OECD Economic Surveys
Euro Area
June 2016
OVERVIEW
www.oecd.org/eco/surveys/economic-survey-europeanunion-and-euro-area.htm
This Overview is extracted from the 2016 Economic Survey of Euro Area. The Survey is published
on the responsibility of the Economic and Development Review Committee (EDRC) of the OECD,
which is charged with the examination of the economic situation of member countries.
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law.
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OECD Economic Surveys: Euro Area
© OECD 2016
Executive summary
●
Monetary and financial policies to support the recovery
●
Restoring credit growth
●
Making public policy more supportive of inclusive growth
9
EXECUTIVE SUMMARY
Monetary and financial policies to support the recovery
Euro area consumer prices
Y-o-y % change
4
Total
Expectations¹
3
2
1
0
-1
2012
2013
2014
2015
2016
1. Expected average annual inflation based on the difference
between 5 and 10-year inflation swaps.
Source: Eurostat Database and Thomson Reuters Datastream
Database.
1 2 http://dx.doi.org/10.1787/888933366894
Growth has picked up gradually over the past
two years, supported by very accommodative
monetary policy. The effect of fiscal policy on
domestic demand has turned broadly neutral. But
unemployment is still very high in many euro
area countries, investment has been sluggish and
credit remains weak. Inflation is well below
target and market-based measures of inflation
expectations have been drifting down. Tackling
these interconnected problems requires resolute
and co-ordinated action by euro area countries to
support aggregate demand and strengthen the
financial sector to unlock credit growth.
Restoring credit growth
Credit to non-financial corporations
January-March 2016
Annual % growth
5
0
-5
-10
Important building blocks of banking union
are now in place. But collective action is needed to
complete banking union by further harmonising
bank regulation, reinforcing deposit insurance at
the national and European levels, and creating a
common fiscal backstop to the Single Resolution
Fund. The dependence between national banks
and their governments still poses a serious risk in
the event of renewed turbulence.
SVN NLD IRL PRT GRC ESP ITA EA DEU FRA BEL
Source: ECB, Statistical Data Warehouse.
1 2 http://dx.doi.org/10.1787/888933366900
Making public policy more supportive of inclusive growth
Euro area fiscal stance
Change in the underlying primary balance
% potential GDP
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
2004
2006
2008
2010
2012
2014
In the wake of the global financial crisis,
governments provided fiscal support and public
debt rose sharply. Subsequent fiscal consolidation
often resulted in deep cuts to public investment
and increases in labour taxes, which weigh
on future growth potential. Addressing these
problems requires applying the flexibility
embedded in the Stability and Growth Pact to
support growth when appropriate, upgrading
national budgetary frameworks and supporting
private investment, including in the context of the
Investment Plan for Europe.
Source: OECD Economic Outlook, Vol. 2016, No. 1.
1 2 http://dx.doi.org/10.1787/888933366912
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OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
EXECUTIVE SUMMARY
MAIN FINDINGS
KEY RECOMMENDATIONS
Monetary and fiscal policies
Inflation remains well under the target of below, but
close to, 2%. Inflation expectations are drifting down.
Aggregate demand is still weak and unemployment
remains very high.
In high-debt, low-growth countries, the strict application
of the debt reduction rule of the Stability and Growth Pact
can require very large fiscal adjustments.
Commit to keep monetary policy accommodative until
inflation is clearly rising to near the target.
Countries with fiscal space should use budgetary
support to raise growth.
Ensure that the application of the debt reduction rule
of the Stability and Growth Pact does not threaten the
recovery.
Financial policies
Non-performing loans (NPLs) are still very high in some When NPLs create a serious economic disturbance,
countries, which hampers credit growth.
speed up and facilitate the resolution of NPLs by not
triggering bail-in procedures within the existing rules.
Consider establishing asset management companies
where needed, and possibly at the European level.
Take supervisory measures to encourage banks to
resolve NPLs, which might include raising capital
surcharges for long-standing NPLs.
National fiscal positions are vulnerable to national Reinforce national deposit insurance schemes and
banking crises.
implement a European Deposit Insurance Scheme, in
tandem with continued risk reduction in the banking
sector.
To reduce links between national governments and
their banks, create a common fiscal backstop to the
Single Resolution Fund.
Banking regulation remains fragmented along national Further harmonise banking regulation in Europe.
borders, which is an obstacle to a level playing field.
Making public finances more growth-friendly
Investment in Europe remains weak.
As intended in the Investment Plan for Europe, the
European Investment Bank should finance higher-risk
projects that would not otherwise be carried out.
Countries should increase targeted public support to
investment while enhancing the framework conditions
for private investment.
The composition of public spending and revenue has Allow longer initial deadlines for correcting excessive
become less growth-friendly.
deficits if countries implement major structural reforms
in spending and tax policies which enhance potential
growth and long-term sustainability.
Reforms to national budgetary frameworks have not Adopt national expenditure rules and conduct spending
been sufficient.
reviews linked to budget preparation.
Ensure that national independent fiscal institutions
have resources to fulfil their mandate.
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
11
OECD Economic Surveys: Euro Area
© OECD 2016
Assessment and recommendations
●
Challenges facing Europe
●
Fostering recovery and rebalancing
●
Keeping monetary policy accommodative
●
Improving monetary transmission by resolving non-performing loans
●
Completing banking union
●
Making public finances more growth and equity-friendly
The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli
authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights,
East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
13
ASSESSMENT AND RECOMMENDATIONS
Challenges facing Europe
Europe has made important progress in harnessing and reinforcing its policies and
institutions to recover from a double-dip recession and improve crisis management. Very
supportive monetary policy has helped growth to pick up gradually over the past two years
(Figure 1, Panel A), and contributed to reduce tensions in sovereign debt markets (Figure 1,
Panel B). The effect of fiscal policy on demand has turned broadly neutral. Important
building blocks of banking union, on both supervision and resolution fronts, have come
into operation, improving the resilience of the European financial system. Confidence in
the European project has recovered from its lows in 2013, although it is still well below
what it was before the crisis (Figure 2).
However, many legacies of the crisis are still unresolved, and major new problems
have emerged. Unemployment is still high in many countries, and there is a wide
dispersion across the euro area (Figure 3). Despite the somewhat stronger economy,
inflation is close to zero, well below the European Central Bank (ECB) target of just
under 2%. Unlike in the United States, investment is still far below 2007 levels, especially in
those countries hit hardest by the crisis (Figure 4), mainly due to weak demand but also to
high non-performing loans and, in many countries, high corporate indebtedness, which
hamper credit (OECD, 2015a). Political tensions have flared up recently due to large inflows
of refugees, and have put strains on border-free travel within the Schengen zone. The
reintroduction of border controls in some Schengen zone countries is a setback for
European integration.
Figure 1. GDP growth and long-term interest rate spreads
4
A. Real GDP growth in the euro area1
Percentage growth
25
3
20
2
1
B. Long-term interest rate spreads2
Percentage points
Greece
Ireland
Italy
Portugal
Spain
15
0
-1
10
-2
-3
5
-4
-5
2007 2008 2009 2010 2011 2012 2013 2014 2015
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
1. Euro area member countries that are also members of the OECD (15 countries).
2. Ten-year government bond spreads relative to the German rate.
Source: OECD (2016), OECD Economic Outlook: Statistics and Projections and Main Economic Indicators (databases).
1 2 http://dx.doi.org/10.1787/888933366926
14
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
ASSESSMENT AND RECOMMENDATIONS
Figure 2. Eurobarometer: Public opinion of the European Union
Question responses,1 per cent
60
60
Total positive
Neutral
Total negative
50
50
40
40
30
30
20
20
10
10
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
0
1. “In general, does the EU conjure up for you a very positive, fairly positive, neutral, fairly negative or very negative image?”
Source: European Commission, “Public Opinion in the European Union”, Standard Eurobarometer, various editions.
1 2 http://dx.doi.org/10.1787/888933366545
Figure 3. Unemployment dispersion in the euro area
Unemployment rates, per cent
25
25
Euro area¹
Average² - Greece, Portugal and Spain
Average² - Austria, Germany and Luxembourg
20
20
15
15
10
10
5
5
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
0
1. Euro area 19 countries.
2. Unweighted average.
Source: Eurostat (2016), “Employment and unemployment (LFS)”, Eurostat Database.
1 2 http://dx.doi.org/10.1787/888933366937
These challenges weigh on economic performance and, more broadly, on the quality
of life of European citizens. Well-being in the euro area often displays large disparities
across countries (Figure 5). These tend to be most acute in income, labour market
outcomes and subjective well-being, all of which were deeply affected by the crisis.
Furthermore, some countries often find themselves among the best or the worst
performers in most dimensions of well-being (Figure 5). Improving well-being requires
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
15
ASSESSMENT AND RECOMMENDATIONS
Figure 4. Investment is still far below 2007 levels
Real gross fixed capital formation, index Q4 2007 = 100
110
France
Germany
Italy
Spain
United States
Euro area¹
110
105
105
100
100
95
95
90
90
85
85
80
80
75
75
70
70
65
65
60
2007
2008
2009
2010
2011
2012
2013
2014
2015
60
2016
1. Euro area member countries that are also members of the OECD (15 countries).
Source: OECD (2016), OECD Economic Outlook: Statistics and Projections (database).
1 2 http://dx.doi.org/10.1787/888933366942
Figure 5. Well-being outcomes1
Euro area, 2016
Euro area
Highest three results²
Lowest three results²
Income and wealth
10
Subjective well-being
8
Jobs and earnings
6
Personal security
Housing
4
2
0
Environmental quality
Work and life balance
Civic engagement and governance
Social connections
Health status
Education and skills
1. Euro area member countries that are also members of the OECD (15 countries). Each well-being dimension is measured by one to three
indicators from the OECD Better Life indicator set. Normalised indicators are averaged with equal weights. Indicators are normalised
to range between 10 (best) and 0 according to the following formula: ([indicator value – worst value]/[best value – worst value]) × 10.
2. Calculated as a simple average of the highest and lowest performers of the euro area cross-country distribution.
Source: OECD Better Life Index, www.oecdbetterlifeindex.org.
1 2 http://dx.doi.org/10.1787/888933366951
stronger and more even growth and job creation across the euro area, but also reforms in
specific policy areas, such as education and health, where the composition and efficiency
of public spending plays a crucial role.
16
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
ASSESSMENT AND RECOMMENDATIONS
Building a better future calls for stronger collective action on several fronts. Despite
recent progress, banking union remains incomplete, which hampers monetary policy
transmission and capital market integration, and the resulting mutual dependence of
national governments and national banks poses vulnerabilities during a crisis. Joint action
is also needed to protect external borders and share the financial burden of the refugee
inflow. Public investment remains depressed, due to strong and lopsided fiscal
consolidations in the recent past, which have fallen heavily on capital spending, and
insufficient consideration of cross-country spillovers. Business investment is further
hampered by the high levels of corporate debt overhang, by remaining weaknesses in some
national banking systems and by scant progress in goods and services markets integration
after the crisis, not least through the persistence of high regulatory heterogeneity.
In this context, the 2016 OECD Economic Survey of the euro area mainly focusses on
fiscal and financial challenges, and the 2016 OECD Economic Survey of the European Union
on structural reform priorities to complete the Single Market. The main messages of the
euro area Survey are:
●
To deal with the problems they face, member states need to harness European
institutions to develop and implement collective and co-operative solutions.
●
The euro area economy is gradually recovering, but investment remains weak and the
wide disparity in economic performance and well-being is still a major concern.
●
Collectively strengthening aggregate demand and financial sector performance will be
critical to ensuring that growth picks up and unemployment continues to decline.
Fostering recovery and rebalancing
Growth has gathered pace since mid-2014, supported by successive rounds of
monetary expansion (Figure 6). The sharp fall in global oil prices has raised household
incomes and fiscal policy is no longer weighing on domestic demand. Exports grew
robustly for several quarters, reflecting the euro depreciation and stronger activity in major
markets, such as the United Kingdom and the United States. More recently, a stronger euro
and the slowdown in emerging markets have made export growth decelerate markedly.
Business investment has disappointed, largely due to weak growth expectations and, in
some countries, credit constraints.
Economic performance has been uneven from country to country. The sovereign debt
crisis and the associated large fiscal and macroeconomic adjustment efforts by the
countries hit hardest (e.g. Greece, Ireland, Italy, Portugal and Spain) led to very divergent
output and unemployment developments across the euro area. This divergence has been
modestly reversed over the past two years, with some of those countries recording
above-average growth. Despite narrowing interest rate differentials and significant
reductions in lending rates, credit and investment in most of those countries have
remained hampered by high non-performing loans and corporate debt (Figure 7), and
incomplete capital market integration. The exceptions have been Ireland, where large
multinationals do not depend on domestic banks for financing, and Spain, which has made
significant progress in cleaning up banks’ balance sheets.
External positions are rebalancing, but the process has been asymmetric and
incomplete, and has left the euro area as a whole with a large external surplus. Germany
and the Netherlands have further increased their already significant surpluses. The
countries hit hardest by the global financial and euro area crises have all eliminated
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
17
ASSESSMENT AND RECOMMENDATIONS
Figure 6. Activity has gradually recovered but sharp cross-country divergence remains
A. Activity in the euro area1
% change over previous quarter, volume
2.5
B. Oil price and effective exchange rate
USD/barrel
150
GDP
Total investment
Exports of goods and services
2.0
Oil spot price (Brent, left axis)
Nominal effective exchange rate (right axis)
2010 = 100
120
125
115
100
110
75
105
50
100
25
95
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
2012
2013
2014
2015
2016
0
C. Unemployment rates
Per cent
2012
2013
2014
2015
90
2016
D. Real GDP
Index Q4 2007 = 100
30
115
2013
2015
110
25
105
20
100
95
15
90
10
85
80
5
75
0
DEU
IRL
FRA
EA¹
ITA
PRT
ESP
GRC
70
Germany
Greece
Ireland
Italy
Portugal
Spain
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
1. Euro area member countries that are also members of the OECD (15 countries).
Source: OECD (2016), OECD Economic Outlook: Statistics and Projections and Main Economic Indicators (databases); and Eurostat (2016),
“Employment and unemployment (LFS)”, Eurostat Database.
1 2 http://dx.doi.org/10.1787/888933366963
significant current account deficits, although, in spite of structural improvement, this also
reflects still weak domestic demand and, therefore, imports (Figure 8). The same countries
also improved cost competitiveness (Figure 9), in the context of substantial output losses.
Apart from Greece and Italy, export performance has improved as a result. However, a
number of these countries continue to display poor net international investment positions,
and improving them will require sustained GDP growth and current account surpluses in
the medium and long run. Stronger wage and internal demand growth in surplus countries
will ease further rebalancing and make it more symmetric, not least by reversing the
persistent decline in their relative unit labour costs (Figure 9).
Labour market developments have also varied markedly across countries. As euro area
unemployment started to increase in 2008, so did its dispersion across countries, which
has only fallen slightly recently (Figure 3). Moreover, especially in the countries hit hardest
by the crisis, estimates of structural unemployment have risen (Ollivaud and Turner, 2014)
18
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
ASSESSMENT AND RECOMMENDATIONS
Figure 7. Debt of non-financial corporations in the euro area1
As a percentage of GDP
450
450
2014
2008
400
400
350
350
300
300
250
250
200
200
150
150
100
100
50
50
0
GRC
SVK
DEU
AUT
ITA
SVN
FIN
EST
NLD
ESP
FRA
EA²
BEL
PRT
IRL
LUX
0
1. Debt is calculated as the sum of the following liability categories, whenever available/applicable: special drawing rights; currency and
deposits; debt securities; loans; insurance, pension, and standardised guarantees; and other accounts payable.
2. Unweighted average of data for euro area member countries that are also members of the OECD (15 countries).
Source: OECD (2016), “Financial Dashboard”, OECD National Accounts Statistics (database).
1 2 http://dx.doi.org/10.1787/888933366974
Figure 8. Indicators of external balance
As a percentage of GDP
A. Current account balance
B. Net international investment position
75
12
2008
2015
2008
2015
50
8
25
4
0
0
-25
-4
-50
-75
-8
-100
-12
-16
-125
GRC
PRT
ESP
IRL
ITA
FRA
NLD
DEU
-150
PRT
IRL
ESP
GRC
ITA
FRA
NLD
DEU
Source: Eurostat (2016), “Balance of payments statistics and international investment positions (BPM6)”, Eurostat Database.
1 2 http://dx.doi.org/10.1787/888933366980
and the labour force has fallen as workers have become discouraged and, in some
countries, have emigrated in search of better job opportunities (OECD, 2015b). Conversely,
Germany has benefited from lower unemployment and an increased labour force.
Unsurprisingly, poverty has tended to increase more in those countries with large hikes in
joblessness (Figure 10). Furthermore, recent consolidation efforts in the countries most
affected by the crisis have sometimes included deep cuts to unemployment benefits (see
Chapter 1), which have likely worsened distributional impacts.
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
19
ASSESSMENT AND RECOMMENDATIONS
Figure 9. Export performance and competitiveness
Index, Q1 1999 = 100
A. Relative unit labour costs1
140
France
Italy
140
Germany
Spain
130
130
120
120
110
110
100
100
90
90
80
1999
2001
2003
2005
2007
2009
2011
2013
2015
80
Greece
Portugal
1999
2001
2003
2005
Ireland
Slovenia
2007
2009
2011
2013
2015
B. Export performance2
160
160
France
Italy
150
Germany
Spain
140
140
130
130
120
120
110
110
100
100
90
90
80
80
70
70
60
1999
2001
2003
2005
2007
2009
2011
2013
Greece
Portugal
150
2015
60
1999
2001
2003
2005
Ireland
Slovenia
2007
2009
2011
2013
2015
1. Real harmonised competitiveness indicator for unit labour costs in total economy.
2. Ratio between export volumes and export markets for total goods and services.
Source: OECD (2016), OECD Economic Outlook: Statistics and Projections (database); and ECB (2016), Statistical Data Warehouse, European
Central Bank.
1 2 http://dx.doi.org/10.1787/888933366617
Gross domestic product (GDP) growth for the euro area as a whole is projected to
accelerate modestly to close to 2% (Table 1). Activity will continue to be supported by
sustained monetary stimulus, a broadly neutral fiscal stance and lower oil prices. However,
high private indebtedness will remain a drag on consumption and investment in many
countries, and falling demand from emerging economies will weigh on exports.
Unemployment will decline only gradually, and the stark differences across countries will
persist. Inflation is projected to edge up to about 1% by 2017 as the effects of cheaper
energy wane and cyclical slack gradually decreases.
A stronger-than-projected slowdown in China and other emerging market economies
would weaken demand in the euro area through several channels. Impacts through trade
linkages alone would likely be small (about 0.1% of GDP per percentage point fall in Chinese
20
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
ASSESSMENT AND RECOMMENDATIONS
Figure 10. Developments in unemployment and poverty
Percentage points
B. Poverty rate1
Change 2009-14
A. Unemployment rate
Change 2008-13
20
3.5
3.0
15
2.5
2.0
10
1.5
1.0
5
0.5
0.0
0
-0.5
SVN
GRC
EST
PRT
ESP
LUX
SVK
ITA
DEU
EA²
IRL
BEL
NLD
FRA
FIN
-1.5
AUT
ESP
GRC
IRL
PRT
ITA
SVN
EA²
SVK
EST
NLD
FIN
FRA
BEL
LUX
AUT
-5
DEU
-1.0
1. The poverty rate is the share of persons with disposable income (equivalised for family size) below 60% of national median disposable
income.
2. Euro area 19 countries.
Source: Eurostat (2016), “Income distribution and monetary poverty” and “Unemployment and employment (LFS)”, Eurostat Database.
1 2 http://dx.doi.org/10.1787/888933366993
domestic demand), as even the whole of Asia accounts for only 12% of euro area goods
exports. However, repercussions on euro area GDP could increase by a factor of three if the
demand slowdown in China led to adjustments in global financial markets, such as higher
risk premia (OECD, 2015c). Through cheaper commodities and pressures for euro
appreciation, a slowdown would also make it more difficult to steer euro area inflation
towards 2%. While tail risks of financial stress have receded, the outcome of the upcoming
referendum in the United Kingdom could have important implications for economic
performance in both the United Kingdom and the rest of Europe (Kierzenkowski et al.,
2016). The refugee crisis is already straining the Schengen agreement and might even
affect the free flow of goods and, especially, labour in Europe. This could to some extent
reduce the benefits of the single market and shake confidence in the European Union more
generally. There is considerable uncertainty regarding the inflation projection, and a more
long-lasting period of low inflation, or even falling prices, cannot be ruled out. This could
make debt burdens more difficult to manage and, for the countries hit hardest by the crisis,
further competitiveness gains harder to achieve, delaying the recovery.
On the other hand, more rapid progress in fiscal and structural reforms would boost
growth relative to the projection. Of particular importance are collective fiscal action
within the Stability and Growth Pact rules to boost investment and growth, the banking
union and further progress on the single market. A resolution of the refugee crisis would
bolster confidence in the EU institutional framework and thereby improve growth
prospects. Recent and potential future policy moves by the ECB may prove more effective
in raising inflation towards its target than assumed. Similarly, cheap oil may have a
stronger-than-expected impact on demand.
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
21
ASSESSMENT AND RECOMMENDATIONS
Table 1. Macroeconomic indicators and projections
Euro area,1 annual percentage change, volume (2011 prices)
Projections
2013
Gross domestic product (GDP)
2014
2015
2016
2017
-0.3
1.0
1.6
1.6
1.7
-0.6
0.8
1.6
1.8
1.7
0.2
0.8
1.3
1.7
1.1
Gross fixed capital formation
-2.5
1.4
2.6
3.3
3.2
Final domestic demand
-0.8
0.9
1.8
2.1
1.9
0.2
0.0
0.0
0.1
0.0
-0.7
1.0
1.7
2.2
1.9
Exports of goods and services
2.2
4.1
5.2
3.0
4.1
Imports of goods and services
1.3
4.5
6.0
4.4
4.6
0.4
0.0
-0.1
-0.4
-0.1
Private consumption
Government consumption
Stockbuilding2
Total domestic demand
Net exports2
Other indicators (growth rates, unless specified)
Potential GDP
Output gap3
0.6
0.7
0.8
0.9
1.0
-3.2
-2.9
-2.2
-1.5
-0.7
Employment
-0.6
0.6
1.0
1.3
1.0
Unemployment rate
11.9
11.5
10.8
10.2
9.8
GDP deflator
1.3
0.8
1.2
0.9
1.1
Consumer price index (harmonised)
1.3
0.4
0.0
0.2
1.2
Core consumer prices (harmonised)
1.1
0.8
0.8
0.9
1.1
Household saving ratio, net4
6.3
6.4
6.4
6.7
6.6
Current account balance5
2.9
3.1
3.8
3.8
3.6
General government fiscal balance5
-3.0
-2.6
-2.1
-1.8
-1.4
Underlying general government fiscal balance3
-1.0
-0.8
-0.8
-1.0
-1.0
1.3
1.4
1.3
0.9
0.7
General government gross debt (Maastricht)5
93.7
94.7
93.3
92.4
91.3
General government net debt5
Underlying general government primary fiscal balance3
66.1
72.5
72.0
72.0
71.5
Three-month money market rate, average
0.2
0.2
0.0
-0.2
-0.3
Ten-year government bond yield, average
2.9
2.0
1.1
0.9
0.8
105.2
112.1
110.5
109.6
108.5
Memorandum item
Gross government debt5
1. Euro area member countries that are also members of the OECD (15 countries).
2. Contribution to changes in real GDP.
3. As a percentage of potential GDP.
4. As a percentage of household disposable income.
5. As a percentage of GDP.
Source: OECD (2016), “OECD Economic Outlook No. 99”, OECD Economic Outlook: Statistics and Projections (database).
Keeping monetary policy accommodative
Following the outset of the financial crisis in September 2008 and the ensuing
long period of low growth, the European Central Bank (ECB) successively cut its policy rates
– except during a short period in 2011 – to their lowest levels since it started operating: the
deposit rate has been negative since mid-2014 (Figure 11, Panel A). However, if assessed
through the evolution of the real short-term market interest rate, monetary policy became
less accommodative in 2013-14 (Figure 11, Panel B). This is explained by the fall in inflation
since late 2011 (see below).
The use of unconventional monetary tools diminished in 2013 and 2014, as most
commercial banks started reimbursing the loans they took under the long-term refinancing
operations (LTROs). As a result, the Eurosystem balance sheet shrank significantly from
30% of GDP end-2012 to about 20% end-2014 (Figure 12). Persistent undershooting of
22
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ASSESSMENT AND RECOMMENDATIONS
Figure 11. Interest rate developments
Per cent
B. Real short-term interest rate1
A. Key ECB interest rates
6
3
Deposit rate
Marginal lending rate
Main refinancing rate
5
2
4
1
3
0
2
-1
1
-2
0
-1
-3
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
1. Three-month rate deflated by the harmonised consumer price index.
Source: ECB (2016), “Statistics Bulletin”, Statistical Data Warehouse, European Central Bank; and OECD (2016), OECD Economic Outlook:
Statistics and Projections (database).
1 2 http://dx.doi.org/10.1787/888933367000
Figure 12. Central banks’ total liabilities
End of period data, as a percentage of GDP
90
90
Euro area¹
United States
Japan
United Kingdom
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
0
1. Estimate for 2016 second quarter onwards based on monthly increases of EUR 80 billion.
Source: Thomson Reuters (2016), Datastream Database; and OECD (2016), OECD Economic Outlook: Statistics and Projections (database).
1 2 http://dx.doi.org/10.1787/888933367019
inflation led the Governing Council to reinvigorate the use of unconventional tools as of
mid-2014, and most recently in March 2016. Measures have included a combination of
conventional monetary policy easing, taking the deposit rate increasingly to negative
territory, credit easing in the form of a series of targeted long-term refinancing operations
(TLTROs), and quantitative easing through an asset purchase programme (APP) that initially
comprised asset-backed securities and covered bonds and increased in scope to include
sovereign bonds (from March 2015) and non-bank corporate bonds (from June 2016).
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
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ASSESSMENT AND RECOMMENDATIONS
The asset purchase programme consists of purchasing various eligible assets, both
private (asset-backed securities, covered bonds and non-financial corporate bonds) and
public (such as government, agencies and European institutions bonds, under the so-called
public sector purchase programme), at an original pace of EUR 60 billion per month,
making it an effective quantitative easing (QE) programme. The initial intention was to
carry out purchases at least till September 2016, but on 3 December 2015 the Governing
Council extended it to March 2017 or beyond, if necessary, and increased the pool of eligible
assets, notably by including regional and local government debt. The size of monthly
purchases was increased to EUR 80 billion in March 2016 and the pool of eligible assets was
widened further to investment grade bonds issued by non-bank firms. The balance sheet
of the ECB is expected to reach close to 40% of euro area GDP by March 2017 (Figure 12).
The effectiveness and timing of quantitative easing policies has been highly debated
(IMF, 2013). However, since the announcement of the programme to the end of the first
quarter of 2015, the valuation of European stock exchanges increased by about 20% and the
euro effective exchange rate depreciated by about 10% (Figure 13). In addition, the asset
purchase programme has helped spreads of sovereign bonds in peripheral countries to
remain low (despite some renewed financial market stress around Greece in 2015), which
is facilitating the recovery in those countries. Based on a macroeconomic model simulation
(NiGEM), a 10% depreciation of the euro could increase inflation by ¾ percentage point and
growth by about 1¼ percentage points in the following year. Using the same model, the
impact of an increase in stock prices of 20% would be more moderate, about ½ percentage
point on activity and none on inflation.
Despite quantitative easing, inflation (total and core) and swaps-based inflation
expectations are now well below the inflation target of the ECB (Figure 14). Temporary
factors, such as the significant drop in oil prices and cheaper imports, notably from China,
Figure 13. Financial indicators
Index, 2010 = 100
150
150
Nominal effective exchange rate
Share price index¹
140
140
130
130
120
120
110
110
100
100
90
80
90
APP dates²
2012
2013
2014
2015
2016
80
1. Dow Jones EURO STOXX Broad Benchmark Index.
2. ECB announcement (22 January 2015), recalibration (3 December 2015) and expansion (10 March 2016) of the Asset Purchase
Programme (APP).
Source: OECD (2016), OECD Economic Outlook: Statistics and Projections and Main Economic Indicators (databases).
1 2 http://dx.doi.org/10.1787/888933367029
24
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
ASSESSMENT AND RECOMMENDATIONS
Figure 14. Inflation developments
Year-on-year percentage change
4.5
4.5
Total¹
Core¹
Expectations²
4.0
4.0
Expanded APP³
22 January 2015
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
2008
2009
2010
2011
2012
2013
2014
2015
2016
-1.0
1. Harmonised indices of consumer prices; core inflation excludes energy, food, alcohol and tobacco.
2. Expected average annual inflation based on the difference between 5-year and 10-year inflation swaps.
3. European Central Bank announcement of an expanded Asset Purchase Programme (APP).
Source: Eurostat (2016), “Harmonised indices of consumer prices”, Eurostat Database; and Thomson Reuters (2016), Datastream Database.
1 2 http://dx.doi.org/10.1787/888933366894
help explain this low inflation rate, but only to a certain extent. For example, the steep fall
in the price of Brent by almost USD 40 per barrel in 2015 would have reduced headline
inflation by only about ¼ percentage point in 2015, based on a NiGEM simulation.
The transmission of monetary policy has improved and interest rates of corporate loans
have been converging in the past two years. However, for loans of smaller size, which matter
more for small and medium-sized enterprises (SMEs), rates remain 1 or 2 percentage points
higher in some countries (Figure 15, Panels A and B). While part of this differential reflects
differences in macroeconomic risk among euro area countries, this could also indicate that
firms with similar risk profile, and especially SMEs, tend to suffer from higher lending costs
depending on the country in which they are located. This could be explained by the still
fragile situation of many banks in some countries, which are plagued with high levels of
non-performing loans (NPLs, see below). Banks with high levels of NPLs tend to lend less as
they are less profitable, have weaker capital buffers and higher funding costs (Aiyar et al.,
2015). As a result, credit is still falling, though more slowly, in most of those countries
(Figure 15, Panel C). In a well-functioning single market, the impact of weak domestic banks
or high sovereign risk premia should be minimal as creditworthy firms should be able to get
financing from other banks or channels (Coeuré, 2015).
With inflation still low, inflation expectations falling and slack still large, monetary
policy needs to remain firmly committed to an expansionary stance. Based on current
OECD projections, inflation is set to remain below the ECB target until end-2017. In this
context, the ECB should explicitly commit to keep monetary policy accommodative (i.e. not
increase interest rates or shrink its balance sheet) and treat risks to the achievement of its
inflation target symmetrically. In fact, explicitly accepting that inflation could go beyond
2% over the next two years without triggering a tightening of monetary policy could make
monetary policy more effective at influencing expectations, which is crucial when interest
rates are at the zero lower bound (Ambler, 2009). Nor would it necessarily reduce credibility.
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
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ASSESSMENT AND RECOMMENDATIONS
Figure 15. Credit developments and financial fragmentation
Non-financial corporations
A. Interest rates on loans of up to and including EUR 1 million1
Per cent
9
France
Italy
8
9
Germany
Spain
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
2010
2011
2012
2013
2014
2015
Greece
Portugal
8
2016
0
2010
2011
2012
Ireland
Slovenia
2013
2014
2015
2016
1
B. Interest rates on loans of over EUR 1 million
Per cent
9
France
Italy
8
9
Germany
Spain
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
2010
2011
2012
2013
2014
2015
Greece
Portugal
8
2016
0
2010
2011
2012
Ireland
Slovenia
2013
2014
2015
2016
C. Loans adjusted for sales and securitisation
Year-on-year percentage change
10
France
Italy
Germany
Spain
10
5
5
0
0
-5
-5
-10
-10
-15
2010
2011
2012
2013
2014
2015
-15
2016
Greece
Portugal
2010
2011
2012
Ireland
Slovenia
2013
2014
2015
2016
1. New business loans with an initial rate fixation period of less than one year. Loans other than revolving loans and overdrafts,
convenience and extended credit card debt.
Source: ECB (2016), “Balance sheet items” and “MFI interest rate statistics”, Statistical Data Warehouse, European Central Bank.
1 2 http://dx.doi.org/10.1787/888933367037
The ECB should ease further if inflation remains below target for longer than expected,
for instance in the event of negative economic shocks. The ECB could envisage additional
rate cuts, notably the deposit rate as it is the most important policy rate in an environment
of excess liquidity, although it would be necessary to carefully assess whether the risks of
lowering bank profitability are still of second order compared to the need to sustain the
recovery (Coeuré, 2014). Expanding the use of TLTRO is a key tool to reduce impairment in
26
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
ASSESSMENT AND RECOMMENDATIONS
the transmission of monetary policy and to enhance the provision of credit. The impact of
the APP could be strengthened further by increasing again the monthly purchases, which
may require a new extension of eligible assets.
Macroeconomic imbalances linked to the very expansionary monetary stance seem so
far limited. There is no indication at this stage of asset price bubbles at the euro area level,
notably in the housing sector (Figure 16). Nevertheless, macro-prudential tools should be
strengthened to avoid the reappearance of bubbles, which could also apply to EU countries
outside the euro area as they could face high capital flows resulting from quantitative
easing policies (Rey, 2015). In the housing sector, for example, lower loan-to-value or
loan-to-income criteria could be imposed.
Figure 16. House prices
Euro area,1 index
Long-term average = 100
2010 = 100
125
125
Real house prices (left axis)
Price to income ratio (right axis)
Price to rent ratio (right axis)
120
120
115
115
110
110
105
105
100
100
95
95
90
2007
2008
2009
2010
2011
2012
2013
2014
2015
90
1. Euro area member countries that are also members of the OECD (15 countries).
Source: OECD (2016), Analytical House Price Indicators (database).
1 2 http://dx.doi.org/10.1787/888933367049
Improving monetary transmission by resolving non-performing loans
On the banking sector side, a more aggressive policy to resolve the high level of
non-performing loans (NPLs) in several countries would improve banks’ financial situation,
facilitating monetary policy transmission and, hence, credit expansion. NPLs are still very
high in several countries (Figure 17). Comparing the level of NPLs is difficult, despite the
introduction by the European Banking Authority (EBA) in October 2013 of a harmonised
definition, as it has mainly applied to the larger banks so far (Aiyar et al., 2015). Swift
resolution of NPLs, before the value of impaired loans or their collaterals becomes too low,
is a key element needed to reallocate credit more productively to other firms. This is also a
financial stability issue as banks in many euro area countries would suffer significant
capital losses if the value of their collateral were to fall substantially (Figure 18).
To that end, banks should be encouraged to provision more on a case-by-case basis.
Since current International Financial Reporting Standards (IFRS) do not require “dynamic”
provisioning (i.e. using a forward-looking model of expected losses) before 2018, the
regulator could consider other options, such as imposing capital surcharges. Such
additional capital requirements could be triggered once NPLs have passed a certain period,
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
27
ASSESSMENT AND RECOMMENDATIONS
Figure 17. Non-performing loans
Gross non-performing debt instruments as a percentage of total gross debt instruments
40
France
Italy
35
40
Germany
Spain
35
30
30
25
25
20
20
15
15
10
10
5
5
0
2010
2011
2012
2013
2014
Greece
Netherlands
0
2015¹
2010
2011
Ireland
Portugal
2012
2013
2014
2015¹
1. Average of first three quarters.
Source: ECB (2016), “Monetary and financial statistics”, Statistical Data Warehouse, European Central Bank.
1 2 http://dx.doi.org/10.1787/888933367053
Figure 18. Non-performing loans net of provisions to capital
As a percentage of capital, Q4 20151
ITA
IRL
GRC
EA²
NLD
PRT
ESP
DNK
BEL
SVN
CZE
DEU
HUN
-10
FRA
0
OECD
0
SVK
10
JPN
10
AUT
20
POL
20
AUS
30
USA
30
EST
40
SWE
40
NOR
50
FIN
50
GBR
60
CAN
60
TUR
70
KOR
70
ISR
80
CHE
80
LUX
90
MEX
90
-10
1. Data is end of period. 2013 for Finland and Luxembourg; 2014 for Germany, Korea and the United Kingdom; Q2 or Q3 2015 for Belgium,
Italy, Japan and Switzerland. Aggregates are unweighted averages of the latest data available and OECD covers 31 countries. The
precise definition and consolidation basis of non-performing loans may vary across countries.
2. Euro area 19 countries.
Source: IMF (2016), Financial Soundness Indicators (FSI Database), International Monetary Fund.
1 2 http://dx.doi.org/10.1787/888933367060
for example through higher risk weights. Still another way to encourage provisioning could
be to impose a progressive reduction of the value of loan collateral past a certain duration:
this was applied by the Bank of Spain for NPLs more than two years old.
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ASSESSMENT AND RECOMMENDATIONS
In parallel to increasing the costs for banks to keep NPLs, policies should also create
instruments for banks to recover the highest possible value from their impaired loans. One
avenue is to improve insolvency procedures. In particular, they should be made faster in
many euro area countries, for example by using out-of-court procedures: fast resolution is
key to preserve the value of collateral, especially for firms whose collateral tends to
depreciate rapidly through obsolescence. In some countries, legal procedures for banks to
access collateral are unduly long.
Setting up an asset management company (AMC) can be a very efficient tool to resolve
NPLs: such companies bring better knowledge to value impaired assets, which allows
banks, especially smaller ones, to get a better price. A company set at the European level
would maximise economies of scale and diversify asset recovery risks. At the same time,
potential cross-country risk sharing could be compensated by some financial sector
conditionality applied to countries benefiting from the European AMC. An alternative
option would be to continue setting up AMCs at the national level. However, public capital
may be needed to facilitate private sector participation. Under the new bank recovery and
resolution directive (BRRD), selling assets to the AMC above market price (which is
considered state aid) triggers a bail-in of junior creditors, the implementation of a
restructuring plan for the bank, and, since January 2016, possibly a bail-in of senior
creditors as well. Some of these senior bonds have been sold by banks to retail customers,
which creates a significant hurdle for governments in some countries to move in that
direction. Given the systemic and financial stability considerations in countries where the
NPL problem encompasses large swathes of the banking sector, bank-level resolution
considerations should not dominate, even if banks having structural viability problems
should be restructured.
To facilitate the creation of AMCs, measures to treat NPLs on bank balance sheets
within the existing rules without triggering bail-in and resolution procedures should be
examined, including possible initiatives at the European level. A very high level of NPLs
should be considered a serious economic disturbance and warrant such a waiver to bail-in
and resolution procedures within the existing rules. Alternatively, a more lenient approach
in the definition of the price level triggering state aid – and hence resolution – could be
applied. Both approaches would have to be weighed carefully against moral hazard effects
and the possible exacerbation of the sovereign-bank nexus. Currently, the European
Commission considers that there is state aid – hence triggering resolution – for any
purchase of the NPL by a state-supported AMC at a price above the estimated “market
price” of the NPL. Alternatively, when market prices are uncertain and depressed by
stressed conditions, resolution requirements could be applicable only for prices above a
level half way between the “market price” and the “real economic value” (the latter being
the ceiling above which purchases of NPLs by a state-supported AMC are prohibited).
Member states benefitting from this exceptional treatment could in return be required to
make their insolvency regimes more efficient, which would facilitate a faster recovery of
collaterals and thus enable the AMCs to get a higher price for impaired assets.
Completing banking union
Despite recent progress, banking union is still unfinished business. Additional,
mutually-reinforcing steps in the areas of supervision, resolution and deposit insurance
are required. By curbing the still large potential for negative feedback loops between banks
and their sovereigns, completing the banking union would considerably ease crisis
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
29
ASSESSMENT AND RECOMMENDATIONS
management. Together with steps to create a Capital Markets Union, it would also foster
capital markets integration, with benefits for monetary policy transmission, private
risk-sharing and rebalancing across the euro area. Furthermore, many of these channels,
together with decreased uncertainty brought about by a more complete Economic and
Monetary Union, would spur investment and demand in Europe.
The Single Supervisory Mechanism (SSM), comprising the ECB and the competent
national authorities, came into operation in November 2014. The ECB directly supervises
about 130 large banks, which account for over 80% of euro area banking assets, and
oversees the supervisory activities of the competent national authorities on other banks.
However, the regulatory framework remains fragmented by numerous options and
discretions in the way national supervisors or legislators implement the EU banking law,
which inter alia creates obstacles to harmonised supervision and cross-border banking
consolidation in Europe. Recent harmonisation work by the ECB is expected to tackle about
120 options and discretions in the supervisory remit through an ECB regulation plus
guidance to supervisory teams for decisions on a case-by-case basis (ECB, 2015). A level
playing field, however, also depends on national legislation, both in banking law and in
related matters, such as insolvency regimes.
Beyond harmonisation, the EU banking law treatment of sovereign exposures, now
generally zero-risk weighted and exempted from large exposure limits, is under review.
However, to avoid disruptions to sovereign debt markets and government financing,
changes in regulation in this area should follow a co-ordinated approach at global level and
require careful consideration of transition arrangements (ESRB, 2015).
The Single Resolution Mechanism became fully operational in January 2016, as
planned, with a resolution authority (the Single Resolution Board), a harmonised
framework for resolution tools (the Bank Recovery and Resolution Directive) and dedicated
financial resources (the Single Resolution Fund). Bailing in shareholders and creditors by at
least 8% of total liabilities (including own funds) is in general a pre-condition for access to
the Single Resolution Fund. Over an eight-year transition period, this Fund will be built up
with risk-adjusted contributions from banks, and its national compartments will be
gradually mutualised. By end-2023, it should reach 1% of covered deposits in participating
member states (an estimated EUR 55 billion). During the transition period, national credit
lines will back up national compartments.
Further progress at both national and European levels is needed on deposit insurance.
The 2014 Deposit Guarantee Schemes Directive further harmonised coverage, sped up
pay-out to depositors and strengthened funding requirements for national schemes, which
are in general to be built-up to a minimum 0.8% of insured deposits by 2024. However, due
to different starting points, transposition delays (most countries missed the July 2015
deadline) and remaining options and discretions, actual funding levels still vary widely.
While desirable in its own right, reinforcing national insurance schemes through full
implementation of the 2014 directive would also help to pave the way for mutualised
area-wide insurance by decreasing moral hazard concerns.
Even when fully built-up, national deposit guarantee schemes will remain vulnerable
to large national shocks, an issue that mutualisation would mitigate. A recent
European Commission proposal for a European Deposit Insurance Scheme, to be phased in
over 2017-24, is a welcome step (European Commission, 2015a, 2015b). Overall costs for
banks would not change, as contributions to the European Deposit Insurance Scheme
would gradually replace those to national schemes, and the funding target of 0.8% of
30
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
ASSESSMENT AND RECOMMENDATIONS
covered deposits by 2024 would also remain unchanged. Moreover, bank contributions
would better reflect risk, since they would be calculated relative to all other participating
banks, rather than in relation to individual national banking systems. Equally welcome is
the pre-condition of further harmonisation of national schemes, in aspects like target
levels of funding and determination of risk-adjusted bank contributions.
To complete the banking union, it is necessary to introduce a European fiscal backstop
to the Single Resolution Fund and to the European Deposit Insurance Scheme, once it is
implemented. Layers of defence have been put in place in recent years, such as higher
capital requirements, enhanced supervision and bail-in provisions. Yet the Single
Resolution Fund, small even when fully built-up, could be insufficient to cope with a large
banking crisis (CEPS, 2014). The direct bank recapitalisation instrument of the European
Stability Mechanism, operational since December 2014 and designed as a last-resort tool
after Single Resolution Fund intervention, provides only a partial solution. Amounts
dedicated to this instrument are also limited (EUR 60 billion) and eligibility criteria are
restrictive (Juncker et al., 2015), as they require national co-financing and could include
general economic policy conditionality. A common backstop could be implemented
through a credit line from the European Stability Mechanism to the Single Resolution Fund,
and would be fiscally neutral in the medium term as banks would reimburse any public
funds used through ex post contributions to the Single Resolution Fund. By breaking the
banks-sovereign nexus at national level, a European fiscal backstop would also ease
acceptance of tighter supervisory harmonisation (Schoenmaker and Wolff, 2015).
Making public finances more growth and equity-friendly
The crisis has taken a heavy toll on public finances, calling for reforms at European
and national level
Public finances matter for growth and equity through multiple channels. Ensuring
debt sustainability and smoothing cyclical fluctuations tend to support growth in mutually
reinforcing ways. High levels of debt can hamper the ability to stabilise the economy (Fall
and Fournier, 2015). In turn, deep recessions can harm long-term growth and thus
compound sustainability challenges through hysteresis effects. By increasing long-term
unemployment, these effects will also likely worsen inequality.
Certain changes in the composition of expenditure or revenue can significantly enhance
growth (IMF, 2015a). Examples include a greater prioritisation of public investment or
education, or a shift of taxation from labour to consumption and property (Johansson et al.,
2008; Cournède et al., 2013). More qualitative fiscal-structural reforms, such as basebroadening in taxation to fund tax rate decreases or greater efficiency in spending, would
also be growth-friendly. At the same time, some compositional changes may harm equity,
but others, such as those favouring education and childcare spending, enhance it.
Sustainability, cyclicality, composition and efficiency are hence interconnected
dimensions of the overall quality of public finances. However, several of these dimensions
have deteriorated since the global financial crisis. The increase in public debt was
substantial (Figure 19), largely due to the recession and to specific events, such as banking
sector rescues (Eyraud and Wu, 2015). High debt can weaken fiscal sustainability including
by triggering shifts in market sentiment, which could make debt financing more difficult.
Further, although without firm conclusions on the direction of causality (e.g. Panizza and
Presbitero, 2014), high debt levels tend to be associated with lower GDP growth. Concerns
about high and rising debt, together with market pressure in some instances, led to sharp
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
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ASSESSMENT AND RECOMMENDATIONS
Figure 19. Evolution of gross public debt in the euro area1
Maastricht definition, as a percentage of GDP
100
100
95
95
90
90
85
85
80
80
75
75
70
70
65
65
60
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
60
1. Euro area member countries that are also members of the OECD (15 countries).
Source: OECD (2016), “OECD Economic Outlook No. 99”, OECD Economic Outlook: Statistics and Projections (database).
1 2 http://dx.doi.org/10.1787/888933367075
Figure 20. The fiscal stance in the euro area1
Change in the underlying balance as a share of potential GDP, percentage points
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
-1.5
1. Euro area member countries that are also members of the OECD (15 countries).
Source: OECD (2016), OECD Economic Outlook: Statistics and Projections (database).
1 2 http://dx.doi.org/10.1787/888933366912
fiscal consolidation in the euro area as a whole, especially in 2011 and 2012, and to a lesser
extent 2013 (Figure 20). Consolidation partly reflected earlier commitments in the context
of the 2008-09 co-ordinated fiscal stimulus package. Although estimates of the importance
of spillovers vary across studies, fiscal consolidation in one country can have a sizeable
negative growth impact on others, especially in bad times (Goujard, 2013; Carnot and
Castro, 2015). As a result, the simultaneous fiscal adjustment across the euro area,
including in core countries, is considered to have made the recession deeper and longer
(Baldwin et al., 2015). This likely aggravated the debt-GDP ratio as growth was weaker.
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ASSESSMENT AND RECOMMENDATIONS
Furthermore, shifts in budget composition have generally hurt medium-term growth
prospects, especially in the countries carrying out the largest fiscal adjustments. Spending
restraint has fallen heavily on public investment (Figure 21). Several countries, especially
those hit hardest by the crisis, also cut social protection expenditures on family and
children, although this spending tends to be growth and equity-friendly. Developments
in revenue composition have been less harmful, but still a matter of concern. Social
contributions have tended to account for a modest share of the adjustment, which is
welcome, but personal income taxes have increased significantly in many countries. These
increases can potentially make income distribution less unequal but tend to penalise
employment and growth. Worryingly, labour tax wedges in euro area countries, already
high in international comparison, have tended to rise further, and those on low incomes
have sometimes risen the most (Figure 21). A recent stock-taking of reforms shows that
many euro area countries are planning or implementing labour tax reductions, though
measures could be more ambitious (European Commission, 2015c).
These developments in government revenue and spending have gone hand in hand
with only a modest degree of implementation of fiscal-structural reforms that improve the
composition or efficiency of public finances. Action in response to country-specific
recommendations addressed to countries by the European institutions has on average
been relatively low, and below-average in fiscal-structural policy areas (Deroose and
Griesse, 2014). For instance, there has been limited progress in reducing taxes on
labour and broadening tax bases. On the spending side, reforms to strengthen public
administration governance and to improve cost-effectiveness and performance in key
domains, such as education and health, have also tended to display below-average
implementation.
While most policy levers to improve the quality of public finances remain at the
national level, European and national policies can be mutually reinforcing in two key areas:
fiscal governance and public investment. Fiscal governance matters for virtually all
dimensions of the quality of public finances. Especially since the crisis, numerical fiscal
rules have striven to reconcile sustainability and stabilisation (Schaechter et al., 2012).
Other desirable features of fiscal governance, such as a multi-year budget horizon and
independent fiscal institutions, can enhance the effectiveness of numerical rules and yield
benefits for the composition and efficiency of public finances. For instance, better budget
institutions tend to lead to more growth-friendly fiscal consolidation (IMF, 2014; Gonçalves
and Pina, 2016). Multi-year budget frameworks, as encouraged by recent Stability and
Growth Pact (SGP) reforms, help optimise public investment (IMF, 2015b), which is one of
the fiscal tools with the strongest impacts on growth. Collective action to increase public
capital formation and leverage private investment is critical to overcome persistent
investment weakness in Europe and spur growth both in the short and the medium run.
Especially in the latter horizon, the Investment Plan for Europe, in articulation with
national resources and with other instruments at EU level, such as regional policy funds,
may play an important role.
Reforming European fiscal governance to promote collective and inclusive growth
Fiscal policy remains a key competency at the national level. At the same time, national
budgets are also subject to the requirements of the Stability and Growth Pact (SGP). The SGP
has a dual structure, with a corrective arm and a preventive arm. The first, also called the
Excessive Deficit Procedure (EDP), is based on ceilings for the nominal deficit and debt as a
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
33
ASSESSMENT AND RECOMMENDATIONS
Figure 21. Post-crisis fiscal consolidation episodes: Composition
and labour tax wedge developments1
A. Expenditure cuts
Change in the underlying primary balance, % points of potential GDP2
15
Public investment
Other
15
Total primary expenditure
12
12
9
9
6
6
3
3
0
0
-3
FIN
BEL
FRA
DEU
ITA
AUT
LUX
NLD
SVN
SVK
PRT
EST
ESP
IRL
GRC
-3
B. Revenue increases
Change in the underlying primary balance, % points of potential GDP2
8
Personal income taxes
Social security contributions
Consumption taxes
Other
Total primary revenue
8
6
6
4
4
2
2
0
0
-2
IRL
DEU
EST
NLD
AUT
LUX
SVN
ITA
FIN
FRA
BEL
SVK
ESP
PRT
GRC
-2
C. Change in the labour tax wedge3
For a single person with no children at different earning levels, percentage points
8
8
67% of average earnings
100% of average earnings
167% of average earnings
6
6
4
4
2
2
0
0
-2
Start
End
AUT
2010
2013
BEL
2010
2013
EST
2009
2012
FIN
2011
2013
FRA
2011
2013
DEU
2011
2013
GRC
2010
2013
IRL
2009
2013
ITA
2010
2012
LUX
2011
2012
NLD
2012
2013
PRT
2011
2013
SVK
2011
2013
SVN
2010
2013
ESP
2010
2013
-2
1. A fiscal consolidation episode is a period of consecutive years where the underlying primary balance is improving. A deterioration of
this balance in an intermediate year is admissible, provided the balance improves in the sum of any two adjacent years. Episodes
considered in the chart are those starting in 2009 or later. Due to data limitations on the composition of consolidation, the final year
considered is 2013, though for some countries consolidation efforts have continued afterwards.
2. On both revenue and expenditure sides, increases or decreases in cyclically-adjusted budget items do not always relate to
discretionary policy measures. For instance, tax elasticities can fluctuate for reasons not captured by the corrections performed for
the economic cycle and for one-offs.
3. Income tax plus employee and employer contributions less cash benefits as a percentage of labour costs.
Source: D. Gonçalves and Á. Pina (2016), “The composition of fiscal consolidation episodes: Impacts and determinants” and D. Bloch et al.
(2016), “Trends in public finance: Insights from a new detailed dataset”, both OECD Economics Department Working Papers, forthcoming; and
OECD (2016), “Taxing Wages: Comparative tables”, OECD Tax Statistics (database).
1 2 http://dx.doi.org/10.1787/888933367086
34
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
ASSESSMENT AND RECOMMENDATIONS
ratio to GDP (3% and 60%, respectively). The preventive arm is based on the so-called
medium-term objective (MTO), which provides a medium-term target for the structural
budget balance of each country.
Some 2011-13 reforms make better allowance for the fiscal and economic situation of
the EU member states. At the same time, SGP rules have become complex due to the
proliferation of different numerical targets, procedures, contingency provisions and
compliance indicators across the two arms (OECD, 2014a; Eyraud and Wu, 2015). The SGP
has nonetheless remained primarily focussed on individual national policies, with scope
for further consideration of their aggregate area-wide impacts. Furthermore, despite
strengthened enforcement provisions of the preventive arm, those of the EDP remain more
visible, often making policymakers focus on the 3% of GDP deficit threshold, risking
procyclical policy responses. With Treaty changes unlikely in the coming years (Juncker
et al., 2015; European Commission, 2015d), the short-term challenge is to ensure a sound
application of the current SGP rules. In particular, degrees of freedom afforded by the rules
should be used by countries with fiscal space to contribute to a more supportive joint euro
area fiscal stance.
The preventive arm contains some welcome flexibility in the structural balance
trajectory towards the MTO. The required annual fiscal adjustment depends on cyclical
conditions (for instance, with no required adjustment in case of negative GDP growth). In
some cases, there can be temporary deviations from the MTO or the consolidation plan
towards it to accommodate the short-term fiscal costs of major structural reforms,
including certain kinds of investment. Rule enforcement allows for some margins of
tolerance, since a deviation from the MTO or the path towards it is regarded as significant
only if it reaches at least 0.5% of GDP in one year, or 0.25% on average in two consecutive
years. Further, countries may be allowed to temporarily deviate from the adjustment path
towards the MTO in periods of severe area-wide economic downturn, a provision unused
so far.
As cyclical conditions improve and more countries leave the EDP, the need for fiscal
adjustment under the preventive arm will increase. In this context, rules should be strictly
enforced to help avoid a return to fiscal slippages in good times, as occurred before the
global financial crisis (Eyraud and Wu, 2015; Carnot and Castro, 2015). In bad times,
national fiscal policies should take account of cross-country spillovers (Goujard, 2013) and,
within SGP rules, contribute to supporting euro area aggregate demand. In the current
weak recovery, countries should use the flexibility afforded by preventive arm rules to
temporarily slow down or halt consolidation efforts and, if room for manoeuvre under the
SGP exists, adopt a temporary fiscal expansion. Public investment on trans-European
networks should rank high among the priorities for using fiscal space. The recently
announced European Fiscal Board may help to inform the debate on the appropriate
area-wide fiscal stance and how it should translate into national fiscal stances.
In the corrective arm, large adjustments induced by the debt reduction benchmark
should be avoided. The benchmark requires that the excess of the debt ratio over 60% of
GDP be reduced at an average 1/20th per year (with some transitional provisions). For
highly indebted countries, these fiscal adjustments can be very large. Italy, for instance,
would have needed a cumulative structural effort of around 3 per cent of GDP over 2013-15
(European Commission, 2015e). In the cases it has examined so far (Belgium and Italy), the
Commission took account of expected compliance with preventive arm requirements and
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
35
ASSESSMENT AND RECOMMENDATIONS
expected implementation of ambitious structural reforms, as well as of unfavourable
economic conditions (especially low inflation), and decided not to open an EDP
(European Commission, 2015e, 2015f). A similar approach should be taken in forthcoming
cases, as other highly indebted countries leave the EDP and become subject to the debt
reduction benchmark. In a future SGP revision, the appropriate speed of adjustment
towards the 60% of GDP debt threshold should be reviewed (see below).
It is also important to strengthen incentives for reform, including of national budget
frameworks. The corrective arm requires an annual adjustment of at least 0.5% of GDP
regardless of cyclical developments, which may imply a procyclical stance, and a deadline
for eliminating the excessive deficit. Longer deadlines are the main provisions for
flexibility. Largely due to the recession, only five euro area countries achieved compliance
with the initial deadline in EDPs that started in 2009/10, and five others were granted two
or more deadline extensions. Building on recent steps (European Commission, 2015g), the
Commission could make greater use of longer initial deadlines (or deadline extensions,
conditional on a satisfactory track record of fiscal adjustment) to provide incentives for
fiscal-structural reforms. Greater emphasis should also be given to the quality of national
budgetary frameworks (an aspect already contemplated in current legislation) when taking
EDP steps.
Over the medium term, SGP rules should be improved along two main dimensions.
First, to reduce complexity and asymmetries in enforcement, the preventive and corrective
arms could be more closely aligned and possibly merged, giving rise to a single set of
targets, procedures and indicators. Second, the current multiplicity of numerical rules
could be replaced by a single fiscal anchor underpinned by a single operational rule (Andrle
et al., 2015). The natural anchor is the public debt-to-GDP ratio in each country, given its
direct link to fiscal sustainability. These reforms would imply very substantial legislative
changes, including to the Treaty. The spring 2017 White Paper envisaged in the Five
Presidents’ Report (Juncker et al., 2015) offers an opportunity to start preparatory work.
Reinforcing national budgetary frameworks
Budget frameworks at national level play a key role in improving the quality of public
finances and the procedures and institutions involved in preparing, approving and
executing budgets are highly country-specific. The SGP reform of 2011-13 required stronger
national fiscal frameworks, including numerical fiscal rules, independent fiscal
institutions and improved budget reporting and transparency. Important strides have been
made in some areas, such as the coverage and timeliness of budget statistics and the
creation of independent fiscal institutions. However, overall budget reform activity since
late 2011, as assessed by the OECD, has been generally modest (Figure 22). Apart from the
transposition of the MTO into national law, the adoption of national-level numerical rules,
such as expenditure rules with a broad coverage, has been limited (Schaechter et al., 2012;
Bova et al., 2015). In most countries, more micro-level reforms enabling systematic
expenditure prioritisation or the efficient use of performance information in budgeting
have also had low implementation.
Adopting national expenditure rules and regularly conducting spending reviews
would upgrade budget frameworks in mutually reinforcing ways. Expenditure rules offer a
good balance between sustainability and stabilisation objectives, as automatic stabilisers
are largely on the revenue side, and tend to perform well on other counts, such as
simplicity and ease of communication (Andrle et al., 2015). In turn, through systematic
36
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
ASSESSMENT AND RECOMMENDATIONS
Figure 22. Intensity of budgetary reform in euro area countries1
Since end 2011, number of countries
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
Intensive²
Moderate³
Not significant
1. The degree of budget reform intensity is based on a qualitative assessment, by reference to the principles set out in the OECD
“Recommendation of the Council on Budgetary Governance” (18 February 2015) of answers provided by 28 OECD countries to a
questionnaire on changes to institutional budgeting frameworks since the end of 2011. Reforms relating primarily to fiscal rules,
independent fiscal institutions and parliamentary/civic participation have been discounted relative to those in other areas. Draft
assessments were submitted to the Working Party of Senior Budget Officials for discussion in June 2015.
2. Intensive reform activity and/or broadly-based across various aspects of budgetary governance.
3. Moderate reform activity and/or focused on specific aspects of budgetary governance.
Source: OECD (2015), The State of Public Finances 2015: Strategies for Budgetary Consolidation and Reform in OECD Countries.
1 2 http://dx.doi.org/10.1787/888933367092
scrutiny of baseline expenditure, spending reviews can improve prioritisation and help
achieve efficiency gains (Robinson, 2014). Rule-based aggregate expenditure ceilings
provide a medium-term anchor to the determination of annual spending allocations, and
thus facilitate reforms to increase the efficiency of public spending at sectoral or
programme level. When integrated into the regular process of budget preparation,
spending reviews support adherence to aggregate spending ceilings. Monitoring of rule
compliance, as well as of spending reviews’ follow-up recommendations and respective
impacts, should be entrusted to an independent fiscal institution.
Besides monitoring compliance with fiscal rules and preparing or endorsing
macroeconomic forecasts, according to SGP requirements, the remit of national independent
fiscal institutions could be usefully extended to estimating the costs of proposed policies, a
common task among such institutions outside the European Union (Debrun and Kinda,
2014). This would contribute to a more informed public debate on spending and tax policies,
potentially leading to a better design of such policies. Independent fiscal institutions should
also be provided with the resources and conditions for a credible fulfilment of their mandate.
Staff needs would generally increase if institutions were tasked with cost estimates, as
this requires sector and programme-specific expertise. Safeguards on institutions’ budgets,
such as multiannual funding commitments, are often lacking, but would enhance the
independence of those bodies (OECD, 2014b). Less than half of EU independent fiscal
institutions have full access to non-public budgetary information (European Commission,
2014). Finally, relations between the new advisory European Fiscal Board and national
independent fiscal institutions should be organised in a mutually-reinforcing way, as
planned, thus avoiding to undermine the scope of action and credibility of the latter.
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
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ASSESSMENT AND RECOMMENDATIONS
Leveraging the impact of EU investment policies
Both European and national policy levers play a key role in ensuring enough and
efficient spending on public investment. EU budget funds for investment and other
growth-enhancing expenditure, such as on education and active labour market
programmes, stand at 0.5% of EU GDP. This amount is arguably too low if account is taken
of the potential for generating economies of scale and positive externalities, for example
from research and development or infrastructure. However, even these limited resources
can have a leveraged impact on the composition and efficiency of public finances if
deployed in a way to crowd in national public funds and private investment, and foster
greater investment productivity. At national level, better co-ordination of investment
across levels of government and upgraded administrative capacity would increase
investment efficiency.
The structure of EU budget expenditure should be made more growth-friendly. Funds
aimed at investment and growth account for close to half of the total (Figure 23, “Smart and
inclusive growth”). Most of these resources fund European regional policy and are
geographically allocated. In contrast, “Competitiveness for growth and jobs” programmes are
directly managed at European level with no country-specific allocations. They include,
among others, the research and innovation Horizon 2020 and the Connecting Europe Facility
(targeted at the development of trans-European networks in transport, energy and digital
services). Also, in the context of the Investment Plan for Europe, the European Fund for
Strategic Investments supports projects across the EU with no geographic pre-allocation. In
the short term, it is essential to preserve investment and growth allocations in the face of
pressures on other fronts, such as the refugee crisis. In the longer term, post-2020 financial
frameworks should continue to increase resources for growth-enhancing expenditure,
funded by either reallocation of expenditure or an increase in the overall EU budget size.
Figure 23. European Union budget: Structure of expenditure
As a percentage of total commitments appropriations for 2014-20
Smart and
inclusive
growth
Sustainable
growth
(mainly CAP)¹
Economic, social and territorial cohesion
Competitiveness for growth and jobs
Market-related expenditure and direct payments
Other sustainable growth expenditure
Administration
Global Europe
Security and citizenship
0
5
10
15
20
25
30
35
1. CAP: Common Agricultural Policy.
Source: European Commission (2014), European Union: Public Finance, 5th Edition.
1 2 http://dx.doi.org/10.1787/888933367109
38
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
ASSESSMENT AND RECOMMENDATIONS
It is important to ensure additionality in EU regional policy (i.e. that EU funding adds
to, rather than replaces, national public spending) and that funds are spent efficiently.
Monitoring and enforcement mechanisms for additionality have been reinforced only
gradually, and remain weak: possible sanctions appear late in the process (not before 2022
for the 2014-20 period) and are relatively light. Furthermore, especially for euro area
countries, the levels of gross fixed capital formation required for compliance with
additionality look often unambitious, implying an increase in the share of European
structural and investment funds (and thus a decrease in that of national funds) in total
public investment (Figure 24). Current rules for additionality should be credibly enforced,
starting with the 2018 mid-term verification, where increasing required investment levels
could be considered. In future programming periods, more ambitious levels should
likewise be envisaged, and possible sanctions brought to an earlier stage.
Figure 24. European structural and investment funds as a share of public investment1
Per cent
140
140
2008-10
2011-13
2014-16
Additionality target²
120
120
100
100
80
80
60
60
40
40
20
20
0
CZE
EST
GRC
HUN
ITA
POL
PRT
SVN
ESP
SVK
0
1. Allocations for the European Regional Development Fund, European Social Fund and Cohesion Fund as a share of government gross
fixed capital formation.
2. Share of European structural and investment fund (ESIF) allocations in public investment if the latter equals the agreed reference
levels for additionality verification. The fact that part of ESIF allocations will not fund gross fixed capital formation but rather other
spending items (e.g. certain transfers) helps explain why shares can exceed 100%. In Italy and Slovenia the national-wide
additionality targets depicted are merely indicative, as additionality will be verified at a regional level.
Source: Calculations based on allocation data from European Commission Decision documents C(2006) 3473, 3474, 3475 and later
amendments, C(2014) 2082 final and “Available budget 2014-2020”, http://ec.europa.eu/regional_policy/en/funding/available-budget; gross
fixed capital formation data from OECD (2015), OECD Economic Outlook: Statistics and Projections (database) and Long-term Baseline, internal
database, Economics Department.
1 2 http://dx.doi.org/10.1787/888933367118
To support institutional quality and investment efficiency, conditionality
requirements in EU regional policy have been generally reinforced in the 2014-20 period.
Numerous ex ante conditionalities need to be met before the disbursement of funds, either
of a general nature (such as compliance with public procurement rules) or of a thematic
one (such as the existence of national strategies in specific sectors). In addition,
macroeconomic conditionality aims to reinforce consistency between European structural
and investment funding and key elements of EU economic governance. For instance, to
better address country-specific recommendations, the Commission may request countries
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
39
ASSESSMENT AND RECOMMENDATIONS
to reprogramme structural and investment funds, which could improve their alignment
with relevant structural reforms. As in the case of ex ante conditionalities, preserving
national ownership of reforms and other requirements will nonetheless be key.
In other cases, however, macroeconomic conditionality may be counterproductive. For
example, the Commission must propose a suspension of structural funds when the
Council assesses that no effective action has been taken to correct an excessive deficit.
Though modulated in the light of economic and social conditions, suspended amounts will
be at least in the range of 0.25 to 0.5% of GDP (or 25% to 50% of annual structural and
investment funding if lower). This suspension will be lifted and re-budgeted as soon as the
member state has adopted the necessary corrective action. Nevertheless, under fiscal
stress, these sanctions would likely worsen the composition of public expenditure by
intensifying downward pressures on public investment and other growth-enhancing
items, and should therefore in most cases be avoided.
Announced in November 2014, the Investment Plan for Europe aims to generate at
least EUR 315 billion (2.2% of 2015 EU GDP) of additional investment over three years,
mainly from private sources and with a focus on strategic sectors, including infrastructure,
innovation and SMEs. The Plan’s funding pillar (the European Fund for Strategic
Investments, EFSI) allows the European Investment Bank (EIB) Group to finance projects
that would not have been supported otherwise. The EFSI is endowed with a risk-absorbing
capacity of EUR 21 billion: EUR 5 billion from EIB resources, and an EU guarantee of
EUR 16 billion. This guarantee will be backed up by EU budget resources mainly reallocated
from other growth-enhancing programmes (Horizon 2020 and the Connecting Europe
Facility). Alternative reallocations, drawing on less growth-friendly expenditure, would
have been preferable. Similarly, it is important to ensure that the amounts committed by
several countries to provide co-financing to investments represent additional public
support, rather than investment reallocation. EFSI-supported investment has so far
provided negligible stimulus to activity, but it may have a positive medium-term impact:
project approvals are proceeding in line with the target, with those approved by
mid-May 2016 expected to trigger total investment of about EUR 100 billion in the coming
years. The Plan also comprises a second pillar for technical assistance (through the
European Investment Advisory Hub) and project promotion, and a third pillar for structural
reforms to create an investment-friendly environment, which are discussed in the 2016
OECD Economic Survey of the European Union. A case in point, essential to unlock
investment, is the reduction of regulatory heterogeneity across Europe.
Given limited public resources, the medium-term success of the Plan will hinge on its
ability to leverage private investment, for which the EIB Group’s lending behaviour and the
quality of the projects presented will be key. The EUR 315 billion investment target
presupposes a multiplier of 15: the EFSI guarantee should enable three times as much EIB
Group funding, which will be used to finance an average 20% of the value of investment
projects (the remainder coming from additional investors, with a large role played by
the private sector). This requires selecting projects which are attractive for additional
co-funding and (to avoid crowding-out) which would not otherwise be carried out.
Crowding in private investment on the scale envisaged also requires that the EIB Group
depart from its usual very prudent lending practices, characterised by a choice of low-risk
projects and negligible levels of non-performing loans (Claeys, 2015). This implies
accepting projects with higher risk than in the past, and financing on average a lower share
of each (one-fifth, rather than the traditional one-third to one-half).
40
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
ASSESSMENT AND RECOMMENDATIONS
Improving public investment governance
At national level, stepping up efforts to co-ordinate investment among tiers of
government is essential. Across the OECD, sub-national governments account for about
60% of total public investment, highlighting the need for vertical and horizontal
co-ordination mechanisms (OECD, 2013). However, effective co-ordination is difficult: in a
recent survey on infrastructure investment, more than three quarters of EU sub-national
governments reported co-ordination challenges (OECD and Committee of Regions, 2015).
Potential tools to foster co-ordination include bringing together different jurisdictions in
dialogue fora with actual involvement in decision-making, co-financing and conditionality
mechanisms, and the promotion of collaboration between sub-national governments
through the removal of legal and regulatory barriers, possibly coupled with financial
incentives. Better co-ordination among sub-national governments will also enhance their
ability to promote sound investment projects under the Investment Plan for Europe.
Public administration capacity is also essential for efficient investment, but is often
inadequate, especially at sub-national level. There is wide variation in the perceived
quality of sub-national governments across the European Union, as well as within some
countries (Charron et al., 2012). Capacity challenges have been identified at various stages
of the investment cycle, including long-term strategic planning, the ability to involve the
private sector (for instance through public-private partnerships) and public procurement
(OECD, 2013). Aware of these weaknesses, EU regional policy has included the
enhancement of administrative capacity among its ex ante conditionalities for the 2014-20
period, with an accompanying increase in financial support for this purpose. A recent
proposal for a Structural Reform Support Programme (European Commission, 2015h) will
also support capacity building, namely through technical assistance. At the same time, the
European Investment Advisory Hub has the potential to provide expertise to national
authorities and co-ordinate the already existing technical assistance activities. National
authorities should prioritise actions to preserve and develop administrative capacity at
different levels of government in response to the main gaps detected. In times of fiscal
restraint, these considerations should inform the design of fiscal consolidation.
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ASSESSMENT AND RECOMMENDATIONS
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OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016
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OECD Economic Surveys: Euro Area
© OECD 2016
ANNEX
Progress in structural reform
45
ANNEX. PROGRESS IN STRUCTURAL REFORM
Main recommendations
Action taken since the previous Survey (2014)
A. Monetary policy
Keep the current expansionary monetary policy stance over an Monetary policy has become more supportive since mid-2014, through
extended period, subject to the outlook for price developments over the policy rate cuts (which have taken the deposit rate increasingly to
medium term.
negative territory), a series of targeted long-term refinancing
operations and expanded asset purchases.
B. Banking regulation and banking union
Ensure that the ongoing comprehensive assessment of banks – which
consists of three complementary elements: a supervisory risk
assessment, an asset quality review and a stress test – leads to a
consistent overall evaluation of banks’ balance sheets.
The 2014 comprehensive assessment of banks’ balance sheets
improved information on the health of the financial sector and led, in a
number of cases, to bank recapitalisations, paving the way for the
coming into operation of the Single Supervisory Mechanism.
Adopt a single resolution mechanism with predictable and swift The Single Resolution Mechanism became fully operational in
decision-making that is politically accountable, and ensure that it is January 2016. Its ability to take decisions in emergency situations has
operative soon after the Single Supervisory Mechanism is in place. The not been tested yet.
agreement needs to ensure the effectiveness of the mechanism and its
ability to quickly take decisions in emergency situations.
Ensure legal certainty and equal treatment in the bail-in of bank
creditors across states to avoid complicating resolution processes and
a potential negative impact on bank funding. Ensure minimisation of
national discretion in setting resolution conditions.
The Bank Recovery and Resolution Directive was adopted (May 2014)
and has been transposed by most countries. However, transposition
has had some delays and has resulted in substantial heterogeneity
across countries in resolution settings.
For the national resolution funds to be set up under the Bank Recovery
and Resolution Directive, ensure that burden-sharing arrangements
for banks with cross-border activities are available. For the
Single Resolution Fund, establish strong arrangements to ensure
cross-border resolution financing as long as the resources of the
national compartments of the Fund are not yet fully pooled. Move over
time to full pooling of the Fund resources. Prefund the Resolution Fund
or temporarily bridge funding gaps that might occur in the transition
phase via a fiscal backstop and recuperate the finances needed by
risk-based contributions from the banking sector.
As per an intergovernmental agreement (May 2014), the Single
Resolution Fund will be built-up over 2016-23 with risk-adjusted
contributions from banks, and its national compartments will be
gradually mutualised. In December 2015 countries agreed to set up
national credit lines backing the respective national compartments.
Complement the Resolution Fund by a common fiscal backstop that is No action taken.
fiscally neutral over the medium term and recoups ex post any bridge
financing via contributions from the financial sector.
Possible changes in the treatment of sovereign bonds, notably the Preparatory work on different policy options for reforming the
gradual phasing out in the long run of the zero-risk weighting, should regulatory treatment of sovereign exposures has continued. No
be assessed with a specific attention to possible impacts on the decisions have been taken yet.
stability of financial markets. Any decision would need to be taken in a
co-ordinated manner at the international level. Diversify in the long run
the banks’ exposure to the debt of a single sovereign. Assess the merits
of leverage ratios, as a supplementary measure to risk-weighted ratios,
for gauging the strength of bank balance sheets.
C. Fiscal policy and the budgetary framework
Continue fiscal consolidation, respecting the requirements of the The aggregate fiscal stance turned into broadly neutral in 2015 and is
Stability and Growth Pact, as planned and allow the automatic expected to remain so in 2016, which is welcome, as it eliminated a
stabilisers to operate fully.
source of drag on domestic demand.
Design fiscal consolidation to favour inclusive growth and employment. In most cases, fiscal consolidation strategies have not favoured
growth, equity and employment. Public investment has not recovered
from previous cuts. Though some countries reduced social
contributions in 2015, this has only reversed a small part of previous
increases in labour taxation.
Ensure effective implementation of the strengthened EU and Fiscal
Compact rules in national fiscal frameworks, including medium-term
budgeting, identification of future spending and revenue pressures and
risks, independent fiscal councils and effective mechanisms to correct
deviations from fiscal targets.
46
More countries have set up independent fiscal institutions and
transposed the medium-term objective and the adjustment path
towards it into national law. The coverage and timeliness of budget
statistics have improved. Less progress has been made in adopting
national expenditure rules and regularly conducting spending reviews.
OECD ECONOMIC SURVEYS: EURO AREA © OECD 2016