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