GOVERNMENT STATISTICS AND THE EUROPEAN MONETARY UNION

Economic and Monetary Union (EMU) The EMU represents a major step in the integration of EU economies. It involves the coordination of economic and fiscal policies, a common monetary policy, and a common currency, the EURO All 28 EU Member States take part in this economic union, but some countries have integrated further through the adoption of the EURO

Background The decision to form an Economic and Monetary Union was taken by the European Council in Maastricht in December 1991. This became known as the Maastricht Treaty (signed Feb 1992). Economic and Monetary Union takes the EU one step further in its process of economic integration, which started in 1957 when it was founded.

Development of economic integration Preferential trading area (with reduced customs tariffs between certain countries) Free trade area (with no internal tariffs on some or all goods between participating countries) Customs union (with the same external customs tariffs for third countries and a common trade policy)

Development of economic integration 4. Single market (with common product regulations and free movement of goods, capital, labour and services) 5. Economic and monetary union (a single market with a common currency and monetary policy) 6. Complete economic integration (all the above plus harmonised fiscal and other economic policies)

Maastricht Criteria The Maastricht criteria are the criteria for EU Member States to enter the EMU and adopt the euro as the national currency. The 4 criteria are defined in article 121 of the treaty: these impose control over inflation, public debt and public deficit, exchange rate stability and the convergence of interest rates.

1. Inflation rates No more than 1.5 percentage points higher than the average of the 3 best performing (lowest inflation) member states of the EU.

2. Government finance Annual government deficit The ratio of the annual government deficit to GDP must not exceed 3% Government debt The ratio of gross government debt to GDP must not exceed 60%

Exchange rate Any applicant countries should have joined the exchange-rate mechanism under the European Monetary System for two consecutive years and should not have devalued its currency during the period

Long Term Interest Rates The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states.

Maastricht Treaty: EDP EU Treaty defines the reference values for public deficit and public debt: EDP Treaty defines them both by reference to ESA Deficit / Surplus = Net lending / net borrowing (B.9) of General Government (S.13) Debt = liabilities of GG in currency and deposits (AF.2); securities other than shares, excluding financial derivatives (AF.33) and loans (AF.4); at nominal value; consolidated

Why such a reference? Comparability across Member States as national budgets may be drawn up on various basis Economic accounting Integration with other macroeconomic statistics

The introduction of ESA2010 Impact on denominator (GDP at current market prices) Specific chapter on government (20) Deficit and Debt impacts from: Classification of units Pension lump sums Standardised guarantees Others (e.g. Mobile phone licences)

Eurostat’s role Treaty:’Commission provides fiscal data to the Council’ Regulation 479/2009 (as amended) – Member States notify the data to the Commission / Eurostat Eurostat: Validates, or Expresses reservations; or changes the data

….Eurostat’s role Eurostat Press Release at t+3 weeks Eurostat must notify + justify 3 days in advance the intention to express reservations or to change the data Report to the Economic and Financial Committee

Separation between statistics and forecasts The Commission is strongly recommending a clear separation between the function of forecasting versus the function of compiling statistics: NSIs do not make forecasts of the deficit and debt. Forecasts are made by Ministries of Finance, and Eurostat is itself not in a position to verify the quality of forecasts.

….Eurostat’s role Dialogue with Member States Conceptual decisions ‘Requests for clarification’ within days of notifications EDP missions (standard dialogue or methodological) Treatment of specific cases (ex post or ex ante) Conceptual decisions Bilateral: letters to Member States with specific or general decisions Regular update to the chapters of the Manual on Government Deficit and Debt

Data Transmission - EDP Actual data (previous four years) and current data (planned data) (eg: By October 2014 data transmitted: 2010-2013 + Planned 2014) Reporting deadlines: before 1 April and 1 October Detailed set of tables by sub-sector: central government, state government, local government and social security funds

Data transmission - EDP EDP (see example of Malta) Table 1 (summary table): Net borrowing (-)/ Net lending (+) Debt Gross fixed capital formation Interest

EDP Table 2 Transition between working balance in the public accounts (e.g. in the budget) to the B.9 in national accounts

Key features of EDP Table 2 Notion of working balance: a key accounting or budget balance which is nationally relevant Notion of sub-sectors Elimination of financial transactions + corrections for time of recording Notion of ‘other bodies’ Other adjustments (includes off-budget treasury operations)

Key features of EDP Table 3 Stock-flow adjustment Role of transactions in assets (privatisations, etc) Importance of receivables/payables Adjustment for accrual of interest and face value definitions Revaluations and other changes in volumes Statistical discrepancies

The edp submission includes also a comprehensive questionnaire asking for a set of supporting data

Crucial Issues Delimitation of general government (dealt with separately) Time of recording Financial vs. non-financial transactions Pension lump sums; capital injections…

Time of recording (1/4) Accrual principle Flows recorded when the economic value is created, transformed or extinguished When claims and obligations arise, are transformed or cancelled

Time of recording (2/4) Taxes and social contributions Taxes expected not to be collected should not be in government revenue: government revenue should over the long run equal to that of cash (ESA 10 paras 20.172-20.175) Two acceptable sources of data Assessment information: use of a coefficient Cash information: time adjustment Two methods of presentation: gross or net

Time of recording (3/4) Interest Recorded as accruing continuously (paid) over time to the creditor (amount of the principal)

Time of recording (4/4) Court decisions with retroactive effect Do not go back and revise history Recorded in the year the court decision occurs (claim is established, recognised) If the total amount remains in doubt, can record claims as these become payable

Central coordinating role of the NSI for EDP Following the crisis of statistics of some years ago, the European Statistical System is strengthening its independence. This change will be reflected in the updates to Regulation 479. The objective is to confirm that it is the national statistical authority which is fully in charge of the notification of EDP statistics.

The EURO The euro was created because a single currency offers several advantages over individual currencies. These include: Greater security and more opportunities for busineses and markets More integrated financial markets Improved economic stability and economic growth

Extension of assessment of quality of data to upstream data sources (1) In April 2011, following the Greek crisis and Financial crisis, a Commission Communication ‘Towards robust quality management for European Statistics’ was issued. The Communication set out a strategy to give the EU a quality management framework for and the mechanisms to ensure the high quality of statistical indicators related to Reinforced Economic Governance.

Extension of assessment of quality of data to upstream data sources (2) Actions taken by Eurostat: - Strengthening the Governance of the ESS (Code of Practice, Independence of NSIs and Code of Confidence) - Preventive approach through internal country risk assessments and more focus on quarterly data - Upstream dialogue visits - Implementation of quality management framework in the EDP processes - Promote accrual based accounting in public finance

The Scoreboard Indicators The LIME working group has established a set of eleven indicators to act as support to the annual Alert Mechanism Report. These indicators are essentially a macroeconomic reading of potential imbalances and identifies those Member States for which in-depth analysis are required The MIP is part of the EU’s so-called ‘six-pack’ legislation, which aims to reinforce the monitoring and surveillance of national macroeconomic policies

Scoreboard Indicators The Scoreboard consists of eleven headline indicators: 5 cover External Imbalances and Competitiveness 6 cover Internal Imbalances

External Imbalances and Competitiveness Current Account Balance as % of GDP Net International Investment Position as % of GDP Real Effective Exchange Rate Share of World Exports Nominal Unit Labour Cost

Internal Imbalances House Price Developments % y-o-y change n deflated prices Private sector Credit Flow as % of GDP, consolidated Private Sector Debt as % of GDP, consolidated General Government Debt as % of GDP Unemployment Rate (3 year average) % y-on-y change in Total Financial Sector Liabilities

Thank you for your attention Joseph Bonello Acting Director General National Statistics Office Malta joseph.a.bonello@gov.mt