Download ECB response to the crisis

Euro area economy and
enlargement
at times of financial crisis
Visit of the Dutch House of Representatives
(Finance and Europe Committees)
Frankfurt am Main, 21 September 2009
Philippe Moutot
Deputy Director General Economics
1
Overview
1. Euro area economic activity and inflation
2. The monetary policy response to the crisis
3. The ECB‘s exit strategy
4. The fiscal policy response to the crisis
5. Euro area enlargement
2
Overview
1. Euro area economic activity and inflation
2. The monetary policy response to the crisis
3. The ECB‘s exit-strategy
4. The fiscal policy response to the crisis
5. Euro area enlargement
3
The unfolding of the crisis
• Turmoil started in 2007 in US as sub-prime crisis
• Intensification in autumn 2008 (Lehman Brothers)
• Functioning of money market seriously hampered
• Spill-over of financial stress to real economy  severe
downward impact on economic growth
4
World real GDP growth
8.00%
8.00%
quarter-on-quarter (RHS)
year-on-year (LHS)
6.00%
6.00%
4.00%
4.00%
2.00%
2.00%
0.00%
0.00%
-2.00%
-2.00%
-4.00%
-4.00%
-6.00%
1999
-6.00%
2000
Source: Eurostat.
Latest observations: 2009 Q1.
2001
2002
2003
2004
2005
2006
2007
2008
2009
5
Euro area real GDP growth
6.0
1.5
quarter on quarter percentage changes (RHS)
1.2
5.0
0.9
4.0
0.6
3.0
0.3
2.0
0.0
1.0
-0.3
0.0
-0.6
-1.0
-0.9
-2.0
-1.2
annual percentage changes (LHS)
-1.5
-3.0
-1.8
-4.0
-2.1
-5.0
-2.4
-6.0
-2.7
1999
2000
Source: Eurostat.
Latest observations: 2009 Q2.
2001
2002
2003
2004
2005
2006
2007
2008
2009
6
Euro area real GDP growth: historical perspective
quarter-on-quarter (LSH)
year-on-year (RHS)
8
8
6
6
4
4
2
2
0
0
-2
-2
-4
-4
-6
1970
-6
1974
Source: Eurostat.
Latest observation: 2009 Q2.
1978
1982
1986
1990
1994
1998
2002
2006
7
Euro area industrial production: historical perspective
Excluding construction production
quarter-on-quarter (LHS)
year-on-year (RHS)
20
20
15
15
10
10
5
5
0
0
-5
-5
-10
-10
-15
-15
-20
1960
-20
1965
Source: Eurostat.
Latest observation: 2009 Q2.
1970
1975
1980
1985
1990
1995
2000
2005
8
GDP growth forecasts / projections
Comparison of forecasts for euro area real GDP growth
(annual percentage changes)
Institution
Date of release
2009
2010
ECB staff macroeconomic projections
Sept. 2009
-4.4 - -3.8
-0.5 - 0.9
European Commission
May 2009
-4.0
-0.1
IMF
July 2009
-4.8
-0.3
OECD
June 2009
-4.8
0.0
ECB Survey of Professional Forecasters
2009 Q3
-4.5
0.3
Consensus Economics
August 2009
-4.3
0.6
Euro Zone Barometer
August 2009
-4.3
0.7
9
Eurosystem staff projections for euro area growth
 Real GDP growth between -4.4% and -3.8% in 2009
and between -0.5% and 0.9% in 2010
 Upwards revision of the range for both 2009 and
2010, reflecting the recent, more positive developments
and information
 GDP expected to continue to stabilise in second half
of 2009, before gradually recovering during 2010
 Projected improvement mainly supported by revival of
exports and positive effects of fiscal impulse on
domestic demand
10
Risks to the growth outlook
Risks are balanced and result from
 Effects from the macroeconomic stimulus from various policy
measures
 Confidence improvement
 Favourable developments in labour markets and foreign
demand
On the other hand
 Stronger impact on the real economy from the turmoil in
financial markets
 Increases in oil and other commodity prices
 Intensification of protectionist pressures
 Adverse developments in the world economy from disorderly
correction of global imbalances
11
Inflation
HICP, (percentage change compared to the previous year)
16
14
12
10
8
6
4
2
0
-2
1970
1975
1980
1985
1990
1995
2000
2005
Latest observation: August 2009.
Sources: BIS, Eurostat and ECB calculations
12
HICP inflation and contributions from energy
and foods
(percentage points, annual percentage changes)
4.5
Contribution of food component to overall HICP
Contribution of energy component to overall HICP
Overall HICP
HICP excluding food and energy
4.5
3.5
3.5
2.5
2.5
1.5
1.5
0.5
0.5
-0.5
-0.5
-1.5
-1.5
2004
2005
2006
2007
2008
2009
Source: Eurostat. Last observation: HICP August 2009.
13
Current labour market developments
Employment growth by sector
Labour cost indicators
Construction
Manufacturing
Market services
T otal economy
6.0
(annual growth
rates)
(annual growth rates)
6.0
6.0
Nominal unit labour costs
Real unit labour costs (GDP deflated)
Compensation per employee
Labour productivity
Background slides
4.0
2.0
6.0
4.0
5.0
5.0
2.0
4.0
4.0
3.0
3.0
0.0
0.0
2.0
2.0
-2.0
-2.0
1.0
1.0
-4.0
-4.0
0.0
0.0
-6.0
-6.0
-1.0
-1.0
-2.0
-2.0
-8.0
-8.0
-3.0
-3.0
-10.0
-10.0
2004
2005
2006
2007
2008
2009
-4.0
1999Q1
2001Q1
2003Q1
2005Q1
2007Q1
-4.0
2009Q1
Source: Eurostat and ECB.
14
Euro area unemployment rate
Percent of labour force
10.0
unemployment rate
9.5
9.0
8.5
8.0
7.5
7.0
6.5
1999
2000
Latest observation: July 2009.
Source: Eurostat.
2001
2002
2003
2004
2005
2006
2007
2008
2009
15
Inflation expectations
(annual percentage change)
4.0
4.0
3.0
3.0
2.0
2.0
Inflation expectations 5 to 10 years ahead
(Consensus Economics Forecasts)
HICP Inflation expectations, 5 years ahead (SPF)
1.0
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
1.0
Sources: Reuters, Consensus Economics and ECB. 1 ECB’s Survey of Professional Forecasters Gathers expectations for euro area inflation, economic activity and
unemployment from experts affiliated to financial or non-financial institutions based in the European Union. Latest observations: 20 August 2009.
16
Survey based and market inflation expectations in the euro area
Percent per annum
3.0
2.5
2.0
1.5
1.0
0.5
5-year BEIR (seas. adj.)
5-year forward 5 years ahead BEIR (seas. adj.)
1-year forward 4 years ahead BEIR (seas. adj.)
6 to 10 years ahead Consensus inflation forecast
Long term inflation expectations from SPF
0.0
2004
2005
Source: Reuters, Consensus, and ECB calculations.
Latest observation: 15 September 2009.
2006
2007
2008
2009
17
HICP forecasts
Comparison of forecasts for euro area consumer price inflation
(annual percentage changes)
Institution
Date of release
2009
2010
ECB staff macroeconomic projections
Sept. 2009
0.2 - 0.6
0.8 - 1.6
European Commission
May 2009
0.4
1.2
IMF
July 2009
0.3
0.6
OECD
June 2009
0.5
0.7
ECB Survey of Professional Forecasters
2009 Q3
0.4
1.1
Consensus Economics
August 2009
0.3
1.2
Euro Zone Barometer
August 2009
0.3
1.1
18
Eurosystem staff projections for euro area inflation
 Price and cost expected to remain dampened in the
wake of ongoing sluggish demand in the euro area and
elsewhere
 Annual HICP inflation projected between 0.2% and
0.6% in 2009 and between 0.8% and 1.6% in 2010
 Slight upward revision for both 2009 and 2010
compared with the June 2009 ECB staff projections,
reflecting mainly upward revisions to energy prices
19
Risks to the inflation outlook
Risks are broadly balanced and relate to
 weak outlook for economic activity
 higher than expected commodity prices
 stronger than currently expected increases in
indirect taxation and administered prices due to the
need for fiscal consolidation in the coming years
20
Overview
1. Euro area economic activity and inflation
2. The monetary policy response to the crisis
3. The ECB‘s exit-strategy
4. The fiscal policy response to the crisis
5. Euro area enlargement
21
Unprecedented response by the ECB to the crisis
Since the intensification of the financial crisis in autumn of 2008
… and against the background of rapidly receding inflationary
pressures …
… the ECB has taken a series of monetary policy and liquidity
management measures …
… unprecedented in nature, scope and timing
22
ECB response: strong decline in ECB interest
rates Percentages per annum; daily data
6.0
EONIA
5.0
marginal lending rate
4.0
main refinancing rate
3.0
2.0
1.0
deposit rate
0.0
Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09
Source: ECB
Last observations: 16 September 2009
23
ECB response to the crisis – enhanced
credit support
Primarily bank-based measures to enhance the flow
of credit beyond the standard interest rate channel
- Fixed-rate full allotment
- Expansion of collateral
- Longer-term liquidity provision
- Liquidity provision in foreign currencies
- Financial market support through purchases of covered
bonds
24
Different role played by banks in funding firms in
the euro area and the US
100
80
100
Non-Bank
80
Non-Bank
60
60
Banks
40
40
20
20
Banks
0
0
Euro Area
United States
Note: Breakdown of the sources of external financing of non-financial corporations, in percent, average 2004 – 2008
Source: ECB Monthly Bulletin, April 2009
25
Different financial structures in euro area and
the US
Breakdown of the financing of nonfinancial businesses in the US
(4-quarter moving sum of transactions, in USD bn)
Breakdown of the financing of nonfinancial corporations in the euro area
(4-quarter moving sum of transactions, in EUR bn)
bank loans
loans from private ABS issuers
trade credit
debt securities
shares and other equity
other financing
total financing
3000
3000
2500
2500
2000
1000
1000
800
800
600
600
400
400
200
200
2000
1500
1500
1000
1000
500
500
0
0
-500
-1000
2000
MFI loans
OFI loans
other financing
debt securities
shares and other equity (netted)
total financing
2002
2004
2006
0
-500
-200
-1000
-400
2000
2008
Sources: Board of Governors of the Federal Reserve System and ECB
Last observations: 2009 Q1
0
-200
-400
2002
2004
2006
2008
26
The Eurosystem’s balance sheet
In millions, euro
1,800
1,600
Start of
financial
turmoil
1,400
1,200
1,000
800
600
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09
Source: ECB
Last observations: End-of-August 2009
27
Loans to the private sector
Annual percentage changes; adjusted for seasonal and calendar effects
14
14
households
11
11
8
8
5
5
non-financial
corporations
2
2
-1
-1
2004
Source: ECB calculations.
Latest observations: July 2009
2005
2006
2007
2008
2009
28
MFI interest rates
Annual percentage points
Short-term
Long-term
consumer credit
loans for house purchase
small loans to non-financial corporations
large loans to non-financial corporations
3-months Euribor
loans for house purchase (over 5 and up to 10 years)
loans for house purchase (over 10 years)
small loans to non-financial corporations (over 5 years)
large loans to non-financial corporations (over 1 and up to 5 years)
large loans to non-financial corporations (over 5 years)
10
10
9
9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
2003
2004
2005
2006
2007
2008
2009
6
6
5
5
4
4
3
3
2
2
2003
2004
2005
2006
2007
2008
2009
Sources: ECB and Reuters.
Latest observations: MFI interest rates: July 2009; money market rates: 9 September 2009 (average of daily data).
29
Money market rates and spreads compared with
those in other major currencies
Spread between 12-Month
EURIBOR/LIBOR and EONIA/OIS*
(percent p.a.)
12-Month EURIBOR/LIBOR
(percent p.a.)
7
4
6
3.5
3
5
2.5
4
GBP SPREAD 12M
EUR SPREAD 12M
USD SPREAD 12M
2
3
1.5
2
◄ 1.29
◄ 1.28
◄ 1.20
1
0
Jul-07
1
◄ 0.89
◄ 0.68
◄ 0.59
0.5
0
Dec-07 May-08 Oct-08 Mar-09 Aug-09
Jul-07
Dec-07 May-08
Oct-08 Mar-09 Aug-09
GBP LIBOR 12M
EURIBOR 12M
USD LIBOR 12M
Sources: ECB, Bloomberg.
Latest observations: 7 September 2009.
* OIS: Overnight Index Swap rates
30
Overview
1. Euro area economic activity and inflation
2. The monetary policy response to the crisis
3. The ECB‘s exit strategy
4. The fiscal policy response to the crisis
5. Euro area enlargement
31
The ECB’s exit strategy to unwind the various
non-standard measures
•
The ECB has an exit strategy and is ready to act when the time comes
•
No pre-determined sequence between the exit from non-standard measures and
interest rate action  depends on the assessment of risks to price stability
•
Key elements
–
Exit will be part of the ECB’s monetary policy strategy
–
ECB's non-standard measures were designed with exit considerations in mind
–
The ECB has full technical capability and institutional independence to start exit
when needed
–
The ECB has established a track record for acting in a timely fashion
32
Overview
1. Euro area economic activity and inflation
2. The monetary policy response to the crisis
3. The ECB‘s exit strategy
4. The fiscal policy response to the crisis
5. Euro area enlargement
33
Fiscal measures
Fiscal measures to stabilise financial markets
 Bank rescue plans in 14 countries, new bail-outs planned
 € 136 bn in capital injections and €1.9 trillion in loan guarantees
 EA governments committed 26% of GDP to rescue banks
 Action on the global front to tackle root problems
European Economic Recovery Plan
 16 fiscal stimulus plans, 1.1% of GDP in 2009, 0.8% in 2010
 Extra budgetary measures and automatic stabilisers add up to an
overall stimulus of about 4.7 % of GDP over 2009 and 2010
 Action on structural reform priorities
34
Main fiscal indicators for EU countries
% of GDP
Balance
2007
2009
Debt
2010
2007
2008
2008
2009
2010
Belgium
Germany
Ireland
Greece
Spain
France
Italy
Cyprus
Luxembourg
Malta
Netherlands
Austria
Portugal
Slovenia
Slovakia
Finland
-0.2
-0.2
0.2
-3.6
2.2
-2.7
-1.5
3.4
3.6
-2.2
0.3
-0.5
-2.6
0.5
-1.9
5.2
-1.2
-0.1
-7.1
-5.0
-3.8
-3.4
-2.7
0.9
2.6
-4.7
1.0
-0.4
-2.6
-0.9
-2.2
4.2
-4.5
-3.9
-12.0
-5.1
-8.6
-6.6
-4.5
-1.9
-1.5
-3.6
-3.4
-4.2
-6.5
-5.5
-4.7
-0.8
-6.1
-5.9
-15.6
-5.7
-9.8
-7.0
-4.8
-2.6
-2.8
-3.2
-6.1
-5.3
-6.7
-6.5
-5.4
-2.9
84.0
65.1
25.0
94.8
36.2
63.8
103.5
59.4
6.9
62.1
45.6
59.4
63.5
23.4
29.4
35.1
89.6
65.9
43.2
97.6
39.5
68.0
105.8
49.1
14.7
64.1
58.2
62.5
66.4
22.8
27.6
33.4
95.7
73.4
61.2
103.4
50.8
79.7
113.0
47.5
16.0
67.0
57.0
70.4
75.4
29.3
32.2
39.7
100.9
78.7
79.7
108.0
62.3
86.0
116.1
47.9
16.4
68.9
63.1
75.2
81.5
34.9
36.3
45.7
Euro Area
-0.6
-1.9
-5.3
-6.5
66.0
69.3
77.7
83.8
Source: AMECO Database, European Commission. DG-ECFIN. Spring 2009.
35
Ten-year government bond spreads vis-à-vis Germany
Daily data in basis points
Source: Bloomberg, Datastream and ECB calculations.
Last observation: 15 September 2009.
36
A way back? Simulations of euro area government debt levels
Debt simulations (2011 onwards):
A debt simulation
120
• Assumptions: potential growth at
2.25%, starting values for 2010 given
by the Commission forecast
110
90
• Scenario 0 (red): no-change-policy
(constant primary deficit at 3.3% of
GDP)
80
70
60
Scenario 0
Scenario I
Scenario II
60 % of GDP
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
50
2010
% of GDP
100
• Scenario I (blue, see previous slide):
revenue ratio to GDP constant; real
expenditures constant; in sum:
consolidate by about 1 p.p. annually,
deficit close to balance by 2016
• Scenario II (purple): consolidate by
only 0.5 p.p. annually, balanced budget
reached by 2023
37
General principles for fiscal exit strategies
•
Condition of banking sector primary criterion for phasing out of
support to the financial sector
•
Fiscal exit should start no later than the economic recovery
•
Consolidation efforts should also take into account growth
prospects, the size of deficits and debt and long-term sustainability
•
Consolidation strategies should be in line with the Stability and
Growth Pact
•
Pace of consolidation must be maintained and stepped up in good
times
38
Lessons to be drawn? (1)
Make financial markets more effective by
 Stricter regulation of all financial market participants
and products
 More adequate capital requirements and accounting
rules
 Stronger international cooperation in financial
oversight
 Appropriate time horizon for macro-economic
policies
 Adjustment of banking models and remuneration
systems
39
Lessons to be drawn? (II)
Moreover:
Strengthen incentives that improve
disciplining forces of competition
Discourage “short-termism” and strengthen
concept of liability and responsibility
The value of monetary union has never been
greater than during this financial crisis
40
Overview
1. Euro area economic activity and inflation
2. The monetary policy response to the crisis
3. The ECB‘s exit strategy
4. The fiscal policy response to the crisis
5. Euro area enlargement
41
Benefits of euro adoption
a) For the individual country
•
stable exchange rates in relation to most important trading
partners
•
reduced transaction/information costs
•
credible framework for monetary policy and price stability =
low risk premia and low long-term interest rates
b) For the euro area
•
completion of the internal market for goods, services, labour
and capital
42
Risks related to premature euro adoption
a) For the individual country
•
differences in business cycles may lead to “suboptimal” interest rates in
the national context and the emergence of local “bubbles”/ “crises”
•
unless convergence is sustainable, a country can run into competitiveness
problems
•
without sufficient flexibility to adjust to changes in
competitiveness/shocks - risks of protracted economic losses.
b) For the euro area
•
could affect the credibility of EMU in case of lack of convergence.
43
The adjustment in the CEE Member States
Real GDP growth (annual percentage changes)
FLEXIBLE EXCHANGE RATES
FIXED EXCHANGE RATES
BG
15
EE
LV
LT
HU
CZ
PL
RO
15
10
10
5
5
0
1999
-5
2001
2003
2005
2007
2009
0
1999
2001
2003
2005
2007
2009
-5
-10
-10
-15
-15
Source: Eurostat.
44 44
The road to the euro
(as stipulated in the Treaty)
Optional:
Pre-ERM II phase
Accession to
the EU
ERM II
membership
Entry into ERM II
ERM II membership
Technical preparations
Adoption
of the
euro
Assessment of convergence,
formal decision on entry and
conversion rate
45
Convergence criteria
There are four criteria for examining economic convergence
•
•
Price stability
•
Fiscal position (general government deficit and debt)
•
Exchange rate
•
Long-term interest rate
In addition, “legal convergence” (i.e. compatibility of national
legislation) is examined
46
Exchange Rate Mechanism II: main features
•
Fixed but adjustable exchange rates vis-à-vis the euro
•
Standard fluctuation band ±15%
•
Central parity and fluctuation bands mutually agreed
•
Both the ECB and the Member State concerned can trigger a
review of the central parity
47
Exchange Rate Mechanism II (cont’d)
Considerations relating to ERM II entry
•
Case-by-case assessment based on equal treatment
•
Major policy adjustments (e.g. foreign exchange market and price
liberalisation) to be undertaken prior to entry
•
Need to follow credible fiscal consolidation path
•
Labour and product markets need to be flexible in order to reduce
the pressure on the exchange rate to adjust to shocks and changes
in the economic environment
•
The central rate should be close to the equilibrium value
•
New members are asked to undertake policy commitments
48
Exchange Rate Mechanism II (cont’d)
Length of participation
•
Minimum two-years prior to a (positive) convergence
examination
•
No restrictions on length of participation beyond minimum
period
•
Length of participation should be assessed on the basis of
what is most helpful to accompany the convergence process
49
Formal enlargement process - role of the ECB
•
Every second year, or at the request of a country, the ECB and the
European Commission report on the state of convergence in their
Convergence Reports
•
Case-by-case examination based on the convergence criteria and the
principle of equal treatment
•
Based on such examinations and on a proposal by the Commission,
the (ECOFIN) Council decides which countries fulfil the conditions
needed for adopting the euro
•
The Council will also decide the conversion rate at which the
national currency will be replaced by the euro (based on a proposal
by the Commission and after consulting the ECB)
50
Formal enlargement process – ECB Convergence
Reports
•
The Convergence Reports typically examine convergence in all
Member States with derogation.
•
Denmark and the United Kingdom have a special status in the
Treaty. For these two countries, Convergence Reports only have
to be provided if they so request.
51
Principles underlying the ECB’s convergence report
Convergence criteria:
•
Strict interpretation and application.
•
All must be satisfied (no hierarchy).
•
To be met on the basis of actual data.
•
Consistent, transparent and simple application.
•
To be achieved on a lasting basis (sustainability).
52
State of economic convergence – ERM II
Participation in ERM II with effect from
Bulgaria
-
Czech Republic
-
Estonia
Latvia
28 June 2004
2 May 2005
Lithuania
28 June 2004
Hungary
-
Poland
-
Romania
-
Sweden
-
53
Lessons to be drawn? (1)
Make financial markets more effective by
•
Stricter regulation of all financial market participants and products
•
More adequate capital requirements and accounting rules
•
Stronger international cooperation in financial oversight
•
Appropriate time horizon for macro-economic policies
•
Adjustment of banking models and remuneration systems
•
Global management of global risks ?
54
Lessons to be drawn? (II)
Moreover
•
Strengthen incentives that improve disciplining forces of
competition
•
Discourage “short-termism” and strengthen concept of liability
and responsibility
•
The value of monetary union has never been greater than
during this financial crisis
55