Can the euro still be saved? Morning session: the threats Anton Brender and Florence Pisani Berlin, June 17
1 Fiscal and monetary policies: some problems have not yet been fully fixed!
Budget balance Budget balance 1.1 FISCAL DISCIPLINE HAS PROVEN ILLUSORY Before the Global Financial Crisis (GFC), Eurozone countries had a poor track record in fiscal discipline -1 - -3 - -5-6 Evolutions in public balances and public debt and the Maastricht criteria 91 Eurozone (1991-7) 7 99 3-7 95-8 5 6 7 8 (% of GDP) 8 By country (7) 6 FI ES DE NL BE IE AT - IT - PT FR -6 GR -8 6 8 1 1 Public debt Public debt June 17 Sources: Thomson Datastream, Candriam 3
1.1 AFTER THE GFC, IMPLEMENTATION OF THE RULES HAS BEEN TOO RIGID (I) The implications of the double deleveraging on growth have been grossly underestimated June 17 8 6 - - -6 8 6 - - -6 Budget balance Private-sector Net lending (+) or borrowing (-) by sectors (% of GDP) A theoretical case Private-sector Budget balance The reality Sources: Thomson Datastream, Candriam Current-account balance [RoW (-)] -8 3 6 9 1 15 Current-account balance -8 6 8 1 1 1 16 With a stable private saving propensity, fiscal rebalancing implied an improved current account 5-5 -1-15 Current accounts in some euro area countries (% of GDP) Portugal Ireland Greece 5 7 9 11 13 15 Calling for all countries to bring, within a short period of time, their public deficit back to the 3% of GDP limit whatever the starting point was a mistake!
1.1 AFTER THE GFC, IMPLEMENTATION OF THE RULES HAS BEEN TOO RIGID (II) Given the unfavorable global environment, part of the improvement in current accounts was achieved by a depression of domestic demand Exports and imports in the periphery countries (goods & services, in real terms, 7=1) 1 11 1 Exports 9 8 7 Imports 7 8 9 1 11 1 13 1 11 1 Greece Exports 1 11 1 Exports 9 8 7 Imports 7 8 9 1 11 1 13 9 8 7 Imports 7 8 9 1 11 1 13 June 17 Sources: Thomson Datastream, Candriam 5
1.1 A TRUE FISCAL COORDINATION FRAMEWORK IS STILL MISSING (I) Continuously loosening fiscal targets is not a proper way to coordinate policies General government balance in Stability and Convergence Programs (% of GDP) - - -6-8 -1-1 9 1 11 1 13 1 15 16 17 18 19 - - -6-8 -1-1 9 1 11 1 13 1 15 16 17 18 19 - - -6-8 -1-1 9 1 11 1 13 1 15 16 17 18 19 - - -6-8 -1-1 9 1 11 1 13 1 15 16 17 18 19 Portugal - - -6-8 -1-1 9 1 11 1 13 1 15 16 17 18 19 June 17 1 1 1 16 11 13 15 17 Source: European Commission 6
1.1 A TRUE FISCAL COORDINATION FRAMEWORK IS STILL MISSING (II) Making the best use of the flexibility within the existing rules still doesn t provide for a tool to collectively address macro-economic shocks Fiscal adjustment towards the medium-term objective under the preventive arm of the pact (for countries with debt-to-gdp ratio in excess of 6%) Fiscal adjustment Fiscal adjustment (% of GDP)......6.6.8.8 1. 1. 1. 1. 1. June 17 Source: Paolo Manasse (15), The EU new fiscal flexibility guidelines: An assessment 7
1. MONETARY POLICY Departing from the established rules has allowed to save the euro ECB policy Policy rates (%) Balance sheet (assets, billions of euros) 6 5 3 1-1 Fed funds rate Euro repo rate Euro inflation (year on year) 7 8 9 1 11 1 13 1 15 16 5 3 1 Lending to banks Total assets 6 7 8 9 1 11 1 13 1 15 16 17 Other assets Gold Claims in foreign currency Securities (of which government securities) June 17 Source: Thomson Datastream 8
1. MONETARY POLICY Still, the heterogeneity in the transmission of monetary policy has not been addressed It is now largely admitted that household mortgage borrowing is central in the transmission of monetary policy. The lack of a unified euro mortgage market played a key role in the building of financial imbalances until 7. 7 6 5 3 1 (%) Interest for house purchase (new business) Euro repo rate 3 5 7 9 11 13 15 17 7 6 5 3 1 (%) Interest for house purchase (new business) 1-year bund 3 5 7 9 11 13 15 17 While addressing this issue is essential, the CMU seems to be missing the point: it makes no distinction between EU member states that belong to the Economic and Monetary Union (EMU) and those that don t and it is targeted mainly at unifying financing conditions for firms, rather than for households. June 17 Source: Thomson Datastream 9
Divergences across bigger countries have dangerously widened 1
.1 TODAY S DIVERGENCES ARE NOT THE EXPECTED ONES! While inflation rates have converged, GDP per capita trends are more and more different 3 1 Inflation (% / 3 years, annual rate) -1 99 1 3 5 7 9 11 13 15 17 Inflation and GDP per capita 3.5 3..5. 1.5 1..5 Core inflation (% / 3 years, annual rate). 99 1 3 5 7 9 11 13 15 17 15 1 115 11 Real GDP per capita (1999 = 1) 15 1 June 17 Sources: Thomson Datastream, Candriam 95 99 1 3 5 7 9 11 13 15 17 11
15 1 5-5.1 LABOR MARKETS EVOLUTIONS HAVE BEEN DIVERGING Unemployment rates remain elevated in and 1 1 1 8 6 99 1 3 5 7 9 11 13 15 17 GDP -1 7 9 11 13 15 17 (%) 3 1-1 -15 5 15 1 5 Unemployment rates 99 1 3 5 7 9 11 13 15 17 Cumulated changes since 7 GDP GDP per employee Employment Labor force Unemployment rate Cumulated contributions to GDP growth (%, cumulated since 7) 5-5 Domestic demand - 7 9 11 13 15 17 1 8 - DE 11% 1% 1% 5% -5% Net exports FR 7% % 3% % +1% 7 9 11 13 15 17 IT -6% -5% -1% % +5% ES 3% 1% -9% 1% +1% 8 GDP points GDP points June 17 Sources: Thomson Datastream, Candriam 1
.1 COMPETITIVENESS IS MAKING MORE AND MORE OF A DIFFERENCE Exports performances have been much less favorable in and than in and Goods and services June 17 1 11 1 9 8 7 6 18 16 1 1 1 8 Real 6 8 1 1 1 16 Export performance index ( = 1) 6 8 1 1 1 16 18 Exports growth ( = 1) Nominal 6 8 1 1 1 16 Sources: Thomson Datastream, Eurostat, Candriam 13 18 16 1 1 1 8 Belgium Finland Austria Netherlands Ireland Luxembourg EA-19 Greece Portugal Labor costs per hour in euro in the industry (16) 1 3
.1 PRODUCTIVITY IS WORRYING IN ITALY THE FRENCH PROBLEM IS DIFFERENT s and s competitiveness problems are neither of the same nature nor have the same acuteness Value added per employee Labor cost per employee Unit labor cost June 17 1 115 11 15 1 Total Sources: Eurostat, Candriam 95 99 1 3 5 7 9 11 13 15 17 16 15 1 13 1 11 1 15 1 13 1 11 1 9 99 1 3 5 7 9 11 13 15 17 9 99 1 3 5 7 9 11 13 15 17 16 15 1 13 1 11 1 1 13 1 11 1 (1999 = 1) Industry (ex construction) 9 99 1 3 5 7 9 11 13 15 17 18 17 16 15 1 13 1 11 1 9 99 1 3 5 7 9 11 13 15 17 9 8 99 1 3 5 7 9 11 13 15 17 115 11 15 1 95 Services (ex real estate) 9 85 99 1 3 5 7 9 11 13 15 17 17 16 15 1 13 1 11 1 99 1 3 5 7 9 11 13 15 17 16 15 1 13 1 11 1 9 99 1 3 5 7 9 11 13 15 17 1
. DIVERGENCES IN THE REAL ECONOMY ARE REFLECTED IN THE FINANCIAL SPHERE Differences in current account evolutions partly explain different domestic debt dynamics (I) Cumulated current accounts deficits since 7 - - -6 (% of country GDP) (cumulated surplus) * -8 7 9 11 13 15 17 (*) For, given the discrepancy between BoP and national account data, cumulating the rest of the world financing capacity leads too a higher increase in debt than cumulating current account balances. 18 16 1 1 1 8 18 16 1 1 1 8 Non financial sector debt and GDP evolutions Nominal GDP 6 8 1 1 1 16 18 Private debt Private debt Total debt Nominal GDP Total debt 6 8 1 1 1 16 18 ( = 1) 18 16 1 1 1 8 18 16 1 1 1 8 Private debt Nominal GDP 6 8 1 1 1 16 18 Total debt Private debt Nominal GDP Total debt 6 8 1 1 1 16 18 June 17 Sources: Thomson Datastream, Candriam 15
. DIVERGENCES IN THE REAL ECONOMY ARE REFLECTED IN THE FINANCIAL SPHERE Differences in current account evolutions partly explain different domestic debt dynamics (II) Non financial sector debt (% of GDP) 1 Households 3 Non financial sector 1 General government 1 6 5 1 6 6 8 1 1 1 16 1 Non financial corporations 15 6 8 1 1 1 16 6 8 1 1 1 16 1 6 6 8 1 1 1 16 June 17 Sources: Thomson Datastream, Candriam 16
CONCLUSION 17
CONCLUSION At the end of the day, the main threat is that we don t invest enough Aggregate demand management has not been optimal. Competitiveness and debt dynamics are diverging across countries. Underinvestment in is a cause for concern but s investment effort is also worryingly modest. Net investment (% of GDP, overall economy) 1 United States 1 Euro area 1 8 6-8 85 9 95 5 1 15 1 1 1 8 6-8 85 9 95 5 1 15 1 1 1 8 6-8 85 9 95 5 1 15 June 17 Sources: Thomson Datastream, Candriam 18
ADDENDA The French non financial corporations net debt position is not the most worrying, but it is slowly deteriorating Non financial corporations financial assets and debt (% of GDP) 8 6 Deposits Debt securities Mutual funds Other net assets Financial assets (ex equity) 8 6 Debt securities Bank loans Pension reserves Debt 8 6 - Debt Net debt Financial assets 99 1 3 5 7 9 11 13 15 8 6 Financial assets (ex equity) 17 99 1 3 5 7 9 11 13 15 17 8 Debt 6-99 1 3 5 7 9 11 13 15 17 8 Debt 6 Financial assets - Net debt 99 1 3 5 7 9 11 13 15 17 99 1 3 5 7 9 11 13 15 17-99 1 3 5 7 9 11 13 15 17 June 17 Sources: Thomson Datastream, Candriam 19
ADDENDA Contrary to, s non financial corporations net debt position has barely improved 1 1 8 6 Financial assets (ex equity) 99 1 3 5 7 9 11 13 15 Non financial corporations financial assets and debt 1 1 8 6 Debt (% of GDP) Debt securities Bank loans Pension reserves 99 1 3 5 7 9 11 13 15 1 8 - Debt Financial assets Net debt -8 99 1 3 5 7 9 11 13 15 17 1 1 8 6 Deposits Debt securities Mutual funds Other net assets Financial assets (ex equity) 99 1 3 5 7 9 11 13 15 1 1 8 Debt 6 99 1 3 5 7 9 11 13 15 1 Debt 8 Financial assets - Net debt -8 99 1 3 5 7 9 11 13 15 17 June 17 Sources: Thomson Datastream, Candriam
This document is provided for information purposes only, it does not constitute an offer to buy or sell financial instruments, nor does it represent an investment recommendation or confirm any kind of transaction, except where expressly agreed. Although Candriam selects carefully the data and sources within this document, errors or omissions cannot be excluded a priori. Candriam cannot be held liable for any direct or indirect losses as a result of the use of this document. The intellectual property rights of Candriam must be respected at all times, contents of this document may not be reproduced without prior written approval. Warning: Past performances of a given financial instrument or index or an investment service, or simulations of past performances, or forecasts of future performances are not reliable indicators of current and future performances. Gross performances may be impacted by commissions, fees and other expenses incurred on the issue and redemption of units. Performances expressed in a currency other than that of the investor's country of residence are subject to exchange rate fluctuations, with a negative or positive impact on gains. If the present document refers to a specific tax treatment, such information depends on the individual situation of each investor and may change. The present document does not constitute investment research as defined by Article, paragraph 1 of the Commission Directive 6/73/EC. Candriam stresses that this information has not been prepared in compliance with the legal provisions promoting independent investment research, and that it is not subject to any restriction prohibiting the execution of transactions prior to the dissemination of investment research. Candriam consistently recommends investors to consult via our website www.candriam.com the key investor information document, the prospectus, and all other relevant information prior to investing in one of our funds. These documents are available either in English or in local languages for each country where the fund s marketing is approved. June 17
www.candriam.com