EURO AREA AT THE CROSSROADS :

Transcription

1 INTERNATIONAL MONETARY FUND EURO AREA AT THE CROSSROADS : ECONOMIC GOVERNANCE AND OPTIONS FOR A FISCAL CAPACITY Jeffrey Franks Director, IMF Europe Office International Monetary Fund Based on IMF s 2016 Euro Area Article IV Staff Report European Parliamentary Research Service, October 20,

2 SUBDUED GROWTH IN ADVANCED ECONOMIES Real GDP Growth Projections (percentage change from a year earlier) World U.S. U.K. Japan Euro Area DEU FRA ITA ESP Revision from July Revision from July Source: IMF World Economic Outlook, October

3 GRADUAL RECOVERY IN EMERGING MARKETS Real GDP Growth Projections (percentage change from a year earlier) World EMDCs Brazil Russia India China Revision from July Revision from July Source: IMF World Economic Outlook, October

4 EURO AREA RECOVERY CONTINUES 115 Real GDP (2008=100) US Euro area Japan UK Source: Haver Analytics, and IMF staff calculations. 4

5 SUPPORTED BY FISCAL AND MONETARY POLICIES 0.5 Euro Area: Structural Balance Fiscal Impulse (Percent of potential GDP) 4 Euro Area: Corporate Lending Conditions (Percent) Loans to NFCs (y/y change) Change in credit standards (rhs) -5 Easing Tightening Q1 2012Q1 2014Q1 2016Q1 20 Source: IMF, World Economic Outlook (April 2016). Source: Haver Analytics. 5

6 BUT MEDIUM-TERM OUTLOOK FOR GROWTH AND INFLATION REMAINS WEAK 130 Euro Area: Real GDP Over Various Cycles (Index: business cycle peak Q = 100) Euro Area: Annual Inflation (percent) HICP: Total Q3 1992Q1 1980Q1 2008Q countries with negative inflation Min Max 8 countries with negative inflation Q 1 year 2 years 3 years 4 years 5 years 6 years 7 years 8 years 9 years 10 years Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Sources: ECB; WEO and IMF staff calculations. Sources: Eurostat and IMF staff calculations. 6

7 DUE TO CRISIS LEGACIES OF STILL HIGH UNEMPLOYMENT 15 Unemployment Rate since the Financial Crisis (Percent) * US EA Sources: Haver and IMF staff calculations. Note: */ after adjusting for changes in labor force participation. 7

8 AND SLOW PROGRESS IN DELEVERAGING 10 Nonperforming Loans and Write-offs 60 8 Gross NPL Write-off ratio (rhs) Percent of GDP Percent of Gross NPL United States * Euro area * Sources: Bloomberg, ECB, EBA Transparency Exercise (2015), U.S. Federal Reserve, IMF WEO, and IMF staff calculations. Note: */ as of end-sept for the United States and end-june 2015 for the Euro Area. 8

9 WEIGHING ON INVESTMENT 110 Real Investment (2008=100) 105 US Euro area 100 Japan UK Source: Haver Analytics, and IMF staff calculations. 9

10 LAGGING PRODUCTIVITY AND COMPETITIVENESS Service Sector Productivity,: US and Euro Area (Index 2007 = 100) ULC-based REER vis-a-vis Germany (Index, 1999Q1=100) EA FRA ITA ESP GRC PRT EA 11 (excl IRL and LUX) US Source: Haver Analytics Source: Haver Analytics. 10

11 COLLECTIVE, COMPREHENSIVE ACTION NEEDED TO BOLSTER GROWTH AND STRENGTHEN THE UNION Create better incentives for growthfriendly structural reforms Strengthen fiscal framework while expanding centralized fiscal support Comprehensive, more balance mix Accelerate balance sheet repair and complete the banking union Continue monetary policy accommodation 11

12 INTERNATIONAL MONETARY FUND OPTIONS FOR A CENTRALIZED FISCAL CAPACITY FOR THE EURO AREA Based on Euro Area Policies 2016 Selected Issues Paper Options for a Centralized Fiscal Capacity for the Euro Area October 20,

13 RATIONALE Motivation Common insurance against country-specific shocks in a currency union Policy context: Constrained monetary policy capacity (ZLB) Limited fiscal space Objectives Fiscal stabilization in the event of area-wide and/or countryspecific shocks Fiscal risk-sharing to limit contagion and mitigate need for crisis support 13

14 HOW TO DESIGN CENTRALIZED FISCAL SUPPORT IN THE EURO AREA? Three options Tax-transfer scheme Borrowing-lending scheme Small euro area budget 14

15 OPTION 1: TAX-TRANSFER SCHEME Tax transfers Reallocation Unemployment Insurance Citizens Member states Central Fiscal Capacity or Rainy Day Fund Member states 15

16 TAX-TRANSFER SCHEME Pros Enhances resilience to country-specific shocks Automatic and counter-cyclical Can be designed to be budget-neutral Can provide incentives for labor and labor taxation reforms Cons Limited capacity to address area-wide shocks, especially if budget-neutral Unemployment insurance is a lagged response to shocks Potentially redistributional, depending on design Without conditionality, might give rise to moral hazard 16

17 OPTION 2: BORROWING-LENDING SCHEME Borrowing Lending Private projects Bond Markets Central Fiscal Capacity Option 2: ESM+ Member states grants Member states capital EA chapter of EU budget 17

18 BORROWING-LENDING SCHEME Pros Enhances resilience to both country-specific and area-wide shocks Creates new fiscal space (countries can borrow at lower rates) New safe asset Can incentivize sound policies if conditional on compliance with rules Cons Political resistance to common borrowing, creates contingent liability Can crowd out national borrowing and raise interest rates for some countries Not automatic Without conditionality, might undermine fiscal discipline 18

19 OPTION 3: A SMALL EURO AREA BUDGET Transfers Various functions Member states or Own resources Central Fiscal Capacity Common public goods and/or Targeted support Citizens Member states + potential debt issuance 19

20 SMALL EURO AREA BUDGET Pros Enhances resilience to both country-specific and area-wide shocks Can provide automatic stabilization Common borrowing creates additional fiscal space and a new safe asset Can be conditional on compliance with rules Cons Political resistance to common taxation, borrowing and spending Can increase the overall tax burden and create contingent liability Potentially redistributional Can crowd out national borrowing Without conditionality, might undermine fiscal discipline 20

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22 INTERNATIONAL MONETARY FUND References Based on IMF s 2016 Euro Area Article IV Staff Report Building a Better Union: Incentivizing Structural Reforms in the Euro Area, IMF Working Paper 15/201, September Options for A Central Fiscal Capacity in the Euro Area, 2016 IMF Euro Area Selected Issues Paper A Strategy for Resolving Europe s Problem Loans and Tackling Small and Medium-Size Enterprise Loans in Europe, IMF Staff Discussion Notes 15/19 and 15/04, Comprehensive, Integrated Policies to Boost Euro Area Growth, 2016 IMF Euro Area Selected Issues Paper October 20,