structural reforms: how to revive growth in asia and in europe? · 2014-12-09 · 11th asia europe...

Structural Reforms: How to Revive

Growth in Asia and in Europe? 11th Asia Europe Economic Forum

Tokyo, December 6, 2014

Lorenzo Codogno

Director General, Italian Ministry of Economy and Finance

2

Have policies worked out six years into the crisis?

Weakness in investment activity.

Steady decline in potential growth almost everywhere.

High unemployment, especially among the youth (but DE).

Need to absorb macroeconomic imbalances.

Increased poverty and reversal of progress towards social

inclusion, with potential political risks (all EA countries).

Continuing disinflation (and risks of de-anchoring

expectations and triggering deflation).

Euro remains too strong for the state of the economy, also due

to rising EA current account surpluses.

EURO AREA MACROECONOMIC TRENDS

3

Additional fiscal consolidation is unavoidable

EURO AREA MACROECONOMIC TRENDS

-14

-12

-10

-8

-6

-4

-2

0

2

4

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

% o

f G

DP

Eurozone Core

Periphery Germany

France Italy

Spain United States

Note: Core Euro area includes Austria, Benelux, Germany, Finland and France. Periphery Euro area includes Greece, Ireland,

Italy, Spain and Portugal. Deficit data for Greece are not available for the period 1995-1999.

Source: Eurostat, US Department of the Treasury, Bureau of Economic Analysis, European Commission (forecasts)

4

Public debt deleveraging has yet to start

MACROECONOMIC TRENDS

20

40

60

80

100

120

140

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

% o

f G

DP

Eurozone Core Periphery

Germany France Italy

Spain United States

Note: Core Euro area includes Austria, Benelux, Germany, Finland and France. Periphery Euro area includes Greece, Ireland, Italy,

Spain and Portugal.

Source: Eurostat, US Department of the Treasury, Bureau of Economic Analysis, European Commission (forecasts)

5

Is GDP growth going back to its pre-crisis potential?


-6

-4

-2

0

2

4

6

-6

-4

-2

0

2

4

6

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

% y

ea

r-o

n-y

ea

r

% y

ear-

on

-year

Eurozone France

Spain Italy

Germany Core

Periphery United States

Source: Eurostat, BEA, European Commission (forecasts)

6

Are GDP level losses going to be recovered?


60

70

80

90

100

110

120

60

70

80

90

100

110

120

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Ind

ex

20

08

=1

00

Ind

ex

20

08

=1

00

Germany France Spain

Italy Eurozone Core

Periphery United States

Source: Eurostat, BEA, European Commission (forecasts)

7

Domestic demand improving slowly even in core EA countries


-8

-6

-4

-2

0

2

4

6

8

-8

-6

-4

-2

0

2

4

6

8

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

% y

ea

r-o

n-y

ea

r

% y

ea

r-o

n-y

ea

r

Eurozone France Spain

Italy Core Periphery

Germany United States

Source: Eurostat,Oxford Economics, European Commission (forecasts)

8

Investments for growth: the challenge to reverse current trends


15

17

19

21

23

25

27

29

31

33

35

15

16

17

18

19

20

21

22

23

24

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

% o

f G

DP

% o

f G

DP

Germany France Italy Eurozone Spain (RHS)

Source: Eurostat, European Commission (forecasts)

9

Policy mix leading to current account surpluses


-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

% o

f G

DP

Germany France Italy Spain United States

Note: Euro area data are not available in the period 1995-1998.

Source: Eurostat, ECB, IMF, European Commission (forecasts)

10

Contraction in credit: still no turning point


Italy’s Strategy for Reforms, Fiscal Sustainability and Economic Growth

-16

-12

-8

-4

0

4

8

12

16

20

24

28

32

-16

-12

-8

-4

0

4

8

12

16

20

24

28

32

Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14

% y

ea

r-o

n-y

ea

r

% y

ea

r-o

n-y

ea

r

Euro Area Germany

Spain France

Italy

Source: ECB

Cost of credit: the gap among EA countries remains wide

11



1

2

3

4

5

6

1

2

3

4

5

6

giu-06 giu-07 giu-08 giu-09 giu-10 giu-11 giu-12 giu-13 giu-14

%

%

Source: ECB

Germany Spain Italy Euro area France

12

Disinflation continues (with non-negligible risk of deflation)


-2

-1

0

1

2

3

4

5

6

-2

-1

0

1

2

3

4

5

6

set-07 set-08 set-09 set-10 set-11 set-12 set-13 set-14

% y

ea

r-o

n-y

ea

r

% y

ea

r-o

n-y

ea

r

HIPC - All Items

Germany France Italy Spain

Core Periphery Eurozone

Source: ECB

13

Inflation expectations has declined steadily MACROECONOMIC TRENDS


1,5

2,0

2,5

3,0

3,5

4,0

4,5

5,0

5,5

Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14

%

Euro zone 5y5y inflation swap

Source: Thomson Reuters Datastream

14

Secular stagnation already priced in MACROECONOMIC TRENDS


-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

1 2 3 4 5 6 7 8 9 10

%

%

Forward Inflation Swap Differential Forward OIS

Source: Bloomberg

Years

15

Where do we get growth from?

Lack of aggregate demand: Is the current policy mix a correct stance for the Euro Area?

Supply-side reforms: what can be done to strengthen them? How can we provide incentives for reforms within the existing fiscal framework?

Are European fiscal rules appropriate for the current economic environment? Can we overcome the moral hazard issue?

PROPER FISCAL CONSOLIDATION PACE AND INCENTIVES FOR REFORMS

16

IMF Art.IV EA: The SGP may reduce incentives for growth

“The SGP may reduce incentives to foster long-term

growth: Two issues features prominently in current discussions. The first is that the SGP may limit the space to finance structural reforms that entail sizeable short-term budgetary costs. Although the 2005 reform explicitly recognized that these costs should be accompanied, the present framework has so far only been applied to some types of pension reforms. Going beyond pension reforms is proving contentious. A second question is whether the MTO and, to a lesser extent, the 3 percent deficit cap, discourages public investment by limiting the capacity to borrow to fund projects that increase long-term growth potential.”


17

Does it make sense to allow flexibility for structural reforms?

Structural reforms increase potential growth over the medium-long run and thus lower the structural part of the deficit.

Structural reforms often imply either near-term recessionary effects or need to compensate losers with a negative impact on public accounts.

What really matters is long-term sustainability of debt: supporting reforms makes sense also from a fiscal point of view.

Risk of providing the wrong incentives: if you do fiscal consolidation you are fine, if you do structural reforms you are punished.


18

How to measure structural reforms?

Already a large body of economic literature. Methods to assess how much reforms add to economic growth over time.

Work of the LIME WG attached top EPC and plenty of papers by the Commission. Uncertainty is admittedly high, but it is feasible to come up with reasonable ranges.

Surveillance of structural reforms is already sufficiently delevoped and deep enough to allow an evidence-based decision on flexibility for reforms.


19

Juncker’s Plan: investment for growth?

Very important for the long-term prospects of the EU economy.

What can be done by the private sector and what instead can only be done by governments (or a supranational institution)?

Unlikely to provide strong support to the economy over the near term, but could give a boost to confidence and thus support the recovery.

Focus on the quality of public investment.


20

What’s the way out?

Need for more integrated common and country-specific structural policies to support long-term growth, employment and social cohesion.

EU Member States are engaged in fiscal consolidation and efforts to reduce macroeconomic imbalances, which inevitably have near-term negative effects on demand: need for fine-tuning and flexibility linked to structural reforms.

The transmission mechanism of monetary policy is still not working properly. Need for inflation moving back to target soon.


21

Best policy for an indebted country in a severe recession?

Many targets: balancing public finance objectives, supporting the economy, respecting fiscal rules and maintaining credibility in financial markets.

But one priority: structural reforms to boost confidence and change expectations of economic agents and investors.

Unfortunately, structural reforms take time to bear fruits.

The ultimate goal must be sustainable economic growth and prosperity .

ITALY’S REFORM AGENDA

22

Italy’s key reforms, completed or under way

Institutional reforms: new electoral law, end to bicameralism,

simplification of the multilayer governance.

Labour market reform: further flexibility in hiring, labour law

reshuffling and simplification, ‘Youth Guarantee’.

Tax system: reduction in the tax wedge, a more equitable,

transparent, simplified and growth-oriented tax system.

Speeding up of payments of the public administration:

new regulatory and monitoring framework, electronic invoicing.



23

Italy’s key reforms, completed or under way

Privatisation programme: State-owned/local gov’t companies

and real estate assets to improve efficiency and reduce debt.

Spending review: reducing procurement costs, increasing

efficiency and cutting unproductive public spending.

Investment framework: alternative financing especially for

SMEs, incentives for large-scale infrastructure investment; extra

budget leeway for public investment at local level.

Public administration: digitalisation and modernisation, open

data, transparency, red tape reduction, fight against corruption.



Thank You

Living document on Italy’s reforms can be

found on website:

http://www.dt.mef.gov.it/en/analisi_program

mazione_economico_finanziaria/strategia_

crescita/index.html

structural reforms: how to revive growth in asia and in europe? · 2014-12-09 · 11th asia europe...

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