From Crisis to Recovery: The Challenges ahead for the European Economy
Moreno Bertoldi
Head of Unit
Countries of the G-20, IMF, G-groups
European Commission
COMEXI24 June 2014
PART I:
Current Economic Conditions
3
World trade and GlobalPMI manufacturing output
Global economic conditions
Source: European Commission
30
40
50
60
70
-20
-15
-10
-5
0
5
10
15
20
25
08 09 10 11 12 13 14
World trade volume, CPB data (lhs)
Global PMI manufacturing output (rhs)
y-o-y% 3-month moving average
Economic Forecast for the EUSpring 2014
Forecast for the EU 2012 2013 2014 2015
GDP growth (%, yoy) -0,4 0,1 1,6 2,0
Inflation (%, yoy) 2,6 1,5 1,0 1,5
Unemployment (%) 10,4 10,8 10,5 10,1
Public budget balance (% of GDP) -3,9 -3,3 -2,6 -2,5
Gross public debt (% of GDP) 86,8 88,9 89,5 89,2
Current account balance (% of GDP)
0.9 1,6 1,8 1,8
4
Economic Forecast for the Euro AreaSpring 2014
Forecast for the EA 2012 2013 2014 2015
GDP growth (%, yoy) -0.7 -0.4 1.2 1.7
Inflation (%, yoy) 2.5 1.3 0.8 1.2
Unemployment (%) 11.3 12.0 11.8 11.4
Public budget balance (% of GDP) -3,9 -3,3 -2,6 -2,5
Gross public debt (% of GDP) 92.7 95.0 96.0 95.4
Current account balance (% of GDP)
1.8 2.6 2.9 2.9
5
GDP and components, EU
6
-5.5
-4.5
-3.5
-2.5
-1.5
-0.5
0.5
1.5
2.5
3.5
05 06 07 08 09 10 11 12 13 14 15
Private consumption Government consumption
Investment Inventories
Net exports GDP (y-o-y%)
forecast
pps
7
European growth map 2012
Source: European Commission
8
European growth map 2013
Source: European Commission
9
European growth map 2014
Source: European Commission
10
European growth map 2015
Source: European Commission
Ten-year government-bond yields, selected EU Member States
11
Sovereign bond markets
Source: European Commission
0
2
4
6
8
09 10 11 12 13 14
DE ES
FR IT
UK
%
Fiscal consolidation isshowing results
General government budget balance, euro area (SF2014)
General government debt,EU and euro area (SF2014)
12
55
60
65
70
75
80
85
90
95
100
07 08 09 10 11 12 13 14 15
EA
EU
% of GDP
forecast
-7
-6
-5
-4
-3
-2
-1
0
1
2
-7
-6
-5
-4
-3
-2
-1
0
1
2
09 10 11 12 13 14 15
General goverment balance (lhs)
Structural balance (rhs)
forecast
% of GDP pps.
Rebalancing is progressing…
• Fragile recovery in Europe, signs of a turnaround in vulnerable economies, internal rebalancing underway
GDP growth (2008=100) Current account balance (% of GDP)
Note: The definition of surplus / deficit countries is based on the average current account balance in the 1999-2007 period. Surplus countries: BE, DE, LU, NL, AT, FI; Deficit countries: IE, EL, ES, FR, IT, CY, MT, PT, SI, SK
13
90
92
94
96
98
100
102
104
106
108
110
08 09 10 11 12 13 14 15
DE IE ESFR IT NLEuro area
index, 2008=100forecast
-4
-2
0
2
4
6
8
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Surplus countries Deficit countries Euro area
% of GDPforecast
… what about inflation?
14
-1
0
1
2
3
4
5
07 08 09 10 11 12 13 14 15
%
Energy and unprocessed food [pps.]
Other components (core inflation) [pps.]
HICP, all items
forecast
Source: European Commission
ECB Monetary policy decisions – 05 June 2014
• What:
• Reductions in the key ECB interest ratesInterest rate on the main refinancing operations of the Eurosystem: 0.15% (-10 bp)
Interest rate on the marginal lending facility: 0.40% (-35 bp)
Interest rate on the deposit facility: -0.10% (-10bp)
• Targeted longer-term refinancing operations
• Intensify preparatory work related to outright purchases of ABS
• Prolongation of fixed rate, full allotment tender procedures
• Why:
• Provide additional monetary policy accommodation
• Support lending to the real economy
• Return of inflation rates to levels closer to 2%
15
PART II:
THE LEGACY OF THE CRISIS
The impact is far-reaching in many countries
Unemployment rates in %
0
5
10
15
20
25
30
EU
27 AT
DE
LU
NL
MT
RO
DK
CZ
UK FI
BE
SE
EE SI
PL
FR
HU IT
BG LT IE CY
LV
SK PT
HR
ES
EL
%
December 2007 March 2013
Investment in EA is low
18
Source: Commission Winter Forecast 2014
'09 '13 vs '09 '15 vs '13
DE -11.7 9.7 8.7
FR -10.6 1.1 4.3
IT -11.7 -14.7 5.4
UK -16.7 -0.8 14.1
US -13.1 14.0 13.5
EA-18 -12.8 -5.8 6.0
Credit conditions remain heterogeneous
19
1
2
3
4
5
6
7
ene 12 abr 12 jul 12 oct 12 ene 13 abr 13 jul 13 oct 13 ene 14
DE ES FR IT PT EA
%
PT
ESIT
EAFRDE
selected Member States
Source: ECB
Conclusions PART II:
- Despite good progress, many challenges remain
- Debt will continue to be a drag on growth
- Growth potential has been damaged by the crisis
- Risk of social and political instability
PART III:
REFORMS MUST CONTINUE
Sustained action is needed at the national,and EU/EA level, both in the short term, andlong-term:
- Continue with a growth friendly fiscal consolidation
- Step up the pace of structural reforms
- Finalise financial sector repair
- Complete the banking union
- Promote non-bank finance
22
What remains to be done?
Growth-friendly fiscal consolidation
• Further adjustment is still required
• Key challenge: Growth-friendly fiscal consolidation
• Expenditure side: increase quality public expenditure, prioritising productive investment
• Revenue side: make the tax system more fair and efficient
• Increased fiscal responsibility is a lasting feature
• Improved surveillance and monitoring tools both at the MS and EA level
23
Structural reforms must continue
� Structural reforms needed to boost growth and facilitate rebalancing
� Vulnerable countries have made significant progress, but more is needed to spur external competitiveness.
24
Source: OECD
25
� In these countries, combining labour market and product market reforms can mitigate negative short-term effects
� Less progress has been made in core countries
� Internal market needs to be completed, starting with energy
Source: OECD
Structural reforms must continue
Complete financial repair
• ECB Comprehensive Assessment
• Supervisory Risk Assessment
• Asset Quality Review
• Stress Test
• Results in October
• Timebound correction for capital shortfalls
26
Complete the banking union
• Single supervisor
• Single resolution mechanism
27
Promoting long-term finance
• Measures to reduce reliance on bank finance
• Concrete initiatives to follow under the new Commission
28
THANK YOU
29