The structure of the euro area recovery Rolf Strauch, Chief Economist JPMorgan Investor Seminar, IMF Annual Meetings Washington, October 2017
The euro area: a systemic player in global trade Trade openness (exports plus imports of goods and services) % of GDP 100 90 80 70 60 50 40 30 20 10 0 Euro area China UK US 1995 2007 2016 Japan Source: ESM Based on national sources Note: Extra-Euro area trade openness 51% in 2016 1
Euro area economies lead the recovery of global activity Purchasing managers index: Manufacturing 62 60 58 56 54 52 India China Japan US Spain France Italy UK Germany Euro area NL 50 48 46 44 2017 Q1 2017 Q2 Source: Thomson Reuters Datastream based on IHS Markit Economics 2
A stronger euro area: improved competitiveness % 0 Reduction in regulation and barriers (1998-2013) -10-20 -30-40 -50-60 US UK Euro area Change in product market regulation indicator Change in barriers to entrepreneurship indicator Change in barriers to trade and investment indicator Notes: Due to data availability, the euro area is comprised of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal and Spain Source: ESM based on OECD 3
A stronger euro area: improved competitiveness Number of euro area countries within top 25 best performers (2016) Global competitiveness index (WEF) Ease of doing business - resolving insolvency (WB) Ease of doing business - enforcing contracts (WB) Ease of doing business - trading across borders (WB) Ease of doing business (WB) Corruption perception index (TI) 0 2 4 6 8 10 12 14 Source: ESM based on World Economic Forum (WEF), World Bank (WB) and Transparency International (TI) 4
Improved price competitiveness after the crisis despite recent appreciation Real effective exchange rate (ULCT-based, 2008Q1=100) 150 140 130 China 120 110 100 US 90 80 70 Euro area 60 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: ESM based on EC, Eurostat 5
A stronger euro area: the robust recovery % 4 GDP per capita growth 2 0-2 US Euro area Average GDP growth per capita, 1999-2008 Euro area 1.6% US 1.6% -4-6 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: EC European Economic Forecast Spring 2017, AMECO 6
A stronger euro area: the robust recovery Employment rate in euro area and US since 2000 (Cumulative change in percentage point) 6 Euro area 4 2 0-2 US -4-6 -8 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: Eurostat and BLS 7
A stronger euro area: the robust recovery Gini coefficient (0 = perfect equality; 100 = maximal inequality) 43 41 US 39 37 35 33 31 29 27 25 2007 2008 2009 2010 2011 2012 2013 2014 2015 Italy Germany France Source: Eurostat, World Bank 8
Investment is weak globally Investment to GDP ratio in the euro area and the US (nominal, % of GDP) 24 23 22 21 20 Euro area 19 18 US 17 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: ESM based on EC, Eurostat Note: Euro area excl. Ireland 9
Business investment in the euro area recovered 5 Investment weakness comes from households and government (real change since Q1/2008 in %, contributions in pp) 0-5 -10-15 -20 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Business Government Residential Total Source: ESM based on EC, Eurostat 10
Productivity falling behind as a driver of growth 6 Sources of GDP Growth in the euro area (in %) 4 2 0-2 -4-6 -8 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 TFP Labour quantity Labour quality ICT capital Non-ICT capital GDP growth Source: ESM based on The Conference Board Total Economy Database (Adjusted version), May 2017 11
Monetary policy relevant gaps are closing 1.0 Euro area: Monetary policy-relevant gaps (in standard deviations) 0.5 0.0-0.5-1.0-1.5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Credit gap Unemployment gap (neg) Output gap Inflation gap Source: ESM based on EC, Eurostat, BIS Notes: data normalised relative to historic EA19+US sample of countries, NFC credit % GDP relative to historic trend, unemployment gap is relative to EC NAIRU estimate quarterly interpolation, output gap is relative to EC potential estimate quarterly interpolation, inflation gap is relative to 2%. 12
Change in the output gap from 2013 to 2017 Faster recovery of countries most hit by the crisis Convergence of Output Gaps since 2013 (in percentage points) 12 ES CY GR SI IE PT LU IT NL SK FI -15-13 -11-9 -7-5 -3-1 10 8 6 4 MT LT 2 LV BE DE FR 0 AT Output gap in 2013-2 Source: ESM based on EC, Eurostat 13
Convergence of HICP across the Euro area 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Convergence of HICP (2015=100%; standard deviation) 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Euro area excl. LU and Baltic Euro area Source: ESM based on EC, Eurostat 14
Next steps for the euro area: Policy proposals No full Fiscal Union needed No full Political Union needed Complete Banking Union European Deposit Insurance Backstop for the SRF Capital Markets Union To facilitate private sector efforts for financial integration More capital flows, more risk sharing Address taxation, insolvency and company law issues Fiscal Union Limited fiscal capacity for the euro area 15
Next steps for the euro area: Risk sharing needs Economic risk sharing in the euro area is lagging behind the US 90 80 70 60 50 40 30 20 10 0-10 Percentage of shock smoothed by different channels EU EMU Canada US Germany Credit market Capital market Fiscal policy Source: Bruegel and IMF 16