Gertrude Tumpel-Gugerell: The euro area's economic outlook
Intervention by Ms Gertrude Tumpel-Gugerell, Member of the Executive Board of the
European Central Bank, during a panel discussion on Europe's financial forecast
at the Bloomberg Businessweek European Leadership Forum, London, 23 November 2010.
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Ladies and Gentlemen,
It is a pleasure to attend this year's Bloomberg Businessweek European Leadership Forum.
Bloomberg's and Europe's economy have at least one thing in common. Coincidently,
Bloomberg was founded in 1981 and so was the ECU, the European currency unit, one of
the forefathers of our common currency, the euro.
So let me take the opportunity, today, to speak about the state of the euro area economy.
When assessing the euro area economic outlook, three criteria are of particular relevance in
the current juncture. First, how much does the euro area banking sector still rely on central
bank liquidity support measures? And second, can we be confident that private sector
domestic demand can contribute to a sustained economic recovery? And third, what are the
implications for price stability against this background?
In what I will present to you I will argue that there are some good news when assessing
these two questions. First, money market activity in the euro area improved which has
allowed the ECB to withdraw some of the liquidity support. Second, household incomes and
non-financial corporations' balance sheets are improving supporting a positive outlook on
euro area growth, also against the background of further consolidation efforts of euro area
governments. And third, we expect price stability to be maintained over the medium term,
thereby supporting the purchasing power of euro area households, also as inflation
expectations remain firmly anchored in line with our aim of keeping inflation rates below, but
close to, 2% over the medium term.
So let me assess the euro area financial and economic outlook in a bit more detail.
Part I: Assessing the euro area financial and economic outlook
Reduction of central bank intermediation...
The size of refinancing operations has decreased considerably since 30 June 2010, from
€881 billion on that date to €510 billion in mid-November. The phasing-out of non-standard
measures continued in the third quarter of 2010, and is still continuing in the fourth quarter,
as all maturing one-year and six-month longer-term refinancing operations (LTROs) are not
being renewed.
... as money markets are improving.
Conditions in the euro area money markets are improving. The volumes in the interbank
money market (EONIA) have virtually doubled since summer, and are now back to the levels
prevailing before August 2007. The overall reduction in central bank liquidity has brought the
interbank (EONIA) rate closer to the policy rate, which is an important step towards going
back to our pre-crisis framework.
Euro area activity recovered in the second quarter of 2010...
Economic activity in the euro area is recovering. According to Eurostat's flash estimate, GDP
grew by 0.4%, quarter on quarter, in the third quarter of 2010, after increasing by 1.0% in the
second quarter.
While no breakdown is available for the third quarter of 2010, all components contributed
positively to quarterly GDP growth in the second quarter. In particular, domestic demand
contributed quite strongly for the first time since the crisis, namely by 0.5 percentage point.
... and surveys point to ongoing growth into the fourth quarter.
Looking beyond the third quarter, survey indicators, such as the Purchasing Managers' index
(PMI) and European Commission business surveys for the manufacturing and the services
sectors, point to ongoing growth in October.
Consumer confidence increased in October and stood above its long-term average, pointing
to a gradual recovery in euro area consumption.
Good prospects for households' income from the stabilisation in the labour markets...
The sentiment in the survey data finds its support in a number of encouraging developments,
both in the household and in the non-financial corporations sector.
On the household side, labour markets are stabilising, with employment levels remaining
stable in the first and the second quarters of 2010, while hours worked increased by 0.2%,
quarter on quarter, in both these quarters. The effect of the crisis on hours worked was far
stronger than that on the number of persons employed. Therefore, the upturn has also been
stronger in terms of the hours worked.
Moreover, the unemployment rate has stabilised in the last few months and stood at 10.0%
in the third quarter of 2010.
Overall, the stabilisation in the labour markets is creating good prospects for household
income and, thereby, also for private consumption. Indeed, the breakdown of households'
income shows that the share of compensation of employees has increased recently, while
the contribution of net social benefits has declined.
... and upward trend in production and new orders.
As to non-financial corporations, we can observe an increasing improvement in their
conditions.
Industrial production (excluding construction) and new orders (excluding ships, railway and
aerospace equipment) are on a rising trend after the strong decline observed during the
crisis.
Financing conditions are showing signs of improvement...
Euro area financing conditions are showing signs of a gradual improvement. Short term and
long term bank lending rates are currently at very low levels by historical standards
supporting a turnaround in the demand for credit.
... supporting the turnaround in the growth of lending to households and non-financial
corporations.
The annual growth of MFI loans to non-financial corporations became less negative in
September, confirming that the turnaround in loan dynamics is ongoing. The annual growth
of loans to non-financial corporations is actually expected to turn positive in the last quarter
of 2010.
Part II: Challenges ahead
The crisis has brought to the fore a number challenges for the euro area economy and our
common currency, the euro. Some of these challenges are new ones, but some are existing
ones that were amplified by the crisis developments.
It is clear that we cannot be complacent against the background of the positive sentiment on
the euro area economic outlook. We need to ambitiously and urgently address the
challenges that we are facing to ensure a continued and sustainable outlook for euro area
growth and price stability. For this reason we need bold reforms in Europe's economic
governance, particularly with regard to fiscal and macroeconomic policy surveillance.
Consolidation of public finances...
The crisis has caused public finances to deteriorate significantly, not only in the euro area,
but throughout the advanced world. This can be seen, first and foremost, from the rapid rise
in government deficits and debt ratios over a short period of time. The budget gaps in the
United Kingdom and the United States have actually reached double-digit figures, with Japan
coming close as well.
As regards the euro area, according to the Spring 2010 projections by the European
Commission, the government deficit could rise to 6.6% of GDP this year, before moderating
to 6.1% in 2011.
... and its underlying factors.
These budgetary developments reflect three main factors. The first, is the operation of
automatic fiscal stabilisers, i.e. the reaction to the recession built into the budgets, given the
existing social security and tax systems. Second, the origins of the fiscal expansion are to be
found in the stimulus packages that were a coordinated response to the European Economic
Recovery Plan of December 2008 and bank recapitalisation. Their cumulative impact was
roughly 2.3% of GDP in 2009-10. Third, a number of other factors show up in an
expansionary fiscal stance, namely other discretionary measures, unexpected revenue
shortfalls (e.g. losses of income linked to the decline in asset prices) and ongoing spending
trends (e.g. in public wages), even as the trend of nominal GDP growth fell markedly.
However, against the background of rapidly deteriorating fiscal positions, many euro area
countries have started to implement their consolidation plans, which is reflected in the
projected decrease in fiscal deficits for the coming year by the European Commission.
Diverse developments in unit labour costs across countries.
In the years prior to the crisis, the development of competitiveness diverged significantly
across euro area countries.
Relative price adjustments have thus far been relatively moderate within the euro area, if
there have been any at all. In fact, unit labour costs in the period 2008-09 have generally
increased in deficit countries relative to those in the euro area as a whole. Looking forward,
such cost adjustment in the period 2010-11 is currently expected to be relatively limited.
According to European Commission forecasts, only Ireland is expected to experience a
significant improvement in its labour costs relative to those in the euro area. While the growth
of labour costs is also expected to decline in all other deficit countries, it will in many cases
remain close to, or even above, the corresponding rate for the euro area as a whole.
Therefore including competitiveness as an indicator for surveillance at the European level is
key and already foreseen in the new EU economic governance framework.
Reform of the EU's economic governance framework...
European leaders recognize the need of a considerable strengthening of the economic
model. At their meeting on 28 and 29 October 2010, the EU Heads of State and Government
agreed on the reform of the European Union's economic governance. The proposals put
forward by President van Rompuy represent a strengthening of the existing framework for
fiscal and macroeconomic surveillance in the European Union. However, the Governing
Council feels that they do not go far enough to be the quantum leap forward in the economic
governance of Monetary Union that it has been calling for.1
On the fiscal surveillance, we need an effective surveillance mechanism so that corrective
policy action is taken in good time. And we need ambitious targets for the reduction of public
debt towards the 60% of GDP ceiling.
On the broader surveillance of macroeconomic policies in the euro area, we need a new
system of mutual surveillance in the euro area, concentrating firmly on euro area countries
experiencing sustained losses of competitiveness and large current account deficits as these
countries face the greatest sustainability challenges. It should be determined by transparent
and effective trigger mechanisms and specify clearly the sanctions in case of breach. And we
need full transparency. The assessments of macroeconomic imbalances and recommendations
for corrective action should be given broad publicity at all stages of the surveillance process.
... with a special focus on financial surveillance.
And finally, the financial crisis has taught us that economic growth can be severely impacted
by financial market disruptions. For this reason, European leaders agreed on a new financial
supervisory architecture for the EU aiming to prevent financial disruptions of the kind that we
have been experiencing in the future. This new financial supervisory architecture, which will
become operational as of 1 January 2011, includes the three new European Supervisory
Authorities (ESAs) for banking, insurance and securities markets to enhance
microprudential supervision and the European Systemic Risk Board (ESRB) as the new
macroprudential supervisory body in the EU.
The ECB will provide the secretariat to the ESRB. The assignment to the ECB of specific
tasks concerning the functioning of the ESRB is welcome, but does not constitute a change
in the mandate or an additional objective for monetary policy. Rather, these tasks should
contribute to financial stability, while being fully in line with the ECB's primary objective of
maintaining price stability. There are clear lines of institutional separation between the ECB
and the ESRB. In particular, both institutions are independent and have separate, clearly
defined mandates, namely the maintenance of price stability in the case of the ECB and the
mitigation of systemic risk in that of the ESRB.
BIS Review 157/2010
BIS Review 157/2010
BIS Review 157/2010
BIS Review 157/2010
BIS Review 157/2010
BIS Review 157/2010
BIS Review 157/2010