The crisis response in the euro area Peter Praet Pioneer Investment s Colloquia Series Beijing, 17 April 213
Outline A. How the crisis developed B. Monetary policy response C. Structural adjustment underway D. Eurozone governance 2
A. How the crisis developed 27 : USA - subprime crisis 28: Lehman Brothers 29: great recession 21: public finance crisis 211: vicious circle financial sector public finances competitiveness crisis 212: governance crisis in the euro area 3
A. How the crisis developed: the feedback loops between banks, sovereigns, and economic growth Bank crisis Sovereign debt crisis Growth & Competitiveness crisis 4
A: How the crisis developed: link between bank and sovereign risks (in basis points) Ireland Portugal Spain 25 18 1 9 2 15 8 Bank CDSs 15 1 5 21 Q1 21 Q2 21 Q3 21 Q4 211 Q1 211 Q2 211 Q3 211 Q4 212 Q1 212 Q2 212 Q3 212 Q4 213 Q1 5 1 15 2 25 Sovereign CDSs Bank CDSs 12 9 6 3 21 Q1 21 Q2 21 Q3 21 Q4 211 Q1 211 Q2 211 Q3 211 Q4 212 Q1 212 Q2 212 Q3 212 Q4 213 Q1 3 6 9 12 15 18 Sovereign CDSs Bank CDSs 7 6 5 4 3 2 1 21 Q1 21 Q2 21 Q3 21 Q4 211 Q1 211 Q2 211 Q3 211 Q4 212 Q1 212 Q2 212 Q3 212 Q4 213 Q1 2 4 6 8 1 Sovereign CDSs Italy Germany United States 7 4 3 Bank CDSs 6 5 4 3 2 1 Source: ECB calculations. Last observation: 4 March 213. Bank CDSs 35 3 21 Q1 21 Q1 2 21 Q2 25 21 Q2 21 Q3 21 Q3 21 Q4 2 21 Q4 15 211 Q1 211 Q1 211 Q2 211 Q2 211 Q3 15 211 Q3 1 211 Q4 211 Q4 212 Q1 1 212 Q1 212 Q2 212 Q2 5 212 Q3 5 212 Q3 212 Q4 212 Q4 213 Q1 213 Q1 1 2 3 4 5 6 7 5 1 15 2 25 3 35 4 Sovereign CDSs Sovereign CDSs Bank CDSs 25 21 Q1 21 Q2 21 Q3 21 Q4 211 Q1 211 Q2 211 Q3 211 Q4 212 Q1 212 Q2 212 Q3 212 Q4 213 Q1 5 1 15 2 25 3 Sovereign CDSs 5
A. How the crisis developed B. Monetary policy response C. Structural adjustment underway D. Eurozone governance 6
B. Monetary policy response: the ECB s standard and non-standard policy measures In exceptional circumstances, the ECB took exceptional monetary policy measures: Standard measures: historically low key ECB interest rates Non-standard measures: Fixed rate full allotment Extension of maturity of refinancing operations Expansion of collateral pool Securities Market Programme Outright Monetary Transactions Overall stance of monetary policy is accommodative Non-standard measures facilitate the transmission of accommodative monetary policy stance to the euro area economy, in a context of impairment in the transmission mechanism 7
B. Monetary policy response: base money, M3 and the money multiplier (annual percentage change for M3, index for base money, 24 = 1) 9 8 7 6 5 4 3 2 1 Base money (24 = 1) Euro Area US UK 9 14 8 12 7 6 1 5 8 4 6 3 4 2 1 2 Euro Area M3 Multiplier 24 25 26 27 28 29 21 211 212 213 24 25 26 27 28 29 21 211 212 213 14 12 1 8 6 4 2 Source: ECB. Latest observation: November 212 14 % 14 12 12 1 1 8 8 6 6 4 4 2 2-2 -2 24 25 26 27 28 29 21 211 212 213 % Euro Area M3 8
B. Monetary policy response: price of deflation and inflation protection declined below 5-year average Price of floor and caps (year-on-year) on euro area HICP inflation 5Y maturity 4 Price of inflation protection Price of deflation protection Average (Jan 28 - Jan 213) Average (Jan 28 - Jan 213) 35 3 25 2 15 1 5 28 29 21 211 212 213 Sources: Bloomberg. ECB calculations. Note: The market for inflation-linked options is relatively illiquid and often heavily influenced by specific demand and supply patterns. Developments should therefore be interpreted with caution. The underlying instruments are for the inflation protection: year-on-year cap of 4% with 5 year maturity; for deflation protection: year-on-year floor of % with 5 year maturity. 9
B. Monetary policy response: key ECB rates were cut forcefully and stand at a record low since July 212 6 Introduction of supplementary 3-month LTRO Announcement fixed-rate full allotment First 1-year LTRO and start of the CBPP Start Securities Markets Programme Reactivation Securites Markets Programme First and second 3-year LTROs Announcement Outright Monetary Transactions 5 4 3 2 1 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Source: ECB main refinancing / minimum bid rate deposit rate overnight interest rate (EONIA) marginal lending rate 1
B. Monetary policy response: central bank intermediation European Central Bank via NCB via NCB Crisis-country banks Flight-tosafety country banks 11
B. Monetary policy response: Target2 balances Source: ECB, NCB and IMF data and author s calculations (P. Cour-Thimann, Target balances and the crisis in the euro area, mimeo). Notes: Last observation is end-january 213. A positive (negative) sign reflects a net claim (liability) of the national central bank vis-à-vis the ECB in the TARGET2 payment system. Claims and liabilities (including that of the ECB) add up to zero. 12
B. Monetary policy response: impact of VLTROs and OMT on crisis in Spain Deterioration in banking sector Bank CDSs 9 6 3 (basis points) Bank CDSs 9 6 3 Impact of VLTROs Summer 212 intensification of crisis 21 Q1 211 Q4 3 6 9 Sovereign CDSs 9 9 6 6 Bank CDSs Bank CDSs 3 3 211 Q4 212 Q1 3 6 9 Sovereign CDSs Impact of OMT announcement 212 Q1 212 Q2 212 Q2 213 Q1 3 6 9 Sovereign CDSs 3 6 9 Sovereign CDSs Source: ECB calculations. Last observation: 4 March 213. 13
B. Monetary policy response: impact of VLTROs and OMT on crisis in Italy Deterioration in banking sector Bank CDSs 8 6 4 (Italy, basis points) Bank CDSs 8 6 4 Impact of VLTROs 2 2 21 Q1 211 Q4 211 Q4 212 Q1 2 4 6 8 Sovereign CDSs 2 4 6 8 Sovereign CDSs Summer 212 intensification of crisis Bank CDSs 8 6 4 Bank CDSs 8 6 4 Impact of OMT announcement 2 2 212 Q1 212 Q2 212 Q2 213 Q1 Source: ECB calculations. Last observation: 4 March 213. 2 4 6 8 Sovereign CDSs 2 4 6 8 Sovereign CDSs 14
B. Monetary policy response: euro area bank funding developments Main liabilities of euro area credit institutions (three-month flows in EUR billion, adjusted for seasonal and calendar effects) 125 1 75 5 25-25 -5-75 capital and reserves volatile funding sources stable funding sources claims of the Eurosystem 125 1 75 5 25-25 -5-75 -1 27 28 29 21 211 212 Source: ECB. Latest observation: December 212. Note: Reporting sector is MFIs excluding the Eurosystem. Stable funding sources include deposits of the non-financial sector excluding central government, longer-term deposits of non-monetary financial intermediaries, deposits of non-resident non-banks and MFI debt securities with a maturity of more than one year. Volatile funding sources include deposits of MFIs excluding the Eurosystem, short-term deposits of non-monetary financial intermediaries, deposits of central governments, deposits of non-resident banks and MFI debt securities with a maturity of up to one year. 15-1
B: Monetary policy response: money / credit growth disconnect M3 and MFI Lending to Non-Financial Private Sector (annual percentage changes) M3 M3 MFI loans to non-financial private sector MFI loans to non-financial private sector 15 15 15 15 1 1 1 1 5 5 5 5-5 -5 2 21 22 23 24 25 26 27 28 29 21 211 212-5 2 21 22 23 24 25 26 27 28 29 21 211 212-5 Source: ECB. Notes: Last observation: January 213. 16
B. Monetary policy response: dispersion in credit conditions Composite Nominal MFI Bank Lending Rates to NFCs (% p.a.) MFI Loans to NFCs (annual growth rates in %) 7 cross-ctry stdv (rhs) DE ES NL EA FR IT 1.75 35 cross-ctry dispersion DE ES NL EA FR IT 35 6 5 1.5 1.25 1. 3 25 2 15 3 25 2 15.75 4.5 3.25 2. 28 29 21 211 212 213 1 1 5 5-5 -5-1 -1 23 24 25 26 27 28 29 21 211 212 213 Source: ECB, MIR Statistics, ECB calculations. Notes: Last observation: January 213. Aggregations based on new business volumes of loans. Sources: ECB calculations based on ECB BIS statistics. Note: Last observation: January 213. 17
B. Monetary policy response: declining spreads between small/large loans and further decline in volumes Spread between lending rates on small and large loans (bps; three-month moving averages) euro area Germany France Italy Spain 3 25 2 15 1 5 Aug.1 Feb.11 Aug.11 Feb.12 Aug.12 Source: ECB., MIR data base. Last observation: January 213. Notes: Small loans are defined as loans of up to 1EUR millions; large loans are above 1EUR million. 18
A. How the crisis developed B. Monetary policy response C. Structural adjustment underway D. Eurozone governance 19
C. Structural adjustment underway: euro area real GDP growth and HICP developments (annual growth rates, percentages) 1999-27 28-213 Real GDP average growth 2.3 -.2 variance 1. 4.2 HICP average growth 2.1 2. variance.1.9 Sources: Eurostat and Consensus Economics. Notes: Calculations based on annual data. Average growth refers to the average of growth rates. Data for 213 are calculated using the Consensus Economics forecast of February 213. 2
C. Structural adjustment underway: euro area real GDP growth: actual and predicted in early 28 Sources: Sources: Eurostat, Consensus Economics and ECB calculations. Latest data: 212 for GDP outcome. The dotted line represents the evolution of GDP based on private sector expectations as measured by Consensus Economics in January 28. 21
C. Structural adjustment underway: impact of the crisis on real GDP - Expected growth in late 27 and realisation Real GDP, euro area, Germany and Spain All series in index form (28=1); 115 Euro area 11 Germany Spain 15 1 95 9 27 28 29 21 211 212 213 Sources: Eurostat, Consensus Economics and ECB calculations. Latest data: 212 for GDP outcome, 213 are EC projections. The dotted line represents the evolution of GDP based on private sector expectations as measured by Consensus Economics in October 27. 22
C. Structural adjustment underway: euro area productivity Euro area productivity developments and components All series in index form (28 Q1=1). Source: Eurostat and ECB calculations. Latest observations: GDP to 212 Q4; employment and labour productivity to 212 Q3. 23
C. Structural adjustment underway: evolution of debt levels in selected euro area countries by sector (as a percentage of national GDP) Government NFCs Households 3 2 27 212 (*) 3 25 25 2 2 15 15 1 1 5 5 Source: ECB. Note: Data for 212 refer to September 212. For all sectors, debt is defined as total financial liabilities minus shares and other equity at the end of the period. All data is reported on an unconsolidated basis. 24
C. Structural adjustment underway: euro area sovereign debt keeps rising, owing to automatic stabilisers, fiscal stimulus and bank support Gross debt (as a % of GDP) 1 95 9 85 8 75 7 65 21 211 29 24 23 213 214 212 22 25 28 21 2 26 27 6-7. -6. -5. -4. -3. -2. -1.. Budget balance (as a % of GDP) Source: European Commission s winter 213 economic forecast. Note: Budget balance excludes UMTS proceeds. 25
C. Structural adjustment underway: fiscal multipliers Fiscal Instrument Short-run multipliers Long-run multipliers Imperfect Full credibility More liquidity Higher More liquidity Higher credibility constrained propensity constrained propensity households to work households to work Gov. consumption - - -- - + Gov. investment -- - -- -- -- -- General transfers ++ ++ Targeted transfers - ++ +++ Labour tax - + Consumption tax - - + + Expenditure package - -- - Revenue package + + Exp. + rev. package - - - + 26
C. Structural adjustment underway: euro area budget balance adjustment Fiscal development in the euro area (as a percentage of GDP) 2. 1.. -1. -2. -3. -4. -5. -6. -7. 28 29 21 211 212 213 214 Primary balance Interest payment Budget balance Source: European Commission s winter 213 economic forecast. 27
C. Structural adjustment underway: budget balance path for euro area and selected countries (as a percentage of GDP) 29 212 29-212 Budget Balance Structural Primary Balance Budget Balance Source: European Commission s winter 213 economic forecast Structural Primary Balance Budget Balance Structural Primary Balance Ireland -13.9-7.9-7.7-3.5 6.3 4.3 Greece -15.6-9.6-6.6 4.6 9. 14.2 Spain -11.2-6.8-1.2-2.9 1. 3.9 Portugal -1.2-5.8-5. -.1 5.1 5.7 Euro area -6.3-1.6-3.5 1. 2.9 2.6 28
C. Structural adjustment underway: unit labour cost adjustment in the euro area 14 135 13 (index 2=1) Germany Italy Greece Ireland France Spain Portugal 125 12 115 11 15 1 95 2 21 22 23 24 25 26 27 28 29 21 211 212 Source: European Commission (Winter 213 Forecast), ECB calculations. Note: Data for 212 are forecast. Unit labour costs data are calculated on the basis of full-time equivalent measures of total employment and employees for DE, ES, FR and IT. 29
C. Structural adjustment underway: rebalancing within the euro area (Changes in current account and unit labour costs since 28) 2 % change in unit labour costs 15 1 5-5 FI AT BE DE FR LU IT EA MT SK NL CY EE ES SI PT GR -1 IE -15-2 -5 5 1 15 pp Change in current account balance (% of GDP) Source: European Commission Winter 213 Forecast, ECB Calculations. Notes: Changes refer to the period between 28 and 212. 3
A. How the crisis developed B. Monetary policy response C. Structural adjustment underway D. Reinforcing Eurozone governance 31
D. Reinforcing Eurozone governance Four building blocks 1. Banking Union: An integrated financial framework Single supervisory mechanism Resolution authority Common deposit insurance 2. Fiscal Union: An integrated budgetary framework Establish mechanisms that prevent and correct unsustainable fiscal policies Common agreements on upper limits to annual budget balances and government debt levels for individual Member States Set up of a framework for budgetary discipline and competitiveness Euro area fiscal body, such as a treasury office 32
D. Reinforcing Eurozone governance 3. Economic Union: An integrated economic policy framework Promote economic integration Ensure that unsustainable policies do not jeopardise the stability of EMU Enforce the framework for policy coordination 4. Political Union: Strengthening democratic legitimacy and accountability Promote mechanisms to make joint decision-making legitimate and accountable 33
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