REPORT FROM THE COMMISSION Alert Mechanism Report
Date: 2012-02-14
Institutions: European Commission
Subjects: EU Member State, competitiveness, economic indicator, economic recession, export revenue, indebtedness, macroeconomics, market supervision, property market, public debt, structural adjustment

EUROPEAN COMMISSION 

Brussels, 14.2.2012  
COM(2012) 68 final 

REPORT FROM THE COMMISSION 

Alert Mechanism Report 

Report prepared in accordance with Articles 3 and 4 of the Regulation on the prevention 
and correction of macro-economic imbalances 

 
 
  
 
1. 

INTRODUCTION 

A new departure that widens and deepens economic governance in EMU 

Large  and  persistent  macroeconomic  imbalances  -  reflected  in  large  and  persistent  external 
deficits and surpluses, sustained losses in competitiveness, the build up of indebtedness and 
housing market bubbles – accumulated over the past decade and were part of the root causes 
of  the  current  economic  crisis.  They  not  only  caused  macroeconomic  difficulties  for  the 
Member  States  concerned,  but  also  serious  spillovers  which  contribute  to  the  threats  facing 
the euro area.  

This  Alert  Mechanism  Report  (AMR)  marks  the  first  step  in  implementing  the  new 
surveillance  procedure  for  the  prevention  and  correction  of  macroeconomic  imbalances 
(hereafter called the Macroeconomic Imbalance Procedure – MIP). This report also contains 
the  final  design  of  the  scoreboard  of  indicators  (presented  in  Table  1  and  Section  2). 
Surveillance  to  prevent  and  correct  macroeconomic  imbalances  under  the  MIP  is  a  new 
instrument of the strengthened framework for economic governance in the EU. It was adopted 
as  part  of  the  so-called  'six-pack'  governance  package  which  inter  alia  also  provides  for  a 
significant  reinforcement  of  surveillance  on  fiscal  policies.  Surveillance  on  macroeconomic 
imbalances under the MIP forms part of the "European semester" which takes an integrated 
and forward looking approach to the economic policy challenges facing the Union in ensuring 
fiscal sustainability, competitiveness, financial market stability and economic growth. 

The role and scope of the Alert Mechanism Report  

The  role  of  the  AMR  is  to  work  as  an  initial  screening  device  where  the  Commission 
identifies  Member  States  where  it  considers  that  developments  warrant  further  in-depth 
analysis  to  determine  whether  imbalances1  exist  or  risk  emerging.  It  should  be  emphasised 
that  it  is  in  the  following  in-depth  studies  that  the  driving  forces  behind  the  observed 
developments are analysed in detail with a view to determining the nature of the imbalances. 
Only on the basis of such in-depth analysis and, if appropriate, the Commission will propose 
policy recommendations, either under the preventive or the corrective arm of the procedure. 
The  in-depth  studies  and  the  proposals  for  recommendations  will  be  part  of  the  European 
semester.  

The  need  for  further  analysis  is  based  on  an  assessment  of  a  scoreboard  of  indicators 
established by the Commission after consultation with the Council, the European Parliament 
and the European Systemic Risk Board (see Section 2 and Tables 1 and 2 below)2. It should 
be emphasised that the scoreboard indicators are not mechanically interpreted. Countries are 
assessed by looking at the evolution of indicators over time as well as taking into account the 
most  recent  developments  and  outlook.  In  addition,  the  assessment  takes  into  account  a 
combination  of  additional  relevant  information.  Also,  the  Commission  pays  particular 
attention to a wider set of indicators (see Section 2, Table 3), which the Council and European 
Parliament stressed as being of particular relevance in an economic reading of the scoreboard.  

1  The  definition  of  imbalances  is  found  in  Article  2  in  the  regulation  on  the  prevention  and  correction  of 

macroeconomic imbalances.   

2  The Council endorsed the scoreboard in the conclusions of the ECOFIN Council of 7 November 2011. The 
European Parliament adopted a resolution on 15 December 2011. The ESRB responded in a letter dated 9 
December 2011.  

1

 
 
                                                 
Section 2 presents the design of the alert mechanism scoreboard. Section 3 makes a horizontal 
and thematic reading of  the  situation  based on a reading of the scoreboard. In  section  4  the 
analysis  of  the  scoreboard  is  made  per  country.  Section  5  provides  main  findings  and 
conclusions.   

2

 
 
 
 
 
Table 1. Scoreboard indicators and indicative thresholds (*) 

External imbalances and competitiveness 

Internal imbalances 

3 year 
average of 
current 
account 
balance  
as a % 
of GDP 

Balance of 
Payments 
statistics 
EUROSTAT. 

Net 
International 
Investment 
Position as a 
%  
of GDP 

Balance of 
Payments 
Statistics, 
EUROSTAT. 

Indicator 

Data 
source 

Indicative 
thresholds 

+6/-4% 

-35% 
Lower quartile 

% change  
(3 years) of  
Real Effective 
Exchange Rate, 
HICP deflators 
relative to 35 
industrial 
countries (a)  

DG ECFIN indicator 
data base on Price 
and Cost 
competitiveness. 

+/-5%  for €A 
+/-11%  non€A 
Lower  and Upper 
Quartiles of EA -
/+ s.d. of EA 

% change  
(5 years) in  
export 
market 
shares 

% change  
(3 years) in 
nominal unit 
labour cost (b) 

y-o-y % 
change in 
deflated 
house prices 
(c) 

private sector 
credit flow  
as % 
of GDP (d), (e) 

private 
sector debt 
as % 
of GDP (d), 
(e) 

general 
government 
debt 
as % 
of GDP 
(f) 

3 year 
average of 
unemploy-
ment rate 

Balance of 
Payments 
statistics, 
EUROSTAT. 

EUROSTAT 

Harmonised house 
price index by 
EUROSTAT, 
completed with 
ECB, OECD and 
BIS data. 

EUROSTAT for 
annual data and  
QSA, ECB for 
quarterly data. 

EUROSTAT for 
annual data and  
QSA, ECB for 
quarterly data. 

EUROSTAT 
(EDP – treaty 
definition). 

EUROSTAT 

-6% 
Lower quartile 

+9% €A 
+12% non-€A 
Upper 
Quartile € A3 p.p 

+6% 
Upper quartile 

+15% 
Upper 
Quartile 

160% 
Upper 
Quartile 

+60% 

+10% 

Period for  
calcu-
lating 
thresholds 
Some 
additi-
onal 
indicators 
to be used 
in 
economic 
reading 

Notes: 

1970-2007 

Net 
lending/borrow
ing vis-à-vis 
ROW (Capital 
Account + 
Current 
Account 
balances as % 
of GDP) 

First available 
year (mid-
1990s)-2007 

1995-2007 

1995-2007 

1995-2007 

1995-2007 

1994-2007 

1994-2007 

Net External 
Debt as % 
GDP 

REER vis-à-vis 
rest of the euro 
area 

Export market 
shares based 
on volumes of 
goods; Labour 
productivity; 
Trend TFP 
growth 

Nominal ULCs 
(changes over 1, 
5, 10 years); 
Effective ULC 
relative to rest 
of euro-area 
Other measures 
of productivity 

Real house price  
(changes over 3 
years); 
Nominal house 
price (changes 
over 1 and 3 
years) 
Residential 
construction 

Indicator on 
change in 
financial 
liabilities of the 
non-
consolidated 
financial sector 
and the debt 
over equity ratio 

Private sector 
debt based on 
consolidated 
data 

(a) for EU trading partners HICP is used while for non-EU trading partners, the deflator is based on a CPI close to the HICP in methodology; (b) index providing ratio of nominal 
compensation per employee to real GDP per person employed; (c) changes in house prices relative to the consumption deflator of EUROSTAT; (d) private sector is defined as non-
financial  corporations;  households  and  non-profit  institutions  serving  households;  (e)  sum  of  Loans,  and  Securities  other  than  shares;  liabilities,  non  –consolidated;  (f)  the 
sustainability of public finances will not be assessed in the context of the MIP given that this issue is already covered by the SGP. However this indicator is part of the scoreboard    
because public indebtedness contributes to total indebtedness of the country and therefore to the overall vulnerability of the country. (*) It is envisaged to develop a wider indicator of 
the banking/financial sector by the end of 2012. 

3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 2: The MIP scoreboard for 2010 

External imbalances and competitiveness 

Internal imbalances 

3 year average of 
Current Account 
Balance as % of 
GDP  

Net Interna- 
tional Invest- 
ment Position as 
% of GDP 

% Change (3 years) 
of Real Effective 
Exchange Rate 
with HIPC 
deflators 

% Change (5 years) 
in Export Market 
Shares 

 % Change  
(3 years) in 
Nominal ULC 

% y-o-y change in 
deflated House 
Prices 

Private Sector 
Credit Flow as % 
of GDP 

Private Sector 
Debt as % of GDP

Public Sector Debt
as % of GDP 

3 year average of 
Unemployment 

-4/+6% 
-0.6 

-35% 
77.8 

±5% & ±11% 
1.3 

-11.1 

-2.5 

3.9 

5.9 

-0.8 

-2.7 

-12.1 

-6.5 

-1.7 

-2.8 

-12.1 

-0.5 

-2.3 

6.4 

-2.1 

-5.4 

5.0 

3.5 

-5.0 

-11.2 

-6.6 

-3.0 

-4.1 

2.1 

7.5 

-2.1 

-97.7 

-49.0 

10.3 

38.4 

-72.8 

-90.9 

-92.5 

-89.5 

-10.0 

-23.9 

-43.4 

-80.2 

-55.9 

96.5 

-112.5 

9.2 

28.0 

-9.8 

-64.0 

-107.5 

-64.2 

-35.7 

-66.2 

9.9 

-6.7 

-23.8 

10.4 

12.7 

0.9 

-2.9 

5.9 

-5.0 

3.9 

0.6 

-1.4 

-1.0 

0.8 

8.5 

9.1 

1.9 

-0.5 

-0.6 

-1.0 

-1.3 

-0.5 

-2.4 

-10.4 

2.3 

12.1 

0.3 

-2.5 

-19.7 

-6% 
-15.4 

15.8 

12.3 

-15.3 

-8.3 

-0.9 

-12.8 

-20.0 

-11.6 

-19.4 

-19.0 

-19.4 

14.0 

13.9 

3.2 

1.4 

6.9 

-8.1 

-14.8 

20.1 

-8.6 

21.4 

-5.9 

32.6 

-18.7 

-11.1 

-24.3 

+9%  & +12%
8.5 

27.8 

5.1 

11.0 

6.6 

9.3 

-2.3 

12.8 

3.3 

7.2 

7.8 

7.2 

-0.1 

0.8 

17.3 

3.9 

7.7 

7.4 

8.9 

12.3 

5.1 

22.1 

15.7 

10.1 

12.3 

6.0 

11.3 

+6%  
0.4 

-11.1 

-3.4 

0.5 

-1.0 

-2.1 

-10.5 

-6.8 

-3.8 

5.1 

-1.4 

-6.6 

-3.9 

-8.7 

3.0 

-6.7 

-1.6 

-3.0 

-1.5 

-6.1 

0.1 

-12.1 

0.7 

-4.9 

6.8 

6.3 

3.4 

15% 
13.1 

-0.2 

1.7 

5.8 

3.1 

-8.6 

-4.5 

-0.7 

1.4 

2.4 

3.6 

30.5 

-8.8 

-5.3 

-41.8 

-18.7 

6.9 

-0.7 

6.4 

3.8 

3.3 

1.7 

1.8 

3.3 

6.8 

2.6 

3.3 

160% 
233 

169 

77 

244 

128 

176 

341 

124 

227 

160 

126 

289 

141 

81 

254 

155 

212 

223 

166 

74 

249 

78 

129 

69 

178 

237 

212 

60% 
96 

16 

38 

43 

83 

7 

93 

145 

61 

82 

118 

62 

45 

38 

19 

81 

69 

63 

72 

55 

93 

31 

39 

41 

48 

40 

80 

10% 
7.7 

7.5 

6.1 

5.6 

7.5 

12.0 

10.6 

9.9 

16.5 

9.0 

7.6 

5.1 

14.3 

12.5 

4.9 

9.7 

6.6 

3.8 

4.3 

8.3 

10.4 

6.6 

5.9 

12.0 

7.7 

7.6 

7.0 

Year 2010 

Thresholds 

BE 

BG 

CZ 

DK 

DE 

EE 

IE 

EL 

ES 

FR 

IT 

CY 

LV 

LT 

LU 

HU 

MT 

NL 

AT 

PL 

PT 

RO 

SI 

SK 

FI 

SE 

UK 

Note: (1) Cut-off date 30 January 2012; * Programme countries (IE, EL, PT, RO). LV ended its BoP assistance programme on 19 January 2012 but remains under post-
programme surveillance.   

4

 
 
  
 
Table 3: Additional indicators used in the economic reading of the MIP scoreboard, 2010 

Year 
2010 

% y-o-y 
growth of 
real GDP

Gross fixed 
capital 
formation 
as % GDP

Gross 
domestic 
expenditure 
on R&D as 
% GDP 

Current 
Account 
balance as 
% of  GDP, 
BoP data 

Net 
lending / 
borrowing 
vs. ROW as 
% GDP, 
BoP data 

Net 
external 
debt as % 
GDP 

FDI 
Inflows as 
% GDP 

Net Trade 
Balance of 
energy 
products as 
% GDP 

% Change 
(3 years) in 
REER vs. 
EA (17) 

% y-o-y 
change in 
Export 
Market 
Shares, 
volumes 

% y-o-y 
growth of 
Labour 
Productivity

% y-o-y 
growth of 
Employ-
ment 

% Change 
(10 years) 
in Nominal 
ULC 

% Change 
(10 years) 
in Effective 
ULC vs. 
EA (17) 

% Change 
(3 years) in
Nominal 
house 
Prices 

Residential 
Construction 
as % GDP 

Private 
Sector Debt 
as % GDP, 
consolidated 
data 

Financial 
Liabilities 
of 
fin.sector, 
non-
consolidated 
y-o-y 
growth  

BE 

BG 

CZ 

DK 

DE 

EE 

IE 

EL 

ES 

FR 

IT 

CY 

LV 

LT 

LU 

HU 

MT 

NL 

AT 

PL 

PT 

RO 

SI 

SK 

FI 

SE 

UK 

2.3 

0.2 

2.7 

1.3 

3.7 

2.3 

-0.4 

-3.5 

-0.1 

1.5 

1.5 

1.1 

-0.3 

1.4 

2.7 

1.3 

2.9 

1.7 

2.3 

3.9 

1.4 

-1.6 

1.4 

4.2 

3.6 

5.6 

2.1 

20.2 

23.5 

24.4 

17.2 

17.5 

18.8 

11.5 

16.6 

22.9 

19.3 

19.7 

18.6 

19.5 

16.3 

18.4 

18.0 

17.7 

18.2 

20.5 

19.9 

19.8 

24.0 

21.6 

22.2 

18.8 

17.8 

14.9 

2.0 

0.6 

1.6 

3.1 

2.8 

1.6 

1.8 

na 

1.4 

2.3 

1.3 

0.5 

0.6 

0.8 

1.6 

1.2 

0.6 

1.8 

2.8 

0.7 

1.6 

0.5 

2.1 

0.6 

3.9 

3.4 

1.8 

1.5 

-1.3 

-3.1 

5.5 

5.7 

3.6 

0.5 

-10.1 

-4.6 

-1.7 

-3.5 

-9.9 

3.0 

1.5 

7.7 

1.1 

-3.9 

6.6 

3.0 

-4.6 

-10.0 

-4.0 

-0.8 

-3.5 

1.8 

6.7 

-3.3 

1.3 

-0.5 

-2.2 

5.6 

5.7 

7.2 

0.1 

-9.2 

-4.0 

-1.7 

-3.5 

-9.7 

4.9 

4.2 

7.1 

2.9 

-2.2 

5.8 

3.1 

-2.8 

-8.9 

-3.7 

-0.8 

-1.9 

1.9 

6.5 

-3.1 

-121.8 

43.6 

0.5 

25.4 

-5.8 

24.1 

-295.9 

97.4 

91.7 

23.5 

51.3 

18.4 

53.5 

39.4 

5.7 

4.9 

3.4 

-2.4 

1.4 

8.1 

12.7 

0.1 

1.8 

1.3 

0.4 

3.3 

1.6 

2.1 

-3312.0 

386.0 

60.3 

-176.2 

30.7 

30.2 

33.5 

84.4 

38.3 

31.7 

23.9 

28.5 

62.3 

46.3 

1.4 

12.8 

-1.7 

1.0 

1.9 

0.6 

1.8 

0.8 

0.6 

2.9 

-0.3 

2.2 

na 

-5.9 

-3.5 

1.1 

-2.9 

-1.5 

na 

-4.2 

-3.0 

-2.4 

-3.4 

na 

-4.8 

-7.2 

na 

-5.0 

na 

-2.9 

-3.0 

na 

na 

-2.2 

-5.1 

na 

-2.9 

-1.7 

na 

1.9 

: 

: 

: 

-1.4 

8.0 

-5.2 

5.1 

1.0 

-0.1 

0.8 

0.6 

: 

: 

1.8 

: 

3.6 

-0.9 

0.2 

: 

-2.1 

: 

3.3 

12.8 

2.1 

: 

: 

-5.6 

3.9 

3.0 

-10.4 

-0.7 

7.7 

-12.4 

-11.7 

-6.8 

-6.0 

-4.7 

-5.8 

2.9 

2.5 

-18.8 

-2.9 

-2.0 

-4.6 

-1.2 

-3.8 

-8.8 

2.4 

-2.3 

2.4 

-8.0 

-0.7 

-5.7 

1.4 

6.4 

4.5 

3.6 

3.2 

7.4 

4.0 

-1.7 

2.6 

1.4 

2.3 

1.1 

4.7 

6.9 

0.8 

0.9 

0.6 

2.2 

1.7 

3.5 

3.0 

0.2 

4.0 

5.7 

5.1 

4.4 

1.9 

0.8 

-5.9 

-0.9 

-2.0 

0.5 

-4.1 

-4.2 

-1.9 

-2.3 

0.2 

-0.7 

0.0 

-3.7 

-5.2 

1.7 

0.0 

2.2 

-0.3 

0.9 

0.6 

-1.5 

-1.8 

-1.7 

-2.0 

-1.5 

1.1 

0.3 

22.5 

72.9 

27.1 

34.5 

4.3 

73.8 

28.7 

36.6 

29.2 

22.6 

30.5 

32.8 

86.0 

28.6 

37.5 

53.7 

32.9 

24.2 

13.2 

12.8 

24.9 

225.5 

52.2 

33.9 

21.8 

15.6 

30.0 

4.0 

: 

: 

: 

-16.7 

42.4 

9.4 

13.7 

8.5 

3.7 

11.5 

9.2 

: 

: 

16.6 

: 

11.2 

6.8 

-2.8 

: 

4.8 

: 

30.4 

15.7 

3.2 

: 

: 

6.3 

-11.8 

4.0 

-14.1 

3.6 

-44.5 

-33.8 

2.8 

-9.9 

0.0 

2.3 

-6.5 

-46.8 

-32.9 

5.0 

1.4 

7.4 

-3.8 

5.6 

na 

6.3 

na 

-2.6 

-1.2 

8.9 

13.3 

-2.1 

na 

4.3 

4.4 

4.2 

5.3 

3.3 

3.0 

4.8 

7.5 

6.1 

5.3 

6.0 

2.0 

1.9 

3.4 

2.5 

2.8 

5.0 

4.2 

2.6 

3.8 

na 

3.2 

2.7 

6.5 

3.2 

3.1 

130.6 

151.2 

71.6 

244.1 

111.8 

na 

292.8 

124.1 

213.9 

137.4 

125.4 

289.0 

135.8 

76.7 

201.6 

134.8 

164.7 

222.0 

149.7 

71.1 

224.4 

76.7 

118.4 

69.0 

155.0 

221.0 

na 

-2.1 

-2.2 

2.5 

7.8 

0.0 

-10.1 

5.9 

8.5 

-1.8 

2.9 

1.4 

-7.6 

-0.1 

0.0 

10.0 

3.2 

18.5 

7.0 

-1.5 

13.5 

10.2 

4.5 

-3.4 

1.6 

19.0 

2.1 

8.0 

Note: (1) 'na' refers to data not available for the moment. (2) Cut-off date is 30 January 2012; * Programme countries (IE, EL, PT, RO). LV ended its BoP assistance 
programme on 19 January 2012.    

5

 
 
2. 

THE DESIGN OF THE SCOREBOARD  

The  scoreboard  has  been  established  by  the  Commission  in  line  with  Article  4  of  the 
Regulation3  and  after  taking  on  board  comments4  from  the  European  Parliament5,  the 
Council6  as  well  as  from  the  European  Systemic  Risk  Board  as  regards  financial  market 
stability related issues7. The scoreboard indicators (see table 1) are publicly available8.  

When  selecting  the  indicators  and  thresholds  for  this  first  edition  of  the  scoreboard,  the 
Commission has followed the guiding principles provided by the legislation. The scoreboard 
contains a small number of relevant,  practical,  simple,  measurable, and available indicators. 
EUROSTAT sources are used when available, else the highest quality alternative data source 
has been chosen (e.g. the ECB). The selection of indicators is intended to allow for the early 
identification of imbalances that emerge over both the short-term as well as imbalances that 
arise due to structural  and  long-term  trends.  To this  end  the  choice of  indicators  focuses on 
the most relevant dimensions of macroeconomic imbalances and competitiveness losses, with 
a particular emphasis on the smooth functioning of the euro area. It should be underlined that 
the surveillance of public debt is limited to its contribution to macroeconomic imbalances as 
the sustainability of public finances is already covered by the Stability and Growth Pact9.  

Indicative  thresholds  have  been  set  at  prudent  levels  a  view  to  avoid  excessive  numbers  of 
'false alarms' but which are not set so stringently that they only identify problems once they 
are entrenched. Table 2 shows the values of the scoreboard indicators. They are based on data 
until  2010  which  is  the  last  complete  year  with  data  currently  available.  The  shaded  areas 
mark  where  the  indicator  value  surpasses  the  identified  indicative  thresholds.  These 
thresholds  are  the  same  for  all  countries  (except  for  indicators  on  Real  Effective  Exchange 
Rates  and  Unit  Labour  Costs  where  a  differentiation  has  been  made  between  euro-area  and 
non-euro-area  countries).  Moreover,  the  assessment  also  takes  into  account  the  most  recent 
data as well as the economic outlook in the Commission's Autumn forecast published on 10 
November  2011.  Values  of  indicators  for  previous  years  and  the  most  recent  period  are 
reported in the accompanying Statistical Annex10. 

The  assessment  of  imbalances  does  not  derive  from  a  mechanical  application  of  the 
scoreboard indicators and the related thresholds. It is the outcome of an economic reading of 
the scoreboard complemented by additional information and indicators taking due account of 
country-specific circumstances and institutions. In its Resolution11, the European Parliament 
highlighted  the  need  to  adopt  a  comprehensive  approach  reflecting  the  productivity  drivers 

3  Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances. 
4  The  Commission  Staff  Working  Paper  including  the  proposal  for  the  envisaged  scoreboard  on  which  the 
consultation took place can be found at: WEBLINK. Moreover, the Commission will publish a background 
paper with additional evidence on the rationale and properties of the chosen indicators. 

5  Resolution of the European Parliament adopted on 15 December 2011: 

http://ec.europa.eu/dgs/economy_finance/index_en.htm 
6  Conclusions of the ECOFIN Council of 8 November 2011; 

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/125976.pdf 

7  The  views  of  the  ESRB  on  the  envisaged  scoreboard  indicators  relevant  for  financial  market  stability: 

http://ec.europa.eu/dgs/economy_finance/index_en.htm 
http://ec.europa.eu/dgs/economy_finance/index_en.htm 

8 
9  Moreover, the indicator on the evolution of unemployment is read in conjunction with other, more forward-
looking,  scoreboard  indicators  and  is  used  to  better  understand  the  potential  severity  of  macroeconomic 
imbalances in terms of their likely persistence and the capacity of the economy to adjust. 

10  http://ec.europa.eu/dgs/economy_finance/index_en.htm 
11  See footnote 7. 

6 

 
 
                                                 
 
 
and  the  unemployment  trends.  The  European  Parliament  also  recommended  giving  full 
consideration to spill over effects in the scoreboard analysis. To this end, and in line with the 
regulation, additional indicators are considered and which are presented in Table 3. This inter 
alia  includes  additional  aspects  linked  to  the  general  macroeconomic  situation  (including 
growth conditions and investments) nominal and real convergence inside and outside the euro 
area  including  additional  aspects  of  trade  performance  and  specificities  of  catching-up 
economies (including FDI and net external debt indicators). They also reflect the potential for 
the  development  of  imbalances  as  well  as  the  adjustment  capacity  of  an  economy  such  as 
productivity.  As  recommended  by  the  Council,  the  European  Parliament  and  the  ESRB  in 
their comments on the Commission proposal for the scoreboard, it also includes the state of 
financial markets, which played an important role in the current crisis12. This set of additional 
indicators  is  an  integral  part  of  the  economic  reading  of  the  scoreboard  and  the  related 
selection of Member States for which further investigation through in-depth reviews appears 
warranted. 

3. 

A THEMATIC READING OF THE SCOREBOARD 

Current account divergences have narrowed but not disappeared with the crises… 

The large contraction in economic activity during the crisis resulted in a significant reduction 
in  external  imbalances.  In  particular,  Member  States  which  entered  the  recession  with  large 
current  account  deficits  have  experienced  pronounced  corrections  on  the  back  of  a  sharper 
drop in private sector demand and a corresponding contraction in imports. At the same time, 
several Member States with large current account surpluses have recently been experiencing 
relatively more resilient, albeit not very dynamic, private sector demand and/or their exports 
have been held back by the slump in world demand, which contributed to some reductions in 
current account surpluses. 

Nevertheless,  high  current  account  deficits  and  surpluses  have  not  vanished  altogether.  The 
scoreboard  indicator  on  the  current  account  balance  (3-year  average  of  current  account 
balances as a % of GDP) still indicates deficits exceeding the indicative threshold of 4% of 
GDP in Bulgaria, Spain, Cyprus, Malta, Poland and Slovakia, even though in some of these 
Member States the current account deficit has continued declining in the most recent period. 

The potential vulnerability from external deficits can be reduced if these are financed through 
relatively safe means such as FDI or capital transfers. FDI inflows were high before the crisis 
in many of the catching-up Member States: over the last five years, for example, FDI inflows 
covered more than half of current account deficits in Bulgaria, the Czech Republic, Estonia, 
Malta and Slovakia. Similarly, the positive balance on the capital account, where the capital 
transfers  from  abroad  are  typically  recorded,  has  been  non-negligible  in  a  majority  of 
catching-up Member States13.  

12 

It should be noted that some of the scoreboard indicators, notably on credit developments and house prices, 
also reflect this aspect. It is envisaged to develop an indicator on banking/financial sector by the end of 2012 
to be included in the scoreboard of the and in time for the subsequent European semester. 

13  These transfers also include capital inflows from EU structural funds. In the cases of Slovakia and Poland, 
including  the  capital  account  balance  would  actually  bring  the  indicator  value  inside  the  limits  of  the 
indicative  thresholds.  Also  Greece,  Spain  and  Portugal  benefited  from  strong  inflows  from  EU  structural 
funds.  

7 

 
 
                                                 
On  the  other  hand,  some  Member  States  continue  to  record  persistent  current  account 
surpluses:  Luxembourg  and  Sweden  exceed  the  indicative  threshold  of  6%,  while  Germany 
and the Netherlands are just below it.  

The Commission's 2011 autumn forecast points to some further narrowing of current account 
positions over next two years, although the reductions in deficits are likely to be mild in most 
cases, while in the Netherlands, for example, surpluses are set to increase (see graph 1). 

On the way forward, a key issue is whether current account imbalances will stay moderate or 
increase again once conditions in markets improve. Some of the past imbalances were driven 
by  excessive  demand  growth  fuelled  by  overly  optimistic  expectations  about  future  income 
growth in some Member States. To  the extent the recent corrections reflect reassessment of 
such expectations rather than purely cyclical drops in output, they could prove sustainable. On 
the  other  hand,  adjustments  in  relative  prices  have  been  limited  in  most  cases,  which 
eventually  leaves  the  question  about  the  structural  nature  of  these  realignments  and  hence 
their sustainability open. 

Graph 1: Current account balances as % of GDP 

10

5

0

-5

P
D
G
%
A
C

-10

CY EL* PT* ES MT SK SI

IT

IE*

FR EE BE FI AT NL DE LU BG RO* PL CZ LT HU UK LV DK SE

Euro-Area

non-Euro Area

2008-2010

2010

Forecast for 2013

-15
Note: Forecast figures are corrected for the level differences betw een Balance of Payments and National Accounts (Rest of the World) data; 
programme countries are in grey and marked w ith an asterisk.

Source: European Commission. 

…and the stocks of net external liabilities remain substantial in many cases. 

The  net  international  investment  positions  (NIIP)14  as  a  share  of  GDP  have  stayed  at  high 
negative levels in many current account deficit countries. This is due to persistent, although 
lower, current account deficits and also weak growth dynamics. Currently, the NIIP positions 
exceed the indicative threshold of -35% in a number of Member States: Bulgaria, the Czech 
Republic, Estonia, Spain, Hungary, Latvia, Lithuania, Slovakia, Poland, and by small margin 
in  Slovenia.  The  degree  of  vulnerability  is  lower  if  the  share  of  liabilities  that  require 
repayment of principal or interest, such as loans or portfolio debt, is low. An indicator of net 

14  Net International Investment Position statistics record the net financial position (liabilities minus assets) of a 
country  vis-à-vis  the  rest  of  the  world.  Data  cover  stocks  of  direct  and  portfolio  investments,  financial 
derivatives and other investment and reserve assets. 

8 

 
 
 
 
 
                                                 
external  debt15  (NED,  see  table  3)  shows  that  such  liabilities  are  relatively  low  in  many 
catching-up Member States, largely due to the high levels of FDI stocks. On the other hand, 
they are rather high in Spain, Hungary, Lithuania and Latvia. 

The  pre-crisis  developments  in  external  positions  coincided  with  price  competitiveness 
divergences …  

Member  States  with  high  and  persistent  current  account  deficits  accumulated  losses  in 
measures  of  price  and  cost  competitiveness  in  the  years  preceding  the  crisis.  Wage  growth 
tended  to  outstrip  productivity  improvements  in  many  EU  countries,  inducing  increases  in 
unit labour costs (ULC). Similarly, the developments in real effective exchange rates (REER), 
which show price competitiveness relative to the main trading partners, painted a picture of 
increasing divergence.  This  may  signal overheating, potential structural  rigidities in product 
and  labour  markets  and/or  inappropriate  responses  of  wages  to  country-specific  shocks,  but 
could  also  reflect  a  catching-up  process  in  some  Member  States.  In  a  number  of  Member 
States  with  high  external  deficits,  the  increases  in  labour  costs  were  concentrated,  although 
not exclusively, in the non-tradable sectors. This, in turn, induced a reallocation of resources 
towards these sectors, exerting further pressure on external positions. 

The  crisis  has  interrupted  these  developments  and  initiated  adjustment16.  The  scoreboard 
indicator (3-year change in the ULC index), nonetheless, shows that a number Member States 
still exceeded the indicative thresholds over the years 2008-2010 (9% for euro-area members 
and  12%  for  non-euro-area  ones)17,  namely  Bulgaria,  Luxembourg,  Poland,  Slovenia, 
Slovakia  and  Finland.  The  indicator  of  REER  developments  (based  on  HICP  deflators  and 
showing  3-year  percentage  change)  also  shows  interruptions  or  reversals  of  the  pre-crisis 
trends.  In  Member  States  which  exceed  the  indicative  thresholds,  the  developments  were 
mainly  driven  by  changes  in  nominal  exchange  rates.  This  is  true  for  Slovakia  (before  its 
entry in the euro area) and the Czech Republic which experienced sharp appreciations of their 
currencies. The UK experienced a significant depreciation. Conversely, Estonia's appreciation 
of its REER was largely driven by higher inflation compared to its trading partners, mainly 
due to a higher responsiveness of domestic inflation to increases in global commodity prices 
as  well  as  to  higher  administered  prices  increases.  Notwithstanding  the  often  sizeable 
reversals,  the  long-run  price  competitiveness  losses  have  not  been  fully  corrected  in  most 
Member States. Further realignments in relative prices and improvements in competitiveness 
would  facilitate  the  needed  sectoral  reallocation  and  contribute  to  the  sustainability  of  the 
external adjustment. 

16 

15  Net External Debt shows the net position of a country vis-à-vis the rest of the world as regards liabilities that 
require payments of principal and/or interest by the debtor at some point in the future. NED can be derived 
from the NIIP by excluding non-debt external liabilities (e.g. equity). 
In 2009, ULC growth accelerated because the large drops in productivity, due to output losses and labour 
hoarding, exceeded the often significant wage corrections. However, average growth of ULCs slowed down 
significantly in 2010 and has been moderate in 2011.  
In the scoreboard indicative thresholds can be differentiated between euro area and non-euro area Member 
States economically justified. As regards the ULC, the rationale for this differentiation is that the majority of 
non-euro  area  Member  States,  i.e.  those  who  acceded  in  2004  and  later,  have  experienced  trade 
liberalisations since early 1990s which has entailed a natural process of factor price convergence implying 
relatively stronger labour cost growth. 

17 

9 

 
 
                                                 
…while the EU as a whole has lost global export market shares, some Member States have 
lost more than others.    

Changes  in  world  export  market  shares  of  goods  and  services  (percentage  change  over  five 
years) point to potentially important structural losses in overall competitiveness in the global 
economy in a number of Member States. Belgium, Denmark, Germany, Spain, France, Italy, 
Cyprus, the Netherlands, Austria, Finland, Sweden and the UK have sustained market share 
loses  exceeding  the  6%  indicative  threshold.  In  a  number  of  these  countries,  the  losses  in 
export  market  shares  are  even  more  pronounced  if  a  longer  time  period  is  considered  (see 
graph  2).  In  addition  to  losses  in  price/cost  competitiveness,  this  may  also  reflect  sluggish 
improvements in non-price competitiveness, low ability to exploit new sales opportunities or 
the  diversion  of  resources  to  the  non-tradable  sector  during  domestic  absorption  booms.  In 
many  cases,  these  reductions  in  global  export  market  shares  are  largely  due  to  the  fact  that 
exports of these Member States grew at a lower pace than the world trade – the export share 
of  the  EU  as  a  whole  has  declined.  However,  export  performance  of  Belgium,  Denmark, 
France, Italy, Cyprus, Austria, Finland and the UK has also been less dynamic compared to 
other EU countries as witnessed by the declining shares of their exports in total exports of all 
EU Member States (see graph 2)18. 

Graph 2: Percentage changes in export market shares. 

World export market share (05-10)

World export market share (00-10)

Share in total exports of EU countries (05-10)

e
g
n
a
h
c
%

120

100

80

60

40

20

0

-20

-40

E
B

E
D

E
E

*
E

I

*
L
E

S
E

T
R I
F

Y
C

U
L

T
M

L
N

T
A

*
T
P

I

S

I

K F
S

G
B

Z
C

K
D

V
L

T
L

U
H

L
P

*
O
R

E
S

K
U

Euro Area

non-Euro Area

Note: Programme countries are in grey and marked with an asterisk.

Source: European Commission. 

Indebtedness weighs on households and corporations 

The prolonged period of credit expansion prior to the crisis has left economic agents in many 
Member  States  with  large  levels  of  accumulated  debt  (see  graph  3).  This  process  partially 
reflected enhanced financial market integration and deepening, altogether with convergence in 
nominal interest rates. Moreover, rapid credit growth was also fuelled by other factors, such 
as  misalignments  in  assets  prices,  exacerbated  by  favourable  asset  taxation  and  lending 
standards  as  confirmed  by  a  generalised  increase  in  the  share  of  loans  for  house  purchases 
over total loans in the run-up to the crisis. The indebtedness of the private sector as a whole 
exceeds  the  indicative  threshold  of  160%  in  more  than  a  dozen  Member  States:  Belgium, 

18  These conclusions seem to broadly hold also when looking at the change in export market shares based on 

volumes of goods trade. 

10 

 
 
 
 
                                                 
Bulgaria,  Denmark,  Estonia,  Spain,  Cyprus,  Luxembourg,  Malta,  the  Netherlands,  Austria, 
Finland, Sweden and the UK. A high level of private sector debt increases the exposure of the 
private  sector  to  changes  in  the  business  cycle,  inflation  and  interest  rates.  Moreover,  the 
unwinding of excessively leveraged positions jeopardises growth and financial stability. At a 
disaggregated  level,  non-financial  corporations  were  the  primary  drivers  behind  debt 
accumulation in Belgium, Spain, Cyprus, Slovenia and Sweden. While the ability of firms to 
repay their debt (debt over GDP or value added) can serve as a starting point for the analysis 
of corporate  indebtedness, a closer look at the share of assets that are financed  by  debt and 
their  maturity  structure  will  qualify  the  actual  needs  for  deleveraging  as  well  as  its  speed. 
Furthermore,  the  household  sector  was  largely  responsible  for  the  rise  in  leverage  in 
Denmark,  the  Netherlands  and  the  UK,  with  the  household  debt  level  exceeding  their  GDP 
levels.  These  developments  came  hand  in  hand  with  cumulated  increases  in  house  prices 
above 150% over the last cycle (only matched by house price hikes in Spain and Ireland). 

Price increases in housing markets reached unprecedented levels.  

Household indebtedness is closely linked with housing market developments: growth in credit 
to households and house price increases went hand in hand during the decade preceding the 
crisis.  The  house  price  cycle  in  the  EU  was  particularly  pronounced,  with  an  average 
cumulated growth in prices of over 40%. For example, house prices more than doubled during 
the  period  of  upswing  in  a  half  of  the  Member  States.  Moreover,  in  around  two-thirds  of 
Member States, the average pace of real house price increases exceeded 6% annually and in 
some cases the average annual growth rates were as  high as 20%  to  35%. While  the  length 
and the speed of this expansion has shown significant variations across countries, house prices 
peaked in a vast majority of Member States  in 2007/2008.  Expectations of continued house 
price  increases  also  facilitated  increases  in  size  of  the  construction  sector.  Indeed,  high 
residential investment went hand in hand with the increase in house prices for many Member 
States, like Denmark, Spain, Lithuania, Malta, Sweden and the United Kingdom. 

… but adjustment is underway although it is unclear how far it will go and for how long it 
will continue. 

A correction is now underway: real house price increases were below the indicative threshold 
of 6% in all Member States but Finland and Sweden in 2010. Recent adjustments have been 
rather  significant  and  countries  that  experienced  the  highest  and  fastest  increases  in  prices 
before the crises have tended to show, albeit not in all cases, the most pronounced corrections, 
signalling the existence of pre-crisis overvaluation. For example, Bulgaria, Denmark, Estonia, 
Spain, Lithuania, Latvia and Slovakia went through a significant adjustment following large 
accumulated  real  house  prices  rises.  Notwithstanding  these  corrections,  there  might  still  be 
scope  for  further  retrenchment  in  several  countries  which  also  experienced  large  and  fast 
house  price  increases,  such  as  Belgium,  France, Luxembourg, Malta, Slovenia, Sweden and 
the United Kingdom, as there is typically a direct link between the strength of the correction 
phase and the amplitude of the boom phase of the house price cycle. In addition, worsening 
credit conditions and weak GDP growth are likely to weigh on housing prices developments 
in the near future. Supply conditions will prove an important factor as well. 

Deleveraging has started … 

More  generally,  the  supply  of  credit  to  the  private  sector  slowed  down  drastically  in  some 
Member States and the deleveraging process has begun. The data on private credit flows show 
that  the  adjustment  started  in  2009,  following  a  still-buoyant  credit  expansion  in  2008.  In 

11 

 
 
2010,  credit  growth  exceeded  the  indicative  threshold  of  15%  only  in  Cyprus.  Slow  credit 
growth  combined  with  increased  net  savings  may  have  a  negative  feed-back  effect  on  GDP 
growth through a constrained internal demand. Empirical evidence shows that crisis-induced 
balance sheet adjustments in the private sector last on average more than five years, and even 
longer  in  the  non-financial  corporate  sector.  In  this  context,  net  exports  and  productivity 
developments are important as essential drivers of economic growth. 

… making the EU economies more vulnerable. 

In  the  course  of  the  financial  crisis,  it  has  become  clear  that  the  overall  indebtedness  of  a 
Member  State  is  important  and  that  there  are  strong  linkages  between  private  sector  and 
general  government  debt19.  Therefore,  private  sector  debt  needs  to  be  considered  together 
with general government debt because the impact of deleveraging in the private sector could 
be  magnified  by  the  on-going  sovereign  debt  crisis  exerting  pressure  on  highly-indebted 
public sectors. This could particularly be the case for Member States characterised by highly 
indebted  public  and  private  sectors,  e.g.  Belgium20  or  the  UK  (see  graph  3).  While  private 
sector  indebtedness  is  not  excessive  in  Italy,  the  high  level  of  public  debt  and  the  need  to 
consolidate  public  finances  could  exert  pressures  on  private  sector  balance  sheets.  Elevated 
amounts  of  debt  in  the  hands  of  non-residents  can  prove  to  be  an  additional  concern  in  a 
context of high uncertainty in international financial markets as they increase the vulnerability 
of  a  country  to  shortages  of  capital  or  sudden  stops  in  capital  inflows.  As  regards  external 
indebtedness, Spain and Hungary in particular feature a combination of high private and net 
external debt. Moreover, when denominated in a foreign currency, debt may raise additional 
vulnerability concerns arising from exchange rate fluctuations.  

Graph 3: Levels of accumulated debt by sector as % of GDP (2010) 

Non-financial corporations

Households' debt

Government Debt

P
D
G

f
o
%

400

350

300

250

200

150

100

50

0

*
E

I

Y
C

U
L

*
T
P

E
B

S
E

L
N

T
M

I

F

E
E

T
A

I

R S
F

T
E I
D

*
L
E

K
S

K
D

E
S

K
U

G
B

U
H

V
L

T
L

Z
C

L
P

*

O
R

Euro Area

non-Euro Area

Note: Programme countries are in grey and marked with an asterisk.

Note: Private debt is based on non-consolidated data. 
Source: European Commission. 

19  Governments  have  taken  on large  contingent  liabilities from  the  private  sector which,  even  if  they  do  not 
immediately  impact  on  debt  levels,  may  affect  their  perceived  creditworthiness.  There  are  also  feedback 
effects  from  the  private  sector  to  the  government  sector,  as  private  sector  actors  (not  only  financial 
institutions) may become large creditors to sovereigns, making them vulnerable to fiscal woes.  

20  Although the private sector debt based on consolidated figures is lower in Belgium due to a high share of 

intra-company loans. 

12 

 
 
 
 
 
 
                                                 
The adjustment in the real economy is ongoing  

The  adjustment  of  external  imbalances  and  the  repair  of  household  and  corporate  balance 
sheets  have  been  rather  painful,  particularly  in  Member  States  which  experienced  large 
imbalances  prior  to  the  crisis.  This  adjustment  has  been  largely  driven  by  developments  in 
domestic  demand,  and  has  often  been  associated  with  a  significant  rise  in  unemployment 
levels.  This  may  reflect  limited  price/wage  adjustment  but  could  also  reflect  the  ongoing 
process of sectoral reallocation. The adjustment to macroeconomic imbalances often requires 
shifts  of  labour  and  capital  across  different  sectors  in  the  economy,  in  particular  from 
artificially  inflated  real  estate  sectors  to  tradable  sectors.  This  process  is  usually  gradual 
(given the different skill requirements of the sectors concerned) and has still some way to go. 

Unemployment levels have been high over the past years and the scoreboard indicator (3-year 
average  of  unemployment  rate)  is  above  the  indicative  threshold  of  10%  in  Estonia,  Spain, 
Latvia, Lithuania and Slovakia. Also in many other Member States, this indicator pointed to 
rather  high  levels  of  unemployment,  which,  moreover,  have  generally  followed  an  upward 
trend.  The  structural  unemployment  rate  has  been  affected  considerably  by  the  recent 
recession. The reallocation of labour across the sectors in the economy has been sluggish in 
most Member States and the resulting high levels of unemployment involve potentially large 
losses in human capital and overall efficiency. Moreover, unemployment prospects are likely 
to be affected by the current uncertainty and fading growth momentum, the scope for sectoral 
reallocation in the economy and the ongoing deleveraging process in many Member States.  

The adjustment is bound to be more challenging in the low productivity growth environment. 
The  declining  trend  in  productivity  contributed  to  the  accumulation  of  macroeconomic 
imbalances and competitiveness losses in the pre-crisis period in a number of Member States. 
At  the  same  time,  achieving  the  necessary  adjustment  in  labour  costs  and  relative  prices  is 
easier  when  productivity  is  increasing  at  a  sustained  pace  as  this  reduces  the  pressure  on 
changes in nominal wages and prices. 

4. 

COUNTRY-SPECIFIC COMMENTARIES ON THE READING OF THE SCOREBOARD 

The commentaries below do not cover Member States which are subject to surveillance under 
programmes.  This  concerns  Greece,  Ireland  and  Portugal  in  the  euro-area  and  Romania 
outside the euro area. 

Belgium:  the  value  of  scoreboard  indicators  for  the  change  in  export  market  shares,  gross 
private sector debt and public sector debt are above the indicative thresholds. With respect to 
external competitiveness, there has been a loss in export market shares, going hand in hand 
with  a  deterioration  in  the  current  account  balance  even  if  the  level  remains  below  the 
indicative threshold and the deteriorating goods balance is partly being offset by the services 
balance  performing  well.  These  trends  may  be  explained  by  declining  cost  competitiveness 
due to, inter alia, ULC increases that are higher than those of the euro area, but also to non-
cost competitiveness. On the internal side, the private sector debt indicator is well above the 
relevant  threshold.  There  are  qualifications  to  take  into  account,  including  the  impact  of 
intercompany  loans  on  non-financial  corporate  debt  and  that  household  debt  is  mostly 
mortgage  related  while  the  household  savings  rate  remains  high.  Notwithstanding  this,  the 
level  of  gross  private  sector  debt  should  be  seen  in  conjunction  with  high  levels  of  public 
debt.  

13 

 
 
Bulgaria: prior to the crisis, Bulgaria recorded large current account deficits, which has led to 
a  NIIP  in  deficit,  driven  by  capital  inflows  (mostly  in  the  form  of  FDI)  and  private  credit 
growth. The crisis resulted in a sharp correction of the current account deficit which is now 
projected to turn into a slight surplus in 2011 and subsequent years. The improvement came 
not  only  from  reduced  imports  but  also  from  a  strong  export  performance  in  a  catching-up 
context.  Bulgaria  shows  one  of  the  highest  rises  in  ULC  in  the  EU  although  the  wage 
increases,  from  very  low  base  level,  are  part  of  the  ongoing  convergence  process  but  could 
slow the catching-up process over the medium and longer run. Private sector indebtedness has 
increased  rapidly  to  levels  above  the  indicative  threshold  mainly  explained  by  increases  in 
corporate debt while household debt remains limited as does public sector debt. 

Czech  Republic:  current  account  deficits,  albeit  below  the  threshold,  have  been  recorded 
over the last decade though some narrowing can be observed in recent years, driven largely by 
an  improving  trade  balance.  As  a  result  NIIP  surpassed  the  indicative  threshold,  although 
recent  unfavourable  valuation  effects  on  the  stocks  of  assets  and  liabilities  should  be 
acknowledged.  Due  to  the  predominant  FDI  financing  and  relatively  contained  private  and 
public  sector  debt,  the  net  external  debt  has  remained  close  to  zero.  Despite  losses  in  price 
competitiveness  through  strong  REER  appreciation  and  growth  in  ULCs,  there  have  been 
gains in export market shares.  

Denmark:  the  current  account  is  recording  continuous  surpluses  mainly  thanks  to  strong 
services  exports,  revenues  from  oil  and  gas  exports,  and  earnings  on  foreign  investment. 
There have however been losses of export performance  over  the past  years as  witnessed by 
the  indicator  of  export  market  shares  being  above  the  threshold.  Moreover,  Denmark  price 
competitiveness has deteriorated somewhat due to high nominal wage agreements in a period 
of overheating and weak productivity growth. The Danish housing boom, which started to be 
corrected in 2007, was associated with rapid credit growth and a surge of private sector debt, 
in particular in the household sector. While credit and house prices have partially adjusted in 
recent  years,  the  stock  of  private  sector  debt  remains  very  high  and  above  the  indicative 
threshold although for households this partly reflects elevated contributions to private pension 
saving schemes and a generous safety net.  

Germany: across the last decade Germany recorded persistent current account surpluses. This 
reflects in part an export performance coinciding with regained price competitiveness, and in 
part  subdued  domestic  investment  and  relatively  high  household  saving  rates.  However,  in 
recent years, domestic demand has been slowly strengthening, supporting a gradual narrowing 
of the current account surplus, and can be seen as part of rebalancing. Further, while a loss of 
export market shares of goods has been recorded, this development is less marked than for the 
euro  area  average.  On  the  internal  side,  private  sector  indebtedness  is  relatively  contained 
while  the  indicator  for  general  government  debt  exceeds  the  indicative  threshold  but  it  is 
projected  to  diminish  in  2011  and  the  phasing  in  of  the  constitutional  debt  brake  should 
underpin a trend decline. 

Estonia:  in  the  last  decade,  Estonia  consistently  recorded  current  account  deficits,  until  a 
marked correction took place during the crisis; in the same period, it achieved large gains in 
export market shares, despite losses in price competitiveness (from a low initial price level). 
In  recent  years,  there  has  been  wage  and  cost  adjustment.  Overall,  there  has  also  been  a 
gradual build up of a negative NIIP and it remains above the indicative threshold: however, 
this to a large extent reflects FDI implying that net external debt is substantially lower. Private 
sector  indebtedness  is  above  the  indicative  threshold,  although  the  deleveraging  process  is 
strong. In combination with high nominal GDP growth the private sector debt ratio is set to 

14 

 
 
fall.  Unemployment  is  high  but  adjusting  quickly  downwards  reflecting  high  labour  market 
flexibility. 

Spain: the economy is currently going through an adjustment period, following the build-up 
of large external and internal imbalances during the extended housing and credit boom in the 
years prior to the crisis. The current account has shown significant deficits, which have started 
to decrease recently in the context of the severe economic slowdown and on the back of an 
improving export performance, but remain above the indicative threshold. Since 2008 losses 
in price and cost competitiveness have partially reversed. While the adjustment of imbalances 
is  on-going,  the  absorption  of  the  large  stocks  of  internal  and  external  debt  and  the 
reallocation of the resources freed from the construction sector will take time to restore more 
balanced  conditions.  The  contraction  in  employment  linked  to  the  downsizing  of  the 
construction sector and the economic recession has been aggravated by a sluggish adjustment 
of wages, fuelling rising unemployment.  

France:  an  economic  reading  of  the  scoreboard  points  to  issues  on  both  the  external  and 
internal  sides.  The  contraction  of  France's  market  share  in  world  exports  is  above  the 
indicative  threshold,  and  this  decline  is  amongst  the  largest  in  the  EU.  There  is  a  gradual 
deterioration of the trade balance, and this is reflected in a deterioration of the current account 
balance  even  if  still  below  the  indicative  threshold.  Concerns  about  the  external  position  of 
the  French  economy  are  also  fuelled  by  some  losses  in  both  price  and  non-price 
competiveness.  In  this  context,  the  reduction  in  profitability  of  French  companies  and  the 
implications  for  investments  are  relevant  factors  that  deserve  further  analysis.  The  level  of 
private sector indebtedness has gradually increased to reach the indicative threshold level, and 
this has occurred alongside higher levels of public sector debt. 

Italy:  scoreboard  values  are  above  the  indicative  thresholds  in  the  areas  of  competitiveness 
and  public  debt.  Italy  has  had  a  significant  deterioration  in  competitiveness  since  the  mid-
1990s which is also seen through the persistent losses of market shares. These losses are only 
partly  reflected  in  the  steady  worsening  of  Italy's  external  position,  given  the  relatively 
subdued  growth  of  domestic  demand.  Weak  productivity  developments  are  the  main 
explanatory factor. While private sector indebtedness is relatively contained in Italy, largely 
thanks to the financial position of households, the level of public debt is a concern, especially 
given the weak growth performance and structural weaknesses. This, in turn, potentially puts 
strain on private sector balance sheets. 

Cyprus: with the values of many indicators above indicative thresholds an economic reading 
of the scoreboard points to wide-ranging challenges as regards both the external and internal 
side. The Cypriot economy has been characterised by persistent current account deficits over 
the  past  decade  mainly  driven  by  buoyant  domestic  demand.  The  evolution  of  the  Cypriot 
current account shows large disparities in the trade of goods and services reflecting a shift of 
the Cypriot economy towards the tertiary sector. The negative trade balance in goods is only 
partly  compensated  by  the  surplus  recorded  in  services  trade.  Cyprus  recorded  price 
competitiveness losses in the years ahead of the crises but this trend has been more contained 
in latter years. The highly leveraged private sector has continued to unwind its large level of 
outstanding debt, which nevertheless coexists with substantial assets. The deterioration of the 
economic outlook and the fiscal situation as well as the implications from the exposure of the 
banking  sector  to  Greece  add  to  concerns  on  the  challenges  involved  in  adjusting  to 
imbalances in other sectors of the economy. 

15 

 
 
Latvia: until 2008, Latvia recorded large and sustained current account deficits coupled with 
a  rapid  growth  of  a  negative  NIIP  even  though  net  external  debt  is  lower  taking  FDI  into 
account. The crisis brought a marked hard landing with an immediate and abrupt correction of 
the current account deficit requiring a strong adjustment programme supported by balance of 
payment assistance which is about to end in January 2012. The previous trend of continuous 
losses of price competitiveness has been compensated by internal adjustment including wage 
and  employment  cuts.  The  boom  years  were  also  characterised  by  strong  credit  growth, 
booming house prices and construction. This implied a rapid build up of private sector debt 
leading to a process of deleveraging and a substantial adjustment of house prices in the bust 
period. While unemployment is still high, it fell quickly from its peak in late 2009. 

Lithuania: until 2008 Lithuania recorded large current  account deficits as well as  losses of 
price  competitiveness,  reflecting  a  domestic  boom.  As  a  result  of  a  marked  and  significant 
adjustment  process  during  the  crisis  years,  the  current  account  is  now  at  levels  closer  to 
balance. The REER has depreciated, mostly as a result of nominal wage declines. Even before 
2008  Lithuania  was  able  to  gain  export  market  shares  from  a  low  level.  While  the  NIIP 
remains negative and at high levels above the indicative threshold, net external debt is much 
lower  taking  financing  through  FDI  into  account.  The  financial  crisis  brought  to  an  end  the 
expansion  of  the  banking  sector  and  robust  wage  dynamics,  private  sector  started  to 
deleverage,  credit  flows  as  a  percentage  of  GDP  turned  negative  and  house  prices  have 
corrected significantly. While unemployment is still high, it is falling from its peak in 2010. 

Luxembourg: the value of the scoreboard indicator for the current account balance is above 
the  threshold,  caused  by  trade  surpluses  reflecting  the  country's  strong  specialisation  in 
financial  services.  This,  however,  is  not  related  to  subdued  domestic  demand,  but 
concentration  of  economic  activities  and  jobs  in  the  country.  Luxembourg  has  lost  price 
competitiveness as a result of high wage increases and low productivity growth, but it should 
be  noted  that  at  the  same  time  Luxembourg  is  gaining  export  market  shares  in  services. 
Private sector indebtedness is above the indicative threshold, coupled with large and volatile 
credit  flows.  This  is  mainly  explained  by  lending  and  borrowing  operations  inside 
international non-financial corporations, rather than an excessive indebtedness of the private 
sector.  The  household  debt  level  is  relatively  contained.  Real  house  prices  witnessed  large 
cumulated growth during the last decade and the correction is limited so far.  

Hungary:  the  values  of  scoreboard  indicators  for  the  public  debt  ratio  and  NIIP  are  well 
above  the  indicative  thresholds.  The  latter  is  the  result  of  the  continuous  current  account 
deficits recorded in the years before the crisis. With the crisis a sharp adjustment has taken 
place as domestic demand collapsed but the  NIIP deficit remains  large even if a substantial 
part is financed by FDI. The pre-crises period also saw very strong credit growth, which in 
particular for households has been largely financed in foreign currency. The accumulation of 
external  financial  exposure  in  the  private  sector  has  taken  place  in  a  context  of  high  and 
increasing  public  debt  levels  also  financed  in  foreign  currency.  In  November  2011,  the 
government formally requested precautionary financial assistance from the EU and the IMF21.  

Malta: the economy experienced persistent current account deficits over the past decade but 
they  have  narrowed  in  recent  years  and  Malta  has  a  positive  NIIP.  It  remains  to  be  seen 
whether  the  narrowing  of  the  external  deficit  is  of  a  structural  nature  or  not.  Past  export 
market  share  losses  reflect  the  decline  in  traditional  manufacturing  activities  but  are  being 

21  Formal negotiations have not yet started. 

16 

 
 
                                                 
reversed by the services sector. On the domestic side, house prices have risen significantly but 
now appear to be on a downward path.  

Netherlands: in the years leading up to the crisis, the Netherlands recorded persistent large 
current  account  surpluses,  mainly  driven  by  the  trade  balance,  including  the  impact  from 
positive  net  gas  exports.  The  levels  are  however  currently  below  the  threshold  even  though 
they will increase in coming years according to the Commission forecast. Despite some rise in 
nominal  unit  labour  costs,  the  losses  in  export  market  shares  has  been  contained.  The 
surpluses  also  reflect  high  saving  in  the  corporate  sector  coupled  with  subdued  investment. 
Internal  risks  to  the  economy  in  the  Netherlands  mainly  relate  to  the  relatively  high  private 
sector debt and real estate markets. In the years before the crisis, household debt relative to 
disposable  income  and  house  prices  increased,  partly  related  to  fiscal  incentives  for 
households to take up large mortgages. At the same time, the net financial asset position of 
households is positive.  

Austria: as regards the external performance Austria has recorded sustained current account 
surpluses.  At  the  same  time  the  indicator  for  export  market  shares  point  to  losses  although 
ULC growth has been contained Private sector debt levels have gradually been rising and are 
currently  somewhat  above  the  indicative  threshold  as  is  also  public  sector  debt.  However, 
Austria did not, in relative terms, experience a domestic housing, asset or credit boom in the 
late 2000s and the increase of indebtedness has been primarily driven by corporations. Recent 
developments for 2011 suggest that the rise in private indebtedness has come to a halt and that 
the private sector, including nonfinancial corporations, will be in a net lending position.  

Poland:  although  the  values  of  scoreboard  indicators  for  the  current  account  balance  and 
NIIP are above  the  indicative thresholds, these need  to  seen  in  the  context  of  a  catching-up 
process and were largely financed through relatively stable FDI and EU funds inflows. There 
have been limited losses in price competitiveness in 2006-2008 driven by nominal exchange 
rate appreciation, but since 2009 the trend reversed. Despite these losses Poland experienced 
large  gains  in  export  market  shares  and  limited  increases  in  nominal  ULC.  There  has  been 
relatively strong credit growth and build up of private sector debt, albeit from a low level, but 
partially financed in foreign currency.  

Slovenia: two indicators in the scoreboard exceed the threshold in 2010. In the years before 
the  crisis,  Slovenia  enjoyed  strong  growth  and  domestic  demand  conditions,  coupled  with 
some  losses  in  price  competitiveness  and  a  gradual  widening  of  the  current  account  deficit. 
There are signs that overheating occurred, particularly as regards private sector credit growth, 
construction  value  added  and  property  prices.  The  Slovenian  economy  was  hit  hard  by  the 
global crisis.  This has brought some, perhaps temporary,  adjustment in the  external balance 
but  this  is  still  at  an  early  stage.  The  high  indebtedness  of  non-financial  corporations, 
including  in  the  construction  sector,  is  reflected  in  corporate  bankruptcies,  loan-to-equity 
ratios and loan arrears.  

Slovakia:  the  current  account  for  Slovakia  recorded  large  and  sustained  deficits  during  the 
last decade, partially financed through capital transfers from abroad. Nevertheless, the current 
account indicator remains above the indicative threshold although marginally. Foreign direct 
investment, which was largely directed to productive export-oriented industries, accounted for 
a dominant share of the gradually deteriorating net international investment position. Loss in 
price competitiveness reflected in a value of the REER indicator that is above the indicative 
threshold is mainly due to a strong nominal appreciation, and came together with high growth 

17 

 
 
in  productivity,  exports  and  world  shares  of  trade.  Overall,  public  as  well  as  private  sector 
indebtedness levels remain low.  

Finland:  several  scoreboard  indicators  relating  to  external  positions,  such  as  export  market 
share losses, are above the indicative thresholds. The current account is in surplus, although 
declining, over the last decade reflecting the global slowdown but also structural changes in 
the export sectors. Moreover, while losses in price competitiveness were relatively contained 
over most of the past decade, in recent years there have been some sharper losses due to slow 
adjustment  of  wages  in  a  context  of  falling  productivity.  The  scoreboard  also  points  to  a 
steady increase in the level of private sector indebtedness during the last decade which is now 
above the indicative threshold, driven to a large extent driven by increasing mortgages. House 
prices  increased  over  the  last  decade  despite  some  moderate  correction  over  2008-2009.  In 
2010  prices  started  to  pick-up  again,  and  at  a  pace  above  the  indicative  threshold,  although 
prices have moderated since the second half of 2011.  

Sweden:  there  has  been  a  record  of  persistently  large  current  account  surpluses,  above  the 
indicative  threshold.  This  reflects  positive  private  and  public  sector  saving  positions  on  the 
one  hand  but  also  to  some  extent  subdued  domestic  investment,  in  particular  in  the 
construction  sector.    Indicators  of  cost  developments  such  as  unit  labour  costs  and  real 
effective exchange rates do not point to a loss in price competitiveness. At the internal side 
Sweden  shows  a  very  high  level  of  private  sector  debt  well  above  the  indicative  threshold. 
There has been increasing household indebtedness, which is now at high levels despite recent 
slower  credit  growth.  This  reflects  very  strong  increase  in  house  prices  over  the  last  fifteen 
years which have started to stabilise only recently.  

UK: the UK has lost export market shares over the last decade, with the indicator being above 
the  threshold,  although  some  stabilisation  can  be  noted  in  recent  years.  This  loss  of  market 
shares has taken place despite a substantial depreciation of the REER in recent years. At the 
same time, the UK recorded current account deficits albeit below the indicative threshold. The 
high level of private debt is a concern also in a context of a weak public finance situation with 
high and increasing public debt. The household debt largely reflects mortgages in a context of 
high accumulated increases in house prices. While both the level of household debt and real 
house  prices  has  been  reduced,  they  still  remain  high  which  suggests  that  the  unwinding  of 
these imbalances has further to go where the speed of adjustment is an important aspect.  

5. 

MAIN FINDINGS AND CONCLUSIONS  

This first implementation of the macroeconomic imbalances procedure takes place against the 
background of a problematic economic environment dominated by concerns about sovereign 
debt.  All  Member  States  are  adjusting  to  the  impact  of  the  crisis,  although  their  individual 
challenges differ in terms of scope and severity. As the Commission's recent Annual Growth 
Survey22 explains, in addition to correcting significant imbalances that built up over previous 
years,  the  Union  and  Member  States  are  also  dealing  with  the  interrelated  challenges  of 
tackling  low  growth  and  high  unemployment,  ensuring  sustainable  public  finances  and 
restoring  stability  to  the  financial  system.  The  objective  to  reduce  imbalances  is  also 
recognised  in  the  context  of  the  G20  where  a  surveillance  process  to  promote  an  orderly 
rebalancing of global growth conditions has been put in place.  

22  http://ec.europa.eu/commission_2010-2014/president/news/documents/pdf/ags_en.pdf  

18 

 
 
                                                 
An adjustment of macroeconomic imbalances is underway in many Member States, especially 
those  which  have/had  high  external  deficits  and  large  imbalances  in  household  and/or 
corporate balance sheets and in their public sectors. This process still has some way to go, and 
has  led  in  a  number  of  Member  States  to  a  significant  rise  in  unemployment  levels  and  a 
reduction  in  the  level  of  economic  activity  in  the  short  term.  As  highlighted  in  the  Annual 
Growth  Survey,  reforms  promoting  productivity  growth  will  have  particular  relevance  for 
Member  States  suffering  from  macroeconomic  imbalances  due  to  their  positive  impact  on 
potential  output  and  adjustment  capacity23.  In  the  current  environment,  the  risks  of  new 
demand-led  imbalances  emerging  are  generally  low,  although  pressures  on  asset  markets 
could re-emerge once growth resumes.  

Given  that  programme  countries  are  already  under  enhanced  economic  surveillance  of  their 
economic situation and policies, they are not examined under the macroeconomic imbalances 
procedure.24  This  concerns  Greece,  Ireland,  Portugal  and  Romania.  Latvia  is  under  post-
programme  surveillance  as  the  balance  of  payment  assistance  programme  expired  on  19 
January 2012 and is therefore examined in this report. 

On  the  basis  of  the  economic  reading  of  the  scoreboard,  the  Commission  considers  that 
further  in-depth  analysis  is  warranted  to  closer  examine  issues  involving  several  Member 
States.  The  broad  approach  reflects  the  fact  that  this  is  the  first  application  of  surveillance 
under  this  procedure  and  that  it  therefore  has  to  cater  also  for  the  adjustment  to  previously 
accumulated imbalances. The Member States concerned are: Belgium, Bulgaria, Denmark, 
Spain,  France,  Italy,  Cyprus,  Hungary,  Slovenia,  Finland,  Sweden  and  the  United 
Kingdom.  

The  identified  Members  States  have  different  challenges  and  potential  risks  including 
spillover  effects.  Some  Member  States  need  to  correct  accumulated  imbalances  on  both  the 
internal  and  external  side.  They  will  have  to  reduce  high  levels  of  overall  indebtedness  and 
regain competitiveness so as to improve their growth prospects and export performance. In-
depth  analysis  will  help  to  assess  the  drivers  of  productivity,  competitiveness  and  trade 
developments  as  well  as  the  implications  of  the  accumulated  level  of  indebtedness  and  the 
degree of related imbalances in several Member States. Some countries are experiencing rapid 
adjustment  partly  due  to  catching-up  effects  and  these  developments  may  require  a  closer 
examination.  Despite  overall  good  macroeconomic  performance  some  countries  display 
developments in asset markets, including in particular housing, and a continuous build-up of 
indebtedness in the private sector, which also warrant further analysis.  

Finally,  the  economic  reading  of  the  scoreboard  indicators  points  to  the  need  for  further 
horizontal  analysis  on  the  drivers  and  policy  implications  of  large  and  sustained  current 
account  surpluses,  especially  in  some  euro  area  Member  States.  In  the  next  months,  the 
Commission  will  undertake  further  assessment  of  the  divergence  in  economic  performance 
across  Member  States,  including  exploring  trade  and  financial  interlinkages  between  deficit 
and surplus countries and examine ways for further re-balancing at the level of the euro area 
and  within  the  global  context.  It  will  also  assess  the  role  played  by  structural  factors, 
including the functioning of services markets, through their impact on domestic consumption 

23  See also the Macro-economic Annex to the Annual Growth Survey: http://ec.europa.eu/commission_2010-

2014/president/news/documents/pdf/annex_2_en.pdf 

24  This  is  also  in  line  with  the approach  taken  in  the  Commissions  proposal  .presented  on  the  23 November 
2011  for  a  regulation  on  the  strengthening  of  economic  and  budgetary  surveillance  of  Member  States 
experiencing or threatened with serious difficulties with respect to their financial stability in the euro area – 
COM(2011) 819final.  

19 

 
 
                                                 
and  investment,  as  a  driver  of  sustained  surpluses  and  thus  pointing  towards  the  necessary 
policy  guidance.  In  this  context  the  Commission  will  also  study  further  the  role  played  by 
catching-up effects.  

In the context of multilateral surveillance and in line with Article 3.4 of the Regulation, the 
Commission invites the Council and the Euro Group to discuss this report. The Commission 
is  also  looking  forward  to  feedback  from  the  European  Parliament  and  other  stakeholders. 
Taking into account these discussions, the Commission will start to prepare in-depth reviews 
for the relevant Member States. 

20