convergence and divergence in the euro area and divergence in the euro area ... no clear real...
TRANSCRIPT
Convergence and divergence in the euro area
Servaas DEROOSE
Deputy Director-General European Commission, DG Economic and Financial Affairs
21st Dubrovnik Economic Conference 8 June 2015
Outline
1. What is the issue?
2. Review of convergence trends in EA
3. Looking ahead: EA – united in how much real divergence/heterogeneity?
2
3
What is the issue?
• What type of convergence?
o OCA and the synchronisation of business cycles
o Nominal convergence
o Real convergence
• Convergence to which frontier?
• Insufficient real convergence – would it be a problem?
• What policies/institutions to address the issue?
EA: Towards an Optimum Currency Area (OCA)?
Note: Green / orange / red stand for 'fulfilled' / 'partly fulfilled' / 'not fulfilled'.
4
Synchronisation of business cycles ('OCA meta criterion')
OCA criteria Reached in
Political and institutional integration
Trade integration
Inter-regional labour mobility
Wage flexibility
Mechanisms for fiscal transfers
Financial integration
1999? 2007? 2015?
5
While difference in real GDP growth returned to pre-crisis levels, cyclical differences remain high in the euro area
Real GDP growth rates
(dispersion)
Output gaps
(dispersion)
Note: Dispersion measured as an unweighted standard deviation.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1995 2000 2005 2010 2015*
EA-11
Current EA-19
EA changing
composition
0
1
1
2
2
3
3
4
4
5
1995 2000 2005 2010 2015*
EA-11
Current EA-19
EA changing
composition
6
Heterogenous propagation of common shocks
Note: Charts show the findings of a BVAR model conditional on the observed EA-12 GDP per capita. Shades of orange/yellow show the distribution of the conditional forecasts of a BVAR model in levels, excluding the lower and higher 5% quantiles. Solid blue line: the median of the distribution of the conditional forecasts in the BVAR in differences. Green line : actual values.
Source: European Commission (2015): Business cycle synchronisation in the euro area, Quarterly Report on the Euro Area, forthcoming.
Germany
2000 2005 2010-10
-5
0
5
10France
2000 2005 2010-10
-5
0
5
Portugal
2000 2005 2010-10
-5
0
5
10Greece
2000 2005 2010-10
-5
0
5
10
15
7
Euro area growth correlations are uneven, but no less than among US states
Source: Goldman Sachs (2014): What makes a monetary union work?, Global Economics Paper: 224.
8
Strong nominal convergence pre-EMU; limited further progress due to weak market pressure and policy complacency
HICP inflation
(dispersion)
10-year govt. bond yield (dispersion)
Public gross debt / GDP
(dispersion)
0
1
2
3
4
5
6
1995 2000 2005 2010
EA-11
Current EA-19
EA changing
composition
20
25
30
35
40
1995 2000 2005 2010 2015*
EA-11
Current EA-19
EA changing composition
Note: Dispersion measured as an unweighted standard deviation. "*" indicates projected values. HICP inflation measured as y-o-y growth rate of the HICP index. 10-year nominal govt. bond yield. Public gross debt in line with EDP definition based on ESA 2010.
Source: Ameco.
0
1
2
3
4
5
6
7
8
1995 2000 2005 2010 2015*
EA-11
Current EA-19
EA changing
composition
9
Real convergence: Catching-up process mostly driven by 'new' euro area Member States
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
AT
BE
EE
FI
FR DE
EL IE
IT
LU
NL PT
SK
SI
ES CY
LV
LT
MT
0
2
4
6
8
10
12
0 10 20 30 40 50
GD
P p
er
capita in P
PS
(avera
ge g
row
th 1
999-2
007)
GDP per capita in thousands PPS (1999)
excl. 'new' EA MS
all countries
AT BE
EE
FI
FR
DE
EL
IE
IT LU NL PT
SK
SI ES CY
LV LT
MT
-4
-3
-2
-1
0
1
2
3
4
5
0 20 40 60 80
GD
P p
er
capita in P
PS
(avera
ge g
row
th 2
008-1
3)
GDP per capita in thousands PPS (2008)
excl. 'new' EA MS
all countries
10
No clear real convergence trend across US States / regions either
Note: Blue entries relate to U.S. States, red entries to BEA regions. Real GDP per capita in thousand USD.
Source: U.S. Department of Commerce. Bureau of Economic Analysis (BEA).
Real GDP per capita before and after the start of the financial crisis
0
1
2
3
4
0 25 50 75 100 125 150
Real G
DP p
er
capita
(a
vera
ge g
row
th 1
999-2
007)
Real GDP per capita in thousands (1999)
US States
BEA regions
-4
-2
0
2
4
6
8
10
0 50 100 150 200
Real G
DP p
er
capita
(avera
ge g
row
th 2
008-1
3)
Real GDP per capita in thousands (2008)
US States
BEA regions
11
Unemployment rate
(dispersion)
Labour productivity
(dispersion)
0
1
2
3
4
5
6
7
EA-11
Current EA-19
Euro Area changing composition6
8
10
12
14
16
18
20
EA-11
Current EA-19
Euro Area changing composition
Note: Dispersion measured as an unweighted standard deviation. Total unemployment rate in line with Eurostat definition. Labour productivity measured as GDP at 2010 reference levels per hour worked. "*" indicates projected values.
Source: Ameco.
While unemployment rates converged prior to the crisis, there is no sign of productivity convergence
12
After the launch of EMU, capital flowed towards lower productivity economies, but largely to less productive sectors
Actual current account levels
(2007 and 2014, % of GDP)
Decomposition of growth in capital services by sector
(avg. annual contributions 1999-07)
Source: European Commission (2013): Catching-up processes in the euro area, Quarterly Report on the Euro Area, 12(1), p. 10.
Source: European Commission (2013): External rebalancing in the euro area: progress made and what remains to be, Quarterly Report on the Euro Area, 13(4), p. 30.
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
ES PT IE EL IT DE FR NL AT BE FI
Construction
Real estate activities
Services sectors/networkindustries/public utilities
-25
-20
-15
-10
-5
0
5
10
2007
2014
2007
2014
2007
2014
2007
2014
2007
2014
2007
2014
2007
2014
2007
2014
2007
2014
2007
2014
2007
2014
2007
2014
2007
2014
LV EL EE CY PT ES IE SK SI IT FR DE NL
Current account
Cyclically-adjusted CA
13
Financial fragmentation hampered the adjustment process, but has declined in the recent years
Interest rates on loans to non-financial corporations (dispersion)
Source: ECB.
0
0.5
1
1.5
2
0
2
4
6
8
10
12
14
04 05 06 07 08 09 10 11 12 13 14 15
loan volumes (lhs) interest rates (rhs)
14
Labour and product market rigidities contributed to the non-sustainable real convergence process
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
-5
0
5
10
15
20
0.5 1 1.5 2 2.5
Change in u
nem
plo
ym
ent
rate
(2009-1
4)
Product market rigidities (2008)
BE
DE
IE
EL
ES
FR
IT
NL
AT
PT SI
SK
-5
0
5
10
15
20
0 25 50 75 100
Change in u
nem
plo
ym
ent
rate
(2
009-1
4)
Change in unit labour costs (ULC) (2001-09)
15
Convergence to which frontier?
EMU frontier?
time
global frontier?
EMU average
Indicator of convergence
country B country C
country A
Minimum requirements?
16
Heterogeneity can be costly, but it can
be overcome by appropriate adjustment mechanisms
Insufficient real convergence: a problem?
Reduce heterogeneity by reinforcing single market integration, risk-sharing financial market integration and cross-border labour mobility, whilst allowing for
system competition and national idiosyncracies
Ensure adequate adjustment mechanisms which make heterogeneous economies resilient to shocks (asymmetric/common) and respond effectively to
internal and external imbalances
Economic argument
Political-economy argument
A monetary union of heterogeneous
economies depends on political
cohesion and identity
Monetary unions with heterogeneous economies can be sustainable as long as a certain degree of
political cohesion and identity exists, e.g. US, Belgium, Germany
If political cohesion is defined in terms of convergence of economic welfare levels and in the absence of large transfers, the sustainability
of heterogeneous monetary unions is less clear.
17
Types of reforms
Reforms to support potential output
(supply-side)
How to strengthen efficient functioning of EMU?
Shorter-term impact on the economic cycle
Medium-term impact on the economic trend
Increase sustainable economic growth
Foster sustainable real convergence
Reforms to strengthen the adjustment mechanism
(if actual output deviates from potential/ if need to
correct imbalances)
18
EMU policy priorities have evolved over time
Potential output
(supply side) Adjustment mechanism
EMU in 1999
Minimum harmonisation approach
• Single Market (acquis communautaire)
• Exceptions:(direct) taxation, labour and social compact, education, health
Limited emphasis
Institutional reforms in EMU since
2011
Limited emphasis
Macroeconomic Imbalance Procedure (MIP)
• Avoid excessive internal and external imbalances
• Still allows for a variety of country-specific settings
Banking and Capital Market Union
19
Which policy priorities to make EMU work?
Potential output
(supply side) Adjustment mechanism
Future EMU
• Prioritise the removal of medium-term bottlenecks to potential growth in the European Semester process
• Exploit the full potential of the Single Market as a key instrument to foster growth and convergence, with a focus on services and the digital economy
• Boost productive investment to support the sustainability of long-term growth
• Re-kindle catching-up convergence with a focus on Member States where catching-up has stalled
• Strengthen national adjustment and shock-absorption capacities by pursuing rigorous reforms in product and labour markets, including removing barriers to labour mobility
• Promote sustainable financial integration and reduce fragmentation by completing Banking Union
• Diversify corporate funding sources by implementing Capital Market Union
• Assure full play of strong fiscal automatic stabilisers by creating national fiscal buffers and adequate aggregate EA fiscal stance, aligned with the monetary stance (policy mix)
• Prevent harmful imbalances by consistent monitoring and corrective action (MIP/EIP)
20
Which governance for genuine EMU?
Deepening EMU governance
Future EMU
• Centralise or de-centralise EMU governance?
— Estalish an EMU Treasury/Debt Management Office, with EA-wide taxing and borrowing powers?
— Or, de-centralise fiscal responsibility by re-instating the no-bailout clause, in conjunction with a EA sovereign insolvency framework?
• Move from a rules-based to an institutions-based approach?
— Develop institutions with appropriate mandates within which they can act flexibly?
• Develop a limited EA fiscal capacity in the form of EU Unemployment Insurance scheme or EA Emergency Facility?
• Introduce systemtic stress-testing of national security systems to establish adequate floors and minimum efficiency standards for social safety nets?
• Create independent Productivity Councils at the national level to monitor trends in competitiveness , productivity and convergence?
• Monitor and benchmark national shock absorption and adjustment capacities?
• Establish minimum requirements for structural reforms?
— Labour markets, e.g. full portability of pension rights and enhanced recognition of qualifications
— Product markets, e.g. strengthening national competition authorities