The Macroeconomic Imbalances Procedure - brief overview ESTP Course - MIP Luxembourg 1-3 December 2015 Kirsten Wentzel & Rosa Ruggeri Cannata, MIP TF

Outline Policy context Scoreboard: Application and Indicators Data sources and role of Eurostat Statistical challenges 2016 Statistical Annex to the Alert Mechanism Report (AMR) – flashing indicators 2016 In-Depth Reviews (IDR)

Policy context: The economic, financial and sovereign debt crisis EU policy initiatives: Six-Pack Regulation: enhanced economic policy coordination and surveillance, including MIP MIP: surveillance mechanism - part of European Semester - preventive and corrective arm

Macroeconomic Imbalances Procedure (MIP) Scoreboard of relevant macro-economic and macro-financial indicators currently 14 headline indicators neither policy targets nor policy instruments supplemented by economic judgment and country specific expertise thresholds defined by the Commission may be adjusted over time annual exercise - results published in the Alert Mechanism Report (AMR)

Macroeconomic Imbalances Procedure Alert Mechanism Report (AMR) starting point of MIP Initial screening device identifies countries for in-depth reviews MIP scoreboard + economic reading

In-depth reviews (IDRS) No imbalance Imbalances which require monitoring and policy action Imbalances which require monitoring and decisive policy action Imbalances which require specific monitoring and decisive policy action Excessive imbalances which require specific monitoring and decisive policy action Excessive imbalances which require decisive policy action and the activation of the Excessive Imbalances Procedure

MIP Headline Indicators Scoreboard Internal Imbalances House price developments Private sector credit flow Private sector debt General government debt Unemployment rate Total financial sector liabilities Labour market Activity rate Long term unemployment Youth unemployment External Imbalances Balance of Payments Current account Net international investment Competitiveness Real effective exchange rate (REER) Share of world exports Nominal unit labour cost

External Imbalances (1) Current account Reference indicator: past three years average of CAB in % of GDP (BOP data) Summarises economic transactions of an economy with the rest of the world Thresholds: +6% of GDP and - 4% of GDP Net international investment position Records the net financial position (assets minus liabilities) of the domestic sectors of the economy versus the rest of the world, as a stock Expressed in % GDP (BOP data) Threshold of -35% of GDP

External Imbalances (2) Real Effective Exchange Rate (REER) Drivers of persistent changes in price and cost competitiveness of each MS relative to its major trading 42 partners Symmetric thresholds +/-5% for EA, +/-11% non EA Export Market Shares (EMS) Percentage change of export market shares over five years (BOP goods and services data) Transformation aiming to capture long-term competitiveness development, structural losses Lower threshold: -6% Nominal Unit Labour cost index Comparing remuneration (compensation per employee) and productivity (GDP per employment) to measure the average cost of labour per unit of output (NA data) EA threshold: +9%, non EA threshold:+12%

Internal Imbalances (1) House price developments Deflated by NA deflator to reflect the value of house prices relative to the whole consumption basket Booms and busts in housing markets affect the real economy through a variety of channels and can be an important source of macroeconomic imbalances Threshold: +6% Private sector credit flow Expressed in % GDP Flow counterpart of private sector debt Threshold: +14% Private sector debt Measuring the debt of the non-financial private sectors (non-financial corporations plus households and NPISH) Threshold: +133%

Internal Imbalances (2) General government debt Maastricht Treaty definition: consolidated GGGD of the whole general government sector at nominal value, outstanding at the end of the year (EDP and SGP) Expressed in % GDP with threshold: +60% Unemployment rate Number of unemployed persons as a percentage of the labour force based on International Labour Office (ILO) definition 3 year backward average Threshold: +10% Total financial sector liabilities Expressed as year on year growth rate Threshold: +16.5 % A very broad measure of the expansion of the exposure to potential risks in the financial sector

Labour market All as three years change in p.p. Activity rate Long term unemployment Youth unemployment All as three years change in p.p. Aim: capture social consequences of the crisis in the medium and long term Not triggering MIP steps

Auxiliary Indicators Indicator Real GDP Gross fixed capital formation Unit Real GDP 1 year % change Gross fixed capital formation % of GDP Gross domestic expenditure on R&D Current plus capital account (Net lending-borrowing) Net external debt Foreign direct investment in the reporting economy - flows Foreign direct investment in the reporting economy - stocks Net trade balance of energy products Real effective exchange rates – Euro Area trading partners 3 year % change Export performance against advanced economies 5 year % change Terms of trade Export market share - in volume Labour productivity Nominal unit labour cost index (2010=100) 10 year % change Unit labour cost performance relative to Euro Area House price index (2010=100) - nominal Residential construction Private sector debt, non-consolidated Financial sector leverage, non-consolidated % debt to equity Employment rate Young people neither in employment nor in education and training (% of total population aged 15-24) % 3 year change in p.p People at risk of poverty or social exclusion (% of total population) People at risk of poverty after social transfers (% of total population) Severely materially deprived people (% total population) People living in households with very low work intensity (% of total population aged 0-59)

What the SB is and what is not A first step (an initial filter) in the procedure An instrument of communication and accountability A set of indicators that helps identifying macroeconomic risks ____________________________________________________ It is not: A tool for a mechanic decision on the existence of imbalances A tool to identify progress in reforms

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Data sources Main providers: National Statistical Institutes and Eurostat Some BoP indicators co-produced by National Central Banks REER indicators compiled by DG ECFIN Figure for global exports (denominator) provided by the International Monetary Fund

The role of Eurostat Ensure statistical support for the MIP Produce and supply the relevant statistical data Ensure high quality of data Set up and implement a quality and monitoring framework for MIP relevant statistics Provide methodological support in the process of choice and definition of indicators Foster harmonisation and documentation of production processes

Statistical developments - 2013 Debt of the non-financial private sectors now measured in consolidated terms Consolidated debt corresponds, by and large, to the amount of funds that the sector receives from other sectors Non-consolidated debt gives the total gross indebtedness of the sector, including debts between two entities of the same sector Unavailability of data for all countries in 2013 The debt of the non-financial private sectors (non-financial corporations, households and non-profit institutions serving households) can be measured in consolidated or non-consolidated terms. Consolidated debt corresponds, by and large, to the amount of funds that the sector receives from other sectors. Non-consolidated debt gives the total gross indebtedness of the sector, including debts between two entities of the same sector. The issue of consolidation is highly relevant in the non-financial corporations (NFC) sector whereas its effect in the household sector is negligible. From an economic point of view, there is a fundamental difference between intra-group loans and loans contracted by two independent companies. Intra-groups loans do not constitute an imbalance, they merely reflect institutional, corporate financing, accounting and tax practices. In contrast, loans between two independent companies could signal deficiencies in the financial intermediation role of the financial sector, generating fragility in the NFC sector. Since consolidated data of non-financial corporations were not available for all Member States at the time of the first release of the MIP Scoreboard, non-consolidated data were used, although consolidated data were considered preferable. To address this issue and to develop further practical guidelines on statistical consolidation of data, a technical Task Force was set up. The result of the significant efforts by Eurostat, statistical institutes and central banks in Member States, is that all Member States now produce consolidated financial data. Based on conceptual (economic) and statistical considerations, the use of consolidated data is both analytically sounder and statistically more robust. Non-consolidated data will, nevertheless, continue to be used as an additional indicator for the economic reading of the scoreboard.

Statistical developments - 2013 (cont.) Financial derivatives excluded from the definition of the private sector debt Removing derivatives from the definition improves the comparability of data among the EU Member States Capture liabilities contracted as funding sources At the same time, it was proposed to exclude financial derivatives from the definition of the private sector debt since it would allow for a clearer economic interpretation of scoreboard indicator. Private sector debt in the scoreboard has been defined as the sum of loans and securities other than shares, including financial derivatives. Removing derivatives from the definition improves the comparability of data among the EU Member States. In fact, the aim of this indicator is to capture liabilities contracted as funding sources, while derivatives are mostly used for either (short-term) hedging or speculation. This item accounts for a very small part of the private sector liabilities, and their exclusion would not have any practical consequence of the MIP implementation.

Statistical developments - 2014 Adoption of the new accounting framework for National Accounts (ESA 2010 replacing ESA 95) Adoption of the new manual for Balance of Payments (BPM6 replacing BPM5) Availability of new inventories (House Price Index) Updated quality information Unemployment Rate: inclusion of Population Census 2011 results EDP: on-going work on updating inventories

Statistical developments - 2014 (cont.) Preliminary analysis of impact of ESA 2010 and BPM6 on MIP indicators HPI: backcalculation for five additional Member States: AT and EL: data produced by NCBs ES, LV and CY: data back-calculated by Eurostat and approved by NSIs At the same time, it was proposed to exclude financial derivatives from the definition of the private sector debt since it would allow for a clearer economic interpretation of scoreboard indicator. Private sector debt in the scoreboard has been defined as the sum of loans and securities other than shares, including financial derivatives. Removing derivatives from the definition improves the comparability of data among the EU Member States. In fact, the aim of this indicator is to capture liabilities contracted as funding sources, while derivatives are mostly used for either (short-term) hedging or speculation. This item accounts for a very small part of the private sector liabilities, and their exclusion would not have any practical consequence of the MIP implementation.

Statistical developments - 2015 MSs efforts to improve BoP data coverage following the adoption of BPM6 euro banknotes treatment in national BOP/IIP statistics has been changed To improve consistency between the treatment of intra-euro system claims/liabilities and the treatment in EMU FA and MFI balance sheets statistics To increase the coherence by reducing net errors and omissions and by improving data consistency for euro area countries Auxiliary indicator on EMS in volume Numerator from NA Monetary Financial Institution

Statistical challenges Comparability, Reliability, Consistency Inventories and quality monitoring Data coverage: last 10 years (longer when considering data transformations) Backward data calculation

The Statistical Annex 2016 14 headline indicators + 25 auxiliary indicators (including some social indicators) - % of young people not in employment, education or training - people at risk of poverty or social exclusion - At risk of poverty rate - Severely materially deprived people - People living in households with very low work intensity

Flashes per indicator

Number of flashing Indicators All Member States: Min. one indicator beyond the thresholds Maximum number of flashing indicators: 7 out of 14 Only one indicator is not flashing for any country: private sector credit flow

IDRs 2014 – countries overview Covering 17 countries Excessive Imbalances which require specific monitoring and decisive policy action: HR, IT, Sl No imbalances : DK, MT, LU Specific monitoring of policy implementation for: HR, IT, Sl and IE, ES and FR Surveillance in context of adjustment programme: PT, RO, CY, EL

IDRs 2015 – countries overview AMR 2015: 16 countries will be subject to IDRs Follow-up on excessive imbalances: HR and IT 3 new countries with excessive imbalances: BG, FR, PT Imbalances, which require (specific) monitoring and (decisive) policy action for 11 countries After completion of adjustment programme: PT, RO No IDR at this stage: CZ, DK, EE, LV, LT, LU, MT, AT, PL and SK Surveillance in context of adjustment programme: GR, CY

IDRs 2016 – countries overview AMR 2016: 18 countries will be subject to IDRs New countries to examine existence of imbalances: AT, EE No IDR at this stage: CZ, DK, LV, LT, LU, MT, PL and SK Surveillance in context of adjustment programme: EL, CY

Reading of the MIP scoreboard No single indicator can capture all potential risks: - Analysis in connection with other scoreboard indicators The number of flashes is not the key criteria The scoreboard should be read also over time The severity of a breach of a threshold can be considered The auxiliary indicators play an important role 31 31

Conclusions - overview MIP: surveillance mechanism integrated part of the European Semester prevention and correction of macroeconomic imbalances early warning system based on scoreboard of indicators + economic reading AMR starting point of MIP  In-Depth Reviews preventive and corrective arm

Any questions? ESTAT-MIP@ec.europa.eu