INTERNATIONAL MONETARY FUND
EURO AREA AT THE
: CROSSROADS
ECONOMIC GOVERNANCE AND OPTIONS FOR A FISCAL CAPACITY Jeffrey Franks Director, IMF Europe Office International Monetary Fund Based on IMF’s 2016 Euro Area Article IV Staff Report
European Parliamentary Research Service, October 20, 2016
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SUBDUED GROWTH IN ADVANCED ECONOMIES Real GDP Growth Projections (percentage change from a year earlier)
2016 Revision from July 2016
2017 Revision from July 2016
World
U.S.
U.K.
Japan
Euro Area
3.1
1.6
1.8
0.5
1.7
1.7
1.3
0.8
3.1
0.0
-0.6
0.1
0.3
0.1
0.1
-0.2
-0.1
0.5
3.4
2.2
1.1
0.6
1.5
1.4
1.3
0.9
2.2
0.0
-0.3
-0.2
0.5
0.1
0.2
0.1
-0.1
0.1
DEU
FRA
ITA
ESP
Source: IMF World Economic Outlook, October 2016.
European Department, International Monetary Fund
2
GRADUAL RECOVERY IN EMERGING MARKETS Real GDP Growth Projections (percentage change from a year earlier)
World
EMDCs
Brazil
Russia
India
China
2016
3.1
4.2
-3.3
-0.8
7.6
6.6
Revision from July 2016
0.0
0.1
0.0
0.4
0.2
0.0
2017
3.4
4.6
0.5
1.1
7.6
6.2
Revision from July 2016
0.0
0.0
0.0
0.1
0.2
0.0
Source: IMF World Economic Outlook, October 2016.
European Department, International Monetary Fund
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EURO AREA RECOVERY CONTINUES … Real GDP (2008=100)
115
110
105
US Euro area Japan UK
100
95
90
Source: Haver Analytics, and IMF staff calculations.
European Department, International Monetary Fund
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… SUPPORTED BY FISCAL AND MONETARY POLICIES 0.5
Euro Area: Corporate Lending Conditions (Percent) 4 2
0.0
Loans to NFCs (y/y change) Change in credit standards (rhs)
-10 -5
0
0
-2
5
-4
10
-6
15
Easing
Euro Area: Structural Balance Fiscal Impulse (Percent of potential GDP)
-1.0
-1.5
-2.0 2012
2013
2014
2015
2016
Source: IMF, World Economic Outlook (April 2016).
European Department, International Monetary Fund
-8 2010Q1
2012Q1
2014Q1
Tightening
-0.5
20 2016Q1
Source: Haver Analytics.
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BUT MEDIUM-TERM OUTLOOK FOR GROWTH AND INFLATION REMAINS WEAK… Euro Area: Real GDP Over Various Cycles (Index: business cycle peak Q = 100)
Euro Area: Annual Inflation
130
130
12
125
125
10
120
120
8
115
115
110
110
6
105
105
100
100
95
95
Sources: ECB; WEO and IMF staff calculations.
European Department, International Monetary Fund
4 2 0
Mar-16
-6
Mar-15
80
8 countries with negative inflation
12 countries with negative inflation
Mar-14
-4
Mar-13
85
Mar-12
-2
Mar-11
90
Mar-10
10 years
9 years
8 years
7 years
6 years
5 years
4 years
3 years
2 years
1 year
Q
80
Max
Mar-09
85
1980Q1 2008Q1
Min
Mar-08
1974Q3 1992Q1
HICP: Total
Mar-07
90
(percent)
Sources: Eurostat and IMF staff calculations.
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DUE TO CRISIS LEGACIES OF STILL HIGH UNEMPLOYMENT… Unemployment Rate since the Financial Crisis (Percent) * 15 US
EA
10
5
2015
2014
2013
2012
2011
2010
2009
2008
0
Sources: Haver and IMF staff calculations. Note: */ after adjusting for changes in labor force participation.
European Department, International Monetary Fund
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…AND SLOW PROGRESS IN DELEVERAGING… Nonperforming Loans and Write-offs 10
60
Gross NPL
Write-off ratio (rhs)
40
6 4
20
2 0
Percent of Gross NPL
Percent of GDP
8
2014
2013
2012
2011
2015*
Euro area
2010
2014
2015*
United States
2013
2012
2011
2010
0
Sources: Bloomberg, ECB, EBA Transparency Exercise (2015), U.S. Federal Reserve, IMF WEO, and IMF staff calculations. Note: */ as of end-Sept. 2015 for the United States and end-June 2015 for the Euro Area.
European Department, International Monetary Fund
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… WEIGHING ON INVESTMENT 110
Real Investment (2008=100)
105
US
Euro area
100
Japan
UK
95 90 85 80
Source: Haver Analytics, and IMF staff calculations.
European Department, International Monetary Fund
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LAGGING PRODUCTIVITY AND COMPETITIVENESS Service Sector Productivity,: US and Euro Area (Index 2007 = 100) 110 105
ULC-based REER vis-a-vis Germany (Index, 1999Q1=100) 150 140
100 130
95 90
120
85
110
80
100 EA 11 (excl IRL and LUX)
US
70 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Haver Analytics.
European Department, International Monetary Fund
90 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
75
EA FRA ITA ESP GRC PRT
Source: Haver Analytics.
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COLLECTIVE, COMPREHENSIVE ACTION NEEDED TO BOLSTER GROWTH AND STRENGTHEN THE UNION
Create better incentives for growthfriendly structural reforms
Strengthen fiscal framework while expanding centralized fiscal support
Comprehensive, more balance mix Accelerate balance sheet repair and complete the banking union
European Department, International Monetary Fund
Continue monetary policy accommodation
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INTERNATIONAL MONETARY FUND
OPTIONS FOR A CENTRALIZED FISCAL CAPACITY FOR THE EURO AREA
Based on Euro Area Policies 2016 Selected Issues Paper “Options for a Centralized Fiscal Capacity for the Euro Area” October 20, 2016
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RATIONALE Motivation • Common insurance against country-specific shocks in a currency union • Policy context: • Constrained monetary policy capacity (ZLB) • Limited fiscal space
Objectives • Fiscal stabilization in the event of area-wide and/or countryspecific shocks • Fiscal risk-sharing to limit contagion and mitigate need for crisis support European Department, International Monetary Fund
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HOW TO DESIGN CENTRALIZED FISCAL SUPPORT IN THE EURO AREA? Three options • Tax-transfer scheme • Borrowing-lending scheme • Small euro area budget
European Department, International Monetary Fund
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OPTION 1: TAX-TRANSFER SCHEME Tax transfers
Reallocation
Unemployment Insurance
Member states
Central Fiscal Capacity
or Rainy Day Fund
European Department, International Monetary Fund
Citizens
Member states
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TAX-TRANSFER SCHEME Pros • Enhances resilience to country-specific shocks • Automatic and counter-cyclical • Can be designed to be budget-neutral • Can provide incentives for labor and labor taxation reforms Cons • Limited capacity to address area-wide shocks, especially if budget-neutral • Unemployment insurance is a lagged response to shocks • Potentially redistributional, depending on design • Without conditionality, might give rise to moral hazard European Department, International Monetary Fund
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OPTION 2: BORROWING-LENDING SCHEME Lending
Borrowing
Central Fiscal Capacity
Option 2: ESM+
Member states grants
Bond Markets
Private projects
Member states’ capital
European Department, International Monetary Fund
EA chapter of EU budget 17
BORROWING-LENDING SCHEME Pros • Enhances resilience to both country-specific and area-wide shocks • Creates new fiscal space (countries can borrow at lower rates) • New safe asset • Can incentivize sound policies if conditional on compliance with rules Cons • Political resistance to common borrowing, creates contingent liability • Can crowd out national borrowing and raise interest rates for some countries • Not automatic • Without conditionality, might undermine fiscal discipline European Department, International Monetary Fund
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OPTION 3: A SMALL EURO AREA BUDGET Transfers
Member states or Own resources
Central Fiscal Capacity
Various functions
Common public goods
Citizens
and/or Targeted support
Member states
+ potential debt issuance European Department, International Monetary Fund
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SMALL EURO AREA BUDGET Pros • Enhances resilience to both country-specific and area-wide shocks • Can provide automatic stabilization • Common borrowing creates additional fiscal space and a new safe asset • Can be conditional on compliance with rules Cons • Political resistance to common taxation, borrowing and spending • Can increase the overall tax burden and create contingent liability • Potentially redistributional • Can crowd out national borrowing • Without conditionality, might undermine fiscal discipline European Department, International Monetary Fund
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INTERNATIONAL MONETARY FUND
References Based on IMF’s 2016 Euro Area Article IV Staff Report http://www.imf.org/external/ns/cs.aspx?id=317 “Building a Better Union: Incentivizing Structural Reforms in the Euro Area,” IMF Working Paper 15/201, September 2015 https://www.imf.org/external/pubs/cat/longres.aspx?sk=43278.0 “Options for A Central Fiscal Capacity in the Euro Area,” 2016 IMF Euro Area Selected Issues Paper http://www.imf.org/external/ns/cs.aspx?id=317 “A Strategy for Resolving Europe’s Problem Loans” http://www.imf.org/external/pubs/cat/longres.aspx?sk=43286 and “Tackling Small and Medium-Size Enterprise Loans in Europe,” IMF Staff Discussion Notes 15/19 and 15/04, 2015 https://www.imf.org/external/pubs/cat/longres.aspx?sk=42614.0 “Comprehensive, Integrated Policies to Boost Euro Area Growth,” 2016 IMF Euro Area Selected Issues Paper http://www.imf.org/external/ns/cs.aspx?id=317
October 20, 2016
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