The excessive imbalances
procedure (EIP)
Declan COSTELLO
European Commission
Directorate General for Economic and Financial Affairs
DNB and IMF workshop on «Preventing
macroeconomic imbalances in the euro area »
Amsterdam, 13-14 October
European Commission
Overall changes to economic governance
Excessive
Imbalances
Procedure
external and internal
imbalances
European Systemic
Risk Board
financial stability and
macro & micro level
Stability and
Growth Pact
The Europe 2020
Strategy
growth enhancing
structural reforms
fiscal policy
AND …. the ongoing debate on the EFSF and ESM as well
as Eurogroup goverance
External
imbalances
• External positions (e.g. current accounts,
net international investment positions)
• Competitiveness developments (e.g.
REERs, ULCs)
• Export performance (e.g. export market
shares)
Internal
imbalances
Broad scope of surveillance
• Private sector indebtedness (e.g. credit,
debt)
• Public sector indebtedness
• Assets markets (e.g. housing)
Example of ‘test’ early warning scoreboard: Portugal
2001-2010
EXTERNAL
INTERNAL
Threshold
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Current Account balance as a
percent of GDP
[+]/-4%
-9,6
-9,7
-8,4
-7,7
-8,4
-9,8
-10,4
-11,2
-11,2
-11,1
Net IIP as % of GDP, BoP data
-35%
-47,6
-54,8
-56,7
-63,0
-67,6
-78,5
-88,2
-96,1
-109,0
-107,6
+/-5% & +/-11%
-0,3
2,3
9,6
8,1
5,3
1,4
1,5
2,7
1,3
-2,4
% change (5 years) in Export
Market Shares
-6%
-6,2
1,6
-2,7
-2,9
-4,0
-5,6
-5,4
-13,1
-9,3
-8,5
ULC index (% change over 3
years) – thresholds 9%
(EA) and 12% (non EA)
+9% & +12%
11,1
12,0
11,4
8,3
8,6
5,5
5,7
6,0
8,7
5,4
% y-o-y change in House Prices
+6%
1,9
-2,2
-1,9
-1,9
-0,4
3,3
15,4
1,2
2,7
.
Private sector Credit flow as
percent of GDP
15%
22,5
12,7
9,8
10,7
14,5
17,2
24,9
21,0
7,1
3,0
Private sector debt as percent of
GDP
160%
187
192
197
198
206
215
229
245
252
248
Public sector debt as percent of
GDP
60%
51
54
55
56
62
64
63
65
76
83
% Change (3 years) of Real
Effective Exchange Rate
(REER) with HIPC
deflators
The preventive arm of the EIP
Policy response
No problem
Procedure stops.
Alert
mechanism
In-depth review
Economic reading
of early warning
scoreboard
indicators to
identify Member
States with
potential risks
Analysis to distinguish between
benign and harmful macroeconomic
developments and to identify policy
options
Imbalance exists
Commission/Council
recommendations
under Article 121.2
Severe imbalance
Commission/Council
recommendation
under Article 121.4
The Corrective Arm
Sufficient
Member
State is
placed in
“Excessive
Imbalance
Position”
abeyance
Corrective
Action
Plan
Surveillance of
compliance with
reform commitments
Insufficient Insufficient:
fine 0.1% of
GDP
interest
bearing
deposit
Insufficient:
Fine
0.1% of GDP
The Corrective Arm is INTRUSIVE and
FOCUSSED
Sufficient
Member
State is
placed in
an
Excessive
Imbalance
Position
abeyance
Corrective
Action
Plan
Surveillance of
compliance with
reform commitments
Fine 0.1% Insufficient:
of GDP
interest
bearing
deposit
Insufficient:
Fine
0.1% of GDP
… and works by reverse Qualified Majority
Voting
Sufficient
Member
State is
placed in
an
Excessive
Imbalance
Position
abeyance
Corrective
Action
Plan
Surveillance of
compliance with
reform commitments
Fine 0.1% Insufficient:
of GDP
interest
bearing
deposit
Insufficient:
Fine
0.1% of GDP
Challenges in applying the EIP
• Analytical
–
–
–
–
large degree of qualitative judgement especially if acting early
requires considerable country specific knowledge;
data limitations
limited consensus on policy responses.
• Political
– greater awareness of the costs of inaction and spillover effects;
– not easy to form blocking minorities;
– macro challenges with euro area spillovers that require micro
policy responses in areas of national competence
– … hinge on effective governance reforms of the Euro area
Additional slides
How the EIP fits into the European semester
(indicative based on timing of 1st year)
Oct
Nov
EU semster
deliverables
LIME and
Alert
EPC (and
mechanism
ECON
Committee)
In-depth
studies
Commission
to finalise
design
Dec
Jan
Feb
Mar
AGS (tbc)
AMR (tbc)
and
discussion in
ECOFINEurogroup
May
SCPs and
NRPs
Council
Commission adopts
Recommenda Recommenda
tions
tions
Commission undertakes in-depth reviews to
provide analytical basis for
recommendationss, can include missions
in liason with the ECB
Surveillance
under the
EIP
Commission with the support of EPC and LIME luanch thematic workstreams
on analytical tools and frameworks to be used in in-depth studies nd to help
underpin policy recommendations
* timing of recommendations under the corrective arm is not necessarily linked to the European semester timetable
Jun
Jul+
In-depth
reviews
released
Preventive
arm:
recommendati
ons under
Article 121,2
included as
part of June
package
Corrective
arm
recommendati
ons under
Article 121,4*
Recommend
ations
Thematic
work
streams
Apr
Progress report of EPC providing
initial guidance for
recommendations under the
European semester and to agree
longer-term work programme
Enhanced surveillance
requiring the submission of
Corrective Action Plan
Sustainability of macro-trends
• Early warning
• Deviation from equilibrium (competitiveness, credit
growth, housing prices)
Identification
of
problematic
• Other factors (GDP growth, demography, catching-up,
global imbalances, saving and investment imbalances,
housing and other asset markets, shocks)
• Policy determinants (fiscal policy, financial regulation,
labour market institutions)
imbalances
Adjustment capacity
• Price and wage flexibility
• Labour market flexibility
• Financial market intermediation
EIP
• Balance sheet adjustment
Spillovers
• Trade linkages
• Financial linkages
Policy options
Policy
Response
• Wage bargaining system
• Financial market regulation
• Fiscal policy
• Growth and structural reforms
Formal links between the EIP
and ESRB in the draft legsialtion
• Commission recommendation – in depth
studies "any early warnings or recommendations
from the ESRB relevant to the Member States
under review" into account
• European Parliament has proposed additional
cross references
– choice of indciators in the scoreboard
– alert mechanism report
Exploring the interlinkages between the EIP and ESRB
EIP
ESRB
Scope of surveillance External
imbalances, -macro-prudential oversight of the
competitiveness,
internal financial system
imbalances
Nature/approach
of surveillance
Prevention/correction
of Systemic risks to the financial
unsustainable
system
macroeconomic imbalances
Country specific
Monitoring
enforcement
and Annual exercise linked
European semester
Thematic
to Continuous process of surveillance
Possibility to address non-legally
warnings
and
Legal
policy binding
recommendations can be recommendations to Member States,
institutions,
national/EU
addressed to Member States EU
supervisory authorities – which can
Scope for financial sanctions be made public
on euro area Member States
Ensuring synergies
• Commission-ESRB: ECFIN Commissioner is permanent member
with voting rights on ESRB Steering Board and provides inputs
• ECOFIN-EFC-ESRB: Council can be a recipient of ESRB
recommendations or warnings and EFC President is a non-voting
member of ESRB
• EIP-ESRB-Parliament: ESRB required to present annual report to
Parliament and there will be regular meetings with ECON
Committee. Parliament is co-legislator for EIP and will be involved at
various steps of the procedure
– Cooperation at technical level between Commission, ESRB and ECB
Scope of surveillance under the EIP
• External imbalances
–
–
–
–
–
current account balance
net international investment position
change in REERs
change in nominal ULC
change in export market shares
• Internal imbalances
–
–
–
–
–
Private sector credit flow
Private sector debt
Change in house prices
General government sector debt
[financial/banking sector]