euro@20€¦ · higher bond yields and debt service default worries deeper recession • the...
TRANSCRIPT
Euro@20
Harvard University, Centre for European studies – 30 October 2018
Marco Buti
Director General - DG ECFIN
European Commission
Content
1. Introduction
2. Did EMU change policy behaviours?
3. Euro area throughout the crisis
4. Reforms during the crisis but job still not done
2
• Efficiency ++
(but certain aspects, like productivity/reforms fully decentralised)
• Stabilisation +
(only based on monetary policy and automatic stabilisers)
• Equity 0
(interpersonal fully in the hands of Member States; cohesion between countries in EU budget)
• Sustainability/Stability +++
(necessity of supranational fiscal rules to secure sustainability and protect monetary policy from deficit bias and debt spillovers/ ECB as the most independent CB in the world)
3
MUSGRAVE + and the MAASTRICHT ASSIGNMENT
MAASTRICHT ASSIGNMENT
Institutional setting in EMU (strong version of the “consensus” on policy making of the 80s' – see Buti Sapir 1998) i) Monetary Policy (centralised) by independent central bank instrumental to
credibly bring down inflation <= conservative, independent central bank to bring down inflation, Barro-Gordon (1983), Rogoff (1985)
ii) Fiscal Policy (decentralised) action limited to automatic stabilization (normal cycles) <= Barro (1979)
iii) Ban on excessive government deficits & on monetary financing of government deficits <= avoid fiscal dominance and no government bailout, Sargent & Wallace (1981)
iv) Financial markets allocate resources efficiently within and across member states <= markets are efficient, Fama (1970) – financial markets smooth efficiently, Obstfeld (1986) & Eichengreen (1992)
v) Competition (trade and internal market) increases efficiency, and synchronization of business cycles <= Cecchini Report (1988), Frankel and Rose (1996)
4
5
What was expected What happened
Efficiency - Financial markets as shock absorbers - Improve resource allocation - Uptake of structural reforms
Efficiency - Shock propagated in the crisis - Capital allocation not always efficient - Limited, anaesthetic effect
Stabilization - House in order allows "negative
coordination" and facing country-specific shocks
Stabilization - Adequate EA fiscal stance not
necessarily resulting from bottom-up national fiscal stances
Equity - Real convergence - Equity/redistribution
Equity - Limited - Limited, no redistribution
Sustainability/Stability - Credibility of the central bank - Expectations that MS would maintain
sustainable public finances
Sustainability/Stability - Established - Fiscal benefits of euro accession largely
spent
Our early beliefs… …and what happened
Content
1. Introduction
2. Did EMU change policy behaviours?
3. Euro area throughout the crisis
4. Reforms during the crisis but job still not done
6
Improvement in prosperity broadly at par with the US, but convergence with the US stalled
GDP per capita
(in pps, US=100)
Source: Ameco
7
• GDP per capita growth
• (%)
Source: Ameco
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
EuropeanUnion
Euro area(EU-19)
US
50,0
60,0
70,0
80,0
90,0
100,0
110,0
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
EuropeanUnion
Euro area (EU-19)
US
Credibility of the Central Bank
Dispersion of HICP inflation
Notes:
Dispersion measured as an unweighted standard deviation.
2018/19 projected values according to Autumn 2018 forecast.
EA changing composition: according to entry date in EA
Source: Ameco
0
1
2
3
4
5
6
7
8
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
EA-11 Current EA-19 EA changing composition
8
Not all MS improved sufficiently public finance sustainability
Data source: AMECO
Government debt/GDP
10-year government bond yields (%)
9
Real convergence mostly driven by 'new' euro area Member States
AT
BE
EE
FI
FR DE
EL IE
IT
LU
NL PT
SK
SI
ES CY
LV
LT
MT
0
2
4
6
8
10
12
0 10 20 30 40 50
GD
P p
er
capita in P
PS
(avera
ge g
row
th 1
999-2
007)
GDP per capita in thousands PPS (1999)
excl. 'new' EA MS
all countries
AT BE
EE
FI
FR
DE
EL
IE
IT LU NL PT
SK
SI ES CY
LV LT
MT
-4
-3
-2
-1
0
1
2
3
4
5
0 20 40 60 80
GD
P p
er
capita in P
PS
(avera
ge g
row
th 2
008-1
3)
GDP per capita in thousands PPS (2008)
excl. 'new' EA MS
all countries
Note: Countries which were in 1999 (left chart) and in 2008 (right chart) not members of the euro area are highlighted in red.
The black regression line is based on the full sample of countries, the blue one excludes the 'new' euro area Member States, which are highlighted in red.
Source: Eurostat.
GDP per capita (in PPS) before and after the start of the financial crisis
10
Imbalances and resource allocation
11
Increasing imbalances
-60
-40
-20
0
20
40
60
-6
-4
-2
0
2
4
6
8
99 00 01 02 03 04 05 0607 08 09 10 1112 13 14 15 1617 18
NII
P,
% o
f countr
y g
roup G
DP
CA,
% o
f countr
y g
roup
CA - Creditors CA - Debtors
NIIP - Creditors NIIP - Debtors
Cumulative growth rate of non-tradable/tradable value added
-5
0
5
10
15
20
25
EA center EA periphery
1995-98 1999-2007 2008-2013
Source: Commission calculations based on AMECO
Center
Center
Periphery
Periphery
Content
1. Introduction
2. Did EMU change policy behaviours?
3. Euro area throughout the crisis
4. Reforms during the crisis but job still not done
12
Origin of the EA crisis: my preferred reading
• A "sudden stop" crisis following capital misallocation in pre-crisis years
• A banking crisis triggered a feedback loop: bank solvency concerns higher bond yields and debt service default worries deeper
recession
• The euro-area crisis was not a fiscal crisis (apart from Greece), but lack of fiscal space hindered the policy response during the crisis
• Heterogeneity in the euro area much larger than assumed before the crisis: different growth models and agglomeration effects
• Structural divergences during the first 10 years of EMU led to divergent social and political preferences "ultima ratio" mode
16
Upon sudden stops, short-term flows were replaced by central bank lending
* start in 2002 , ** start in 2004 Source: Eurostat
Central bank lending to EA credit institutions
17
ECB intervention: rates and balance sheet
15
0
50
100
150
200
250
300
350
400
450
-1
0
1
2
3
4
5
6
janv.-05 janv.-07 janv.-09 janv.-11 janv.-13 janv.-15 janv.-17 janv.-19
ECB policy and euro overnight rates, Eurosystem BS size
ECB deposit facility rate EONIA BS total (Jan-07 = 100), rhs
%
Source: Macrobond, ECB
index Lehman Brothers default
Start of EA Sovereign Debt Crisis
ECB negative policy rate
QE announcement
OMT
Fiscal policy tended to be pro-cyclical
Source: Commission calculations based on spring 2018 Commission forecast 16
Broadly neutral fiscal stance
Contra-cyclical loosening
Pro-cyclical loosening
Pro-cyclical restriction
Contra-cyclical restriction
Fiscal stance over the economic cycle, EA 2011-2018e
2011
2012
2013
2014
2015 2016
2017
2018e
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
-4,0 -3,0 -2,0 -1,0 0,0 1,0 2,0
Ch
an
ge
in S
tru
ctu
ral
Ba
lan
ce (
pp
s. o
f G
DP
)
Output Gap (% of GDP)
Structural reform uptake
17
Source: OECD (PMR)
Programs: the euro-area crisis was not a fiscal crisis (apart from Greece)
Ireland: €85bn, exit
in 2013
Five financial assistance
programmes
Portugal: €78bn, exit
in 2014
Spain: financial sector
support; €40bn, exit in
2014
18 Greece: 1st €110bn in 2010,
2nd €172.6bn in 2012 and
€86bn in 2015 €, exit in 2018 Cyprus: €10bn, exit in 2016;
Content
1. Introduction
2. Did EMU change policy behaviours?
3. Euro area throughout the crisis
4. Reforms during the crisis but job still not done
19
20
Structural reform
strategy
(Europe 2020)
Crisis resolution
instruments
- EFSM/EFSF: temporary
- ESM: permanent
- ECB: OMT
Growth Compact (EIB, Structural funds,
Projects bonds)
More effective
supervision and
regulation of the
financial system ESAs - ESRB - CRD IV
Banking Union: SSM; direct recaps
by ESM
Prevention and
correction of macro
imbalances
Procedure and
sanctions
European Semester
for economic policy
coordination
Balanced
growth
Better enforcement
of SGP rules
-Sanctions
- Two Pack: ex ante submission of
draft budgets, closer monitoring
- National layer: Directive on fiscal
frameworks, Fiscal Compact
Focus on debt
developments
Debt reduction benchmark
More effective
prevention of gross
policy errors
- Focus on structural balances
- Expenditure benchmark
Sound fiscal
policy
EMU reform during the crisis: an overview
Two competing models for EMU
"Back-to-Maastricht" Fast forward to federalist EMU
Stronger enforcement of EU fiscal rules to rein debt and deficits
Distribution of fiscal efforts to achieve an appropriate aggregate fiscal stance
Mechanism of imbalances procedures (MIP) focused on competitiveness of lagging countries
Symmetric adjustment to help weak countries and reduce Euro area current account surplus
Banking Union does not need common deposit insurance
Full Banking Union to ensure financial stability and private risk sharing
End to the risk-free status for sovereign debt and establish sovereign debt restructuring mechanism
Fiscal capacity for public risk sharing and eventually sovereign debt mutualisation
More market discipline Euro area Treasury
21
In their « pure » form, both are economically and/or politically unfeasible
To enter into the adult age of the Euro, the institutional framework is to be profoundly reinforced
22
Complete Banking Union
and Capital Markets Union
Common fiscal
stabilisation function
Accountable institutions and
effective governance
Economic and social
convergence
1. Financial Union
2. Economic and
Fiscal Union
3. Institutions and
Governance
European safe asset,
Not €bonds
Diversified banks'
sovereign exposures
Banking & Capital Market Union
23
CAPITAL MARKET UNION
33 action in 6 areas
Possible forms for a European safe asset
24 Source: Buti, Deroose, Leandro and Giudice (2017)
The evolving EA fiscal framework
Increased adaptability at the expense of simplicity…
CLARITY
(simplicity)
ADEQUACY (adaptability)
PREDICTABILITY
25
Impact of a central stabilisation capacity in bad times
Source: Commission calculations based on spring 2018 Commission forecast 26
Contra-cyclical loosening
Pro-cyclical loosening
Pro-cyclical restriction
Contra-cyclical restriction
Fiscal stance over the economic cycle, EA 2011-2018
(2013) (2012)
Very bad economic times
Very good economic times
2011
2012
2013
2014
2015 2016
2017
2018e
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
-4,0 -3,0 -2,0 -1,0 0,0 1,0 2,0
Ch
an
ge
in S
tru
ctu
ral
Ba
lan
ce (
pp
s. o
f G
DP
)
Output Gap (% of GDP)
Conclusion, quasi
27
• Crisis is over, but the job is not yet done
• EMU deepening is an unfinished business
• Key ingredient: trust to be rebuilt
(Habermas helps).
• Overcome creditors/debtors divide
• Additional difficulties in a multi-layer
governance. Discount rate of COM < than
that of Member States
• …and Italy
28
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1792
1798
1804
1810
1816
1822
1828
1834
1840
1846
1852
1858
1864
1870
1876
1882
1888
1894
1900
1906
1912
1918
1924
1930
1936
1942
1948
1954
1960
1966
1972
1978
1984
1990
1996
2002
2008
2014
2020p
Total Federal Government Expenditure 1792-2020p
Total Federal Government Expenditure, Excl. War Department,Naval Department and Interest on the National Debt 1792-1945
EU Budget in 2014 = ~1.17% of EU GDP
War of 1812: 1812-1815
Mexican-American War:
1846-1848
U.S. Civil War: 1861-1865
Spanish-American War:
1898
World War I: 1917-1918
World War II: 1941-1945
LESSON FROM THE US: completing monetary unions take a long time
Source: Kirkegaard (2018), Williamson (2014). Expenditure data from 1792-1945 , US Census (1949); 1945-2020p OMB (2015).
Thank you for your attention
29