Europe Economic Outlook:Is There Light at the End of the Tunnel?

DR. PETR ZEMCIK, DIRECTOR – ECONOMIC RESEARCH

WEBINARJune 6, 2013

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Outline

• Today’s economy• Structural adjustment• Private debt and the real economy• Austerity and tight credit• Banking union• Monetary policy• Outlook

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Today’s Economy1

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Source: Moody’s Analytics

Expansion

In recessionAt riskRecovery

May 2013

Global Business Cycle Status

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Source: Moody’s Analytics

Expansion

In recessionAt riskRecovery

May 2013

Europe Business Cycle Status

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Structural Adjustment2

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00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F90

100

110

120

130

140

150Germany Ireland Greece Spain France Italy

Labor Costs Declining in Some CountriesUnit labor costs, 2000=100

Sources: EU Commission, Moody’s Analytics

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NetherlandsGermany

IrelandAustria

Euro areaItaly

SpainPortugal

FranceGreece

U.K.Cyprus

-10 -8 -6 -4 -2 0 2 4 6 8 10 12

2013F20122011

Competitiveness Improves on the Periphery

Sources: Consensus Economics, Moody’s Analytics

Current account, % of GDP

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Private Debt and the Real Economy3

13

Private Debt High in Cyprus and Low in Italy

Sources: Eurostat, Moody’s Analytics

Private sector debt as % of GDP

00 01 02 03 04 05 06 07 08 09 10 1150

100

150

200

250

300France Germany Italy Portugal

Spain Cyprus U.K.

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Germany

France

Italy

Euro zone

Portugal

Spain

Cyprus

Greece*

0 10 20 30 40 50 60 70

Youth unemployment

Jobless rate

Labor Market Dualism Needs to Be Reduced

Sources: Eurostat, Moody’s Analytics

Unemployment rate in Mar, %

* as of Feb 2012

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06 06 07 07 08 08 09 09 10 10 11 11 12 12 1350

60

70

80

90

100

110

120

U.K. Spain

Ireland Portugal

Netherlands

Unemployment Weighs on House Prices…House prices, 2006Q1=100

Sources: National statistics offices, Moody’s Analytics

16

80

100

120

140

160

Norway

Sweden

Switzerland

…Although There Are ExceptionsHouse prices, 2006Q1=100

Sources: National statistics offices, Moody’s Analytics

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Austerity and Tight Credit4

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Government Debt Rising Sharply Across Europe

Sources: IMF, Moody’s Analytics

Italy Greece

Spain Slovenia

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Cyclically adj balance,% of potential GDP

Fiscal space, ppts

2010 2011 2012 2013 Sep-12 Dec-12 Apr-13

Germany -3.5 -1 0.1 0.0 158.9 158.3 154

U.K. -8.6 -6.5 -5.4 -4.3 137.4 136.7 128.7

France -5.1 -3.9 -3.1 -1.9 112.3 128.7 103.4

Ireland -8.7 -7.0 -6.0 -5.5 57.8 93.1 97.6

Spain -8.3 -7.6 -5.1 -4.2 0.0 0.0 85.1

Portugal -9.7 -3.6 -3.0 -3.0 0.0 0.0 0.0

Italy -3.4 -2.8 -1.2 -0.2 0.0 0.0 0.0

Greece -12.2 -8.2 -2.7 0.2 0.0 0.0 0.0

Does Austerity Bear Fruit?

Sources: IMF, Moody’s Analytics

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May-

11

Jun-11

Jul-

11

Aug-

11

Sep-

11

Oct-11

Nov-

11

Dec-

11

Jan-12

Feb-12

Mar-

12

Apr-

12

May-

12

Jun-12

Jul-

12

Aug-

12

Sep-

12

Oct-12

Nov-

12

Dec-

12

Jan-13

Feb-13

Mar-

13

3

4

5

6

7

8

9Germany Spain France Italy Potugal

Borrowing Costs Higher in Spain, Italy & Portugal

Sources: ECB, Moody’s Analytics

Interest rates, new loans, NFCs, maturity 1-5 yrs, up to €1 mil, %

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Banking Union5

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0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 380

85

90

95

100

105

110

Cyprus SpainItaly PortugalGreece Slovenia

Bank Runs Are a PossibilityBank deposits, Jul 2011=100

Sources: Bloomberg, Moody’s Analytics

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Assets 30.4 Liabilities+equity 30.4

Loans 24.9 Central and other banks 10.2

Other 5.5 Deposits 17.9

Loans 1.4

Equity 1

Bail-In Now Acceptable

Assets 36.2 Liabilities+equity 36.2

Loans 30.8 Central and other banks 4.1

Other 5.4 Deposits 27.9

Loans+other 1.9

Equity 2.3

Laiki Bank, 2012Q3, ₡ bil

Bank of Cyprus, 2012Q3, ₡ bil

Sources: Public financial statements, Moody’s Analytics

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Monetary Policy6

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Mar-02 Sep-04 Mar-07 Sep-09 Mar-12-10

-5

0

5

10

15

Policy rate Euro zone SpainGermany

One Size Does Not Fit AllTaylor rule implied policy rate, %

Sources: ECB, Bloomberg, Moody’s Analytics

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Jan-1203 January 201204 January 201205 January 201206 January 201209 January 201210 January 201211 January 201212 January 201213 January 201216 January 201217 January 201218 January 201219 January 201220 January 201223 January 201224 January 201225 January 201226 January 201227 January 201230 January 201231 January 201201 February 201202 February 201203 February 201206 February 201207 February 201208 February 201209 February 201210 February 201213 February 201214 February 201215 February 201216 February 201217 February 201220 February 201221 February 201222 February 201223 February 201224 February 201227 February 201228 February 201229 February 201201 March 201202 March 2012Mar-1206 March 201207 March 201208 March 201209 March 201212 March 201213 March 201214 March 201215 March 201216 March 201219 March 201220 March 201221 March 201222 March 201223 March 201226 March 201227 March 201228 March 201229 March 201230 March 201202 April 201203 April 201204 April 201205 April 201209 April 201210 April 201211 April 201212 April 201213 April 201216 April 201217 April 201218 April 201219 April 201220 April 201223 April 201224 April 201225 April 201226 April 201227 April 201230 April 201201 May 201202 May 201203 May 201204 May 201207 May 2012May-1209 May 201210 May 201211 May 201214 May 201215 May 201216 May 201217 May 201218 May 201221 May 201222 May 201223 May 201224 May 201225 May 201228 May 201229 May 201230 May 201231 May 201201 June 201204 June 201205 June 201206 June 201207 June 201208 June 201211 June 201212 June 201213 June 201214 June 201215 June 201218 June 201219 June 201220 June 201221 June 201222 June 201225 June 201226 June 201227 June 201228 June 201229 June 201202 July 201203 July 201204 July 201205 July 201206 July 201209 July 2012Jul-1211 July 201212 July 201213 July 201216 July 201217 July 201218 July 201219 July 201220 July 201223 July 201224 July 201225 July 201226 July 201227 July 201230 July 201231 July 201201 August 201202 August 201203 August 201206 August 201207 August 201208 August 201209 August 201210 August 201213 August 201214 August 201215 August 201216 August 201217 August 201220 August 201221 August 201222 August 201223 August 201224 August 201227 August 201228 August 201229 August 201230 August 201231 August 201203 September 201204 September 201205 September 201206 September 201207 September 201210 September 2012Sep-1212 September 201213 September 201214 September 201217 September 201218 September 201219 September 201220 September 201221 September 201224 September 201225 September 201226 September 201227 September 201228 September 201201 October 201202 October 201203 October 201204 October 201205 October 201208 October 201209 October 201210 October 201211 October 201212 October 201215 October 201216 October 201217 October 201218 October 201219 October 201222 October 201223 October 201224 October 201225 October 201226 October 201229 October 201230 October 201231 October 201201 November 201202 November 201205 November 201206 November 201207 November 201208 November 201209 November 201212 November 2012Nov-1214 November 201215 November 201216 November 201219 November 201220 November 201221 November 201222 November 201223 November 201226 November 201227 November 201228 November 201229 November 201230 November 201203 December 201204 December 201205 December 201206 December 201207 December 201210 December 201211 December 201212 December 201213 December 201214 December 201217 December 201218 December 201219 December 201220 December 201221 December 201227 December 201201 January 201302 January 201303 January 201304 January 201307 January 201308 January 201309 January 201310 January 201311 January 201314 January 201315 January 201316 January 201317 January 201318 January 201321 January 2013Jan-1323 January 201324 January 201325 January 201328 January 201329 January 201330 January 201331 January 201301 February 201304 February 201305 February 201306 February 201307 February 201308 February 201311 February 201312 February 201313 February 201314 February 201315 February 201318 February 201319 February 201320 February 201321 February 201322 February 201325 February 201326 February 201327 February 201328 February 201301 March 201304 March 201305 March 201306 March 201307 March 201308 March 201311 March 201312 March 201313 March 201314 March 201315 March 201318 March 201319 March 201320 March 201321 March 201322 March 201325 March 2013200

250

300

350

400

450

500

550

600

650

700

300

500

700

900

1,100

1,300

1,500

1,700Italy (L) Spain (L) Cyprus (R)

OMTs announced

Italy’s elections

Bailout for Cyprus

Yield Spreads May Rise Again

Sources: Bloomberg, Moody’s Analytics

Spread on 10-yr government bond yield vs. German bund, bps

LTROs

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04 05 06 07 08 09 10 11 12 13-10

-5

0

5

10

15

20

25

30Japan Euro zone U.S. U.K.*

*M4

Central Banks May Refocus on Money SupplyAnnualized growth of money supply, M3, %

Sources: Central banks, Moody’s Analytics

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04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12290

310

330

350

370

390

410

430Actual nominal GDP

An illustrative precrisis nominal GDP trend

Will the BoE Target Nominal GDP?GDP, £ bil

Sources: ONS, HM Treasury, Moody’s Analytics

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1313131314141414151515151616161617171717181818180

5

10

15

20

25

30

35

40

45

50

Risk of Stagflation in the U.K.Stagflation probability under the baseline assumptions, %

Source: Moody’s Analytics

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Outlook7

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Recipe for Growth?

• Restructuring of the banking sector• Fiscal consolidation

- Cut spending rather than raise taxes- Long-term view: pensions, healthcare, welfare- Tax collection

• Privatization• Structural reforms

- Labor market- Goods and services market: energy, housing,

tourism

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12 13 14 15 16 12 13 14 15 16 12 13 14 15 16 12 13 14 15 1695

100

105

110

115

120

125

Euro zone

Will Europe Ever Get Its Groove Back?Real GDP, 2008Q1=100

Sources: Government sources, Moody’s Analytics

World

U.K.

U.S.

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12 13 14 15 16 12 13 14 15 16 12 13 14 15 16 12 13 14 15 160

2

4

6

8

10

Rus-sia

Emerging Markets Drive Global GrowthReal GDP growth

Sources: Government sources, Moody’s Analytics

China

Brazil

India

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