DEEPENING OF THE ECONOMIC AND MONETARY UNION –Taking stock of the Euro@20
Marco ButiEuropean Commission – DG Economic and Financial Affairs
A deepening EMU – where will it leave Sweden and Denmark?
Stockholm, 5 February 2019
Content
2
1. Coming of age: has the euro delivered on its objectives?
2. EMU@20=EMU@10+10
3. Reforms during the crisis but job still not completed
4. Euro ins, pre-ins and outs: charting the future together
The euro
EU Member States using the euro
EU Member States not using the euro
Non-EU States
3
From 11 to 19 euro area Member States
GDP growth per capita broadly at par with the US
GDP per capita
(in pps, US=100)
Source: Ameco
• GDP per capita growth
• (%)
4
50
60
70
80
90
100
110
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
European Union
Euro area (EU-19)
SE
DK
US
-8
-6
-4
-2
0
2
4
6
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Credibility of the Central Bank
Dispersion** of HICP inflation
Notes:
* The EA-19 aggregate does not reflect the changing composition according to entry date in EA
** Dispersion measured as an unweighted standard deviation. 2018/19 projected values according to Autumn 2018 forecast. EA changing composition:
according to entry date in EA
Source: Ameco
0
1
2
3
4
5
6
7
8
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
EA-11
Current EA-19
EA changing composition
5
Inflation target versus actual inflation
in EA-19*
In %
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
EA-19 2% Target
Not all Member States improved sufficiently public finance sustainability
Data source: AMECO
Government debt/GDP
(%)
10-year government bond yields
(%)
6
0
20
40
60
80
100
120
140
DE IE IT SE DK EA-19
0
2
4
6
8
10
12
DE IE IT SE DK EA-19
Start of EA
Sovereign
debt crisis
(Oct-09) Lehman Brothers
default (sept-08)Lehman Brothers
default (sept-08)
Start of EA
Sovereign
debt crisis
(Oct-09)
« What
ever it
takes »
(Jul-12)
« What
ever it
takes »
(Jul-12)
QE
announcement
(Jan-15)
QE
announcement
(Jan-15)
Real convergence mostly driven by 'new' euro area Member States
ATBE
EE
FI
FRDE
IE
IT
LU
NLPT
SK
SI
ESCY
LV
LT
MT
0
2
4
6
8
10
12
0 10 20 30 40 50
GD
P p
er
ca
pita
in P
PS
(ave
rage
gro
wth
19
99
-20
07
)
GDP per capita in thousands PPS (1999)
excl. 'new'
EA MS
all
countries
ATBE
EE
FI
FR
DE
IE
ITLU
NLPT
SK
SIESCY
LVLT
MT
-4
-3
-2
-1
0
1
2
3
4
5
0 20 40 60 80
GD
P p
er
ca
pita
in P
PS
(a
ve
rage
gro
wth
20
08
-13
)
GDP per capita in thousands PPS (2008)
excl. 'new'
EA MS
all
countries
Note: Countries which were in 1999 (left chart) and in 2008 (right chart) not members of the euro area are highlighted in red. The black regression line is
based on the full sample of countries, the blue one excludes the 'new' euro area Member States, which are highlighted in red.
Source: Eurostat.
GDP per capita (in PPS) before and after the start of the financial crisis
7
Imbalances and resource allocation
Increasing imbalances
-60
-40
-20
0
20
40
60
-6
-4
-2
0
2
4
6
8
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
NIIP
, %
of
co
un
try g
rou
p G
DP
CA
, %
of
co
un
try g
rou
p
CA - Creditors CA - Debtors
NIIP - Creditors NIIP - Debtors
Cumulative growth rate of non-
tradable/tradable value added
Source: Commission calculations based on AMECO and Eurostat
Center
Center
Periphery
Periphery
8
-5
0
5
10
15
20
25
EA center EA periphery
1999-2008 2009-2017
Content
9
1. Coming of age: has the euro delivered on its objectives?
2. EMU@20=EMU@10+10
3. Reforms during the crisis but job still not completed
4. Euro ins, pre-ins and outs: charting the future together
Origin of the EA crisis: my preferred reading
• A "sudden stop" crisis following capital misallocation in pre-crisis years
• A banking crisis triggered a feedback loop: bank solvency concerns higher bond yields and debt service default worries deeper recession
• The euro-area crisis was not a fiscal crisis (apart from Greece), but lack of fiscal space hindered the policy response during the crisis
• Heterogeneity in the euro area much larger than assumed before the crisis: different growth models and agglomeration effects
• Structural divergences during the first 10 years of EMU led to divergent social and political preferences "ultima ratio" mode
10
Upon sudden stops, short-term flows were replaced by central bank lending
11
* start in 2002 , ** start in 2004
Source: Eurostat
Central bank lending to EA
credit institutions
11
ECB intervention: rates and balance sheet
12Source:Macrobond, ECB
Fiscal policy tends to be pro-cyclical
Source: Commission calculations based on autumn 2018 Commission forecast13
Broadly
neutral fiscal
stance
Counter-cyclical
loosening
Pro-cyclical
loosening
Pro-cyclical
restriction
Counter-cyclical
restriction
Fiscal stance over the economic cycle, EA 2011-2018e
2011
2012
2013
2014
2015
2016
2017
2018e
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
-4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0
Ch
an
ge
in S
tru
ctu
ral
Ba
lan
ce (
pp
s. o
f G
DP
)
Output Gap (% of GDP)
Programs: the euro-area crisis was not a fiscal crisis (apart from Greece)
Ireland: €85bn, exit
in 2013
Five financial assistance programmes
Portugal: €78bn, exit in
2014
Spain: financial sector support; €40bn,
exit in 2014
Greece: 1st €110bn in 2010, 2nd
€172.6bn in 2012 and €86bn in
2015 €, exit in 2018
Cyprus: €10bn, exit in
201614
Content
15
1. Coming of age: has the euro delivered on its objectives?
2. EMU@20=EMU@10+10
3. Reforms during the crisis but job still not completed
4. Euro ins, pre-ins and outs: charting the future together
16
EMU reform during the crisis: an overview
The job is not completed
Complete Banking Union and Capital
Markets Union
Common fiscal stabilisation
function
Accountable institutions and
effective governance
Economic and social
convergence
1. Financial Union
2. Economic and
Fiscal Union
3. Institutions and
Governance
17
Policy integration in the financial sector is progressing
18
Private risk sharing
Reallocation of excess
savings via equity
Banking Union Capital Market Union
SSM,SRM
EDIS,SRF backstop
Action plan17 proposals
14 still on-going
Economic objectives
EU initiative
InstrumentsDelivered Pending Delivered Pending
18
Impact of a central stabilisation capacity in bad times
Source: Commission calculations based on autumn 2018 Commission forecast19
Fiscal stance over the economic cycle, EA 2011-2018
(2013) (2012)Broadly
neutral fiscal
stance
Counter-cyclical
loosening
Pro-cyclical
loosening
Pro-cyclical
restriction
Counter-cyclical
restriction
2011
2012
2013
2014
2015
2016
2017
2018e
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
-4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0
Ch
an
ge
in S
tru
ctu
ral
Ba
lan
ce (
pp
s. o
f G
DP
)
Output Gap (% of GDP)
Content
20
1. Coming of age: has the euro delivered on its objectives?
2. EMU@20=EMU@10+10
3. Reforms during the crisis but job still not completed
4. Euro ins, pre-ins and outs: charting the future together
The Euro and the Single market
21
The Euro createdto tackle the
“inconsistent quartet”
The Single Market: a priority area for
Denmark and Sweden
Single market perspective versus euro area perspective
22
Single Market Euro Area
Banking Union Protect deposits, boost pan-
European banking sector, promote
most efficient lending conditions
Break the sovereign-bank doom loop, foster
private risk sharing
Capital Market Union Financing, investment, saving Recycling of excess saving via equity
Stabilisation fund for
the euro area
Supplementing national stabilisers in case of
large shocks
Productivity boards,
Support reform
programme (including
Reform Delivery Tool)
Can improve the functioning of the
Single market
Increase economic resilience to reduce
agglomeration effects
Working methods of the Eurogroup / Eurogroup plus
Eurogroup
• Role set out in Protocol No 14 to the Lisbon Treaty
(entered into force on 1 December 2009)
• Who: EU-19 + relevant institutions (COM, ECB, …)
• President: elected for 2.5 years by EU-19
• Frequency: usually once a month, one day before Ecofin
• Work programme: set every 6 months
• Topics pertaining to the euro area: economic situation and
outlook, budgetary policies, macroeconomic situation,
structural reforms, EMU architecture, financial stability,
euro area enlargement
Eurogroup plus
• EU Member
States +
relevant
institutions
(COM, ECB, …)
• Architecture of
EMU (BU, ESM,
fiscal capacity)
23
Thank you!
24
Background slides
25
Structural reform uptake at national level
26
Source: OECD (PMR)