Lords accepted the Commons vote, and the Bill now goes for Royal Assent, becoming law. 35 Parliament has now to deal with several Bills relating to Brexit: The June 2017 Queen s Speech (there is no Queen s Speech in 2018) listed a Customs Bill, a Trade Bill, an Immigration Bill, a Fisheries Bill, an Agriculture Bill, a Nuclear Safeguards Bill and an International Sanctions Bill. 36 In addition, there will be the Withdrawal Agreement and Implementation Bill, which will give legal standing to separation from the EU. 37 This Bill is expected to cover the contents of the Withdrawal Agreement, including issues such as an agreement on citizens rights, any financial settlement and the details of an implementation period agreed between both sides. It means that Parliament will be given time to debate, scrutinise and vote on the final agreement agreed with the EU. As already mentioned, the next European Summit is on June. There seems to have been little progress in the UK-EU negotiations for the UK-EU future framework (the second part of the Withdrawal Agreement) since the transition was agreed in March, which will probably be reported. 38 8

9 One notable EU development has been the release of the Commission s latest thoughts on a UK- EU security deal. 39 The Commission stated that continued UK membership of the European Court of Human Rights (ECHR), as well as the European Convention on Human Rights, would be necessary to conclude a future UK-EU security agreement. The Commission also called for a guillotine clause operating on any UK-EU security deal if the UK decided to leave the Court s jurisdiction after Brexit. Mansion House speeches Finally, the Chancellor and the Bank of England Governor delivered speeches at the Mansion House on 21 June. The points made in the Chancellor s speech included: 40 He confirmed there will be extra funding for the NHS, which will boost spending on health by over 20bn a year (in real terms, for England). It will be partly funded by lower contributions due to Brussels (the Brexit Dividend ). 41 But taxpayers will have to contribute a bit more. The next full spending review is in We will stick to our fiscal rules. Concerning a UK-EU deal on financial services, he reiterated his opposition to the EU s existing equivalence regime. (He prefers mutual recognition.) Mr Hammond also referred to the updated financial relationship between the Treasury and the Bank of England, also announced on 21 June. 42 In the new relationship the Bank will operate under a new capital and income framework which reinforces the Bank s independence and resilience, provides greater transparency concerning the Bank s finances and reinforces the stability of the UK s financial system. 43 There will be a flexible dividend-sharing arrangement. Between 0.5bn (the agreed floor for the Bank s loss-absorbing capital) and 3.5bn (the target), the Bank will keep all the net income. Between 3.5bn and 5.5bn (the ceiling) there will be a 50:50 split between the Treasury and the Bank. Above 5.5bn the Treasury will take all the net income. The Bank s current capital is 2.3bn, so there will be a 1.2bn capital injection from the Exchequer to the Bank s balance sheet in FY2018 to reach the target of 3.5bn. 44 The Bank Governor s speech included the following points: 45 On the UK-EU deal for financial services, he said with respect to the EU, the Bank remains of the view that an ambitious future financial services relationship, founded on commitments to achieving equivalent outcomes and supervisory cooperation, remains both feasible and in the interests of the UK, Europe and the world. Mr Carney also referred to the updated relationship between the Treasury and the Bank, noting the additional capital will significantly increase the amount of liquidity the Bank can provide through collateralised, market-wide facilities without needing an indemnity from HM Treasury to more than half a trillion pounds ( 500bn). This lending capacity would expand to over three quarters of a trillion pounds ( 750bn) when, as designed, additional capital above the target level is accrued through retained earnings. 9

10 References 1. Ruth Lea, The Eurozone: convergence remains elusive as one size fits all policies don t fit all, Arbuthnot Banking Group, 4 June ECB, TARGET balances of participating NCBs, ECB website. TARGET stands for Trans- European Automated Real-time Gross Settlement Express Transfer System. 3. DW News, Italian Finance Minister Giovanni Tria commits to euro, aims to cut debt, 10 June See also Reuters, Italy s Savona says euro indispensable, praises Germany, 12 June Ruth Lea, The Eurozone: convergence remains elusive as one size fits all policies don t fit all, Arbuthnot Banking Group, 4 June 2018, discussed the new government and its fiscal policies. 5. Ambrose Evans-Pritchard, Eurosceptics take control of key posts as Italy s stance hardens, Daily Telegraph, 22 June European Commission, Standard Eurobarometer 89, Spring 2018, June European Commission, Spring 2018 Standard Eurobarometer: one year ahead of the European elections, trust in the Union and optimism about the future is growing, 14 June Federal Chancellor, Meseberg Declaration, 19 June Politico, Three fudges and a funeral for Eurozone reform, 20 June European Commission, Completing Europe s Economic and Monetary Union: further steps towards completing Europe s Economic and Monetary Union, 6 December Ruth Lea, UK public finances unsustainable without fiscal tightening: a reminder from the OBR, Arbuthnot Banking Group, 10 July 2017, discussed the Commission s plans to mid European Commission, The Five Presidents Report, Completing Europe s Economic and Monetary Union, 22 June European Commission, Reflection Paper on the deepening of the Economic and Monetary Union, May European Commission, Reflection Paper on the Future of EU Finances, 28 June Financial Times, EU plans 30bn fund to help crisis-hit Eurozone members, 31 May Commission, EU Budget: a Reform Support Programme and an Investment Stabilisation Function to strengthen Europe s Economic & Monetary Union, press release, 31 May Ruth Lea, Economic growth improving in 2018Q2: albeit modestly, Arbuthnot Banking Group, 18 June 2018, discussed the ECB s June meeting. 18. ECB, Monetary policy decisions, 14 June ECB website: Asset purchase programmes. 20. In addition, there are three terminated programmes: Securities Markets Programme (SMP), holdings 82.7bn; covered bond purchase programme (CBPP), holdings 4.5bn; second covered bond purchase programme (CBPP2), holdings 4.1bn. 21. Brueghel, Sovereign bond holdings, database, last updated 22 March Geotrendlines, Central bank owns 18% of Italian government debt, 11 March European Commission website, Financial assistance to Greece. 24. Ruth Lea, The Greek crisis: an 11 th hour deal in sight?, Arbuthnot Banking Group, 22 June Politico, Greek deal paves way for August bailout exit, 22 June European Council, Eurogroup statement on Greece of 22 June Commission, A new chapter for Greece: key indicators & figures, June Bank of England, Monetary policy summary and minutes of the MPC meeting ending on 20 June 2018, 21 June

11 29. Ruth Lea, Economic growth improving in 2018Q2: albeit modestly, Arbuthnot Banking Group, 18 June Bank of England, Monetary policy summary and minutes of the MPC meeting ending on 20 June 2018, 21 June ONS, Public sector finances, UK: May 2018, 21 June OBR, Economic and fiscal outlook, November 2017, March Huffington Post, There is no Brexit Dividend : economist Paul Johnson rubbishes Theresa May s 20bn NHS boost, 17 June One of Johnson s arguments for rubbishing the Brexit Dividend was that the OBR had estimated (in November 2016) that the public finances in FY2020 would be 15bn worse off because of Brexit. As if the OBR know! Johnson is director of the IFS. 34. Ruth Lea, The Autumn Statement: weaker growth, higher public borrowing and debt, extra infrastructure spending, Arbuthnot Banking Group, 28 November 2016, discussed the OBR s November 2016 forecasts. 35. BBC, Brexit: Theresa May vows smooth and orderly EU exit, 21 June Ruth Lea, Given continuing public sector deficits, there is little alternative to austerity, Arbuthnot Banking Group, 3 July 2017, discussed the Queen s Speech. 37. Government website, New Bill to implement Withdrawal Agreement, 13 November Ruth Lea, Brexit: agreement on the transition period, Arbuthnot Banking Group, 26 March Open Europe, EU says Brexit security deal contingent on UK membership of European Court of Human Rights, 19 June Government website, Mansion House 2018: Speech by the Chancellor of the Exchequer, 21 June The Brexit Dividend is the potential saving from no longer contributing to the EU Budget. And footnote 33 above on the rubbishing by Paul Johnson. 42. HM Treasury, Financial relationship between HM Treasury and the Bank of England: memorandum of understanding (MoU), 21 June HM Treasury, Financial relationship between HM Treasury and the Bank of England: letter from the Chancellor to the Governor, 21 June Daily Telegraph, BoE free to pump more cash into banks, 22 June As policies such as the Term Funding Scheme (TFS, ended in February 2018) become more usual, they reported that the Bank s independence from politicians needed to be reinforced. 45. Governor of the Bank of England, New Economy, New Finance, New Bank, Mansion House speech, 21 June

12 Annex Table 1 Support for euro, % balance ( for minus against ) For Against Don t know Balance (for minus against) EU Eurozone: Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Portugal Slovakia Slovenia Spain Non-Eurozone: Bulgaria Croatia Czech Republic Denmark Hungary Poland Romania Sweden UK Source: European Commission, Standard Eurobarometer 89 Spring 2018, June

13 Table 2 Roadmap for deepening Europe s Economic and Monetary Union In 2018 Financial union Economic & fiscal union Banking & capital markets union EU multinational financial framework Adoption of all the remaining proposals on Adoption of the proposal to reinforce Banking Union, including on risk reduction, Structural Reform Support Programme. European Deposit Insurance Scheme (EDIS) & Adoption of the targeted changes to the common backstop for Single Resolution Fund Common Provisions Regulation. (SMR). Commission proposals for the post-2020 Commission proposal for an enabling Multiannual Financial Framework. framework for European Sovereign Bondbacked Securities for euro area, following work of European Systemic Risk Board (ESRB). Democratic accountability & effective governance European Monetary Fund Incorporation of Fiscal Compact into EU law Discussion on the legislative proposal Discussion on the legislative proposal European Minister of Economy & Finance Dialogue between EU institutions Discussion at political level Formalisation of practices between the European Parliament (EP) & the Commission. External representation of the euro area Discussion on the legislative proposal By mid-2019 Financial union Economic & fiscal union Banking & capital markets union EU multinational financial framework Fully functional backstop to Single Resolution Adoption of post-2020 proposals for Fund. structural reform support. Implementation of European Deposit Adoption of post-2020 proposal on Insurance Scheme (EDIS). dedicated convergence facility for noneuro Member States. Finalising all pending legislative initiatives for Capital Markets Union (CMU). Adoption of the post-2020 proposal for stabilisation function. Democratic accountability & effective governance European Monetary Fund (EMF) External representation of the euro area Adoption of legislative proposal Adoption of legislative proposal European Minister of Economy & Finance Incorporation of Fiscal Compact into EU law Common understanding Adoption of legislative proposal 13

14 Possible further steps: end Financial union Continuous implementation of Capital Markets Union initiatives. Move towards the issuance of a European safe asset. Changes to regulatory treatment of sovereign exposures. Democratic accountability & effective governance Fully-fledged function of European Minister of Economy and Finance as chair of Eurogroup & Vice-President of Commission. Economic & fiscal union Implementation of new Multiannual Financial Framework. Fully functional stabilisation function. Simplification of rules of Stability and Growth Pact (SGP). Fully-operational European Monetary Fund (EMF). Setting-up of a euro area Treasury. Source: European Commission, Completing Europe s Economic and Monetary Union: further steps towards completing Europe s Economic and Monetary Union, 6 December Table 3 Debt securities under public sector purchase programme (PSPP): cumulative monthly net purchases, bn bn % Cumulative % Germany France Italy Spain Supranationals The Netherlands Belgium Austria Portugal Finland Ireland Slovakia Slovenia Lithuania Luxembourg Latvia l Malta Estonia Cyprus [Greece, not 0 0 [100.0] eligible] Total 2, Source: ECB website. Holdings, book value, end-may

15 Chart 1 Debt securities under public sector purchase programme (PSPP): cumulative monthly net purchases, bn Source: ECB website. Holdings, book value, end-may See annex table 3. Table 4 UK economic data tracker Date Release Source Quarter, year Outcome 2 Nov 2017 Bank of England: Bank Rate BoE Current Bank Rate: 0.5% (previous 0.25%) 29 Mar Current Account, Balance of Payments (2017Q4) ONS 2017Q4 Deficit: 18.4bn (3.6% of GDP, 2017Q4), 19.1bn (3.7% of GDP, 2017Q3) 29 Mar Visible trade balance ONS 2017Q4 Deficit: 35.7bn (2017Q4), 32.9bn (2017Q3) 29 Mar Services balance ONS 2017Q4 Surplus: 28.1bn (2017Q4), 27.7bn (2017Q3) 29 Mar Primary income balance ONS 2017Q4 Deficit: 6.6bn (2017Q4), 8.4bn (2017Q3) 29 Mar Secondary income ONS 2017Q4 Deficit: 4.2bn (2017Q4), balance 29 Mar Current Account, Balance of Payments (2017) 5.6bn (2017Q3) ONS 2017 Deficit: 82.9bn (4.1% of GDP, 2017), 113.6bn (5.8% of GDP, 2016) 29 Mar Current account: EU/non-EU ONS 2017 EU: deficit of 95.6bn; non-eu: surplus of 12.7bn 29 Mar Visible trade balance ONS 2017 Deficit: 135.6bn (2017), 135.5bn (2016) 29 Mar Services balance ONS 2017 Surplus: 107.0bn (2017), 94.8bn (2016) 29 Mar Primary income balance 29 Mar Secondary income balance 15 May Productivity (output per hour), flash ONS 2017 Deficit: 33.3bn (2017), 50.4bn (2016) ONS 2017 Deficit: 21.0bn (2017), 22.5bn (2016) ONS 2018Q1-0.5% (QOQ), +1.0% (YOY) 15

16 25 May GDP (2018Q1, 2 nd estimate) 25 May GDP per head (2018Q1) 25 May GDP: output breakdown (2018Q1) 25 May GDP: expenditure breakdown (2018Q1) ONS 2018Q1 0.1% (QOQ), 1.2% (YOY) ONS 2018Q1-0.1% (QOQ), 0.6% (YOY) ONS 2018Q1 Services: +0.3% (QOQ); production: +0.6% (QOQ); construction: -2.7% (QOQ) ONS 2018Q1 Household consumption: +0.2% (QOQ), General Government spending: 0.5% (QOQ); GFGC: 0.9% (QOQ); exports: -0.5% (QOQ); imports: -0.6% (QOQ) 25 May Services (Mar) ONS 2018Q1 0.1% (MOM), +1.1% (YOY) 31 May Car production SMMT 2018Q2 Apr: total (+5.2% (YOY)); home (+7.3% (YOY)), export (+4.7% (YOY)) 31 May Car production (2018, YTD) 31 May Mortgage approvals for house purchase 31 May Total lending to individuals, of which: 31 May Secured on dwellings SMMT 2018 Jan-Apr: total (-3.9% (YOY)); home (-10.3% (YOY)), export (- 2.2% (YOY)) BoE 2018Q2 62,455, after 62,802 (Feb), compared with 63,968 (average of previous 6 months) BoE 2018Q2 Growth rate (YOY): 4.1%, 4.0% (Mar) BoE 2018Q2 Growth rate (YOY): 3.4%, 3.3% (Mar) 31 May Unsecured credit BoE 2018Q2 Growth rate (YOY): 8.8%, 31 May Total loans to nonfinancial businesses 1 June Manufacturing PMI (May) 4 June Construction PMI (May) 8.6% (Mar) BoE 2018Q2 Growth rate (YOY): 2.0%, 3.0% (Mar) Markit- CIPS 2018Q2 Index: 54.4 (May), 53.9 Markit- 2018Q2 Index: 52.5 (May), 52.5 CIPS 5 June Services PMI (May) Markit- 2018Q2 Index: 54.0 (May), 52.8 CIPS 5 June New car registrations SMMT 2018Q2 May: +3.4% (YOY), (May) of which diesel -23.6% (YOY) 5 June New car registrations SMMT 2018Q2 Jan-May: -6.8% (YOY), (Jan-May) of which diesel -30.6% (YOY) 11 June Index of production ONS 2018Q2 Production (3 months to April): +0.3% (QOQ), +2.4% (YOY) 11 June Manufacturing output ONS 2018Q2 Manufacturing output (3 months to April): -0.5% (QOQ), +2.2% (YOY) 16

17 11 June Construction output 11 June UK trade in goods & services 11 June UK trade in goods 11 June UK trade in services 11 June Monthly GDP estimates (3 months to May) 12 June Employment (3 months to Apr) 12 June Unemployment (3 months to Apr) 12 June Unemployment rate (3 months to Apr) 12 June Vacancies (3 months to May) 12 June Earnings (3 months to Apr) ONS 2018Q2 Output (3 months to April): - 3.4% (QOQ), -3.3% (YOY) ONS 2018Q2 Trade deficit: 5.3bn, 3.2bn (Mar) ONS 2018Q2 Visible trade deficit: 14.0bn, 12.0bn (Mar) ONS 2018Q2 Services surplus: 8.8bn, 8.8bn (Mar) NIESR 2018Q2 Growth rate: +0.2% (3 months to May), +0.1% (3 months to April) ONS 2018Q2 +146k (QOQ), +440k (YOY) ONS 2018Q2-38k (QOQ), -115k (YOY) ONS 2018Q2 4.2%, compared with 4.6% a year earlier ONS 2018Q2 Total vacancies: 818k, +2k (QOQ), +33k (YOY) ONS 2018Q2 2.5% (YOY, total pay, including bonuses), 2.8% (YOY, regular pay, excluding bonuses) 13 June CPIH (May) ONS 2018Q2 YOY inflation: 2.3% (May), 2.2% 13 June CPI (May) ONS 2018Q2 YOY inflation: 2.4% (May), 2.4% 13 June PPI (output) (May) ONS 2018Q2 YOY inflation: 2.9% (May), 2.5% 13 June PPI (input) (May) ONS 2018Q2 YOY inflation: 9.2% (May), 5.6% 13 June House prices (Apr, official) ONS 2018Q2 YOY inflation: 3.9%, 4.2% (Mar) 14 June Retail sales (May) ONS 2018Q2 Volume: 1.3% (MOM), 3.9% (YOY) 14 June Retail sales (3 months to May) ONS 2018Q2 Volume: 0.9% (QOQ), 2.1% (YOY) 21 June Public Sector Net Borrowing (PSNB) (May) ONS 2018Q2 5.0bn deficit (May 2018), compared with 7.0bn deficit (May 2017). 21 June Public Sector Net Borrowing (PSNB) (FY2018, to date) 21 June Public sector finances, public sector net debt (PSND) (May) Sources include ONS website. ONS FY bn deficit (Apr-May 2018), compared with 16.0bn deficit (Apr-May 2017). ONS 2018Q2 1,781.4bn (end-may 2018, 85.0% of GDP), compared with 1,736.7bn (end-may 2017, 85.8% of GDP) 17