i AGS independent Annual Growth Survey www iagsproject

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i. AGS independent Annual Growth Survey www. iags-project. org 2016 Give Recovery a Chance

i. AGS independent Annual Growth Survey www. iags-project. org 2016 Give Recovery a Chance 23 rd meeting of the Europe 2020 Steering Committee press contact : [email protected] org [email protected] org

i. AGS independent Annual Growth Survey www. iags-project. org 2016 i. AGS is an

i. AGS independent Annual Growth Survey www. iags-project. org 2016 i. AGS is an independent project under creative commons license with the financial support from the S&D Group of the European Parliament

i. AGS 2016 A too slow recovery n Some positive factors ¨ ¨ ¨

i. AGS 2016 A too slow recovery n Some positive factors ¨ ¨ ¨ n Monetary policy&exchange rate; oil prices Slow down of emerging markets, war of currencies (somehow linked to positive factors) Less fiscal consolidation But ¨ ¨ Persistant risk of deflation, monetary policy alone Growing inequalities in the EA Source: LFS, Eurostat, lfsa_eppgai, lfsa_eppgan, lfsa_pganws www. iags-project. org Source: EU Silk, 2016 i. AGS calculations

i. AGS 2016 A too-slow recovery n Strong external push ¨ ¨ n Oil,

i. AGS 2016 A too-slow recovery n Strong external push ¨ ¨ n Oil, exchange rates Emerging economies slowdown not yet completely accounted for Pause in fiscal policy Agressive monetary stance Recovery remains weak and uneven ¨ ¨ Regional divergence is still there Italy is lagging 2010 2011 2012 2013 2014 2015 2016 2017 2. 0 1. 7 -0. 8 -0. 2 0. 9 1. 6 2. 0 1. 9 Oil price deviation from 100$/b 0. 0 -0. 3 -0. 2 0. 0 0. 1 0. 5 0. 3 0. 2 Price competitiveness 0. 3 0. 4 0. 5 0. 1 -0. 2 0. 3 0. 4 0. 2 Financial conditions 0. 0 -0. 1 -0. 9 -0. 3 0. 0 0. 1 0. 0 -0. 2 -1. 3 -2. 4 -1. 3 -0. 6 -0. 2 -0. 3 2014 Emerging countries slowdown 0. 0 -0. 2 -0. 4 -0. 2 Carry on (quarterly profile) 0. 1 0. 4 -0. 2 -0. 4 -0. 3 -0. 5 -0. 3 -0. 1 0. 0 0. 2 -1. 0 -3. 1 -1. 8 -1. 1 -0. 1 0. 0 2. 1 3. 2 2. 8 2. 1 1. 6 1. 7 1. 9 GDP effect of … on GDP Fiscal policy Other Sum of above effects Growth in the absence of effects Potential growth Output gap Figure 1. GDP per head www. iags-project. org 0. 9 0. 8 0. 9 1. 1 -2. 0 -0. 8 -2. 0 -2. 9 -2. 2 -1. 1 -0. 3 Figure 5. Inflation expectations are measured using 5 Years Forward 5 Years Swap. Source: Datastream

i. AGS 2016 Euro area is lagging behind Figure 2. EA vs USA vs

i. AGS 2016 Euro area is lagging behind Figure 2. EA vs USA vs UK www. iags-project. org

i. AGS 2016 Internal and external rebalancing are fueling deflationary pressures 5 Figure 3.

i. AGS 2016 Internal and external rebalancing are fueling deflationary pressures 5 Figure 3. Current account in % of EA GDP 4 Euro area 3 Austria Netherlands 2 Germany 1 Belgium Portugal 0 Ireland -1 Greece Italy -2 Spain -3 -4 France 2007 2008 2009 2010 2011 2012 2013 2014 2015 Upward shift of current account is a consequence of lower raw material prices, low internal demand unconventional monetary policy. Source: national accounts, ECB, i. AGS 2016 calculations. Current account is cumulated over 4 quarters. Table 4: Nominal adjustment for value added prices (relative to Germany) 2008 2009 2010 2011 2012 2013 2014 0 0 0 0 France -21 -18 -21 -22 -17 -21 Italy -35 -29 -40 -38 -22 -13 -10 Spain -63 -40 -37 -35 -25 -16 -20 -5 6 6 4 5 7 1 Belgium -40 -36 -17 -37 -25 -27 Portugal -116 -106 -90 -56 -37 -18 -24 Ireland -31 -34 -29 -31 -33 -22 -16 Finland 5 -1 -8 -34 -37 -33 -28 Austria www. iags-project. org 18 15 12 1 3 6 1 Germany Netherlands

i. AGS 2016 Current account surplus and exchange rate : a war of currencies

i. AGS 2016 Current account surplus and exchange rate : a war of currencies Figure 4. EA Nominal Effective Exchange Rate versus EA current account 4 3. 77 current account Figure 4. EA Nominal Effective Exchange Rate versus EA 2015 3. 30 3 2. 62 2013 2. 57 3. 13 2. 85 2. 722014 2. 21 1. 94 2 1. 56 1 0. 40 0. 600. 62 2000 -0. 16 -0. 09 0 80 -0. 44 -0. 48 90 -0. 67 -0. 752001 100 2012 1. 14 1. 12 1. 04 2005 1. 02 0. 87 0. 86 2007 0. 79 0. 78 0. 77 2004 0. 73 0. 70 0. 68 2011 0. 67 0. 56 0. 51 2008 0. 50 0. 42 0. 41 2003 2006 0. 33 0. 27 0. 19 0. 00 -0. 22 -0. 29 2009 110 120 -1 Source: Effective Exchange Rate, broad partners, ECB. EER is 100 in Q 1 1999, increase shows appreciation of euro against trade partners currencies. Current account is for Euro area countries, in % of EA GDP, from national accounts (Eurostat). Real exchange rate of euro brings the same pattern. www. iags-project. org 130

i. AGS 2016 Wrap-up: a deflationary recovery is not a recovery n Current half

i. AGS 2016 Wrap-up: a deflationary recovery is not a recovery n Current half recovery is not sufficient to prevent deflationary pressure Scarfication of labor market, inequalities rising ¨ Monetray policy is buying some time but in the next 2 years, its normalization will trigger a sharp appreciation of euro against dollar (and other currencies) ¨ Fiscal consolidation pause is not enough to stimulate demand ¨ Internal adjustment is still necessary ¨ n The 3 leg strategy of the AGS will not change the game ¨ ¨ ¨ n Monetray policy alone can do the trick Demand stimulation through Junker Plan is far from being macro significant Fiscal consolidation may in the near future come back (low inflation, TSCG, debt rule) Structural reforms especially on the labour market can increase deflationary pressure on the short term Capital market Union, Bank Union won’t be short term patches Active demand stimulation and internal rebalancing Reducing external surplus, so to limit future euro appreciation and boost short term demand ¨ Use any mean to rebalance, differential minimun wages norms being a partial answer ¨ www. iags-project. org

i. AGS 2016 Main policy proposals n #1: Monetary policy is opening a window

i. AGS 2016 Main policy proposals n #1: Monetary policy is opening a window of opportunity It will be limited in time for various reasons (currency war, side effect, distributional effect, institutional pressures) ¨ It should also aim at reducing sovereign spreads inside the EA ¨ n #2: demand management is needed ¨ ¨ ¨ n Investment is key (building assets). Public Investment, golden rule Social investment is also necessary to fight against the social scars Fiscal policy should be complemented with fiscal coordination (fight against tax heavens, tax competition, fiscal devaluation) Fiscal space has to be used as it is in the interest of surplus countries and is necessary to Euro stability Juncker Plan may not be enough (and should be closely monitored) #3: internal rebalancing may have repercussion on deflation Wage push in surplus countries is a way to avoid that (minimum wage norms as a lever) ¨ Non cost competitiveness has to be implemented ¨ www. iags-project. org