Monetary Policy and Fiscal Soundness

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Presentation transcript:

Monetary Policy and Fiscal Soundness Ludger Schuknecht Director General „Economic and Fiscal Policy Strategy, International Economy and Finance” Federal Ministry of Finance, Germany 57th Annual Conference of the Italian Economic Association Milan, 22nd October 2016

Triangle of Stability Fiscal Policy Real Eco-nomy Financial Markets Stable Eurozone Financial Markets

Public debt stabilised but at record highs Public debt as a percentage of GDP 1999 2007 2009 2015 2017 Euro Area 70.4 64.9 78.3 92.9 91.1 Germany 60.0 63.5 72.4 71.2 65 ¾ France 60.2 64.4 79.0 95.8 97.0 Italy 109.6 99.8 112.5 132.7 131.8 Spain 60.9 35.5 52.7 99.2 99.6 Portugal 51.0 68.4 83.6 129.0 124.5 Greece 88.8 103.1 126.7 176.9 178.8 Ireland 46.7 23.9 61.8 93.8 86.6 UK 41.7 43.5 65.7 89.2 89.1 USA 58.9 64.0 86.0 105.9 107.5 Source: European Commission Spring Forecast (3 May 2016) for 2015-2017, Statistical Annex Germany: Federal Statistical Office and BMF-Projection (April 2016) rd. to ¼ percentage points

Nominal deficits stabilised but persisting Net lending/borrowing as a percentage of GDP 2007 2009 2015 2017 Euro Area -0.6 -6.3 -2.1 -1.6 Germany 0.2 -3.2 0.7 0.0 France -2.5 -7.2 -3.5 Italy -1.5 -5.3 -2.6 -1.9 Spain 2.0 -11.0 -5.1 -3.1 Portugal -3.0 -9.8 -4.4 -2.3 Greece -6.7 -15.2 -1.8 Ireland 0.3 -13.8 UK -10.8 -2.4 USA -12.7 -4.0 Source: European Commission Spring Forecast (3 May 2016) for 2015-2017; AMECO for 2007-2009 Germany: Federal Statistical Office and BMF-Projection (April 2016) rd. to ¼ percentage points

Social spending drives public expenditure Public expenditure as a percentage of GDP Total spending Social spending Euro Area 48.6 30.3 Germany 43.9 28.3 France 56.8 35.3 Italy 50.5 31.4 Spain 43.3 26.6 Portugal 48,3 27,1 Greece 55,3 28,7 Ireland 35,1 20,9 UK 43.2 26.3 USA 38.1 19.2 Korea 31.8 10.4 Source: EU Commission for EU countries (2015), OECD for USA and Korea (2014).

Demographic challenges Old-age dependency ratio (ratio of population 65+ per 100 population 15-64) Projected changes in age-related spending 2013–40 in % of potential GDP 2010 2040 Korea 15.3 54.4 USA 19.4 36.2 China 11.1 39.6 Germany 31.3 55.8 France 26.4 45.6 Italy 31.2 63.1 Japan 36.0 63.8 Euro Area 27.6 49.4 Source: UN World Population Prospects: The 2015 Revision. Euro Area: For 2010: Eurostat; For 2040: EPC Ageing Report 2015 – Underlying Assumptions and Projection Methodologies Source: BIS, Annual Report 2013

Financial sector more resilient Source: ECB, Consolidated Banking Data

Sovereign bonds on banks‘ balance sheets Source: ECB, Statistical Data Warehouse

Non-performing loans weigh on banks NPL as a percentage of total loans Source: EBA Data Risk Dashboard, Q1/2016

Risk of “Fiscal Dominance”/”Moral Hazard” How to exit? 10 Year Government Bond Yields (%) Source: Reuters, 6.9.2016.