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The excessive imbalances procedure (EIP) Declan COSTELLO European Commission Directorate General for Economic and Financial Affairs DNB and IMF workshop.

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Presentation on theme: "The excessive imbalances procedure (EIP) Declan COSTELLO European Commission Directorate General for Economic and Financial Affairs DNB and IMF workshop."— Presentation transcript:

1 The excessive imbalances procedure (EIP) Declan COSTELLO European Commission Directorate General for Economic and Financial Affairs DNB and IMF workshop on «Preventing macroeconomic imbalances in the euro area » Amsterdam, 13-14 October European Commission

2 Overall changes to economic governance European Systemic Risk Board financial stability and macro & micro level Excessive Imbalances Procedure external and internal imbalances The Europe 2020 Strategy growth enhancing structural reforms Stability and Growth Pact fiscal policy AND …. the ongoing debate on the EFSF and ESM as well as Eurogroup goverance

3 Broad scope of surveillance External positions (e.g. current accounts, net international investment positions) Competitiveness developments (e.g. REERs, ULCs) Export performance (e.g. export market shares) Private sector indebtedness (e.g. credit, debt) Public sector indebtedness Assets markets (e.g. housing) External imbalances Internal imbalances

4 Example of ‘test’ early warning scoreboard: Portugal 2001-2010 Threshold2001200220032004200520062007200820092010 EXTERNAL Current Account balance as a percent of GDP[+]/-4%-9,6-9,7-8,4-7,7-8,4-9,8-10,4-11,2 -11,1 Net IIP as % of GDP, BoP data-35%-47,6-54,8-56,7-63,0-67,6-78,5-88,2-96,1-109,0-107,6 % Change (3 years) of Real Effective Exchange Rate (REER) with HIPC deflators+/-5% & +/-11%-0,32,39,68,15,31,41,52,71,3-2,4 % change (5 years) in Export Market Shares-6%-6,21,6-2,7-2,9-4,0-5,6-5,4-13,1-9,3-8,5 ULC index (% change over 3 years) – thresholds 9% (EA) and 12% (non EA)+9% & +12%11,112,011,48,38,65,55,76,08,75,4 INTERNAL % y-o-y change in House Prices +6% 1,9-2,2-1,9 -0,43,315,41,22,7. Private sector Credit flow as percent of GDP15%22,512,79,810,714,517,224,921,07,13,0 Private sector debt as percent of GDP160%187192197198206215229245252248 Public sector debt as percent of GDP60%51545556626463657683

5 Alert mechanism Economic reading of early warning scoreboard indicators to identify Member States with potential risks In-depth review Analysis to distinguish between benign and harmful macroeconomic developments and to identify policy options No problem Procedure stops. Imbalance exists Commission/Council recommendations under Article 121.2 Severe imbalance Commission/Council recommendation under Article 121.4 The preventive arm of the EIP Policy response

6 The Corrective Arm Member State is placed in “Excessive Imbalance Position” Corrective Action Plan Surveillance of compliance with reform commitments Sufficient abeyance Insufficient: interest bearing deposit Insufficient: Fine 0.1% of GDP Insufficient fine 0.1% of GDP

7 The Corrective Arm is INTRUSIVE and FOCUSSED Member State is placed in an Excessive Imbalance Position Corrective Action Plan Surveillance of compliance with reform commitments Sufficient abeyance Insufficient: interest bearing deposit Insufficient: Fine 0.1% of GDP Fine 0.1% of GDP

8 … and works by reverse Qualified Majority Voting Member State is placed in an Excessive Imbalance Position Corrective Action Plan Surveillance of compliance with reform commitments Sufficient abeyance Insufficient: interest bearing deposit Insufficient: Fine 0.1% of GDP Fine 0.1% of GDP

9 Challenges in applying the EIP Analytical –large degree of qualitative judgement especially if acting early –requires considerable country specific knowledge; –data limitations –limited consensus on policy responses. Political –greater awareness of the costs of inaction and spillover effects; –not easy to form blocking minorities; –macro challenges with euro area spillovers that require micro policy responses in areas of national competence –… hinge on effective governance reforms of the Euro area

10 Additional slides

11 How the EIP fits into the European semester (indicative based on timing of 1st year)

12

13 Formal links between the EIP and ESRB in the draft legsialtion Commission recommendation – in depth studies "any early warnings or recommendations from the ESRB relevant to the Member States under review" into account European Parliament has proposed additional cross references –choice of indciators in the scoreboard –alert mechanism report

14 Exploring the interlinkages between the EIP and ESRB EIPESRB Scope of surveillance External imbalances, competitiveness, internal imbalances -macro-prudential oversight of the financial system Nature/approach of surveillance Prevention/correction of unsustainable macroeconomic imbalances Country specific Systemic risks to the financial system Thematic Monitoring and enforcement Annual exercise linked to European semester Legal policy recommendations can be addressed to Member States Scope for financial sanctions on euro area Member States Continuous process of surveillance Possibility to address non-legally binding warnings and recommendations to Member States, EU institutions, national/EU supervisory authorities – which can be made public

15 Ensuring synergies Commission-ESRB: ECFIN Commissioner is permanent member with voting rights on ESRB Steering Board and provides inputs ECOFIN-EFC-ESRB: Council can be a recipient of ESRB recommendations or warnings and EFC President is a non-voting member of ESRB EIP-ESRB-Parliament: ESRB required to present annual report to Parliament and there will be regular meetings with ECON Committee. Parliament is co-legislator for EIP and will be involved at various steps of the procedure –Cooperation at technical level between Commission, ESRB and ECB

16 Scope of surveillance under the EIP External imbalances –current account balance –net international investment position –change in REERs –change in nominal ULC –change in export market shares Internal imbalances –Private sector credit flow –Private sector debt –Change in house prices –General government sector debt –[financial/banking sector]


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