surveillance of macroeconomic imbalances: the excessive ... · the excessive imbalances procedure...
TRANSCRIPT
Surveillance of macroeconomic imbalances:
The excessive imbalances procedure (EIP)
Adja A. SiSSOKOEuropean Commission
Directorate General for Economic and Financial Affairs
Conference on « Role of statistics in managing economic imbalances »
Radenci 7.-9 November 2011
European Commission
Outline
• A description of the EIP
• The scoreboard
• Developing analytical tools/frameworks
Part I
A description of surveillance under the preventive and corrective
arms of the EIP
Overall changes to economic governance
European Systemic Risk Board
financial stability and
macro & micro level
Excessive Imbalances Procedure
external and internal
imbalances
European semester and the 2020
strategy
growth enhancing
structural reforms
Stability and Growth Pact
fiscal policy
AND …. the ongoing debate on EFSF/ESM and Eurogroup goverance
Diagnosis of problematic imbalances
• A framework for enhanced and broadermacro-economic surveillance for allMember States focussing on imbalances.
– preventive arm to avoid the build-up ofimbalances
– corrective arm with strong enforcementmechanisms for euro area members wherespill-overs are stronger.
European Commission
Broad scope of surveillance
• External positions (e.g. current accounts, net international investment positions)
• Competitiveness developments (e.g. REERs, ULCs)Export performance (e.g. export market shares)
• Private sector indebtedness (e.g. credit, debt)
• Assets markets (e.g. housing)
Exte
rnal
imb
ala
nces
Inte
rnal
imb
ala
nces
Alert
mechanism
Economic reading of early warning scoreboard indicators to identify Member States with potential risks
In-depth review
Analysis to distinguish between benign and harmful macroeconomic developments and to identify policy options
No problemProcedure stops.
Imbalance exists
Commission/Council recommendations under Article 121.2
Severe imbalance
Commission/Council recommendation under Article 121.4
The preventive arm of the EIP
Policy response
The Corrective Arm
Member State is placed in “Excessive Imbalance Position”
Corrective Action Plan
Surveillance of compliance with
reform commitments
Sufficientabeyance
Insufficient:interest bearing deposit
Insufficient:Fine
0.1% of GDP
Insufficient fine 0.1% of
GDP
The Corrective Arm is INTRUSIVE and FOCUSSED
Member State is placed in
an Excessive Imbalance Position
Corrective Action Plan
Surveillance of compliance with
reform commitments
Sufficientabeyance
Insufficient:interest bearing deposit
Insufficient:Fine
0.1% of GDP
Fine 0.1% of GDP
… and works by reverse Qualified Majority Voting
Member State is placed in
an Excessive Imbalance Position
Corrective Action Plan
Surveillance of compliance with
reform commitments
Sufficientabeyance
Insufficient:interest bearing deposit
Insufficient:Fine
0.1% of GDP
Fine 0.1% of GDP
Challenges in applying the EIP
• Analytical– large degree of qualitative judgement especially if acting early
– requires considerable country specific knowledge;
– data limitations
– limited consensus on policy responses.
• Political– Positive : greater awareness of the costs of inaction and spillover
effects, and not easy to form blocking minorities;
– Challenge: macro challenges with euro area spillovers that require micro policy responses in areas of national competence
– … hinge on effectiveness of overall governance package and ongoing discussion to overhaul the Eurogroup
Part II
The scoreboard
The alert mecahnism
• The surveillance begins with an alert mechanism which combines a transparent review of a small set of indicators (i.e. the scoreboard) with economic analysis.
• The alert mechanism is a trigger device that prompts more in-depth analysis to determine whether observed development are benign or problematic.
What role for the scoreboard?
• Only a trigger for launching in-depth studies are the substantive basis of policy recomendations
• Scoreboard is nonetheless important– implictly defines the scope of surveillance;
– a communciation tool.
• Scoreboard indicators not equivalent to EDP reference values for deficits and debt (more ‘structural indicators in the Lisbon process startegy)
The choice of indicators: main considerations
• Limited SET of indicators that capture external
and internal imbalances at an early stage, and
take account of stocks and flows
• Timely availability (including forecasted data)
and broad coverage of Member States
• Aim to respect the principles of the European
Statistics Code of Practice of the European
Statistical System (ESS)
Example of ‘test’ early warning scoreboard: Portugal 2001-2010
Scoreboard Analysis: PT
Thresholds 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
EXTERNAL
IMBALANCES
3 year average of Current Account balance
as a percent of GDP +6/-4% -9.6 -9.7 -8.4 -7.7 -8.4 -9.8 -10.4 -11.1 -11.2 -11.1
IIP as % of GDP -35% -48 -55 -57 -63 -68 -79 -88 -96 -109 -108
% Change (over 3 years) of Real Effective
Exchange Rate (REER) with HIPC deflators
+/-5% &
+/-11% -0.3 2.3 9.6 8.1 5.3 1.4 1.5 2.7 1.3 -2.4
% change (5 years) in Export Market Shares -6% -15.3 -6.2 1.6 -2.7 -2.9 -4.0 -5.6 -5.4 -13.1 -9.1
% change (over 3 years) of ULC index
+9% &
+12% 11.1 12.0 11.4 8.3 8.6 5.5 5.7 5.6 8.2 5.4
INTERNAL
IMBALANCES
% y-o-y change in House Prices +6% 3.1 1.7 -2.4 -1.9 -2.0 -0.7 -0.6 -1.6 1.3 1.7 0.7
Private sector Credit flow as percent of GDP 15% 23.1 22.5 12.7 9.8 10.7 14.5 17.2 24.9 21.0 7.1 2.9
Private sector debt as percent of GDP 160% 173 187 192 197 198 206 210 223 240 251 248
Public sector debt as percent of GDP 60% 49 51 54 56 58 63 64 68 72 83 93
3 year average of unemployment rate 10% 4.2 4.4 5.2 6.1 6.9 7.4 7.9 7.9 8.5 9.4
Approach to thresholds
• Distribution (freq.) – over time and across
countries (in excluding the current crisis years).
• Identify quartiles (25% of observations)– Upper threshold: the value
of X for which only 25% of obs. is above.
– Lower threshold: and the value of X for which only 25% is below.
• “generous thresholds” followed by investigation
0.0
2.0
4.0
6.0
8D
en
sit
y
-67.5 -52.5 -37.5 -22.5 -7.5 7.5 22.5 37.5 52.5 67.5% difference from Long Term average reer_gdp 35% change (over 3 years of the RRER_ULC
The scoreboard indicators and the indicative thresholds
External imbalances and competitiveness Internal imbalances
Year 2010 3 year average of
Current Account
balance as a
percent of GDP
IIP as %
of GDP
% change (5 years) in
Export
Market
Shares
% Change (over 3 years) of Real Effective
Exchange Rate
(REER) with HIPC
deflators
% change (over 3 years) of ULC index
Private sector
Credit flow as
percent of
GDP
Private
sector debt
as percent
of GDP
Public
sector debt
as percent
of GDP
% y-o-y change in
House Prices
3 year average of
unemployment rate
Threshold +6/-4% -35% -6% +/-5% & +/-11% +9% & +12% 15% 160% 60% 6% 10%
BE -0.11 65.33 -20.72 0.01 0.08 13.27 234 97 0.17 8.3
DE 5.83 42.45 -8.36 -0.03 0.07 1.60 127 84 0.73 6.8
IE -3.14 -12.48 -0.05 -0.02 -4.53 341 95 -9.73 13.7
EL -12.04 -19.89 0.04 0.10 -0.66 123 143 -5.10 12.6
ES -6.45 -87.11 -11.47 0.00 0.04 1.40 225 60 -3.86 20.1
FR -1.66 -19.49 -0.01 0.07 82 4.96 9.7
IT -2.77 -19.00 -0.01 0.09 119 -1.32 8.4
CY -2.58 -10.16 15.55 0.01 0.07 61 -7.51 6.5
LU 6.65 96.12 4.53 0.02 0.12 254 18 2.69 4.5
MT -6.10 9.17 4.78 -0.01 0.07 69 -1.91 6.8
NL 5.46 29.43 -6.47 -0.01 0.07 -0.73 223 63 -2.85 4.5
AT 3.57 -5.15 -17.47 -0.01 0.08 10.62 274 72 -0.99 4.4
PT -11.13 -107.55 -8.47 -0.02 0.05 2.98 248 93 0.72 11.0
SI -3.01 -35.74 -6.94 0.02 0.16 2.37 127 39 0.74 7.3
SK -4.29 -66.40 38.16 0.12 0.09 41 -4.67 14.4
FI 2.76 6.89 -22.00 0.12 6.80 178 48 7.23 8.4
BG -10.98 -97.65 16.75 0.10 0.28 -0.18 169 16 -10.69 10.2
CZ -2.56 -49.38 12.72 0.13 0.09 39 -8.49 7.3
DK 3.90 9.57 -15.43 0.01 0.10 6.65 245 44 0.54 7.4
EE -0.50 -72.81 -0.58 0.06 0.09 7 -1.07 16.9
LV -0.29 -81.33 13.30 0.09 0.00 -8.77 141 69 -4.82 18.7
LT -2.33 -55.75 14.45 0.09 -0.01 81 38 -13.03 17.8
HU -1.61 -115.31 2.91 0.06 -18.72 155 80 -8.00 11.2
PL -4.98 -63.24 18.03 0.15 3.39 74 55 9.6
RO -6.61 -64.31 25.37 -0.10 0.22 31 -10.83 7.3
SE -22.46 -12.03 -0.03 0.06 0.54 230 40 -4.77 8.4
UK -2.13 -12.98 -25.20 -0.20 0.11 2.70 215 80 -0.19 7.8
Additional indicators for the “economic reading”
European parliament
External imbalances and competitiveness Internal imbalances
Headline
Scoreboard Indicators
3 year average of
current account
balance
as a %
of GDP
Net International
Investment
Position as
a %
of GDP
% change
(3 years) of
Real Effective
Exchange
Rate, HICP
deflators
relative within
35 industrial
countries (a)
% change
(5 years) in
export
market
shares
% change
(3 years) in
nominal
unit
labour cost (b)
y-o-y %
change in
deflated
house
prices (c)
private
sector
credit
flow
as %
of GDP
(d), (e)
private
sector debt
as %
of GDP (d),
(e)
general
government
debt
as %
of GDP
(f)
3 year
average of
unemploy-
ment rate
Additional
indicators to be used
in economic
reading
Net
lending/borrowing
vis-à-vis ROW
(CA+KA) as % of
GDP
Net External
Debt as %
GDP
REER vis-à-vis
rest of the euro
area
Export market
shares based
on volumes of
goods; Labour
productivity;
Trend TFP
growth
Nominal
ULCs
(changes
over 1, 5,
10 years);
Effective
ULC
relative to
the rest of
euro-area
House
prices
(changes
over 3
years);
Residential
construction
Change
in
private
credit
Private
sector debt
based on
consolidated
data
Three year average of Current Account balance as % of GDP
• Rationale: Flow external Imbalances indicator.
• Thresholds: -4/+6% applies to deficit and surplus countries
- Data series:
- Headline indicator: “Current account balance” (annual BOP data) as a share of GDP; source EUROSTAT. The series includes all the available observations between 1960 – 2007.
- Additional indicator: Net lending/borrowing vis-à-vis ROW (% GDP); source EUROSTAT.
Net International Investment Positions as a share of GDP
• Rationale: Stock counterpart of CA/GDP (the stock of debt of the domestic sector of the economy)
• Threshold: -35% (only left tail as large external ASSET positions are not a threat for the functioning of EMU).
• Data series:
– Headline indicator: "Net IIP; total economy" as a share of GDP;
source EURSOTAT (annual BOP data). The series includes all
the available observations between 1980 and 2007.
– Additional indicator: Net external debt (% GDP)
Change (over 3 y.) in Real Effective Exchange Rate HICP deflator
• Rationale: competitiveness indicator: losses and gains in global price competitiveness relative to the major trading partners (35),
• Thresholds: -/+ 5% & -/+ 11% (upper and lower quartile of EA -/+ s.d. of EA)
• Data series:
– Headline indicator: “REER based on HICP deflators; performance relative to 35 trade partners, double export weights”; source DG ECFIN (1995 – 2007).
– Additional indicator: REER vis-à-vis the rest of EA; source DG
ECFIN
Change (over 5 y.) in Export Market Shares (in goods and services)
• Rationale: competitiveness indicator capturing non price competitiveness or the ability of exploiting new sales opportunities (i.e. from emergent countries)
• Thresholds: -6% (lower quartile)
• Data series:
– Headline indicator: “Current account for goods and services”, position: credit, partner: World (annual BOP data); source: EUROSTAT. The series includes all the available observations between 1995-2007.
– Additional indicator: Export market shares based on volumes of goods, labour productivity, trend TFP growth; sources: EUROSTAT, ECFIN
Change (over 3 y.) in Nominal Unit Labour Cost
• Rationale: Measure of cost competitiveness indicator providing a direct link between cost and productivity.
• Thresholds: -/+ 9% & -/+ 12% ( upper quartile EA +3pp)
• Data series:
– Headline indicator: “Nominal ULC”, ratio of nominal compensation per employee to real GDP per person employed; sources: EURSTAT, DG ECFIN. The series includes all the available observations between 1995-2007.
– Additional indicator: Changes (over 1,5, 10 years) of nominal ULCs, effective ULC relative to the rest of EA; source: ECFIN.
Y-O-Y change in Real house prices
• Rationale: recent experiences of asset bubbles
• Threshold: 6% annual increase (only right tail).– The threshold is chosen from the results of Agnello
and Schuknecht (2010):
• Data series:
– Headline indicator: Harmonised houses price index; source EURSOTAT (completed with ECB, OECD and BIS data). The series includes all the available observations till 2007.
– Additional indicator: House price (changes over 1, 3 years), Residential construction development; sources: EUROSTAT, ECFIN.
The private sector credit as a % of GDP
• Rationale: indicator of risks for growth and financial stability (early warning)
• Threshold: 15% (only right tail)
• Data series:
– Headline indicator: Sum of “loans and securities other than shares” for non financial corporations and households, non consolidated N.A. data; source EURSOTAT. The series includes all the available observations between 1995-2007.
– Additional indicator: Change in private credit.
The private sector Debt as a % of GDP
• Rationale: indicator of risks for growth and financial stability.
• Threshold: 160% (only right tail)
• Data series:
– Headline indicator: Sum of “loans and securities other than shares” for non financial corporations and households, non consolidated N.A. data; source EURSOTAT. The series includes all the available observations between 1995-2007.
– Additional indicator: Private sector debt based on consolidated data; source: EURSOTAT.
Government debt ratio
• Rationale: indicator of potential contribution of the government public sector debt to macroeconomic imbalances
• Threshold: 60% (only right tail)
• Data series: "Gross debt of Government Sector" as a share of GDP; source: EUROSTAT EDP (ESA95).
3 year average of Unemployment rate
• Rationale: Indicator of potential misallocation of resources and adjustment capacity.
• Threshold: 10% (only right tail)
• Data series: Labour force survey annual data from EUROSTAT. The series includes all the available observations between 1994-2007.
Excel spreadsheet
How the EIP fits into the European semester
(indicative based on timing of 1st year)
Forthcoming web plate-form
How the EIP fits into the European semester
(indicative based on timing of 1st year)
Example of standardised graph:
Current account vs capital account (2010, 3-year MA)
-15
-10
-5
0
5
10
LV EE HU LT CZ SI SK PL MT RO CY BG SE LU DE NL DK AT FI BE FR UK IT IE ES PT EL
new Member States old Member States
CA
CA+KA
Example of standardised graph:
NIIP and NED (2009, % GDP)
-250
-200
-150
-100
-50
0
50
100
150
200
250
BE BG CZ DK DE EE IE EL ES FR IT CY LV LT HU MT NL AT PL PT RO SI SK FI SE UK
-250
-200
-150
-100
-50
0
50
100
150
200
250
NIIP
NED
Part III
Developing analytical tools and frameworks to support
surveillance
Spillovers
• Trade linkages
• Financial linkages
EIP
Adjustment capacity
• Price and wage flexibility
• Labour market flexibility
• Financial market intermediation
• Balance sheet adjustment
Policy options
• Wage bargaining system
• Financial market regulation
• Fiscal policy
• Growth and structural reforms
Sustainability of macro-trends
• Early warning
• Deviation from equilibrium (competitiveness, credit
growth, housing prices)
• Other factors (GDP growth, demography, catching-up,
global imbalances, saving and investment imbalances, housing and other asset markets, shocks)
• Policy determinants (fiscal policy, financial regulation, labour market institutions)
Identification
of
problematic
imbalances
Policy
Response
What is required
• Shared understanding on the analytical:
– the diagnosis of problematic imbalances– the design of appropriate policy responses
� Approach involves literature surveys, event analysis, modelling exercises and cases studies leading to guidance on the approach/principles to be used in multilateral surveillance
• Indicators/tools
– statistical datasets– development of conceptual indicators– information sets on institutional settings at Member State level,
e.g. wage bargaining systems, housing markets
• analytical frameworks or dedicated analysis to identify problematic imbalances, e.g. progress in deleveraging or external positions of catching up countries
• statistical datasets, e.g. the EIP database
• development of conceptual indicators, e.g. CA norms, equilibrium REERs or equilibrium credit
• information sets on institutional settings at Member State level, e.g. wage bargaining systems, housing markets
• analytical frameworks useful for identifying policy responses to imbalances
• training programme
Types of tools/frameworks needed to conduct surveillance on macroeconomic imbalances
40
External imbalances: main issues to address
European Commission
• The anatomy of intra-/extra-EU external imbalances and their drivers
• External debt sustainability
• Channels of adjustment and their functioning
• The role of policies in stimulating adjustment of external imbalances
• External positions of catching up countries
• The role of surplus countries in the adjustment of divergences
• Assessment of competitiveness and export performance and their determinants
External imbalances: indicators, tools and databases
European Commission
Main outputs Project Description of the project
Analytical indicators,
tools or
databases
External DSA
Standardised tool with debt projections and
robustness analysis (e.g. different types of
shocks)
CA/IIP normsIndicators of CA/IIP norms based on different
approaches
Flow of Funds analysis
Standardised tool with F-o-F tables (different level
of detail depending on the purpose of the
analysis)
Stock-flow analysisAnalytical tool to do the stock-flow analysis and
assess the importance of valuation effects
BoP/IIP datasetDataset with BoP/IIP data allowing for detailed
analysis of external positions of countries
42
Internal imbalances: main issues to address
European Commission
Examination of private sector balance sheets to detectunsustainable positions: granular approach
• developments in households, non-financial corporations, MFIs.
• examine stocks, flows and sustainability/vulnerability
• policy factors, e.g. financial regulation, taxation
Asset markets, starting with housing
• assessment of house price developments: event analysis,equilibrium price estimation, supply responsiveness,complementary indicators (affordability ratios)
• examine structural features of housing and mortgage market
• transmission channels: through C, I, credit
Thank you
Additional slides
How EIP fits into the European semester (preventive arm only)
Nov Dec Jan Feb Mar Apr May Jun
EU semster
deliverables AGS
SCPs and
NRPs
Commission
Recommend
ations
Council
adopts
Recomme
ndations
Alert
mechanism Finalise
scoreboard
design AMR
ECOFIN
and
Eurogroup
discussion
In-depth
studies
Preventive
arm:
recommenda
tions under
Article 121,2
included as
part of June
packageCorrective
Surveillance
under the EIP
(preventive
Recommendat
ions
Commission undertakes in-depth
reviews to provide analytical basis
for recommendationss, can
include missions
in liason with the ECB
In-depth
reviews
released