The European Paradox
and the specificities of the challenges
ahead
Carlos da Silva Costa • Governor
28 abril 2014
XCVII Meeting of Central Bank Governors
of the Center for Latin American Monetary Studies
São Paulo, Brazil
The European Paradox
and the specificities of the challenges ahead
Euro Area has:
• Current account surplus
• Public debt ratio lower than other advanced economies
Current account balance
(percent of GDP)
4,0
Euro Area
3,0
UK
Public debt
(percent of GDP)
120
UK
100
USA
2,0
Euro Area
USA
1,0
80
0,0
-1,0
60
-2,0
40
-3,0
-4,0
20
-5,0
2 • Source: AMECO.
2014e
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
2014e
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
0
1995
-6,0
The European Paradox
and the specificities of the challenges ahead
Euro Area has:
• Fiscal deficits lower than other advanced economies
• Low inflation in line with other advanced economies
Fiscal Balance
(percent of GDP)
Inflation
(YoY, per cent)
6,0
Euro Area
4,0
UK
5,0
UK
4,0
USA
2,0
Euro Area
0,0
USA
3,0
-2,0
2,0
-4,0
-6,0
1,0
-8,0
-10,0
0,0
-12,0
2014e
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
2013
2014e
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
3 • Source: AMECO.
1995
-1,0
-14,0
The European Paradox
and the specificities of the challenges ahead
But, large internal imbalances were built up in the years prior to the crisis:
• Countries under stress: accumulated significant external deficits and
competitiveness losses
• High-rated countries: registered persistent current account surplus
Current account balance
(percent of GDP)
Nominal Unit Labour Costs
(index, 1995=100)
160,0
15,0
13,0
11,0
9,0
7,0
5,0
3,0
1,0
-1,0
-3,0
-5,0
-7,0
-9,0
-11,0
-13,0
-15,0
150,0
Countries under
stress
140,0
High-rated
countries
130,0
120,0
110,0
High-rated
countries
100,0
90,0
Note: High-rated countries include Belgium, Germany, France, Netherlands and Austria; Countries under stress
include Greece, Ireland, Italy, Spain and Portugal.
4 • Source: AMECO.
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
2013
2012
2011
2010
2009
2008
2007
2006
80,0
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
Countries under
stress
The European Paradox
and the specificities of the challenges ahead
• Countries under stress: budget deficits; significant accumulation of debt by
the private sector
• High-rated countries: budget deficits (more moderate); the private sector
maintained (in general) a net lending position
Net lending (+) or net borrowing (-) Net lending (+) or net borrowing (-)
by corporations
by households
(percent of GDP)
(percent of GDP)
Fiscal balance
(percent of GDP)
8,0
15,0
13,0
11,0
9,0
7,0
5,0
3,0
1,0
-1,0
-3,0
-5,0
-7,0
-9,0
-11,0
-13,0
-15,0
10,0
4,0
6,0
High-rated
countries
4,0
2,0
2,0
Note: High-rated countries include Belgium, Germany, France, Netherlands and Austria; Countries under stress
include Greece, Ireland, Italy, Spain and Portugal.
5 • Source: AMECO.
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-4,0
1999
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
-4,0
1998
Countries under
stress
-2,0
Countries under
stress
-2,0
1997
0,0
1996
Countries under
stress
0,0
1995
High-rated
countries
High-rated
countries
6,0
8,0
The European Paradox
and the specificities of the challenges ahead
• Countries under stress: an economic growth model based on the dynamics of
the domestic demand, which proved unsustainable
• High-rated countries: more favourable growth performance
Private consumption
(YoY, per cent)
Gross Domestic Product
(YoY, per cent)
6,0
5,0
3,0
3,0
2,0
2,0
1,0
0,0
High-rated
countries
1,0
-1,0
-2,0
-1,0
Note: High-rated countries include Belgium, Germany, France, Netherlands and Austria; Countries under stress
include Greece, Ireland, Italy, Spain and Portugal.
6 • Source: AMECO.
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
1998
-2,0
1997
2014
2013
2012
2011
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
-5,0
1995
-6,0
2010
Countries under
stress
-4,0
1996
-3,0
Countries under
stress
-4,0
0,0
1995
-2,0
2000
High-rated
countries
0,0
Countries under
stress
1999
2,0
4,0
High-rated
countries
4,0
4,0
Potential Output
(per cent)
The European Paradox
and the specificities of the challenges ahead
• Countries under stress: higher non-sustainable employment growth (e.g.
construction and retail); higher inflation rates
• High-rated countries: moderate but more stable employment growth rates
Employment
(annual rate of change, per cent)
Inflation
(per cent)
6,0
5,0
Countries under
stress
4,0
3,0
Countries under
stress
5,0
2,0
4,0
1,0
3,0
0,0
2,0
-1,0
High-rated
countries
-2,0
-3,0
High-rated
countries
1,0
0,0
-4,0
Note: High-rated countries include Belgium, Germany, France, Netherlands and Austria; Countries under stress
include Greece, Ireland, Italy, Spain and Portugal.
7 • Source: AMECO.
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1995
-1,0
-5,0
The European Paradox
and the specificities of the challenges ahead
Euro Area Member States with very different starting positions
The two crises: financial crisis + debt crises
affected differently the different Member States
Fragmentation of the Monetary Union:
The crisis revealed that
the institutional
framework of the euro
area was not adequate
to ensure
macroeconomic and
financial stability and to
deal with the crisis
8•
• Stop of external finance to some
sovereigns;
• “renationalization” of the banking
system;
• Corporations and households of
Member States face very different
financing costs depending on their
geographical location in spite of identical
risk/return.
The European Paradox
and the specificities of the challenges ahead
Financial Fragmentation in the context of the crisis:
• Non- financial corporations and households in countries under stress face higher
financing costs; negative implications for competitiveness of corporations of countries
under stress
7,0
Interest rates on new MFI loans
to non financial corporations
(per cent)
8,0
6,0
5,0
7,0
Countries under
stress
4,0
Countries under
stress
6,0
5,0
4,0
3,0
3,0
2,0
Interest rates on MFI loans to
households
(per cent)
2,0
High-rated
countries
1,0
Jan.03 Abr.04 Jul.05 Out.06 Jan.08 Abr.09 Jul.10 Out.11 Jan.13
High-rated
countries
1,0
0,0
Jan.03 Abr.04 Jul.05 Out.06 Jan.08 Abr.09 Jul.10 Out.11 Jan.13
Note: High-rated countries include Belgium, Germany, France, Netherlands, Austria and Finland; Countries under
stress include Greece, Ireland, Italy, Spain, Portugal and Cyprus.
9 • Source: ECB MFI interest rates statistics and Banco de Portugal calculations.
The European Paradox
and the specificities of the challenges ahead
The European Response
Immediate Response
 Eurosystem provided significant amounts of liquidity to banks
 Official finance to sovereigns were provided in the context of Adjustment
Programmes
 Firewalls were created: EFSF/ESM
Further response
 Reinforced governance, surveillance and coordination framework:
• Reinforced Stability and Growth Pact ("Six-Pack”)
• Set up the "European semester" of integrated multilateral economic and
budgetary surveillance
• Introduce a new procedure for macroeconomic surveillance: Macroeconomic
Imbalance Procedure ("Six-Pack“ )
• Enhance economic surveillance, coordination, integration and convergence
amongst euro area Member States (“Two-Pack”)
• Treaty for Stability, Coordination and Governance further strengthens
budgetary discipline and economic governance among these Member States
(entered into force on 1 January 2013)
 Reinforced financial integration: creation of the Banking Union
10 •
The European Paradox
and the specificities of the challenges ahead
Lessons to take:
1.
Unsustainable economic policies will pass wrong signals that will induce:
- Misallocation
of capital and labour
- Default of economic agents that followed the misleading policy signals
- Sub-optimal economic growth (stop and go)
2.
The absence of an integrated economic and fiscal policy leads to:
- Financial fragmentation
- Limited ability of common monetary policy to stimulate demand and
investment
3.
A successful integration process calls for greater coordination of fiscal policy, economic
policy and policy in general and new steps in fiscal and economic integration
- Need for institutional arrangements to deal with unsustainable and inconsistent policies
followed by countries that are part of the integration process
- Need for stronger mechanisms that reinforce policy coordination taking into account
the imperative of the whole over its parts and the need for a sustainable equilibrium of
each part
- Need for new steps in fiscal and economic integration and in policy democratic
legitimacy
11 •
The European Paradox
and the specificities of the challenges ahead
Challenges that need to be tackled ahead
Responsibility
It is not possible to reinforce the area as a whole without the
acceptance by the parties of the rules resulting from the whole
Solidarity
It is not possible to guarantee the stability of the whole without
policy instruments to absorb shocks that Member State are
subject
Idiosyncratic
shocks
Common shocks
12 •
Common approaches to deal with
idiosyncratic effects
Not resulting
from local
policies
Common approaches to deal with
idiosyncratic effects
Resulting
from local
policies
Responsibility Approach
(even if solidarity is justified)
The European Paradox
and the specificities of the challenges ahead
Thank you.
13 •