THE EURO AREA AT A CROSSROADS

Transcription

1 I N T E R N A T I O N A L M O N E T A R Y F U N D THE EURO AREA AT A CROSSROADS Jeffrey Franks Director, IMF Europe Office International Monetary Fund February 2,

2 MONETARY UNION HAS IMPORTANT ACHIEVEMENTS The ECB has become a highly competent institution Monetary policy has been conducted with great skill The run-up to EMU, provided strong incentives for countries to reform: There was significant structural reform. Convergence and income growth Fiscal responsibility improved in highly indebted countries Recently, banking union and the development of common supervision and regulation European Department, International Monetary Fund 2

3 HOWEVER, SIGNIFICANT CHALLENGES FACE THE MONETARY UNION, WHICH UNLESS ADDRESSED COULD ENDANGER ITS LONG-TERM VIABILITY: Weak economic growth and convergence Inadequate fiscal policy Continued concerns about financial sector health Governance structures have not been adequate for the challenges faced These issues are all interrelated European Department, International Monetary Fund 3

4 SLOW GROWTH AND INVESTMENT RECOVERY 115 Real GDP (2008=100) 110 Real investment (2008=100) 110 US UK 105 US UK 105 Japan Euro area Euro area Japan Source: Haver Analytics and IMF staff calculations. European Department, International Monetary Fund 4

5 LONG-TERM SLIPPAGE IN PRODUCTIVITY GROWTH Slowdown in Total Factor Productivity Growth (GDP-weighted, average annual growth, in percent) 2,5 2 1,5 1 0,5 0-0,5 Core Periphery 1970s 1980s 1990s 2000s 2010s Sources: AMECO. Periphery: Greece, Ireland, Italy, Portugal and Spain. Core: Austria, Belgium, Finland, France, Germany and the Netherlands. European Department, International Monetary Fund 5

6 REAL INCOME CONVERGENCE HAS STALLED σ-convergence Across EA Countries, Coefficient of variation, PPP GDP per capita 0,4 0,35 0,3 0,25 0,2 0,15 0,1 0,05 0 Euro area 12 1/ 2/ Euro area 19 1/ 3/ Sources: WEO database and IMF staff calculations. 1/ Excludes Luxembourg. 2/ Includes Ireland from 1970 and the Netherlands from 1980 onwards. 3/ Includes Lithuania from 1995 onwards. Euro introduction European Department, International Monetary Fund 6

7 FIN LUX EST AUT BEL LVA NLD EA 18 IRL ESP DEU SVN CYP FRA ITA SVK MLT GRC PRT CORRECTIVE PREVENTIVE FISCAL POLICY HAS NOT BEEN ADEQUATE Constraint MTO MTO Adjustment path toward MTO Fiscal aggregate Nominal fiscal balance (level) Non-compliance with 3 percent of GDP deficit ceiling (percent of years, ) Expenditure benchmark 3 percent deficit 60 percent debt Net expenditure growth Structural fiscal balance (level) /20 th debt reduction criterion Annual nominal balance targets under EDP Annual fiscal effort under EDP Fiscal compact (national structural balance rule) Structural fiscal balance (change) Public debt ( level) Public debt (change) European Department, International Monetary Fund 7

8 * * déc.-07 août-08 avr.-09 déc.-09 août-10 avr.-11 déc.-11 août-12 avr.-13 déc.-13 août-14 avr.-15 déc.-15 Percent of GDP Percent of Gross NPL PERSISTENT BANKING PROBLEMS LIMIT CREDIT GROWTH Nonperforming Loans and Write-offs 10 Gross NPL 8 Write-off ratio (rhs) Bank Credit to Non-Financial Corporations Annual Growth Rates Euro area USA United States Euro area Sources: Bloomberg, ECB, EBA Transparency Exercise (2015), U.S. Federal Reserve, IMF WEO, and IMF staff calculations. Note: */ as of end-sept for the United States and Sources: ECB Statistical Data Warehouse, FRED, and IMF staff calculations. European Department, International Monetary Fund 8

9 SVN ESP FIN EST ITA PRT 1/ IRL 1/ BEL MLT FRA NLD LVA AUT SVK LTU DEU LUX THE STRUCTURAL DIMENSION IS ALSO LAGGING 4 Country Compliance with Country Specific Recommendations (CSRs) (Index, full compliance = 4) Source: European Commission, and IMF staff calculations. Note: The EC assesses progress on CSR on the scale: none (0), limited (1), some (2), substantial (3), full (4). 1/ IRL and PRT data are for 2014 since these countries fell outside the Macro Imbalance Procedure framework in European Department, International Monetary Fund 9

10 COLLECTIVE, COMPREHENSIVE ACTION NEEDED TO BOLSTER GROWTH AND STRENGTHEN THE UNION Create better incentives for growth-friendly structural reforms Strengthen fiscal framework while expanding centralized fiscal support Accelerate balance sheet repair and complete the banking union European Department, International Monetary Fund 10

11 BOOSTING PRODUCTIVITY AND GROWTH Undertake productivity-enhancing structural reforms Union level: Digital single-market, capital markets union, concentrate spending on growth-boosting activities. Provide greater incentives for countries to reform. Country level: undertake greater reforms in product, services, and labor markets. Reorient spending toward growth-boosting activities Juncker plan and similar initiatives Banking reforms will help Capital Markets Union European Department, International Monetary Fund 11

12 MORE ROBUST RULES AND GREATER CENTRALIZED FISCAL SUPPORT Compliance with fiscal rules has been weak Simplify and strengthen the framework: Debt-to-GDP could be the ultimate fiscal anchor and expenditure growth the single operational target More automatic enforcement Centralized fiscal support desirable: Rainy day fund, unemployment insurance, etc. Central fiscal support could be contingent on compliance with country-specific recommendations European Department, International Monetary Fund 12

13 REPAIR BALANCE SHEETS AND COMPLETE BANKING UNION SSM: Comprehensive assessment revealed high NPLs Apply strict supervisory monitoring of banks NPL reduction targets Impose additional bank-specific capital requirements as needed SRM not yet complete: SRF needs a common fiscal backstop EU-wide deposit guarantee scheme Capital Markets Union can diversify funding sources and facilitate cross-border private-sector risk-sharing SME securitization Insolvency frameworks European Department, International Monetary Fund 13

14 IMPROVE EMU GOVERNANCE Carrots and Sticks Structural reform incentives Banking sector architecture Fiscal: Simplification, enforcement and incentives European Department, International Monetary Fund 14

15 I N T E R N A T I O N A L M O N E T A R Y F U N D Thank You! The IMF in Europe--get the latest on the IMF's activities, analyses, and views on the economic trends and policies in Europe. Try it February 2,