The structure of the euro area recovery
Rolf Strauch, Chief Economist
JPMorgan Investor Seminar, IMF Annual Meetings
Washington, October 2017
The euro area: a systemic player in global trade
1
Euro area
US
ChinaUK
Japan
0
10
20
30
40
50
60
70
80
90
100% of GDP
1995 2007 2016
Source: ESM Based on national sourcesNote: Extra-Euro area trade openness 51% in 2016
Trade openness (exports plus imports of goods and services)
Euro area economies lead the recovery of global activity
2
Source: Thomson Reuters Datastream based on IHS Markit Economics
India China
JapanUS Spain
France Italy UK
Euro area
GermanyNL
44
46
48
50
52
54
56
58
60
62
2017 Q1 2017 Q2
Purchasing managers’ index: Manufacturing
A stronger euro area: improved competitiveness
3
Reduction in regulation and barriers (1998-2013)
Notes: Due to data availability, the euro area is comprised of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal and SpainSource: ESM based on OECD
-60
-50
-40
-30
-20
-10
0
Change in product market regulation indicator
Change in barriers to entrepreneurship indicator
Change in barriers to trade and investment indicator
%
Euro area
UKUS
A stronger euro area: improved competitiveness
4
Number of euro area countries within top 25 best performers (2016)
Source: ESM based on World Economic Forum (WEF), World Bank (WB) and Transparency International (TI)
0 2 4 6 8 10 12 14
Corruption perception index (TI)
Ease of doing business (WB)
Ease of doing business - trading across borders (WB)
Ease of doing business - enforcing contracts (WB)
Ease of doing business - resolving insolvency (WB)
Global competitiveness index (WEF)
Improved price competitiveness after the crisis despite recent appreciation
5
Source: ESM based on EC, Eurostat
60
70
80
90
100
110
120
130
140
150
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Real effective exchange rate (ULCT-based, 2008Q1=100)
Euro area
China
US
A stronger euro area: the robust recovery
6
Source: EC European Economic Forecast – Spring 2017, AMECO
-6
-4
-2
0
2
4
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
US
Euro areaAverage GDP growth per
capita, 1999-2008
Euro area 1.6%
US 1.6%
GDP per capita growth%
A stronger euro area: the robust recovery
7
Source: Eurostat and BLS
-8
-6
-4
-2
0
2
4
6
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
US
Euro area
Employment rate in euro area and US since 2000(Cumulative change in percentage point)
A stronger euro area: the robust recovery
8
Germany
Gini coefficient
(0 = perfect equality; 100 = maximal inequality)
25
27
29
31
33
35
37
39
41
43
2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Eurostat, World Bank
US
Italy
France
Investment is weak globally
9
Source: ESM based on EC, EurostatNote: Euro area excl. Ireland
17
18
19
20
21
22
23
24
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Investment to GDP ratio in the euro area and the US (nominal, % of GDP)
US
Euro area
Business investment in the euro area recovered
10
Source: ESM based on EC, Eurostat
-20
-15
-10
-5
0
5
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Business Government Residential Total
Investment weakness comes from households and government(real change since Q1/2008 in %, contributions in pp)
Productivity falling behind as a driver of growth
11
Source: ESM based on The Conference Board Total Economy Database™ (Adjusted version), May 2017
-8
-6
-4
-2
0
2
4
6
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
TFP Labour quantity Labour quality ICT capital Non-ICT capital GDP growth
Sources of GDP Growth in the euro area (in %)
Monetary policy relevant gaps are closing
12
Source: ESM based on EC, Eurostat, BISNotes: data normalised relative to historic EA19+US sample of countries, NFC credit % GDP relative to historic trend, unemployment gap is relative to EC NAIRU estimate quarterly interpolation, output gap is relative to EC potential estimate quarterly interpolation, inflation gap is relative to 2%.
-1.5
-1.0
-0.5
0.0
0.5
1.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Credit gap Unemployment gap (neg) Output gap Inflation gap
Euro area: Monetary policy-relevant gaps (in standard deviations)
Faster recovery of countries most hit by the crisis
13
Source: ESM based on EC, Eurostat
BEDE
IE
GR
ES
FR
IT
CY
LVLT
LU
MTNL
AT
PT
SI
SK
FI
-2
0
2
4
6
8
10
12
-15 -13 -11 -9 -7 -5 -3 -1
Ch
ange
in t
he
ou
tpu
t ga
p f
rom
20
13
to
20
17
Output gap in 2013
Convergence of Output Gaps since 2013 (in percentage points)
Convergence of HICP across the Euro area
14
Source: ESM based on EC, Eurostat
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Euro area excl. LU and Baltic Euro area
Convergence of HICP (2015=100%; standard deviation)
Next steps for the euro area: Policy proposals
No full Fiscal Union needed
No full Political Union needed
Complete Banking Union
• European Deposit Insurance
• Backstop for the SRF
Capital Markets Union
• To facilitate private sector efforts for financial integration
• More capital flows, more risk sharing
• Address taxation, insolvency and company law issues
Fiscal Union
• Limited fiscal capacity for the euro area
15
Next steps for the euro area: Risk sharing needs
16
Source: Bruegel and IMF
Economic risk sharing in the euro area is lagging behind the US
-10
0
10
20
30
40
50
60
70
80
90
EU EMU Canada US Germany
Credit market Capital market Fiscal policy
Percentage of shock smoothed by different channels