Surveillance of macroeconomic imbalances: The excessive imbalances procedure (EIP)

Transcription

1 Surveillance of macroeconomic imbalances: The excessive imbalances procedure (EIP) Adja A. SiSSOKO European Commission Directorate General for Economic and Financial Affairs Conference on «Role of statistics in managing economic imbalances» Radenci 7.-9 November 2011 European Commission

2 Outline A description of the EIP The scoreboard Developing analytical tools/frameworks

3 Part I A description of surveillance under the preventive and corrective arms of the EIP

4 Overall changes to economic governance Excessive Imbalances Procedure European Systemic Risk Board financial stability and macro & micro level external and internal imbalances Stability and Growth Pact fiscal policy European semester and the 2020 strategy growth enhancing structural reforms AND. the ongoing debate on EFSF/ESM and Eurogroup goverance

5 Diagnosis of problematic imbalances A framework for enhanced and broader macro-economic surveillance for all Member States focussing on imbalances. preventive arm to avoid the build-up of imbalances corrective arm with strong enforcement mechanisms for euro area members where spill-overs are stronger. European Commission

6 Broad scope of surveillance External imbalances External positions (e.g. current accounts, net international investment positions) Competitiveness developments (e.g. REERs, ULCs)Export performance (e.g. export market shares) Internal imbalances Private sector indebtedness (e.g. credit, debt) Assets markets (e.g. housing)

7 The preventive arm of the EIP Policy response Alert mechanism Economic reading of early warning scoreboard indicators to identify Member States with potential risks In-depth review Analysis to distinguish between benign and harmful macroeconomic developments and to identify policy options No problem Procedure stops. Imbalance exists Commission/Council recommendations under Article Severe imbalance Commission/Council recommendation under Article 121.4

8 The Corrective Arm Member State is placed in Excessive Imbalance Position Corrective Action Plan Sufficient abeyance Surveillance of compliance with reform commitments Insufficient fine 0.1% of GDP Insufficient: interest bearing deposit Insufficient: Fine 0.1% of GDP

9 Member State is placed in an Excessive Imbalance Position The Corrective Arm is INTRUSIVE and FOCUSSED Corrective Action Plan Fine 0.1% of GDP Insufficient: interest bearing deposit Sufficient abeyance Surveillance of compliance with reform commitments Insufficient: Fine 0.1% of GDP

10 and works by reverse Qualified Majority Voting Member State is placed in an Excessive Imbalance Position Corrective Action Plan Fine 0.1% of GDP Insufficient: interest bearing deposit Sufficient abeyance Surveillance of compliance with reform commitments Insufficient: Fine 0.1% of GDP

11 Challenges in applying the EIP Analytical large degree of qualitative judgement especially if acting early requires considerable country specific knowledge; data limitations limited consensus on policy responses. Political Positive : greater awareness of the costs of inaction and spillover effects, and not easy to form blocking minorities; Challenge: macro challenges with euro area spillovers that require micro policy responses in areas of national competence hinge on effectiveness of overall governance package and ongoing discussion to overhaul the Eurogroup

12 Part II The scoreboard

13 The alert mecahnism The surveillance begins with an alert mechanism which combines a transparent review of a small set of indicators (i.e. the scoreboard) with economic analysis. The alert mechanism is a trigger device that prompts more in-depth analysis to determine whether observed development are benign or problematic.

14 What role for the scoreboard? Only a trigger for launching in-depth studies are the substantive basis of policy recomendations Scoreboard is nonetheless important implictly defines the scope of surveillance; a communciation tool. Scoreboard indicators not equivalent to EDP reference values for deficits and debt (more structural indicators in the Lisbon process startegy)

15 The choice of indicators: main considerations Limited SET of indicators that capture external and internal imbalances at an early stage, and take account of stocks and flows Timely availability (including forecasted data) and broad coverage of Member States Aim to respect the principles of the European Statistics Code of Practice of the European Statistical System (ESS)

16 Example of test early warning scoreboard: Portugal Scoreboard Analysis: PT Thresholds year average of Current Account balance as a percent of GDP +6/-4% IIP as % of GDP -35% EXTERNAL IMBALANCES % Change (over 3 years) of Real Effective Exchange Rate (REER) with HIPC deflators +/-5% & +/-11% % change (5 years) in Export Market Shares -6% % change (over 3 years) of ULC index +9% & +12% % y-o-y change in House Prices +6% Private sector Credit flow as percent of GDP 15% INTERNAL IMBALANCES Private sector debt as percent of GDP 160% Public sector debt as percent of GDP 60% year average of unemployment rate 10%

17 Approach to thresholds D e n s ity % difference % change from (over Long 3 years Term of average the RRER_ULC reer_gdp 35 Distribution (freq.) over time and across countries (in excluding the current crisis years). Identify quartiles (25% of observations) Upper threshold: the value of X for which only 25% of obs. is above. Lower threshold: and the value of X for which only 25% is below. generous thresholds followed by investigation

18 Year 2010 The scoreboard indicators and the 3 year average of Current Account balance as a percent of GDP indicative thresholds External imbalances and competitiveness Internal imbalances IIP as % of GDP % change (5 years) in Export Market Shares % Change (over 3 years) of Real Effective Exchange Rate (REER) with HIPC deflators % change (over 3 years) of ULC index Private sector Credit flow as percent of GDP Private sector debt as percent of GDP Public sector debt as percent of GDP % y-o-y change in House Prices 3 year average of unemployment rate Threshold +6/-4% -35% -6% +/-5% & +/-11% +9% & +12% 15% 160% 60% 6% 10% BE DE IE EL ES FR IT CY LU MT NL AT PT SI SK FI BG CZ DK EE LV LT HU PL RO SE UK

19 Additional indicators for the economic reading External imbalances and competitiveness Internal imbalances Headline Scoreboard Indicators 3 year average of current account balance as a % of GDP Net International Investment Position as a % of GDP % change (3 years) of Real Effective Exchange Rate, HICP deflators relative within 35 industrial countries (a) % change (5 years) in export market shares % change (3 years) in nominal unit labour cost (b) y-o-y % change in deflated house prices (c) private sector credit flow as % of GDP (d), (e) private sector debt as % of GDP (d), (e) general government debt as % of GDP (f) 3 year average of unemployment rate Additional indicators to be used in economic reading Net lending/borrowing vis-à-vis ROW (CA+KA) as % of GDP Net External Debt as % GDP REER vis-à-vis rest of the euro area European parliament Export market shares based on volumes of goods; Labour productivity; Trend TFP growth Nominal ULCs (changes over 1, 5, 10 years); Effective ULC relative to the rest of euro-area House prices (changes over 3 years); Residential construction Change in private credit Private sector debt based on consolidated data

20 Three year average of Current Account balance as % of GDP Rationale: Flow external Imbalances indicator. Thresholds: -4/+6% applies to deficit and surplus countries - Data series: - Headline indicator: Current account balance (annual BOP data) as a share of GDP; source EUROSTAT. The series includes all the available observations between Additional indicator: Net lending/borrowing vis-à-vis ROW (% GDP); source EUROSTAT.

21 Net International Investment Positions as a share of GDP Rationale: Stock counterpart of CA/GDP (the stock of debt of the domestic sector of the economy) Threshold: -35% (only left tail as large external ASSET positions are not a threat for the functioning of EMU). Data series: Headline indicator: "Net IIP; total economy" as a share of GDP; source EURSOTAT (annual BOP data). The series includes all the available observations between 1980 and Additional indicator: Net external debt (% GDP)

22 Change (over 3 y.) in Real Effective Exchange Rate HICP deflator Rationale: competitiveness indicator: losses and gains in global price competitiveness relative to the major trading partners (35), Thresholds: -/+ 5% & -/+ 11% (upper and lower quartile of EA -/+ s.d. of EA) Data series: Headline indicator: REER based on HICP deflators; performance relative to 35 trade partners, double export weights ; source DG ECFIN ( ). Additional indicator: REER vis-à-vis the rest of EA; source DG ECFIN

23 Change (over 5 y.) in Export Market Shares (in goods and services) Rationale: competitiveness indicator capturing non price competitiveness or the ability of exploiting new sales opportunities (i.e. from emergent countries) Thresholds: -6% (lower quartile) Data series: Headline indicator: Current account for goods and services, position: credit, partner: World (annual BOP data); source: EUROSTAT. The series includes all the available observations between Additional indicator: Export market shares based on volumes of goods, labour productivity, trend TFP growth; sources: EUROSTAT, ECFIN

24 Change (over 3 y.) in Nominal Unit Labour Cost Rationale: Measure of cost competitiveness indicator providing a direct link between cost and productivity. Thresholds: -/+ 9% & -/+ 12% ( upper quartile EA +3pp) Data series: Headline indicator: Nominal ULC, ratio of nominal compensation per employee to real GDP per person employed; sources: EURSTAT, DG ECFIN. The series includes all the available observations between Additional indicator: Changes (over 1,5, 10 years) of nominal ULCs, effective ULC relative to the rest of EA; source: ECFIN.

25 Y-O-Y change in Real house prices Rationale: recent experiences of asset bubbles Threshold: 6% annual increase (only right tail). The threshold is chosen from the results of Agnello and Schuknecht (2010): Data series: Headline indicator: Harmonised houses price index; source EURSOTAT (completed with ECB, OECD and BIS data). The series includes all the available observations till Additional indicator: House price (changes over 1, 3 years), Residential construction development; sources: EUROSTAT, ECFIN.

26 The private sector credit as a % of GDP Rationale: indicator of risks for growth and financial stability (early warning) Threshold: 15% (only right tail) Data series: Headline indicator: Sum of loans and securities other than shares for non financial corporations and households, non consolidated N.A. data; source EURSOTAT. The series includes all the available observations between Additional indicator: Change in private credit.

27 The private sector Debt as a % of GDP Rationale: indicator of risks for growth and financial stability. Threshold: 160% (only right tail) Data series: Headline indicator: Sum of loans and securities other than shares for non financial corporations and households, non consolidated N.A. data; source EURSOTAT. The series includes all the available observations between Additional indicator: Private sector debt based on consolidated data; source: EURSOTAT.

28 Government debt ratio Rationale: indicator of potential contribution of the government public sector debt to macroeconomic imbalances Threshold: 60% (only right tail) Data series: "Gross debt of Government Sector" as a share of GDP; source: EUROSTAT EDP (ESA95).

29 3 year average of Unemployment rate Rationale: Indicator of potential misallocation of resources and adjustment capacity. Threshold: 10% (only right tail) Data series: Labour force survey annual data from EUROSTAT. The series includes all the available observations between

30 Excel spreadsheet

31 How the EIP fits into the European semester (indicative based on timing of 1st year)

32 Forthcoming web plate-form

33 How the EIP fits into the European semester (indicative based on timing of 1st year)

34 Example of standardised graph: Current account vs capital account (2010, 3-year MA) LV EE HU LT CZ SI SK PL MT RO CY BG SE LU DE NL DK AT FI BE FR UK IT IE ES PT EL -5 new Member States old Member States CA CA+KA

35 Example of standardised graph: NIIP and NED (2009, % GDP) BE BG CZ DK DE EE IE EL ES FR IT CY LV LT HU MT NL AT PL PT RO SI SK FI SE UK NIIP NED

36 Part III Developing analytical tools and frameworks to support surveillance

37 Identification of problematic imbalances Policy Response Early warning Sustainability of macro-trends Deviation from equilibrium (competitiveness, credit growth, housing prices) Other factors (GDP growth, demography, catching-up, global imbalances, saving and investment imbalances, housing and other asset markets, shocks) Policy determinants (fiscal policy, financial regulation, labour market institutions) EIP Policy options Wage bargaining system Financial market regulation Fiscal policy Growth and structural reforms Adjustment capacity Price and wage flexibility Labour market flexibility Financial market intermediation Balance sheet adjustment Spillovers Trade linkages Financial linkages

38 What is required Shared understanding on the analytical: the diagnosis of problematic imbalances the design of appropriate policy responses Approach involves literature surveys, event analysis, modelling exercises and cases studies leading to guidance on the approach/principles to be used in multilateral surveillance Indicators/tools statistical datasets development of conceptual indicators information sets on institutional settings at Member State level, e.g. wage bargaining systems, housing markets

39 Types of tools/frameworks needed to conduct surveillance on macroeconomic imbalances analytical frameworks or dedicated analysis to identify problematic imbalances, e.g. progress in deleveraging or external positions of catching up countries statistical datasets, e.g. the EIP database development of conceptual indicators, e.g. CA norms, equilibrium REERs or equilibrium credit information sets on institutional settings at Member State level, e.g. wage bargaining systems, housing markets analytical frameworks useful for identifying policy responses to imbalances training programme

40 External imbalances: main issues to address The anatomy of intra-/extra-eu external imbalances and their drivers External debt sustainability Channels of adjustment and their functioning The role of policies in stimulating adjustment of external imbalances External positions of catching up countries The role of surplus countries in the adjustment of divergences Assessment of competitiveness and export performance and their determinants European Commission 40

41 External imbalances: indicators, tools and databases Main outputs Project Description of the project External DSA Standardised tool with debt projections and robustness analysis (e.g. different types of shocks) Analytical indicators, tools or databases CA/IIP norms Flow of Funds analysis Stock-flow analysis Indicatorsof CA/IIP norms based on different approaches Standardised toolwith F-o-F tables (different level of detail depending on the purpose of the analysis) Analytical toolto do the stock-flow analysis and assess the importance of valuation effects BoP/IIP dataset Datasetwith BoP/IIP data allowing for detailed analysis of external positions of countries European Commission

42 Internal imbalances: main issues to address Examination of private sector balance sheets to detect unsustainable positions: granular approach developments in households, non-financial corporations, MFIs. examine stocks, flows and sustainability/vulnerability policy factors, e.g. financial regulation, taxation Asset markets, starting with housing assessment of house price developments: event analysis, equilibrium price estimation, supply responsiveness, complementary indicators (affordability ratios) examine structural features of housing and mortgage market transmission channels: through C, I, credit European Commission 42

43 Thank you

44 Additional slides

45 How EIP fits into the European semester (preventive arm only) EU semster deliverables Nov Dec Jan Feb Mar Apr May Jun AGS SCPs and NRPs Commission Recommend ations Council adopts Recomme ndations Alert mechanism Finalise scoreboard design AMR ECOFIN and Eurogroup discussion Surveillance under the EIP (preventive In-depth studies Commission undertakes in-depth reviews to provide analytical basis for recommendationss, can include missions in liason with the ECB In-depth reviews released Recommendat ions Preventive arm: recommenda tions under Article 121,2 included as part of June package Corrective