Presentation of Prof. Lars Feld - The Economic Situation in EMU - Where do we stand? - Held on 18 July 2018 at Bankenverband
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Presentation of Prof. Lars Feld - The Economic Situation in EMU - Where do we stand? - Held on 18 July 2018 at Bankenverband
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GCEE Business Cycle Update, March 2018: “In the euro area, the level of indebtedness of many member states remains very high. This is particularly true of Italy where the national debt stands at over 130 % of GDP. Should financial markets lose confidence in the sustainability of public debt on account of the political uncertainty resulting from the outcome of the election, given the size of the Italian economy a return of the euro crisis cannot be ruled out. Furthermore, risks to financial stability continue to persist in certain member states due to the fragility of many banks, particularly with regard to the extent of non-performing loans.”
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Presentation of Prof. Lars Feld - The Economic Situation in EMU - Where do we stand? - Held on 18 July 2018 at Bankenverband
- 1. 17 18 The Economic Situation in EMU – Where Do We Stand? Berlin, July 18, 2018 University of Freiburg and Walter Eucken Institut Prof. Dr. Dr. h.c. Lars P. Feld
- 2. 2 Economic growth in the euro area Euro area 7 100 2.3 2.3 (0.2) 1.9 1.5 1.5 (0.0) 1.6 9.1 8.3 (– 0.3) 7.9 including: Germany 29.2 2.2 2.3 (0.1) 1.8 1.7 1.7 (0.0) 1.7 3.8 3.5 (– 0.2) 3.4 France 20.7 1.8 2.1 (0.2) 1.8 1.2 1.6 (0.3) 1.5 9.4 8.6 (– 0.5) 8.1 Italy 15.5 1.5 1.4 (0.0) 1.2 1.3 0.9 (– 0.3) 1.2 11.3 10.7 (– 0.1) 10.3 Spain 10.3 3.1 2.5 (0.2) 2.1 2.0 1.6 (0.0) 1.6 17.2 15.6 (– 0.5) 14.7 Netherlands 6.5 3.1 2.8 (0.1) 2.1 1.3 1.8 (0.2) 2.4 4.9 3.9 (– 0.4) 3.6 Belgium 3.9 1.7 1.7 (0.1) 1.6 2.2 2.0 (0.2) 2.0 7.2 6.4 (– 0.9) 6.3 Austria 3.2 2.9 2.8 (0.3) 2.1 2.2 2.3 (0.4) 2.0 5.5 5.2 (– 0.2) 5.0 Ireland 2.6 7.8 6.6 (2.9) 3.8 0.3 1.0 (– 0.2) 1.2 6.7 5.5 (0.1) 5.0 Finland 2.0 2.7 2.4 (0.3) 2.1 0.8 1.0 (– 0.2) 1.3 8.6 8.3 (– 0.1) 7.9 Portugal 1.7 2.7 2.3 (0.4) 1.9 1.6 1.6 (– 0.2) 1.7 9.0 7.5 (– 0.7) 6.8 Greece 1.6 1.4 2.0 (0.0) 2.0 1.1 1.0 (– 0.1) 1.4 21.4 19.4 (– 0.6) 18.3 memorandum: Euro area without Germany 70.8 2.4 2.3 (0.2) 1.9 1.4 1.5 (0.1) 1.6 11.0 10.0 (– 0.4) 9.5 20195 Update Diff. to AR 2017/186 Update Diff. to AR 2017/186 Update Diff. to AR 2017/186 20195 2017 20185 20195 2017 20185 Gross domestic product, consumer prices and unemployment rates in the Euro area Country/ country group Weight in % 1 Gross domestic product2 Consumer prices (HICP) 3 Unemployment rate 4 Change on previous year in % % 2017 20185
- 3. 3 Economic growth in the euro area Assessment of factors limiting production by companies¹ 0 5 10 15 20 25 30 2006 08 10 12 14 16 2018 Shortage of labour %² 0 10 20 30 40 50 60 70 80 90 2006 08 10 12 14 16 2018 Insufficient demand %² 1 – Quarterly survey of industrial companies conducted by the European Commission. Companies are asked about the factors limiting production. Possible answers are: none, insufficient demand, shortage of labour, shortage of space and/or equipment, financial constraints, others. Multiple answers are possible. Seasonally adjusted data. In total about 24,000 industrial companies are surveyed in the euro area. Usually, about 18,000 of them respond. 2 – Share of companies. Source: European Commission © Sachverständigenrat | 18-052 Germany France Italy Spain Euro area
- 4. 4 Economic growth in the euro area 80 120 140 160 180 200 100 1991 94 97 00 03 06 09 12 15 2018 Germany Real GDP © 8 138Sachverständigenrat | 1 -Sources: OECD, own calculations 1991 = 100 France United Kingdom Italy Japan United States 90 110 120 130 140 150 160 100 1991 94 97 00 03 06 09 12 15 Germany Real GDP per capita © 8 139Sachverständigenrat | 1 -Sources: OECD, own calculations 1991 = 100 France United Kingdom Italy Japan United States 2017
- 5. 5 Large Euro countries and Japan lag behind the U.S. and the U.K. Particularly bad performance of Italy No or even slightly negative productivity growth between 1997 and 2007 Clearly negative productivity growth since 2007. Productivity in the euro area 90 110 120 130 140 150 100 1991 94 97 00 03 06 09 12 15 2018 Germany Labour productivity © 8 137Sachverständigenrat | 1 -Sources: OECD, own calculations 1991 = 100 France United Kingdom Italy Japan United States
- 6. 6 GDP per capita: Regional development 40 50 60 70 80 90 100 110 120 130 140 2000 2002 2004 2006 2008 2010 2012 2014 2016 Deutschland Deutschland = 100 Max-Min Bayern Nordrhein-Westfalen Hessen Sachsen © Sachverständigenrat | ns-gdp 40 50 60 70 80 90 100 110 120 130 140 2000 2002 2004 2006 2008 2010 2012 2014 2016 Italien Deutschland = 100 Max-Min Lombardei Latium Umbrien Kalabrien Italien © Sachverständigenrat | ns-gdp
- 7. 7 Differences in competitiveness in different member states still exist Structural reforms to increase productivity Particularly in good times Responsibility of national governments Convergence in the euro area Real effective exchange rates vis-a-vis the euro area 80 85 90 95 105 110 115 120 100 2000 02 04 06 08 10 12 14 1 quarter of 2000 = 100st ItalyGermany France © 7 455Sachverständigenrat | 1 - Sources: European Commission, own calculations Portugal Spain 2017
- 8. 8 Almost all member states comply with the 3 % deficit Maastricht limit by now But: Public debt ratios exceed the 60 % limit in 13 of 19 member states in 2016 High public debt ratios (not only) in the euro area Debt-to-GDP ratios of selected countries Largest member states of the EMU 0 50 100 150 200 1970 75 80 85 90 95 00 05 10 15 % of GDP G7 excluding member state fo the EMU 0 50 100 150 200 0 70 140 210 280 1970 75 80 85 90 95 00 05 10 15 % of GDP United States Canada United Kingdom Japan (right hand scale) © 7 425Sachverständigenrat | 1 - Sources: IMF, Mauro et al. (2015), own calculations 2017 ItalyGermany France Spain 2017 % Maastricht criterion
- 9. 9 Almost all member states comply with the 3 % deficit Maastricht limit by now But: Public debt ratios exceed the 60 % limit in 13 of 19 member states in 2016 High public debt ratios (not only) in the euro area Debt-to-GDP ratios of selected countries © 7 425Sachverständigenrat | 1 -Sources: IMF, Mauro et al. (2015), own calculations Other selected member states of the EMU 0 50 100 150 200 1970 75 80 85 90 95 00 05 10 15 % of GDP Programme countries in the EMU excluding Spain 0 50 100 150 200 1970 75 80 85 90 95 00 05 10 15 % of GDP 2017 BelgiumGreece Ireland PortugalCyprus 2017 Finland Netherlands Maastricht criterionMaastricht criterion Austria
- 10. 10 Sustainabilty gaps in the euro area -2 2 4 6 8 10 0 14 16 S1 S2 S1 S2 S1 S2 S1 S2 S1 S2 S1 S2 S1 S2 S1 S2 S1 S2 S1 S2 S1 S2 AT BE CY DE ES FI FR IE IT NL PT Sustainability gaps in selected euro area countries¹ % of GDP 1 – Calculations by the European Commission (Debt Sustainability Monitor 2016). The S1 indicator corresponds to the constant annual im- provement in the structural primary balance that is required over the next five years to reduce the current level of debt to 60 % of nominal GDP within fifteen years. The S2 indicator shows the percentage of GDP by which the structural primary balance would have to be adjusted compared to the status quo in the case of an infinite horizon to stabilize the debt-to-GDP ratio at its current level. AT-Austria, BE-Belgium, CY- Cyprus, DE-Germany, ES-Spain, FI-Finland, FR-France, IE-Ireland, IT-Italy, NL-Netherlands, PT-Portugal. No figures are provided for Greece. 2 -No-fiscal policy change scenario (assuming that the structural primary balance remains constant at the last forecast value), and taking into account the costs of demographic change. 3 - As a result of non-demographic factors such as technological change (new treatment methods). 4 - Structural primary balance gradually converges to the historical average for the past 15 years within four years. Source: European Commission © 7 282Sachverständigenrat | 1 - Baseline scenario2 Scenario with higher health and long-term care costs3 Scenario with historical values of the primary balance4
- 11. 11 Sustainabilty gaps in the euro area 1 – In relation steady-state GDP. 2 – Parameterization of the baseline scenario based on the values from Bi (2012) for the average of a group of 19 OECD member states. 3 – In the steady state, the ratio of government final consumption expenditure to GDP is 21.3 % in the baseline scenario, 18 % in the scenario with lower expenditure, and 24 % in the scenario with higher expenditure. 4 – Results for the baseline scenario. The diagram shows the values for the steady state of productivity (average productivity), as well as for realizations of the productivity shock, which are two standard deviations above or below this value. Simulation of the fiscal limit according to Bi (2012) Sources: Bi (2012), own calculations % 0 10 20 30 40 50 60 70 80 90 100 % Baseline scenario2 Higher government final consumption expenditure3 Probability of exceeding the fiscal limit for dif- ferent levels of government final consumption tion expenditure Probability of exceeding the fiscal limit for dif- ferent realizations of the productivity shock © 7 402Sachverständigenrat | 1 - Lower government final consumption expenditure³ 0 10 20 30 40 50 60 70 80 90 100 Debt-to-GDP ratio (%)1Debt-to-GDP ratio (%)1 Average productivity4 High productivity4 Low productivity4 80 100 120 140 160 180 200 220 80 100 120 140 160 180 200 220
- 12. 12 Spreads in the euro area 0 300 600 900 1 200 1 500 2008 09 10 11 12 13 14 15 16 17 2018 Ireland 10 year government bonds spreads © 8 142Sachverständigenrat | 1 - Sources: Thomson Reuters, own calculations Base points Italy Portugal Spain
- 13. 13 Spreads in the euro area
- 14. 14 Target2 Balances -600 -400 -200 0 200 400 600 800 1000 2001Jan 2002Jan 2003Jan 2004Jan 2005Jan 2006Jan 2007Jan 2008Jan 2009Jan 2010Jan 2011Jan 2012Jan 2013Jan 2014Jan 2015Jan 2016Jan 2017Jan 2018Jan Target2-Balances (Mrd €) ECB AUS BEL CYP DE EST ES FIN FR GR IRE IT LIT LUX LAT MA NET PT SLV SLK Out-NCBs
- 15. 15 GCEE Business Cycle Update, March 2018: “In the euro area, the level of indebtedness of many member states remains very high. This is particularly true of Italy where the national debt stands at over 130 % of GDP. Should financial markets lose confidence in the sustainability of public debt on account of the political uncertainty resulting from the outcome of the election, given the size of the Italian economy a return of the euro crisis cannot be ruled out. Furthermore, risks to financial stability continue to persist in certain member states due to the fragility of many banks, particularly with regard to the extent of non-performing loans.” Don‘t say, we‘ve not warned….
- 16. 16 Hoping for the best in Italy, but … Markets will further punish Italian political chaos: hence stop it. Ortherwise, it will bring us to the brink of the next Euro crisis. Ringfencing the Italian problem as good as it gets. ECB will only have restricted possibilities. Completion of banking union (fiscal backstop) is key. No further steps, rather defining conditions of access to the fiscal backstop restrictively, such that countries with low ratings are not allowed. For the time being, the Italian situation prevents Europe from further reforms. The Way Ahead….