The excessive imbalances procedure (EIP)

Declan COSTELLO & Aurora MORDONUDG ECFIN

29 November 2011

European Commission

Outline

• A description of the EIP

• Monitoring housing market developments: analyical approaches and future work

Part I

A description of surveillance under the preventive and corrective

arms of the EIP

Overall changes to economic Overall changes to economic governancegovernance

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

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)

Ext

ern

al

imb

alan

ces

Inte

rnal

im

bal

ance

s

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 problem Procedure stops.

Imbalance exists

Commission/Council recommendations under Article 121.2

Severe imbalance

Commission/Council recommendation under Article 121.4

The preventive arm of the EIPThe preventive arm of the EIP

Policy response

The Corrective ArmThe Corrective Arm

Member State is

placed in “Excessiv

e Imbalanc

e 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 The Corrective Arm is INTRUSIVE and FOCUSSEDFOCUSSED

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 and works by reverse Qualified Majority VotingMajority 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

Next steps

• Finalising the scoreboard design. ECOFIN supported the envisaged design on 7 November 2011, and comments expected from the European Parliament and ESRB by mid December

• Commission will present its Alert Mechanism Report (expected either 20 December or 4 January) for discussion in ECOFIN-Eurogroup in January

Part II

Monitoring housing market developments

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 and broad coverage of Member States

• Aim to respect the principles of the European Statistics Code of Practice of the European Statistical System (ESS)

• The angle of surveillance under the EIP: potential house price bubbles, due to concerns linked to:

o Wealth and collateral effects (Consumption)

o Reallocation of resources towards the construction sector

(Investment, employment)

o Bank balance sheets, impact on macro-economic stability

• Broad scope: general access to affordable housing, labour mobility, spatial developments, energy efficiency

• Equity and efficiency policy goals (study)

Public policy intervention in housing markets

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

Hinging on a broad set of policies:

• Monetary policy

• Macro-prudential policies (Loan to Value Ratio, forex borrowing)

• Taxation policy (mortgage interest rate deductibility)

• Regulatory issues affecting supply (building permits)

Policies affecting housing markets

•development of analytical frameworks conceptual indicators, e.g. equilibrium house prices, affordability measures, asset-pricing models

•statistical datasets, e.g. the EIP database

•analytical frameworks useful for identifying policy responses to imbalances

•information sets on institutional settings at Member State level

Types of tools/frameworks needed to conduct surveillance on macroeconomic imbalances

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LIME workshop on housing – 8-9 December

1. Stock taking: Methodologies and tools Methodological approaches to assess equilibrium

house prices The house price cycle and the real economy

2. Policies and structural features Structural features and policies of housing markets Demand and Supply-side policies interaction

3.Case studies involving experts from the Member States and country desks: SE, IE, ES

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Thank you for your attention!