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)