Session 3 : Quelle gouvernance pour quelle croissance en Europe? Natacha Valla 24 Septembre 212 Goldman Sachs Global Economics, Commodities and Strategy Research Goldman Sachs Global Economics, Commodities and Strategy Research 1 Natacha valla@gs com +33 1 42 12 13 43
Gouvernance, croissance Les 4 piliers des Présidents (rapport de Juin 212) Union bancaire Union budgétaire Politique économique commune Démocratie La BCE et la time consistency Croissance: dynamique de crise versus modèle de long-terme Goldman Sachs Global Economics, Commodities and Strategy Research 2
Intra-Euro area cross-country divergence is driven by impact of fiscal austerity. -.2 ppt -.4 -.6 -.8-1. -1.2-1.4-1.6-1.8 Source: GS Global ECS Research Fiscal drag in 212 Fiscal drag in 213 France Goldman Sachs Global Economics, Commodities and Strategy Research 3
Financial conditions diverge significantly between core and periphery 18 16 14 Financial conditions Index avg. 27=1 Tightening conditions 12 1 98 96 94 5 6 7 8 9 1 11 12 The index includes four variables: real 3-month interest rates, real long-term interest rates, real trade-weighted value of the exchange rate and equity market capitalisation to GDP Source: GS Global ECS Research, ECB Goldman Sachs Global Economics, Commodities and Strategy Research 4
From area-wide perspective, divergence can start to address competitiveness issues 16 15 14 13 unit labour costs, index 2Q1=1 France Ireland Greece* Portugal 12 11 1 9 1 2 3 4 5 6 7 8 9 1 11 12 Source: Eurostat, National Statistical offices, GS Global ECS Research Goldman Sachs Global Economics, Commodities and Strategy Research 5
Treatment of the programme countries (migration onto official balance sheet) PSI accelerated migration of Greek debt onto official balance sheets 45 4 35 3 25 2 15 1 5 EUR bn Bilateral Loans from EU (Greece 1) EUR 53Bn EFSF Greece 2 EUR112 Bn EFSF/EFSM Ireland EUR 45Bn EFSF/EFSM Portugal EUR 52Bn Official Sector Privately Held 9 11 14 14 Source: ECB, GS Global ECS Research EFSF/EFSM EUR 191Bn Under 2nd package Spanish Banks EUR 1 Bn Under 1st package ESM EUR 5Bn Remaining capacity after disbursement of committed amount is EUR 691 Bn Even without PSI, Portuguese debt is undergoing in the same migration 4 35 3 25 2 15 1 5 25 2 15 1 5 EUR Bn Greece* Portugal Ireland 9 11 13 9 11 13 9 11 13 *Including PSI & the second Greek package EUR Bn Official Sector Privately Held The ECB bought a large part of government debt Purchases outstanding under the Securities Market Program (SMP) May-1 Nov-1 May-11 Nov-11 May-12 Goldman Sachs Global Economics, Commodities and Strategy Research 6
External debt is of central concern 3 25 2 15 1 5-5 Change in 1Y Yields (Jun '12 vs. Jan '7, %) Portugal Greece Ireland R² =.87 exc. Greece US Sweden Netherlands France UK Switzerland Norway -1 Net foreign assets (% GDP, 21) -15-1 -5 5 25 2 15 There is a high correlation between change in sovereign yields and net foreign assets The correlation between change in sovereign yields and public debt is weaker Change in 1Y Yields (Jun '12 vs. Jan '7, %) Greece s debt problem is external rather than public debt 2 % GDP Gross central government debt 18 Gross general government debt 16 Public and private gross external debt 14 12 1 8 6 4 2 185 187 189 191 193 195 197 199 21 Source: Reinhart and Rogoff (21) "From financial crashto debt crisis", NBER WP 15795 s foreign liabilities are skewed towards debt not equity 25 2 15 % GDP 1 R² =.32 excl. Greece 1 Portugal 5 Ireland T Switzerland Netherlands France Gvt. debt (% GDP, 211) Norway US Sweden UK -5 35 55 75 95 115 135 155 175 5 Equity 23 27 212 Derivatives BdE other Other Deposits Loans Portfolio Money Mkt Insts Portfolio bonds Portfolio Equity Intercompany debt Source: IMF, Eurostat, Datastream, Banco de España,GS Global ECS Research, Goldman Sachs Global Economics, Commodities and Strategy Research 7
with intra-euro area imbalances of greatest concern, given manageable area-wide position 6. 4. 2.. -2. -4. -6. 1. 5.. EA current account is broadly balanced % GDP CA deficit, 27Q4 CA deficit, 211Q4 Japan US UK Euro Area Current account balances have diverged broadly % GDP Current Account NIIP is moderately negative but more balanced than peers 6 5 4 3 2 1-1 -2-3 -4 6. 4. 2.. -2. % GDP NIIP, 27 NIIP, 211 Japan US UK Euro Area % GDP NIIP...as have NIIP positions -5. France -1. -15. 99 1 2 3 4 5 6 7 8 9 1 11 12 Source: ECB, NCBs, BoJ, UK ONS, US BEA, GS Global ECS Research -4. -6. -8. France -1. -12. 99 1 2 3 4 5 6 7 8 9 1 11 12 Goldman Sachs Global Economics, Commodities and Strategy Research 8
Economic forces inflation differentials, migration have begun to address imbalances Peripheral economies had persistently higher inflation pre-crisis 1.4.9 Avg. inflation differential VAT increases 2.5 2. 1.5...as a result of their cyclical positions Consumer prices (%yoy, 213 IMF f'cst) AUS FIN NETH FRA GER BEL SPA.4 1. IRE POR -.1.5 ITA R² =.4 -.6-1.1 7 6 5 4 3 2 1 Pre-crisis (1999-27) Latest quarter (212Q1) IRE GRE SPA POR NETH ITA FRA AUS GER Higher wage growth in pre-crisis YoY change in nominal wages (%) France -1-2 1 2 3 4 5 6 7 8 9 1 11 12 Source: Eurostat, Statistisches Bundesamt, GS Global ECS Research Output gap ( inverted, % of potential GDP,213 IMF f'cst) -.5. 1. 2. 3. 4. 5. 6. 7. 8. Net migration to has reverted Goldman Sachs Global Economics, Commodities and Strategy Research 9. 8, 6, 4, 2, -2, -4, -6, -8, -1, Net migration to by nationality GRE Italian Greek Portugese Spanish Dutch 5 6 7 8 9 1 11
and we see some results in terms of changing economic structures has shifted towards tradables during the crisis; has moved in the opposite direction 1. After 15 years of stagnation, house prices are rising again in 2 %, yoy.5. 15 1 -.5 5-1. -1.5-2. avg. difference between Manuf. and Services PMI, pts to 7/7 since 7/7-2.5 Private consumption growth in is mirroring 2.5 2. 1.5 1..5. -.5 Private consumption (lhs) (rhs) -1. -4. 3 4 5 6 7 8 9 1 11 12 Source: Markit, Ministerio de Vivienda, Statistisches Bundesamt, Eurostat, GS Global ECS Research 6. 5. 4. 3. 2. 1.. -1. -2. -3. -1 91 93 95 97 99 1 3 5 7 9 11 After a long drought, German residential construction orders are rising strongly again Goldman Sachs Global Economics, Commodities and Strategy Research 1-5 3 2 1-1 -2-3 Construction output, yoy % -4 91 93 95 97 99 1 3 5 7 9 11
but pass-through to rates and credit creation in the periphery has been limited 7.5 7. 6.5 6. 5.5 5. 4.5 Interest rates on business loans % up to 1mil. above 5Y of maturity 4. 3.5 France 3. 2.5 7 8 9 1 11 12 1 8 6 4 2 Interest rates to SMEs vary in level and responsiveness Credit standards for SMEs in and % balance (unweighted, past 3mths) Tightening -2 : Change in Credit Standards to SMEs -4 : Change in Credit Standards to SMEs -6 7 8 9 1 11 12 Source: ECB, National Central Banks, GS Global ECS Research 14 12 1 8 6 4 2 %, yoy Area-wide credit creation has stalled Money Supply (M3) Loans to private sector ECB reference value -2 1 2 3 4 5 6 7 8 9 1 11 12 6 5 4 3 2 1-1 -2-3 with lending corporates contracting EUR Bn, monthly flow(sa) To Households To Non-Financial Corporates -4 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Goldman Sachs Global Economics, Commodities and Strategy Research 11
Disclosures I, Natacha Valla, hereby certify that all of the views expressed in this report accurately reflect my personal views, which have not been influenced by considerations of the firm s business or client relationships. Global product; distributing entities The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global basis. Analysts based in Goldman Sachs offices around the w orld produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN 21 6 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; in Canada by Goldman Sachs Canada & Co. regarding Canadian equities and by Goldman Sachs & Co. (all other research); in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 19862165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection w ith its distribution in the United Kingdom and European Union. European Union: Goldman Sachs International, authorised and regulated by the Financial Services Authority, has approved this research in connection w ith its distribution in the European Union and United Kingdom; Goldman, Sachs & Co. AG, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also distribute research in. General disclosures This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that w e consider reliable, but w e do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment. Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships w ith a substantial percentage of the companies covered by our Global Investment Research Division. SIPC: Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://w w w.sipc.org). Our salespeople, traders, and other professionals may provide oral or w ritten market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent w ith the recommendations or view s expressed in this research. The analysts named in this report may have from time to time discussed w ith our clients, including Goldman Sachs salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed n this report, w hich impact may be directionally counter to the analysts published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analysts fundamental equity rating for such stocks, w hich rating reflects a stock s return potential relative to its coverage group as described therein. We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, w ill from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction w here such an offer or solicitation w ould be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider w hether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents w hich are available from Goldman Sachs sales representatives or at http://w w w.theocc.com/publications/risks/riskchap1.jsp. Transaction costs may be significant in option strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation w ill be supplied upon request. In producing research reports, members of the Global Investment Research Division of Goldman Sachs Australia may attend site visits and other meetings hosted by the issuers the subject of its research reports. In some instances the costs of such site visits or meetings may be met in part or in w hole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the specific circumstances relating to the site visit or meeting. All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client w ebsites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our research by third party aggregators. For all research available on a particular stock, please contact your sales representative or go to w w w.36.gs.com Disclosure information is also available at http://w w w.gs.com/research/hedge.html or from Research Compliance, 2 West Street, New York, NY 1282. 212 Goldman Sachs. Goldman Sachs Global Economics, Commodities and Strategy Research 12