The EU response to the crisis. Nicolas PHILIPONNET, European Commission, DG ECFIN 1 December 2015

Transcription

1 The EU response to the crisis Nicolas PHILIPONNET, European Commission, DG ECFIN 1 December 2015

2 The objective A procedure to capture: "Macroeconomic" "Imbalances" Therefore: How do you describe the state of the macroeconomy? How do you identify an imbalance? 2

3 Outline 1. The origin of the crisis 2. The EU's response to the crisis: enhanced economic governance 3. The (long) road to recovery 4. Macroeconomic Imbalances Procedure 5. Imbalances: where do we stand? 3

4 1. The origin of the crisis 4

5 Origin of the crisis: what went wrong?

6 5 Stages of the crisis: from financial to economic to institutional crises Subprime crisis Excess credit + prolonged upswing + expectations 2008 Banking crisis Defaults cause bank losses, distrust rises 2009 Economic crisis Credit crunch; high risk aversion hits trade & investment 2010 Sovereign debt crisis Recession hits tax revenues; welfare spending rises; GDP denominator falls systemic crisis of the euro Contagion spreads crisis through financial and economic links; speculation on exit & breakup

7 : the financial crisis What we missed: the signs Abundant global liquidity, real estate bubble (credit backed by the value of the collateral) Rapid credit growth, high leveraging Supervisory failures : supervision too focused on individual institutions, not the global picture What was wrong Originate and distribute model Complex and opaque financial products (CDOs ) Conflicts of interest of rating agencies Incentives for short-run risk taking (Compensation schemes ) Maturity mismatches in banks balance sheets Domino effects and feedback loops when bubbles pop

8 % year on year growth : the EU experienced the deepest slump since WWII 6 GDP in the face of crisis t-12 t-8 t-4 t = 0 t+4 t+8 t historical crises (median) US (current crisis) EU (current crisis) Note: y-o-y grow th rates during tw elve quarters before and after the beginning (0) of a finanical stress episode. T = 0 corresponds to 2007Q4. Dotted lines refer to forecasts. Sources: IMF, OECD, European Commission. 8

9 GDP, Pre-crisis=100.Or worse GDP in volume US vs Greece Number of years since the start of the crisis US, Greece, Source: US bureau of Economic Analysis; European Commission (Autumn 2015)

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11 Aggressive fiscal policies caused a hike in public indebtedness 140 General Government gross debt (% of GDP) EU EA EL IT BE PT AT FRHUDEMTUK IE NL CY ES PL HR FI DK SE LV SK SL CZ LT ROLU BG EE Source: European Commission. 11

12 The negative feedback loop FINANCIAL STABILITY SOVEREIGN DEBT ECONOMIC GROWTH 12

13 PT ES EL EE IE SK SI IT AT CY* FR FI MT NL DE BE* LU* Meanwhile, unsustainable external positions and asset bubbles contributed to divergences in the EU NIIP (% of GDP) 120 Housing prices (2007=100) Ireland Spain Germany (*) start in 2002 Source: European Commission. 13

14 2. The EU's response to the crisis: enhanced economic governance 14

15 The original design of EMU was incomplete Failure to adapt to requirements of EMU Accumulation of unsustainable debt levels, both in public and private sector Excessive risk-taking in the banking sector Failing market discipline EMU led Member States to delay necessary structural reforms Inadequate governance framework Insufficient monitoring and enforcement tools to safeguard fiscal discipline No instruments available to address macroeconomic imbalances No established sovereign-debt crisis resolution mechanism for euro-area Member States No integrated European supervisory and regulatory architecture for financial institutions 15

16 Stabilisation thanks to a strong policy response What has been done so far? Improved crisis management (ESM / EFSF) Better surveillance tools: o Stronger enforcement instruments o Extended surveillance beyond fiscal dimension o Enhanced coordination Banking Union Monetary policy (OMT, LTRO, UMP) 16

17 Crisis management was improved through the setup of stability funds Non-euro area - Balance of Payments Facility Euro area -Temporary: - European Financial Stabilisation Mechanism - European Financial Stability Facility - Permanent: - European Stability Mechanism In case of use: macroeconomic adjustment programme and intensive monitoring by so-called Troika: COM, ECB, IMF (two pack) ESM instruments: - loans under a macroeconomic adjustment programme - purchase of debt in the primary and secondary debt markets - credit lines - recapitalisations of financial institutions through loans - direct recapitalisation of banks 17

18 Breaking the negative feedback loop Bank funding FINANCIAL STABILITY Bank recaps Fiscal Fiscal Discipline Enhanced discipline rules Structural reforms SOVEREIGN DEBT ECONOMIC GROWTH Firewalls Improved Governance Differentiated fiscal consolidation & quality of public finances 18

19 Strengthened economic governance in EMU Fiscal compact More effective preventive arm of SGP - Expenditure benchmark - Draft Budget Plans - Autonomous recommendations Focus on debt developments Numerical benchmark in the corrective arm of the SGP ESM Crisis Resolution EFSM/EFSF/ ESM Better enforcement of rules -Larger range of sanctions, starting more gradual, quasiautomaticity (RQMV) -Strengthened national fiscal frameworks Sound Fiscal Policy Prevention and correction of macro imbalances New surveillance procedure and possible sanctions Structural reforms Europe 2020 strategy 19 Financial Stability Sustained Economic Growth Banking Union Based on a single rule book for the EU 28 Single Supervisory Mechanism Single Resolution Mechanism Price stability ECB - LTRO - OMT - Forward guidance

20 Key pieces of the EU-wide Financial Reform 20

21 Making European banks more robust December 2011: EBA bank recapitalisation exercise Ensuring the medium-term funding of banks to avoid a credit crunch ECB support: two 3-year LTROs EUR 489bn for 523 participating banks (21/12/2011) EUR 529bn for 800 participating banks (29/02/2012) Enhancing the quality and quantity of bank capital to withstand shocks Core Tier 1 ratio of 9% to be achieved by end-june 2012 November 2014: AQR and stress tests (comprehensive assessment. 21

22 Key elements of the Banking Union November the ECB becomes the supervisor of all major banks in the Euro Area (around 130) and the MS that 'opted-in' AQR and stress tests IGA Finally signed in May 2014 MS have time to ratify until the beginning of 2016 Final arrangement in 5 PR Single Supervisory Mechanism Effective supervision based on high common standards Single Resolution Mechanism Effective crisis resolution, private sector funding Single Deposit Guarantee Scheme Harmonised system for depositors protection Single Rulebook for EU28 (CRD IV/CRR and BRRD) 22

23 Extraordinary measures by the ECB "Securities Market Programme" (SMP) from May 2010 limited sterilised interventions Long-term repurchase operations (LTRO) End 2011 OMT Secondary market purchase of government debt, Response to fears on the reversibility of the euro.

24 Stability and Growth Pact Two Arms to ensure fiscal discipline in the EMU Each Member State required to stay within the limits of (defined in the TFEU): o government deficit (3% of GDP) & debt (60% of GDP) Preventive Arm o Submission of Annual Stability and Convergence Programmes o Country-Specific Medium-Term Budgetary Objectives MTO Corrective ('Dissuasive') Arm o Excessive Deficit Procedure EDP o Sanctions 24

25 Six Pack, Two Pack & Fiscal Compact Preventive arm o Expenditure benchmark to prevent that spending rises faster than medium-term potential GDP o Balanced Budget Rule - structural deficit must not exceed 0.5% of GDP (or 1.0% of GDP if debt significantly < 60% of GDP) Corrective arm o Debt criterion became enforceable EDP can be launched on deficit and debt criterion 1/20th target - debt must decrease by 1/20 th of GDP annually if > 60% Strengthened budgetary surveillance o o o Draft budgetary plans submitted to the Commission Common budgetary timeline for an enhanced coordination Independent Fiscal Councils established in the Member States Strengthened enforcement o o For MS in EDP the deposits and fines kick in earlier Reverse QMV for graduated financial sanctions 25

26 6 Lessons for economic governance Scope and nature of surveillance Wider, especially on macro-financial issues and competitiveness/imbalances Deeper, especially on debt sustainability and key growth-enhancing reforms Better integrated, avoiding partial and fragmented approaches Follow-up and enforcement Stronger enforcement instruments Influence on economic policy debates at national level Taking account of Euro area dimension Deepening EMU: 4 Presidents' report + Commission's Blueprint

27 3. The (long) road to recovery 27

28 Policy response has led to a gradual stabilisation of financial markets 28

29 Jan-04 Oct-04 Jul-05 Apr-06 Jan-07 Oct-07 Jul Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 EL SI BG CY IE HR HU IT LT PT LV CZ ES PL BE AT FR DK SK EE NL UK DE MT SEFI Financial sector repair work in progress Changes in euro area banks' aggregate CT1 ratios, (% and pps) Loan to deposit ratio Gross total doubtful and non-performing loans [% of total debt instruments and total loans and advances) 195 EA DE IE ES IT PT June 2013 EA (June 2013) Source: ECB, SNL Financial Source: ECB Source: ECB consolidated banking data

30 Banking Union work in progress Financial fragmentation & 'creditless' recovery Interest rates on loans to enterprises (new business, maturity up to 1 year) Economic and credit cycles, euro area (year-on-year %) Source: Winter Forecast 2014

31 Budget deficits have improved since the crisis 4% Government deficit (% of GDP) 2% 0% -2% -4% -6% -8% -10% th percentile EU-27 median 25th percentile EU-27 average Source: Commission services 31

32 FI HR FR PT UK IE BE EE BG LU LV RO SE LT CZ DK PL SK FI HR MT NL DE HU ATSI EU UK FR EA ES BE IE CY PT IT EL Government debt is high across the EU and some countries need substantial further fiscal adjustment by 2020 Government debt (% of GDP) S1 indicator: required fiscal adjustment by 2020 to reach a 60% debt-to-gdp ratio in % 160% 140% 120% 100% 80% 60% 40% 20% 0% Autumn 2010 Spring 2014 EE LV DK SE BG LT HU RO SK DE PL ES LU CZ NL IT MT AT SI 32

33 Recovery takes hold, but fragile and uneven Real GDP, the whole of EU Real GDP, Selected countries 2008= Quarterly GDP growth GDP annual (index) GDP quarterly (index) Column3 BE DE IE EL ES FR IT UK PT Source: Autumn Forecast

34 What are the economic prospects for the upcoming five years? 108 Current recovery against past average* (GDP, euro area) index o Signs of a turnaround in the euro area, including in vulnerable economies previous recoveries current recovery quarters o o More weight of domestic demand in the core and external demand in the periphery But growth is still weak due, notably, to EA specific factors

35 Case No 1: Full return to earlier path Potential output level Slope = long-term potential growth No loss in potential output level after some time The medium- to longrun: possible trajectories for growth Case No 2: Permanent loss in GDP level Potential output level Permanent loss in potential output level Same long-term potential growth after the crisis (same slope) Case No 3: Permanent loss on growth rates Potential output level Years Potential growth before crisis (e.g. 2%) Potential output loss increasing overtime Lower long-term output growth after the crisis (e.g. 1.5%)(lower post-crisis slope) Years 35

36 4. MACROECONOMIC IMBALANCES PROCEDURE : Aiming to prevent the next crisis 36

37 The macroeconomic imbalance procedure Context: Enhancing economic governance in the EU and the euro area, six-pack Fiscal surveillance - Prudent fiscal policy - Debt criterion - Minimum standards for fiscal frameworks Macroeconomic surveillance New regulation on prevention and correction of macroeconomic imbalances Enforcement New regulation on effective enforcement of budgetary surveillance Stronger incentives & sanctions Enforcement New regulation on effective enforcement of macroeconomic surveillance Sanctions in case of persistent inaction/insufficient action 37

38 Governance architecture The European Surveillance Cycle November Autumn forecast Annual Growth Survey Alert Mechanism Report Commission's opinions on Draft Budgetary Plans Winter forecast In-Depth Reviews 15 October 15 April Euro-area Member States: Draft Budgetary Plans Stability/Convergence Programmes National Reform Programmes Country-Specific Recommendations Spring forecast May/June 38

39 Challenge 1: complexity of the surveillance mechanisms A multiplicity of legal acts which is hard for experts to follow and emphasises process over substance The problem of the "complete contract": rules versus discretion Communication with stakeholders, especially at national level: ownership 39

40 Challenge 2: economic analysis in practice More difficult to identify problems earlier in the economic cycle, e.g. credit growth, house prices? Economic literature is not so conclusive on policy diagnosis and responses, especially in the aftermath of a balance-sheet crisis. Requires a lot of country specific knowledge. Overall, it requires qualitative judgement to complement quantitative analysis which is contestable. 40

41 Challenge 3: political economy accountability and ownership Respect the subsidiarity principle: when macroeconomic problems at the level of the Euro area require microeconomic actions at MS level. Democratic accountability and transparency at both EU and national level. The ins and the outs 41

42 The two arms of the MIP PREVENTIVE ARM: Ensure efficient and timely surveillance of macro imbalances where needed and bring the issues to the table. Integrated in European semester. CORRECTIVE ARM: Ensure efficient and timely policy action and correction when required. Follow-up by own time line.

43 The MIP procedure : a 2-step process to detect imbalances a. Alert mechanism report Economic reading of the MIP Scoreboard November Potential imbalance b. In-depth reviews Commission prepares in-depth country reviews (IDR), using a wide set of indicators and analytical tools. February/March Programme countries have their own enhanced surveillance No risk identified Procedure stops No problem Procedure stops Imbalances Recommendatio ns under European Semester May Excessive imbalances Decision to trigger (or not) the corrective arm

44 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

45 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

46 a. The alert mechanism report and the MIP scoreboard

47 Role and scope of the AMR Screening device to identify Member States for which in-depth review is warranted Programme countries are not assessed No policy conclusions or country-specific recommendations Based around an economic reading of a scoreboard of indicators Commission Report adopted by college

48 MIP scoreboard: an analytical tool Headline scoreboard: selected 14 indicators with indicative alert thresholds: alert thresholds based on historical data Scoreboard complemented by set of additional 28 "reading indicators" (including 9 of social character) Presented on t-1 annual statistics but the economic reading considers latest data available at any frequency Scoreboard may be adjusted over time (AGS 2015: possible promotion of some social indicators for AMR-2016) 48

49 It is: What the scoreboard is and what is not A first step (an initial filter) in the procedure An instrument of communication and accountability (COM needs to explain its decision taking into account the scoreboard) A set of indicators that helps identifying macroeconomic risks (but needs to be complemented by detailed analysis) It is not: A tool for a mechanic decision on the existence of imbalances A tool to identify progress in reforms and developments in macro risks 49

50 New employment indicators Internal imbalances External imbalances The scope of the scoreboard External positions (current accounts, net international investment positions) Competitiveness developments (REERs, ULCs) Export performance (export market shares) Private sector indebtedness (credit, debt) Public sector indebtedness Assets markets (housing) Financial sector developments (fin. Sector liabilities) Unemployment Activity rates Long-term unemployment Youth unemployment 50

51 Results of the AMR 2016 The 16 countries for which imbalances were identified in 2015 (FR, HR, BG, IT, PT, SI, IE, ES, HU, DE, BE, NL, FI, SE, RO, UK) An IDR will be prepared for the first time for 2 Member States: Estonia: risks and vulnerabilities linked to a renewed build-up of demand pressures Austria: issues related to the financial sector, notably its high exposure to developments abroad and the impact on credit provided to the private sector Programme countries are not under MIP surveillance. As was previously the case for Member States expected to exit their financial assistance programme, the situation of Cyprus will be assessed in the context of the MIP only after the on-going financial assistance programme, which is expected to finish by March 2016.

52 b. In-depth reviews

53 IDRs in general Broad assessment of imbalances complemented with focused analysis (building on AMR) Common framework but assessments are by nature country specific drawing on common and national sources as well as on relevant empirical evidence. Fact finding missions to Member States (ECFIN, other services, ECB (EA), ESO) Use of widely available and transparent data, analytical tools and descriptive statistics Methodological work progress in tandem (LIME, surplus study, deleveraging report)

54 Broad structure of IDRs Executive summary and conclusions Macroeconomic developments Analysis of the nature and causes of imbalances Focused sections on key issues Policy challenges

55 Identification of problematic imbalances 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 Adjustment capacity Price and wage flexibility Labour market flexibility Financial market intermediation Balance sheet adjustment Spillovers Trade linkages Financial linkages Policy Response Policy options and implementation Wage bargaining system Financial market regulation Fiscal policy Growth and structural reforms 55

56 Nature of MIP Medium term horizon Pre-emptive Approach Snapshot Dynamics Reform implementation Objective What is an imbalance? (no numerical benchmark) Risk assessment and impact 56

57 Challenges vary significantly across Member States Large stocks of net liabilities concerning a wide range of sectors, both external and internal: PT, ES, CY, EL, IE, SI, HU, HR, BG Large and persistent current account surpluses: DE, NL Combination of high public debt and declining trend in potential growth or competitiveness: IT, FR, BE Vulnerabilities confined to a particular sector: NL, SE, UK, AT, EE, FI Large negative NIIP: RO

58 Analytical tools External positions (CACA, CA benchmarks, NIIP stabilising CA) Trade performance and competitiveness (allocative efficiency, access to finance, productivity and export performance) Wages and productivity (wage benchmarks) Deleveraging pressures House price cycle assessment (equilibrium, overvaluations) QUEST simulations (impact structural reforms) 58

59 The MIP identifies competitiveness and indebtedness as the most prevalent imbalances % of countries with identified imbalance in the MIP external competittiveness private indebtedness public indebtedness external sustainability housing market financial sector other average ( ) labour markets 0% 10% 20% 30% 40% 50% 60% 59 Source: Commission services; other includes: imbalances stemming from weak domestic demand, weak corporate governance and high level of state involvement in the economy 59

60 Labour market reforms Human capital and social policies Product market reforms Public finance Financial sector. Macro imbalances & structural reforms CSRs addresses the major reform priorities Number of CSRs in 2013 and 2014, by policy area 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 Source: Commission services

61 Specific monitoring The corrective arm was not initiated either in 2013 or 2014 despite finding of excessive imbalance This is formally in line with legislation ("may") EA CSR asks for "specific monitoring" of implementation of reform commitments for countries with excessive imbalances and EA countries with imbalances requiring decisive action. Was done for ES and SI (first time) and HR, IT, SI and FR, IE, ES COM can at any moment initiate corrective arm

62 4. Imbalances: where do we stand (AMR 2016)? 62

63 Novelties in this year's AMR A greater emphasis is put on the euro-area dimensions of imbalances through: A dedicated box presenting the main euro-area considerations A more systematic analysis of the euro-area wide implications of countries' imbalances and how such implications require a coordinated approach to policy responses. The social dimension is strenghtened Inclusion of 3 new employment indicators to the main scoreboard with thresholds (activity rate, youth and long-term unemployment) Rationale: social consequences of the crisis; impact on potential GDP of long, drawn-out negative employment and social developments with risk of compounding macroeconomic imbalances Focus unchanged: flashes of the new indicators do not imply, by themselves, an aggravation of the macro-financial risks, and consequently are not used to trigger any steps in the MIP

64 The euro area current account balance % of GDP Large current account deficits have adjusted while large surpluses persist DE NL ES FR IT Other Euro Area

65 The growing current account surplus in the euro area reflects weak domestic demand The euro area surplus is now one of the world's largest and is forecast to remain large It largely reflects an excess of domestic savings over investment, as a consequence of deleveraging pressures in all sectors, including in countries with low deleveraging needs It is above what fundamentals would imply, notwithstanding oil and FX effects In general, cyclically-adjusted figures are lower than the headline balances. One exception is Germany. Scoreboard indicator flashes in four surplus countries (like last year: DE, NL, DK, SE) and two deficit countries: CY and for the first time UK.

66 Net International Investment Positions and Net External Debt in 2014 Large net external liabilities persist despite the adjustment in flows 150 In % of GDP Net external debt (neg. sign) 100 Other net assets 50 Net international investment position (NIIP) CY EL PT IE* ES SK LV LT SI EE IT FR FI AT LU* MT* DE BE NL HR HU BG PL RO CZ UK SE DK Euro Area Non-Euro Area

67 Vulnerabilities linked to external debt remain significant In general, higher current account surpluses would be needed in order to reduce the net external liabilities in a timely fashion Valuation effects also have weighed on the rebalancing of stocks The contribution of nominal GDP growth has generally been either small or negative (highlight risks linked to low inflation environment) Scoreboard indicator reflects this inertia with 16 countries flashing like in the AMR 2015, 2014 and The fast and continuous accumulation of net creditor risks should not be overlooked.

68 CY EL IE SI ES PT BE SK NL FI EA19 MT IT LU FR DE AT LT EE LV HR UK PL CZ RO BG SE DK HU Decomposition of ULC growth in 2014 Cost competitiveness developments have been broadly consistent with adjustment needs 10% 8% 6% 4% Of which: labour productivity (neg. sign) - contribution of total factor productivity and capital accumulation Of which: labour productivity (neg. sign) - contribution of hours worked Of which: real hourly compensation per employee Of which: inflation (GDP deflator growth) ULC growth in % 0% -2% -4% -6% -8% Euro Area Non-Euro Area

69 CY FI MT HR EL DK AT HU IT FR SI ES NL BE SE UK DE IE CZ PT SK PL BG LV LU RO EE LT CY FI MT HR DK AT HU IT FR EL SI ES NL BE SE UK DE IE CZ PT SK PL BG LV LU RO EE LT The decline in export market shares has eased in most EU countries 5 year change in export market shares in year change in export market shares in Gains within Extra-EU market Gains within EU market Exposure to Extra-EU Exposure to EU Scoreboard indicator 2014 (5 year change) Gains within Extra-EU market Gains within EU market Exposure to Extra-EU Exposure to EU Cumulated change in 2013 and

70 DK CY NL IE UK PT ES SE DE FI EL MT BE EE LU FR AT LV IT HR HU PL LT SK CZ SI BG RO CY IE BE SE NL PT ES BG MT EE DK UK FI FR SI HR LV IT HU AT EL DE RO LT CZ SK PL % of GDP % of GDP Private debt reduction is dwarfed by pre-crisis accumulation Household debt, consolidated Corporate debt, consolidated incr. to peak incr. to peak Country Peak year Country Peak year

71 pp. % of GDP Recent progress in deleveraging has been mixed 4 2 Drivers of 1 year change in household debt 10 5 Drivers of 1 year change in corporate debt Credit flows Writeoffs, reclass., val. changes Nom. GDP growth D/GDP, ch Credit flows Writeoffs, reclass., val. changes Nom. GDP growth D/GDP, ch. -10 IE PT ES HULV NL EL RO SI IT UKDK CZ DE LT EE LU HR CY FR AT PLMTSE FI BE SK -25 SI PT ES ROHU IE FI LT IT LV DKMTUK CZ HR EL CY EE DE SE PL AT BE SK FR NL Active deleveraging Passive Unsucc. No deleveraging Active deleveraging Passive Unsucc. No deleveraging

72 CY EL IE RO BG HU IT HR SI LT PT ES MT LV CZ SK PL DK FR BE NL UK AT DE EEFI SE LU Vulnerabilities in the banking sector persist Non-Performing Loans (NPLs) Q4 2014Q

73 Deflated house prices 1 year % change, 2014 (%) House prices developments reflect different positions in housing cycles across the EU House prices: valuation levels in 2013 and variations in Recovering from undervalued levels IE EE LT PT LV HU SK CZ DK BG PL DE ES NL CY HR RO IT Undervalued and still falling SI EL Overvalued and still growing UK SE AT FI MT FR BE LU Correcting from overvalued levels Estimated valuation gap, 2013 (%)

74 Change in unemployment rate between 2013Q1 and 2015Q2 Labour market conditions are converging but social distress remains too high 2.0 Evolution of the unemployment rate since AT LU NL RO FI BE FR IT CY -1.0 DE DK SE SI MT CZ UK EE LT PL LV BG SK HR EL -4.0 HU IE ES -5.0 PT Unemployment rate in 2013Q1

75 Long and negative social developments may hamper potential output and compound macroeconomic imbalances Unemployment rate has reached historically high levels and the number of flashes is still high (12 this year compared to 14 in the last AMR) Activity rates remains resilient in most countries, with flashes observed only in two Member States Over the past three years, long-term unemployment has strongly increased in 11 Member States (incl. EL, ES, PT, CY, IT). Despite improvements, youth unemployment is close to historically high levels with the 3-year pp change indicator flashing for 13 countries.

76 Euro area spillovers call for coordinated approach to macro policies Domestic demand and investment need to be boosted particularly in countries with sufficient fiscal space, a large current account surplus or low deleveraging, so as to mitigate the risk of protracted low growth and low inflation. Structural reforms aimed at unlocking growth potential must continue or be stepped up, in particular in countries of systemic relevance Countries whose capacity to sustain demand is constrained by debt overhang and a high level of NPLs should also focus on growth enhancing reforms, ensuring that their insolvency frameworks are also adequate to address the stocks of non-viable debt, free up economic resources, and reallocate capital efficiently.

77 6. Conclusion and next steps 77

78 Next steps The AMR conclusions to be discussed in the Council and Eurogroup; IDRs planned to be published in February, ahead of CSR package as last cycle; IDRs embedded in country reports After IDR, for some countries imbalances may not any longer be identified Specific monitoring for 8 Member States (FR, HR, BG, IT, PT, SI, IE, ES)

79 The MIP is now well-established but the full set of instruments has not yet been used Opportunities Earlier detection of imbalances Ability to communicate and have impact on domestic policy debates Evolving over time to capture macroeconomic priorities: adjustment of flows but outstanding stocks Challenges Given the nature of imbalances, less rules-based, more judgement Corrective arm not used yet Exploit the existing framework (repeated game with potential stigma effects) to ensure its effectiveness Shifting emphasis to reflect topical policy issues: e.g. current account surpluses or social implications of adjustment Improved analytical tools 79 IDRs for all Member States or more selective? Is the framework capturing the main challenges and is it adapting in an adequate manner?