challenges of the ea compared with the us and japan
TRANSCRIPT
Challenges of the EA compared with the US and Japan
Servaas DEROOSE
Deputy Director-General European Commission, DG Economic and Financial Affairs
Belgian Financial Forum Brussels, 21 March 2016
Outline
1. Significant growth differences between EA, US and Japan
2. Where do the differences between EA and US come from?
3. Will the euro area become the "next Japan"?
2
90
100
110
120
130
140
1999 2001 2003 2005 2007 2009 2011 2013 2015
US JP EA-19
3
Substantial growth differences between EA, US and JP, partly explained by demographics
Real GDP
(Index: 1999=100)
Real GDP per capita
(Index: 1999=100)
Source: Own calculations based on Ameco data.
90
100
110
120
130
140
1999 2001 2003 2005 2007 2009 2011 2013 2015
US JP EA-19
Post crisis Post crisis
4
Significant differences in potential GDP growth
Potential GDP level
(Index: 1999=100)
Potential GDP growth
(in %)
Source: Own calculations based on OECD data.
90
100
110
120
130
140
150
1999 2001 2003 2005 2007 2009 2011 2013 2015
US JP EA-15
Post crisis Post crisis
0
1
2
3
4
1999 2001 2003 2005 2007 2009 2011 2013 2015
US JP EA-15
5
Repeated downward revisions of potential growth
Euro Area
(y-o-y, in %)
US
(y-o-y, in %)
Note: Euro area based on EA-15 (spring 2008), EA-16 (spring 2010), EA-17 (spring 2012), EA-18 (spring 2014), EA-19 (winter 2016). For the US, forecast vintages for 2008 and 2012 are not available.
Source: Own calculations based on Ameco.
Winter 16
Spring 14
Spring 12
Spring 10
Spring 2008
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
99 01 03 05 07 09 11 13 15 17
Winter 16
Spring 14
Spring 2010
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
99 01 03 05 07 09 11 13 15 17
Comparison of potential growth projections over past forecast vintages
-1
0
1
2
3
4
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Labour (total hours) Capital stock
TFP Potential GDP growth
6
Differences in potential growth between EA and US exacerbated by financial/sovereign debt crisis
Euro area
(in ppt.)
US
(in ppt.)
Source: DG-ECFIN calculations, Winter Forecast 2016.
-1
0
1
2
3
4
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Labour (total hours) Capital stock
TFP Potential GDP growth
Δ = 1.2 pp
forecast
Contributions to potential growth
Δ = 1.4 pp
forecast
Δ = -0.9
Δ = 0.9
Δ = -0.2
Δ = 0.5
-1
0
1
2
3
4
5
6
Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15
ECB MRO rate
ECB deposit facility rate
US Fed target rate (upper bound)
%
7
Monetary policy response: more front-loaded action by Fed than ECB
Policy rates set by the ECB and the US ECB and Fed balance sheets
(% of GDP)
Source: HIS. Last observation 15 march 2016.
0
100
200
300
400
500
600
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
Size of Fed and ECB balance sheets
FED ECB
Jan 2007 = 100
-4
-3
-2
-1
0
1
2
3
4
2004 2006 2008 2010 2012 2014 2016
US EA-19
8
Fiscal policy response: broadly similar timing but stronger cycles in the US
Change in structural balances (in % of GDP)
Source: Own calculations based on IMF World Economic Outlook, October 2015.
Annual data 2004 – 2016 Pre-crisis vs. post-crisis period
-4
-3
-2
-1
0
1
2
3
4
2004-08 2009-16
EA-19 US
9
Private sector deleveraging: higher needs and less progress in EA than in US
Non-financial corporations indebtedness
(% of GDP)
Household indebtedness
(% of GDP)
Note: Data consolidated at sector level shown in descending order for values observed in 2014. The initial observation is 2000 except (due to data availability): 2001 for DE and NL, 2002 for IT and 2004 for AT and FI. Source: EA data from Eurostat, US data from Bureau of Economic Analysis.
0
20
40
60
80
100
2000 2002 2004 2006 2008 2010 2012 2014
EA-18 US
0
20
40
60
80
100
2000 2002 2004 2006 2008 2010 2012 2014
EA-18 US
Post crisis Post crisis
0
10
20
30
40
50
1999 2001 2003 2005 2007 2009 2011 2013 2015
EA PT
CY EL
IE IT
SN ES
0
1
2
3
4
5
6
7
8
9
1999 2001 2003 2005 2007 2009 2011 2013 2015
EA
US
10
High NPLs remain a major concern for the Euro Area, in particular for the vulnerable Member States
Bank non-performing loans to gross loans
(in %)
Source: World Bank World Development Indicators.
Post crisis Post crisis
11
Flaws in EA governance framework
National fiscal frameworks
Stronger preventive arm SGP
• Introduction of an expenditure rule (6-P) and balanced budget rule (TSCG)
• Possibility of imposing sanctions (6-P)
• Surveillance of draft budgetary plans by Commission (2-P)
• Mandatory minimum requirements at the national level (accounting and statistics, forecasts, fiscal rules monitored by independent bodies, transparency)
Macro • Prevention and correction of macroeconomic imbalances via the introduction of
the Macroeconomic Imbalance Procedure (MIP) (6-P)
Stronger corrective arm SGP
• Introduction of a numerical debt benchmark (6-P)
• Earlier and more gradual sanctions (6-P)
• More automaticity in decision-making via new voting scheme (TSCG)
• Enhanced surveillance for MS threatened with financial difficulties (2-P)
Crisis resolution mechanism
• European Stability Mechanism (ESM)
• OMT programme by the European Central Bank (ECB)
Fiscal
Banking Union
• Single Supervisory Mechanism (SSM)
• Single Resolution Board (ERB) and Single Resolution Fund (SRB)
• Under construction: Common deposit insurance scheme
Financial
• Macro-prudential: European Systemic Risk Board (ESRB)
• Micro-prudential: European Supervisory Authorities (ESAs) with EBA (for banks), ESMA (securities), EIOPA (insurance), national authorities etc.
Eur. System of Financial
Supervision
11
Note: Key reforms steps taken in the area of fiscal and macroeconomic policies are shown in italics in brackets, namely 6-Pack (6-P), Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG), 2-Pack (2.P).
Major differences in the decline of potential GDP between EA and the US stem from weak labour and TFP contribution
12
Contributions to potential growth
Labour
(persons)
Capital
accumulation TFP
1999-08 2.0 0.4 0.8 0.8
2009-15 0.5 -0.1 0.3 0.4
Diff. -1.4 -0.5 -0.5 -0.4
1999-08 2.6 0.2 1.1 1.3
2009-15 1.4 0.3 0.4 0.6
Diff. -1.2 0.1 -0.6 -0.7
EA-19
US
Potential
growth
(annual %
change)
Contributions to potential growth (in pps.)
Source: DG-ECFIN calculations, Winter Forecast 2016.
0
2
4
6
8
10
12
14
2000 2002 2004 2006 2008 2010 2012 2014 2016
NAWRU (% of labour force)
Unemployment rate
0
2
4
6
8
10
12
14
2000 2002 2004 2006 2008 2010 2012 2014 2016
NAWRU (% of labour force)
Unemployment rate
13
Faster labour market adjustment in the US compared with the EA
Euro area US
Source: DG-ECFIN calculations, Winter Forecast 2016.
Post crisis Post crisis
14
More flexible labour and product markets in the US facilitated adjustment after the crisis
Product market regulation Employment protection legislation
Note: Indicators range on a scale from 0 (least restrictions) to 6 (most restrictions). EPL refers to individual and collective dismissals. Latest data available 2013.
Source: DG-ECFIN calculations based on OECD data.
-2
-1
0
1
2
3
US LU NL IE FI AT DE BE IT FR ES PT EL
1998 2013 Difference 2013-08
-2
-1
0
1
2
3
4
5
US IE BE FI FR ES DE AT IT EL NL PT
1998 2013 Difference 2013-08
15
Labour and product market rigidities contributed to weak labour market performance in the EA
Product market rigidities and
unemployment rate
Changes in ULC and unemployment rate
Source: All indicators taken from Ameco except for the product market rigidity measure, which comes from the OECD.
BE
DE
IE
EL
ES
FR
IT
NL
AT
PT SI
SK FI
US
-10
-5
0
5
10
15
20
0.5 1 1.5 2 2.5
Ch
ange
in u
nem
plo
ymen
t ra
te
(2
00
9-1
4)
Product market rigidities (2008)
BE
DE
IE
EL
ES
FR
IT
LU
AT
AT SI
SK
US
-10
-5
0
5
10
15
20
0 25 50 75 100
Ch
ange
in u
nem
plo
ymen
t ra
te
(2
00
9-1
4)
Change in unit labour costs (2001-09)
16
Sluggish investment: both in the EA and the US
Investment to potential output ratio
(in %)
15
17
19
21
23
25
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
US EA-19
Source: DG-ECFIN calculations, Winter Forecast 2016.
Post crisis
forecast
17
Weak investment: not exclusively driven by housing investment
Total investment except housing
(% of GDP, rescaled 2002=0)
-1
-0.5
0
0.5
1
1.5
2002 2004 2006 2008 2010 2012 2014 2016
US EA-12
Housing investment
(% of GDP, rescaled 2002=0)
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
2002 2004 2006 2008 2010 2012 2014 2016
US EA-12
Source: OECD.
Post crisis Post crisis
18
Weakness in investment: both cyclical and structural factors at work
• Sluggish economic growth (the so-called 'accelerator channel')
• Deleveraging and reduction of overcapacity
• Regulatory and non-regulatory bottlenecks
• Decline in public investment
• Financial fragmentation
• Economic uncertainty
19
Key drivers of weak investment are: low growth and high deleveraging needs …
Investment regressions using the accelerator model for the Eurozone
Non-residential investment and non-financial corporations’ debt
Source: European Commission. Estimations based on an EA-12 sample using real gross fixed capital formation to GDP ratios.
14
15
16
17
18
19
20
21
22
23
-2
-1
0
1
2
3
4
5
6
1999 2001 2003 2005 2007 2009 2011 2013 2015
Residual (lhs)
Actual investment to GDP ratio (rhs)
Fitted investment to GDP ratio (rhs)
BE
DE
IE
EL
ES
FR
IT
CY
NL
AT
PT
FI
-10
-8
-6
-4
-2
0
-50 0 50 100 150
Change in debt of NFCs (% of GVA) (2000-08)
Ch
ange
in in
vest
men
t o
f N
FCs
(%
of
GD
P)
(20
08
-12
)
Source: European Commission.
20
… sizeable barriers to investment and declines in public investment …
Note: CSR stands for the "country-specific recommendations" issued by the European Commission as part of the European Semester.
Source: European Commission, DG Ecfin.
5
4
2
4
6
6
6
4
13
0 2 4 6 8 10 12 14 16 18
Public administration/ Business environment
Labour market/ Education
Financial Sector / Taxation
R&D&I
Sector specific regulation
Barriers to Investment - EA MS heavily hit by the crisis
Barriers CSR-related
Barriers non CSR-related
Public investment
(% of GDP)
Note: 'EA stressed countries' consists of CY, ES, GR, IE and PT. Group averages are calculated based on simple arithmetic averages. Data for Greece are only available from 2006.
Source: Own calculations based on European Commission 2015 Autumn Forecast.
.
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2000 2002 2004 2006 2008 2010 2012 2014
EA-19 EA stressed countries EU-28
21
… high fragmentation and economic uncertainty
Investment and fragmentation Investment and uncertainty
Source: European Commission. Estimations based on an EA-12 sample using real gross fixed capital formation to GDP ratios.
Source: Investment measured as gross fixed capital formation in percent of GDP.
BE
DE
IE
EL
ES FR
IT
LU NL
AT
PT
FI
R² = 0.4662
14
16
18
20
22
24
-2 -1 0 1 2
Real in
vestm
ent
(avera
ge 2
009-2
015,
in %
of
GD
P)
Real lending interest rate of HH and NFCs in
difference to the EA
(average 2009-14, in %)
22
TFP decline started already before the crisis, and affected both the EA and the US
Source: European Commission.
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
US EA-19
forecast
Post crisis
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
SE-FI-DK-UK-IE minus US DE-BE-FR-NL-AT minus US
ES-PT-IT-EL minus US EA minus US
23
Substantial divergence in TFP growth across EA/EU countries
Source: Own illustration inspired by Mc Morrow et al. (2016): Medium term economic dynamics of the Euro Area, International Economics and Economic Policy, 13, 27-43.
Increasing divergence
Mainly due to different abilities to absorb new ICT technologies (see e.g. Jorgensen et al. 2008, Inklaar et al, 2008)
Sluggish TFP levels
Mainly due to excess capacity in the EA (see e.g. Mc Morrow et al., 2016)
TFP trend growth differentials relative to the US
Convergence at low levels
Forecast assumptions too optimistic?
forecast
More convergence
Relatively strong trend growth
How to increase TFP?
Note: Government effectiveness is measured with a WB indicator capturing perceptions of the quality of public services and the degree of its independence from political pressures and the credibility of the government's commitment to such policies.
Source: European Commission (2014): The drivers of total factor productivity in catching-up economies, Quarterly Report on the Euro Area, Vol. 13(1).
24
Source: Varga and in't Veld (2014): The potential growth impact of structural reforms in the EU. A benchmarking exercise, European Economy. Economic Paper No. 541.
Structural reforms to significantly lift growth potential
GDP effects closing half the gap with best practice
25
Decomposition of real GDP growth in the EA and the US
26
Source: Kollmann et al. (2016): The post-crisis slump in the Euro Area and the US: Evidence from an estimated three-region DSGE model, ECARES working paper, February 2016.
EA US
TFP -3.8 0.7
Fiscal -0.5 -0.7
Monetary 0.8 0.8
Price Mark-up 0.8 -1.2
Wage Mark-up -0.5 -0.9
Private savings shock -0.1 0.1
Investment risk premium -2.2 -2.7
Trade and foreign shocks 0.4 0.9
Others 0.3 0.4 Total deviation from log-linear trend -4.7 -2.7
27
Japan underwent a long period of low growth and deflation
Real GDP
(Index: 1995=100)
HICP and CPI
(Index: 2000=100)
Source: Sources: Eurostat, IHS Economics, Statistics Bureau, Ministry of Internal Affairs and Communications.
90
95
100
105
110
115
120
125
130
135
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
euro area
Japan
80
90
100
110
120
130
140
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
euro area (HICP)
Japan (CPI)
28
Key features of the long period of stagnation in Japan (I)
• Domestic
o Burst of the asset-price bubble in the early 1990s
o Bank restructuring was delayed, whilst bank lending continued to be misdirected into so-called "zombie" firms
o 2011 Great East Japan earthquake
• External
o 1997-98 Asian financial crisis
o 2008-09 global financial crisis
• Structural
o Population ageing triggered a long-term decline in domestic demand and sluggish TFP growth (notably in the SME sector)
Potential growth declined steadily from over 3% in the early 1990s to around 0.7% in 2014
Less fiscal buffers together with governance flaws
In 2015, nominal GDP grew by 2.5%, but was still 4.6% lower than in its peak in 1997.
29
Key features of the long period of stagnation in Japan (II)
• Fiscal policy
o High budget deficits over the last 23 years [6% of GDP on average]
o Whilst the response to the early-90s crisis entailed an increase in public investment to 9% of GDP in 1996, long-term growth in social security expenditure and insufficient revenue growth account for a gradual deterioration in the state of public finances
o World's highest gross debt-to-GDP ratio of 270.8% in 2014 (74.6% in 1990)
• Prices
o Persistent deflationary pressures: long period [1995 to 2012] of negative CPI inflation [-0.1% on average] and GDP deflators [-1.1% on average]
• Monetary policy
o Almost three years of QQE, entailing an expansion of the balance sheet of the Bank of Japan to 76% of GDP
Will the Euro Area become the "next Japan"?
Note: Green / orange / red stand for 'low' / 'medium' / 'high'.
30
Burst of asset-price bubble Domestic
Key factors of low growth and deflation in Japan Risk for the EA
Sluggish TFP growth
Delayed bank restructuring
Financial crisis in neighbouring countries
Decline in working age population
External
Structural
Fiscal Sizeable budget deficits
Soaring public debt-to-GDP ratio
Prices Long period of negative inflation
Sizeable QE
in 2009? in 2016?
Monetary
Will the EA become the next JP? Currently unlikely
31
Source: DG-ECFIN calculations, 2016 Winter Forecast. Forecast horizon highlighted in grey.
Labour
(persons)
Capital
accumulation TFP
1999-08 2.2 2.0 0.4 0.8 0.8
2009-15 0.4 0.5 -0.1 0.3 0.4
2015 1.6 0.9 0.3 0.2 0.4
2016* 1.7 1.0 0.4 0.3 0.4
2017* 1.9 1.1 0.3 0.4 0.4
2018* 1.1 0.2 0.4 0.5
2019* 1.1 0.2 0.4 0.5
2020* 1.1 0.1 0.4 0.5
Contributions to potential growth
(in pps.)Real GDP
growth
(annual %
change)
Potential
growth
(annual %
change)
Commission medium-term baseline scenario assumes that EA will move back towards its pre-crisis growth rate, corrected for capital growth
32
Conclusion
Slower recovery in the EA than in the US
Less supportive macroeconomic policies
Slower fixing of the banking system and more bank-centric economy
Less flexible economy
Different sequencing of policy response due to incomplete EMU architecture
EA not the 'next Japan'
Secular decline in potential growth in the EA (and the US)
Mainly driven by ageing, struggling capital deepening and anaemic TFP growth
Gap between US and EA potential growth due to differences in labour and TFP
Going forward: Protracted period of moderate growth and low inflation
No secular stagnation but move towards lower equilibrium
New policy challenges: debt overhang; zero lower bound; social fabric
Four-pronged policy strategy urgently needed, namely appropriate (i) monetary, (ii) fiscal, (iii) investment and (iv) structural policies