challenges for emu€¦ · the eu / emu project the eu project has certainly improved the life of...

DIRECCIÓN GENERAL DE ECONOMÍA Y ESTADÍSTICA

CHALLENGES FOR EMU

Javier J. Pérez

Director, International Economics and Euro Area

Banco de España

UCIIM, Madrid

19 November 2019


FISCAL RULES IN THE EU

2

The EU / EMU project

The EU project has certainly improved the life of millions of people in Europesince its creation, not only in economic terms, but also regarding rights andliving standards across the whole Union.

The success of the EU project cannot be assessed solely on the basis of itseconomic performance; we must also look at its other original objectives,namely, to increase the level of political and economic integration in the region.

Throughout its history, the EU integration process has not been linear, and noteven gradual. Actually, over nearly seven decades, the European project hasexperienced long, quiet periods –where little or nothing remarkable happened–punctuated by, so to speak, ‘transformative periods’, that have contributeddecisively to its development and to shaping its current form.


Monetary Policy

• Single monetary policy and an

independent central bank

• The primary objective is

maintaining price stability

• Without prejudice to this,

support the policies in the

Community

Fiscal Policies

• Exclusive competence of

Member States

• Budgetary autonomy is, in

formal terms, absolute

• But: Fiscal policies are subject

to rules of budgetary discipline

The division of labour in EMU

Other

• Banking Union?

• Capital markets Union?

• Structural, institutions, …

DIRECCIÓN GENERAL DE ECONOMÍA Y ESTADÍSTICA 4DG ECONOMICS, RESEARCH AND STATISTICS

MONETARY POLICY IN EMU


FISCAL RULES IN THE EU

5

DIRECCIÓN GENERAL DE ECONOMÍA Y ESTADÍSTICA 11

Source: Eurostat. Last observation: 2019 August.

-1

0

1

2

3

4

5

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

HICP INFLATION CORE INFLATION

INFLATION%

Eu

rop

ean

Sta

bili

ty M

ech

an

ism

Fir

st

EB

Astr

ess t

est

Leh

man

failu

re

US

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tan

tru

m

Eu

rop

ean

Fin

an

cia

lS

tab

ility

Facili

ty

Gre

ece

req

uests

fin

an

cia

lassis

tan

ce

UK

Bre

xit

refe

ren

du

m

2 %

AFTER THE FINANCIAL AND SOVEREIGN DEBT CRISES, THE EURO AREA HAS WITNESSED DISINFLATIONARY PRESSURES SINCE 2013


PER CAPITA GROWTH IN THE EURO AREA HAS BEEN SOMEWHAT DISAPPOINTING SINCE 2012

Sources: Datastream and European Commission

85

90

95

100

105

110

115

07 08 09 10 11 12 13 14 15 16 17 18 19

EURO AREA UNITED STATES JAPAN

GROWTH OF THE REAL GDP PER HEAD OF POPULATION(2010 prices; 2007=100)

85

90

95

100

105

110

115

07 08 09 10 11 12 13 14 15 16 17 18 19

EURO AREA GERMANY FRANCE

ITALY SPAIN


Source: European Central Bank. Last observation: Rates, 19 September 2019; Balance sheet: 12 September 2019.

-1

0

1

2

3

4

5

6

-1

0

1

2

3

4

5

6

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

DEPOSIT FACILITY RATE MROs RATE EONIA EUROSYSTEM BALANCE SHEET (right scale)

EUROSYSTEM BALANCE SHEET AND INTEREST RATES%

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OVER THE DIFFERENT PHASES OF THE CRISIS, THE ECB HAS DEPLOYED A PACKAGE OF MUTUALLY REINFORCING MEASURES


Sources: Datastream, European Central Bank and Banco de España. Last observations: Rates,19 Sep 2019; Balance sheet: Eurosystem,12 Sep 2019; FED, 11 Sep 2019; BoJ, 09 Sep 2019; BoE,

-1

0

1

2

3

4

5

6

07 08 09 10 11 12 13 14 15 16 17 18 19

EUROSYSTEM

FEDERAL RESERVE

BANK OF JAPAN

BANK OF ENGLAND

%

POLICY INTEREST RATES

0

20

40

60

80

100

120

0

10

20

30

40

50

60

08 09 10 11 12 13 14 15 16 17 18 19

EUROSYSTEM

FEDERAL RESERVE

BANK OF JAPAN (right scale)

BANK OF ENGLAND

% of GDP 2017

CENTRAL BANKS BALANCE SHEET

% of GDP 2017

THE MONETARY POLICY RESPONSE HAS BEEN COMPARABLE TO THAT IN OTHER LARGE ADVANCED ECONOMIES


Source: Rostagno, Altavilla, Carboni, Lemke, Motto, Saint-Guilhem, Yiangou (2019), forthcoming.

Notes: The chart shows the impact of ECB non-standard measures on the GDP-weighted aggregate of euro area sovereignbond yields.

UPWARD PRESSURES ON EURO AREA SOVEREIGN BOND YIELDSIN ABSENCE OF ECB’s NON-STANDARD MEASURES 2014-2018

% per annum

NEGATIVE INTEREST RATE POLICY (NIRP) FORWARD GUIDANCE (FG) APP

THESE MEASURES HAVE BEEN EFFECTIVE AT EASING FINANCIAL CONDITIONS, SUCH AS YIELD CURVES…


CONTRIBUTION OF ECB NON-STANDARD MEASURES TO REAL GDP GROWTH

2014-2018

% per annum

Source: Rostagno, Altavilla, Carboni, Lemke, Motto, Saint-Guilhem, Yiangou (2019), forthcoming.

Notes: The chart shows the impact of ECB non-standard measures on macro variables based on a macroeconomic modelwith financial variables conditioning on the yield curve impact shown in the previous slide.

% per annum

CONTRIBUTION OF ECB NON-STANDARD MEASURES TO HICP INFLATION

2014-2018

…WHICH IN TURN HAVE STIMULATED GROWTH AND INFLATION OVER THE PERIOD 2014-2018


Sources: Thomson Reuters and Banco de España. Last observation: 19 September 2019.

1,00

1,25

1,50

1,75

2,00

2,25

2,50

2,75

3,00

3,25

3,50

2011 2012 2013 2014 2015 2016 2017 2018 2019

EURO AREA UNITED STATES

FIVE-YEAR FORWARD BREAK-EVEN INFLATION RATE FIVE YEARS AHEAD

%

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IN 2019 WE WITNESS AGAIN THE THREAT OF A DISANCHORING OF INFLATION EXPECTATIONS…


Sources: IHS Markit and CPB. Last observation: PMI, August 2019; Trade, June 2019.

• The world economy slowed down in the second quarter and high-frequency indicators point to a

continuation of this trend in the next months.

• World trade slowed down against a background of growing uncertainty over the trade policy of USA

and China.

48

49

50

51

52

53

54

55

56

2014 2015 2016 2017 2018 2019

MANUFACTURING. CONSUMER GOODSMANUFACTURING. INVESTMENTS GOODSMANUFACTURING. INTERMEDIATE GOODSSERVICES

GLOBAL PMI

Index

-2

-1

0

1

2

3

4

2017 2018 2019

WORLD TRADE GROWTHq-o-q, 3 month moving average

OTHERS AFRICACHINA LATIN AMERICAEMERGING ASIA EMERGING EUROPEEURO AREA JAPANUNITED STATES WORLD TRADE

%

46

48

50

52

54

56

58

60

62

2016 2017 2018 2019

GLOBAL UNITED STATES

EURO AREA EMERGING

MANUFACTURING PMI

… IN A CONTEXT OF DECELERATING GLOBAL GROWTH


• Lower interest rates (Deposit Facility to -0.50%) and a new two-tier system for reserve remuneration to support the bank-based transmission of monetary policy

• Reinforcing forward guidance (dependent on inflation outlook)• Resumption of net asset purchases (APP) and modifications in TLTRO-III

0

300

600

900

1200

1500

1800

2100

2400

2700

3000

0

10

20

30

40

50

60

70

80

90

3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 911

2015 2016 2017 2018 2019 2020

NET MONTHLY PURCHASES

TARGETED MONTHLY NET PURCHASES

TOTAL APP HOLDINGS (Rhs)

ASSET PURCHASE PROGRAMME (APP)Net monthly purchases and holdings

€ bn € bn

25 % GDP

Sources: ECB and Thomson Reuters

-0,6

-0,4

-0,2

0,0

0,2

0,4

0,6

2014 2015 2016 2017 2018 2019 2020 2021 2022

DEPOSIT FACILITY RATE 3-MONTH EURIBOR

FUTURES 7-OCT-19 FUTURES 2-JUL-18

ECB OFFICIAL INTEREST RATES AND 3-MONTH EURIBOR FUTURES

%

13

THE ECB INTENSIFIED MONETARY STIMULUS WITH A COMPREHENSIVE PACKAGE OF MEASURES


• Fiscal stimulus

• Countries with fiscal space

• The composition of spending is important

• Positive synergies to other countries in a context of low interest rates

• Developing a common fiscal capacity

• Cyclical stability for the monetary union as a whole

• Provides public risk sharing in case of country-specific shocks

• Instrument for convergence and competitiveness: right direction but

insufficient

• Structural reforms

• Need to raise potential growth

• Also positive synergies in parallel with demand-side expansionary policies

• Further progress on the euro area institutional architecture

• Completing banking union will help to create pan-European banking groups

and it will make the monetary union more robust and resilient

• Further progress on the Capital Market Union project will help to increase

market financing and it will promote risk sharing through private channels

14

CURRENT DEBATE: THE PARTICIPATION OF NON-MONETARY ECONOMIC POLICIES IS ESSENTIAL


FISCAL POLICY IN EMU


+ Independent Institutions: EC / National IFIs / European Fiscal Board

+ Monitoring of national budgetary process22

Additional national FRs

European FRs - SGP

3% of GDP deficit

rule

60%Debt Rule

(1/20th)

MTO / Adjustment path to MTO

Expenditure benchmark

Balance budget rules, Expenditure rules, Debt

brakes…

Preventive ArmCorrective

Arm

SGP

DESIGN – THE EU FISCAL FRAMEWORK IN A NUTSHELL


FISCAL RULES IN THE EU (DESIGN - III)

23

The EU has been at the policy frontier in designing fiscal rules

Source: own ellaboration based on IMF Fiscal Rules Dataset, 2016 (independent bodies; formal application; legal basis; coverage; escape clause; stabilization; investment)

Note: index for budget balance rules

0

1

2

3

4

5

6

7

1989 1994 1999 2004 2009 2014

Quality of fiscal rules index

EU Other Aes EMEs

Fiscal compactSGP reformMaastricht

(national frameworks)


FISCAL RULES IN THE EU (DESIGN - IV)

24

The flexibility of EU fiscal rules is high by international standards

Source: own ellaboration based on IMF Fiscal Rules Dataset, 2016

Note: index for budget balance rules. In 2015, the EU included a new investment clause in the fiscal framework

0

0,5

1

1,5

2

2,5

1995 2000 2005 2010 2015

Me

an

of

the

in

de

x

Flexibility of rules’ index

EU Other AEs EMEs


FISCAL RULES IN THE EU (IMPLEMENTATION II)

25

The rules in practice

o Compliance not brilliant

0

10

20

30

40

50

60

70

80

90

100

-4

-3

-2

-1

0

1

2

3

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

OUTPUT GAP COMPLIANCE WITH THE DEFICIT RULES (Right-hand scale)

EU: OUTPUT GAP AND COMPLIANCE WITH THE DEFICIT RULES (a)

% POTENTIAL GDP %

Source: European Commission(a) % of countries with public deficit higher than 3% of GDP


OTHER POLICIES AND WAY FORWARD


BEFORE

SGP

DIAGNOSTICS

TODAY

SGP+ Reinforced rules+ ESM (rescue fund)+ Banking Union (joint,SRF)+ Tried-and-tested ECB

REFORMS

• Banking Union to be completedo SRF backstop / EIDS

• Shock absorption mechanismso Private: capital marketso Public: funds/debt, central?

• Elements that complementcurrent framework

• Elements that substitute parts of current framework


Report 2 ADEMU

Report 1 CEPR FR-DE

TWO REPORTS WITH REFORM PROPOSALS

Textual analysis: relative density of words in both reports


Report 2 ADEMU

Report 1 CEPR FR-DE

Report 1, more on “fiscal” (rules, enforcement, design)…

A WORD CLOUD VIEW OF THE REPORTS


Report 2 ADEMU

Report 1 CEPR FR-DE

… and on “countries” (ownership, responsibility, etc)…



Report 2 ADEMU

Report 1 CEPR FR-DE

… and linked to that, also on (sovereign) debt, risk & markets



Report 2 ADEMU

Report 1 CEPR FR-DE

… while Report 2, more on macro, monetary-fiscal, “central”



SOME OPEN ISSUES


ISSUE #1On fiscal rules

Proposals:

Simplification

Debt target + expenditure rule

Remarks:

Are proposals robust to the same problemsthe current framework suffers?

Expenditure rules interact with institutions / implementation


ISSUE #2On (fiscal) governance

Proposals:

National fiscal watchdog

EU-wide fiscal watchdog

Evolution of ESM: crisis management / discret. vs. autom.

Remarks:

Technocracy vs. democracy?

– politicians accountable to “the people”, how would techno?

New watchdogs vs. old ones?

– why it should be different? Sources of EC biases?

Liquidity vs. sustainability crisis

– Beyond core issues… real-time detection key & consecuences


ISSUE #2On (fiscal) governance – remark 1/2

Technocracy vs. democracy?


37DG ECONOMICS, RESEARCH AND STATISTICS

EU FISCAL FRAMEWORK…

… Useful in the axis “EU citizens versus National Governments”?

… Specially in countries with low trust in national governments

SPAIN GERMANY

Source: Bruegel note 24 March 2017, based on Eurobarometer


ISSUE #2On (fiscal) governance – remark 2/2

New watchdogs vs. old ones?

Merola and Pérez (2013), EJPE


ISSUE #3(Central) stabilization tools

Proposals:

European Unemployment Insurance System

Financial Stability Fund (heterogeneity, insurance)

Reinsurance (rainy-day) fund

Remarks:

Is moral hazard completelly eliminated? Time-consistent?

– Report TFP shock / Identify relevant shock / Exclusion

From center to nation-state

From center to subnational / agents

Current framework under the assumptions of the Reports?

– Institutional reforms due to political failure of existing. Under political failure: why should new institutions be better? If the failure can be remedied, why do we need new institutions?

– Coordination and spillovers


ISSUE #3(Central) stabilization tools- remark 1/3

From center to subnational / agents

Coelho (2018), IMF-Central Bank of Ireland joint conference



Coordination: spillovers empirically relevant (ex. ARRA & ERP of 2009)

Alloza, Burriel, Pérez (2018), Bank of Spain WPhttps://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/18/Files/dt1820e.pdf

Public investmentshock: multiplier 1.9 after 2-years

Public investmentshock: multiplier 3.8 after 2-years



Centralised tool/fiscal capacity - an average contribution of some 1% of GNP would suffice to get a “fiscal insurance” similar to the one of the US

The creation of a stabilisation fund in 1999, when certain cyclical conditions were met, would have enabled a risk-sharing capacity (in terms of insurance or fiscal stabilisation) similar to that in the United States to have been achieved, without having committed major resources or permanent income transfers between countries. However, its design would not have obviated the difficulties in estimating countries' cyclical position in real time.

SIMULATION OF THE CONTRIBUTIONS AND FUNDS RECEIVED UNDER A HYPOTHETICAL SCHEME. AVERAGE 1999-2015

% of GNP

Contribution Receipt Contribution Receipt

Euro area 1.0 1.0 0.2 0.2

Belgium 1.0 0.3 0.2 0.1

Germany 1.0 0.7 0.1 0.2

Greece 1.0 2.5 0.3 0.5

Spain 1.0 2.1 0.3 0.4

France 1.0 0.5 0.3 0.1

Italy 1.0 1.1 0.2 0.2

Netherlands 1.0 1.2 0.1 0.3

Austria 1.0 0.5 0.1 0.1

Portugal 1.0 1.3 0.2 0.3

Finland 1.0 0.9 0.2 0.2

Memorandum item:

Stabilisation capacity

CYCLICAL INSURANCE SCHEMES (based on the output gap) (a)

Scheme 1 Scheme 2

0.37 0.15

a In Scheme 1, the countries make a set contribution of 1% of GNP and receive a transfer when their output gap is negative. The amount of the benefit is determined on the basis of the country’s size, its output gap and the size of the fund. In Scheme 2, the countries make contributions to the fund if they have a positive output gap, while they receive a transfer if the gap is negative. The amount of the transfer and of the contribution of each country is 25% of the size of the output gap. For further details see E. Gordo (2017), “The risk-sharing mechanisms in EMU”, forthcoming. The stabilisation capacity refers to the percentage of the adverse shock which is softened with each schema, where 1 would represent the maximum possible percentage (100%).


ISSUE #4Financial integration - remark 1/3

Financial integration - completing the Banking Union, together with the CMU, will also benefit the financing conditions in the euro area

Source: ECB

INDICATORS OF FINANCIAL INTEGRATION IN THE EURO AREA



Financial integration - strengthen the region’s risk absorbing capacity

0

10

20

30

40

50

60

70

80

90

100

1999 - 2015 1998 - 2014 1961 - 2006 1995 - 2006 2003 - 2016

Euro Area United States Canada Germany Spain

CAPITAL MARKETS FISCAL CHANNEL CREDIT MARKETS NON-SHARED RISK

STRENGTH OF RISK-SHARING CHANNELS (a)

INTERNATIONAL COMPARISON

As % of GDP

(a) Estimated following the methodology of Asdrubali et al (1996), which approximates the percentage of shocks recorded in an economy’s GDP thatpass through to that economy’s residents’ income and consumption decisions. The channels that enable the impact of the shocks to be softened are,firstly, the capital markets channel whose strength depends on the income that residents obtain from other countries not affected by the shockbecause they hold shares in the companies of those countries and obtain income from labour and from other financial assets. Secondly, the shockmay be softened by public intervention through fiscal transfers from the federal budget, as in the case of the United States, or from other regions(fiscal channel). Finally, households and firms in that economy may smooth their consumption by resorting to their savings or to the credit market(credit channel)Source: Banco de España Annual Report 2016 and Burriel (forthcoming)



Financial integration - Banking Union

The Banking Union is now an integral part of the Euro project

The crisis led to the conviction that a common and enhanced framework for banking supervision and resolution was needed to help break the link between banks and sovereigns. This conviction gave rise to the Single Supervisory and the Single Resolution Mechanisms, which, so far, are the key components of the BU

Yet, incomplete: European Deposit Insurance Scheme (EDIS)


ISSUE #5Safe assets - remark 1/1

Safe assets – scarcity, relevant in particular in crisis times

0

10

20

30

40

50

60

70

80

90

100

ÁREA DEL EURO EEUU

CON RAITING AA O SUPERIOR CON RAITING MENOR QUE AA

DEUDA SOBERANA (CORTO Y LARGO PLAZO)

% PIB

2600 mm €

5000 mm €

15800 mm €


THANKS FOR YOUR ATTENTION

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