Economic and Monetary Policy Perspectives for Europe and the Euro Area

Economic and Monetary Policy Perspectives for Europe and the Euro Area Peter Mooslechner Executive Director and Member of the Governing Board Oesterreichische Nationalbank Roundtable Discussion, Austrian Consulate General New York City, November 8, 2017-0 -

Outline Prologue: ECB Monetary Policy Decisions of October 26, 2017 Where Do We Stand? Where Do We Come From? Where Are We Heading To? The (forthcoming) New Normal : Important Issues Ahead - 1 -

Prologue: ECB: Monetary Policy Expansion Continued - 2 -

Where Do We Stand? The Euro Area Economy is Recovering Source: Eurostat. Source: September 2017 ECB staff macroeconomic projections. Euro area: Real GDP 2016 (2007=100) 140 135 130 125 120 115 110 105 100 95 90 85 80 75 70 EL IT PT FI LV CY EE ES SI EA19 FR NL AT BE DE LU SK IE MT - 3 -

Domestic Demand and Employment Up - 4 -

Sustainable Improvement in Labor Market Conditions Employment development in selected euro area countries Unemployment in selected euro area countries 112 109 Index: 2007Q1=100 Austria Germany 30 Eurostat unemployment rate in % 106 25 103 France Euro area 20 Greece 100 Spain 97 Italy Ireland 15 94 91 Portugal Spain 10 Italy Portugal Euro area 88 85 Greece 5 Ireland Austria Germany 82 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Eurostat. - 5 -

Headline Inflation Low But Rising Oil Prices Will Lead to Upward Correction Inflation and core inflation in the euro area annual change of HICP in % 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0-0,5-1,0 Jän.10 Jän.11 Jän.12 Jän.13 Jän.14 Jän.15 Jän.16 Jän.17 Source: Eurostat. HICP HICP without energy and unprocessed food Sept. 2017 ECB staff macroeconomic projections. - 6 -

Underlying Inflation Picking Up - 7 -

Investment Still Below Pre-crisis Level EU investment by country group (2008=100) 110 105 100 95 90 85 80 75 70 65 60 2008 2009 2010 2011 2012 2013 2014 2015 2016 CESEE (EU) EU periphery Core EU EU Source: European Commission. - 8 -

Where Do We Come From: The Euro Area Had to Overcome Two Crises - The Great Recession and a Sovereign Debt Crisis Real GDP in selected countries Index 2008 = 100 120,0 115,0 110,0 105,0 100,0 95,0 90,0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Euro area Germany Spain France Italy Austria USA Source: European Commission and European Commission Economic Forecast for 2017. - 9 - In the Great Recession (2007-2008) euro area countries lost on aggregate almost 5% of GDP. After a short-lived recovery the euro area was hit by another shock: a sovereign debt crisis. The sovereign debt crisis hit some countries, e.g. Spain and Italy, as hard as the Great Recession: between 2011 and 2013 Italy and Spain lost another 4% of GDP, respectively. Monetary policy reacted with expansionary conventional and unconventional measures (see next slide). Have these measures been successful? Do we see a proper pass-through to financing conditions? Did the transmission from easier financial conditions to economic activity and from economic activity to prices work?

Growth Falling Behind Potential Significantly - 10 -

Interest rates Cut to Record Low Levels Monetary policy interest rates worldwide 8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0 in % -1,0 Jän.07 Jän.08 Jän.09 Jän.10 Jän.11 Jän.12 Jän.13 Jän.14 Jän.15 Jän.16 Jän.17 Source: Macrobond. Euro area USA Japan UK Sweden Switzerland China - 11 -

The Eurosystem s Monetary Policy Measures: An Overview Excess liquidity, EONIA and the interest corridor 2.5 % EUR billion 2.0 1.5 1.0 0.5 0.0-0.5 01/2010 01/2011 01/2012 01/2013 01/2014 01/2015 01/2016 01/2017 Excess liquidity (rhs) Main refinancing facility Lending facility Deposit facility EON IA Source: ECB, Thomson Reuters. Reduction of monetary policy rates to 0.25%, 0.00%, 0.40%. Forward guidance: ( ) policy rates are expected to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases. Continuation of fixed rate full allotment in all tender operations at least until the end of 2017. Provision of targeted longer-term refinancing operations (TLTROs II) with a maturity of four years (2016/17 2020/21). The Expanded Asset Purchase Programme (APP), with monthly purchases worth EUR 60 billion, is intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council of the ECB sees a sustained adjustment in the path of inflation consistent with its inflation aim. Reinvestment of the principal payments from maturing securities purchased under the APP for as long as necessary. - 12 -

Balance Sheet Expansion as Monetary Policy Instrument - 13 -

Non-standard Monetary Policy Measures of the Eurosystem Forward guidance (on rates and QE volumes) Ample liquidity for the banking system Fixed rate full allotment TLTRO: Long maturities, funding for lending Change of eligibility rules for collateral Change of interest rate corridor Asset purchase program (APP) Sovereign bonds, covered bonds, ABS, corporate bonds EUR 60 billion per month until end-2017, EUR 30 billion thereafter - 14 -

Some Details on the Eurosystem s Monetary Policy Operations Liquidity provision in the euro area 3000 in EUR billions 2800 2600 2400 2200 2000 1800 1600 1400 1200 1000 800 600 400 200 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: ECB, own calculations. APP TLTROs 6-months 1-month Liquidity demand SMP (non-sterilized) LTROs 3-months 1-week MP operations (29.09.2017) in EUR billions CBPP 1 7.0 SMP 91.4 CBPP 2 4.8 CBPP 3 231.3 ABSPP 24.1 PSPP 1748.1 CSPP 114.7 Tender operations 768.3 Sum 2989.7 Currently the Eurosystem creates nearly EUR 3 trillions of central bank liquidity. Approximately 75% thereof are created through various asset purchase programmes. - 15 -

Inflation Surprises: A Simple Illustration - 16 -

Balance Sheet Expansion By All Major Central Banks Central bank balance sheets Composition of APP program 900 800 700 January 2007 = 100 5,1% 11,1% 1,2% 600 500 400 300 200 100 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Thomson Reuters. Eurosyst em Bank of England (published sterling liabilities) Federal Reserve Bank Bank of Japan Schweizerische Nationalbank OeNB Source: ECB. 82,6% CBPP 3 ABSPP PSPP CSPP - 17 -

Structural Change in Eurosystem Tender Operations - 18 -

Quantitative Easing European Style As of 12.10. 2017-19 -

Adverse feedback loops and the role of the central bank Lower growth Fiscal consolidation Worsening fiscal balance Provide monetary stimulus Deleveraging & less bank lending Lower bank asset quality Ease fiscal strains Central bank Ease funding strains Government: Unsustainable fiscal trajectory, deteriorating creditworthiness Sovereign risk exposure Need for public support Financial sector: Inadequate capital, need for public sector support - 20 -

Where Are We Heading To? Euro Area GDP (per capita) Growth Outpaces the US Real GDP per capita Annual percentage change, in PPP international currency Average 1999-2008 Average 2009-2015 2016 2017 2018 2022 Euro area 1.7 0.1 1.4 2.0 1.8 1.4 U.S.A. 1.5 0.8 0.8 1.5 1.7 1.1 Source: IMF World Economic Outlook, October 2017. Comparing annual GDP per capita growth rates, the picture looks somewhat different. The euro area has been outpacing the U.S.A. since the introduction of the euro in most years, with the exception of the crisis years 2009 to 2015. - 21 -

Recovery Is Increasingly Investment-driven - 22 -

Looking Ahead: The Economic Recovery in the Euro Area Will Remain Robust Euro area real GDP (including projections) The economic expansion in the euro area is projected to continue over the projection horizon at growth rates well above potential. Source: ECB (September 2017, ECB staff macroeconomic projections for the euro area). Over the medium term, domestic demand, supported by favorable financing conditions and improving labor markets, will continue to drive the growth outlook. Business investment is projected to continue its recovery, as financing conditions are expected to remain very supportive over the projection horizon. At the same time, despite the recent appreciation of the euro, the global recovery is expected to support euro area exports. Following a post-crisis peak of 2.2% in 2017, annual real GDP growth is expected to average around 1.8% in 2018 and 2019. Risks surrounding the euro area growth outlook remain broadly balanced. - 23 -

Towards a Complete Monetary Union EMU 3.0 Currency union Currency union Currency union Economic union Financial union Fiscal union Political union - 24 -

In Addition: The Capital Market Union Project Startups & SMEs Banks Saving & investing Large enterprises Infrastructure projects - 25 -

First Money Market Implied ECB-Rate Hike Expected in May 2019 well past estimated at about 5-7 months Note: Euro-area OIS forward curves. Last updated: 16/10/2017-26 -

Some Forthcoming Issues: International Imbalances? - 27 -

Does Expansionary Fiscal Policy Explain Faster Recovery in the US - 28 -

Why a Debt Crisis in Europe But Not in US/UK/Japan? Public debt 2007 vs. 2016 in % of GDP 300 250 200 150 100 50 0 Source: EC. JP UK US EA19 DE FR IT ES AT EL IE PT 2007 2016 Gov. bond yields (10y) for selected major economies in % 8 7 6 5 4 3 2 1 0-1 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 DE ES FR IT UK US JP Source: Thomson Reuters. - 29 -

European Corporate Sector Much More Bank Dependent Than in the US Market-based corporate financing % of GDP 160% 140% 120% 100% 80% 60% 40% 20% 0% 11% 11% 31% Corporate bonds (2016) 31% 65% 147% Stock market capitalization (2016) Austria Euro area U.S.A. Source: BIS, World Bank. Bank-based corporate (and private) financing % of GDP 350% 300% 250% 200% 150% 100% 50% 0% 39% 36% Bank credit to nonfinancial firms (2016) 98% 100% 21% 52% Bank credit to the private sector (2016) 251% Austria Euro area U.S.A. Source: BIS, ECB, Federal Reserve Bank of St. Louis 294% 85% Size of banking sector (2015) - 30 -

Small and Medium-sized Enterprises (SMEs) Play a More Significant Role in Europe Enterprise distribution by size class % of total number of firms 0.3% 0.2% 0.6% 1.6% 1.0% 3.4% 5.9% 10.8% 17.2% 93.0% 87.3% 78.9% 100% 95% 90% 85% 80% 75% 70% Austria EU-28 U.S.A. Micro Small Medium Large Source: Eurostat, U.S. Small Business Administration. Enterprise distribution by number of employees % of total number of firms 100% 80% 60% 40% 20% 0% 31.1% 33.2% 19.2% 16.8% 24.2% 20.1% 25.6% 29.9% 56.3% 16.9% 16.5% 10.3% Austria EU-28 U.S.A. Micro Small Medium Large Source: Eurostat, U.S. Small Business Administration. - 31 -

Banking Union is Most Significant Step of Economic and Institutional Integration in Europe Since the Launch of the Euro Scope Status Challenges SSM Uniform supervision of 124 significant banking groups in EEA 4 Nov 2014: ECB assumed responsibility for direct supervision of 124 SIs in EEA important steps to harmonize supervision (JSTs, SREP, stress test...) Continue to harmonise banking supervision Continue to promote a common supervisory culture Improving proportionality Improving incentives for opt-in SRM Uniform rules and procedures for recovery and resolution 1 Jan 2016: SRB taking decisions and setting measures for resolution cases 1 Jan 2016: SRF is being set up and financed by contributions from banks (target in 2024: EUR 55bn) Determination of MREL und adaption MREL to TLAC Consistent application bail-in-rules Uniform hierachy of creditors (bail-in) Harmonization moratorium Common SRF-Backstopp For the time being: Harmonization of DGSs EDIS Cross-border depositor protection EC put forward proposal on EDIS in Nov 2015 EDIS builds on DGS Further prerequisites: Risk-reductions: Harmonization of insolvency regimes Sovereign exposures Legend: SSM:Single Supervisory Mechanism; SRM :Single Resolution Mechanism; EDIS :European Deposit Guarantee Scheme; MREL: Minimum Requirement for own funds and Eligible Liabilities; TLAC: Total Loss Absorbing Capacity; ONDs: Options and national discretion. CRR/CRD-IV: Capital Requirement Regulation/Direc; JST: Joint Supervisory Team; SREP: Supervisory Review and Evaluation Process. - 32 -

ECB-RESTRICTED Different Design of Liquidity Provision Balance sheet structure 100% 0,7% 0,8% Eurosystem: open market operations (41%) and securities (59%) 80% 60% 27% 24% Other assets Federal Reserve: almost exclusively Treasury and MBS (99.9%) 40% 20% 49% 98,5% Foreign reserves Monetary policy assets 0% Eurosystem 2015 Federal Reserve 2015-33 -

FED and Eurosystem Balance Sheet Structure Developments Compared Federal Reserve Eurosystem - 34 -