ESTP Course Balance of Payments – Introductory course Paris, 22-23 May 2014 Currency Unions and Regional Balance of Payments Data

The BPM6 Includes an Appendix on Currency Unions, Economic Unions, and Other Regional Arrangements In BPM5, there was a chapter (XXIV) on regional statements. In BPM6 this has been substantially updated to include Currency Unions (CU) and Economic Unions (EcUn) and has become Appendix 3. Major contributions from ECB and Eurostat to this appendix Compilation of BOP and IIP for regional arrangements involves the aggregation of data for two or more economies; “Regional statement” are compiled by an economy vis-à-vis a grouping of selected countries

Economic Unions In an economic union, the free circulation of capital and persons adds specific challenges for BOP compilers : - the application of the residency principle, crucial for external accounts statistics, can be more difficult (for some individuals, the institutions of the Union) - the capture of financial flows between member countries of the economic union becomes increasingly difficult

Currency Union Once a single currency is decided, the focus moves towards the achievement of area-wide statistics especially in view of the single monetary policy to be conducted; while, however, needs remain at national level. This requires the availability of a rather wide range of statistics covering the monetary union as a single economy, including balance of payments and international investment position statistics

Two Types of Currency Unions Centralized currency union The CU has a Regional Central Bank (RCB) owned by the governments of the member countries. The common currency is issued by the RCB and central bank operations in each country are carried out by branches or agencies of the RCB. Decentralized currency union The CU comprises a RCB and national central banks (NCBs) of the member countries. The RCB is owned by the NCBs, and not by the Governments. The decision on the single monetary and foreign exchange policy are taken by the decision making body of the RCB, which also coordinates the implementation of the decisions, a primary responsibility of the NCBs

Treatment of Foreign Assets of the Centralized Currency Union Two possibilities: All foreign assets are allocated to the RCB (member countries do no longer show reserve assets in their BOP/IIP, only a net position to the RCB) Distinction between allocated and unallocated foreign assets (member countries show their “allocated” reserve assets in their BOP/IIP). This is the treatment recommended in the BPM6.

Decentralized Currency Union: The European Monetary Union Basic principles : Compilation of both national and regional balance of payments and IIP Common methodology but different compilation systems (output requirements) Compilation of monthly and quarterly balance of payments statements

Compilation of the Balance of Payments of the Euro Area In theory two possibilities : 1) Aggregation of balance of payments of each member country (with offsetting of intra euro area transactions) 2) Aggregation of only “extra euro area” transactions of each member country

Compilation of the Balance of Payments of the Euro Area Many shortcomings in the aggregation of balance of payments : only net flows can be shown less details in classification (for example, no distinction between assets and liabilities for the same instrument) problems with bilateral imbalances To compile a balance of payments of good quality and in conformity with international standards, the only solution is to ask member countries to provide data on extra euro area transactions, hence the importance of a correct geographical allocation of transactions/positions, and of a complete harmonization and implementation of standards

Compilation of the Balance of Payments of the Euro Area The European Central Bank (ECB) compiles the figures for the euro area by aggregating the euro area Member States’ transactions vis-à-vis non residents of the euro area for the current and capital accounts, and transactions/holdings relating to non residents of the euro area for the financial account and the IIP, excluding portfolio and financial derivatives. Compilation of portfolio investments (stocks, flows and related income) and financial derivatives follows a different approach owing to the difficulties in identifying the residency of the holders of securities issued by domestic residents

Compilation of the Balance of Payments of the Euro Area Purchases/sales by euro area residents of securities issued by non residents of the euro area can be measured directly However, purchases/sales by non euro area residents of securities issued by euro area residents are difficult to capture because these transactions are often cleared through central securities depositories or other intermediary located in the euro area (e.g. Euroclear and Clearstream) and end-investors remain unknown To avoid risks of misclassification, the liability side of portfolio investments is calculated as the difference between total national transactions with non residents on securities issued by euro area residents and transactions on such securities by residents of the euro area

Compilation of Portfolio Investment Transactions Ideal situation : a breakdown can be made between transactions within and outside the euro area for both assets and liabilities (disregarding the BOP sign convention): Countries Total Assets A B C Net acquisitions of : non euro area securities 500 -100 30 430 euro area securities 300 150 -50 400 Total 830 Liabilities Net acquisitions of domestic securities by : non euro area residents 250 50 40 340 residents of other euro area countries 200 120 80 400 Total 740

Compilation of Portfolio Investment Transactions BOP entries are derived automatically: Country A Country B Country C Credits Debits Credits Debits Credits Debits Portfolio invest. Assets 800 50 20 Liabilities 450 170 120 BOP euro area Portfolio invest. Credits Debits Assets 430 Liabilities 340

Compilation of Portfolio Investment Transactions Current situation : on the liability side, there is no accurate breakdown between transactions within and outside the euro area, so only one line can be shown Countries Euro Assets A B C area Net acquisitions of : non euro area securities 500 -100 30 430 euro area securities 300 150 -50 400 Total 830 Liabilities Net acquisitions of domestic securities by non residents of member states: 450 170 120 740

Compilation of Portfolio Investment Transactions No changes in BOP entries of countries which are derived automatically. However, BOP entry for portfolio investments liabilities of the euro area is calculated by difference : Country A Country B Country C Credits Debits Credits Debits Credits Debits Portfolio invest. Assets 800 50 20 Liabilities 450 170 120 BOP euro area Portfolio invest. Credits Debits Assets 430 Liabilities 340 (740 – 400)

Other Regional Balance of Payments Statements What is a regional balance of payments statement ? - A BOP statement completed to show external transactions of an economy with individual countries or groups of countries (and not ROW) - A BOP statement compiled to show external transactions of a group of countries with the rest of the world

Other Regional Balance of Payments Statements Why compile Regional BOP Statistics ? - Analyze large payment imbalances - Help in reconciliation work to improve data quality - Bilateral/multilateral trade and investment negotiations - Trend toward economic and monetary integration

Other Regional Balance of Payments Statements Compilation principles Same as for compiling global BOP statements, but substitute relevant partner country/region for ROW Therefore : - not so many methodological issues - but lots of practical issues

Other Regional Balance of Payments Statements Example of a compilation issue: transactions in goods Geographical allocation of trade : the “country of consignment” principle instead of the “country of origin” principle In the euro area, goods in transit are recorded as extra-euro area transactions only by that Member State in/from which the goods enter/leave the euro area to avoid risks of double-counting

Use of Country of Origin and Country of Last Known Destination In the context of an economic (currency) union, where customs declarations are in many cases filled out in a country that does not at any time obtain itself ownership of the goods (country of consignment, e.g., the Netherlands in the European union), there is a double recording of extra union trade flows, and imbalance in intra union trade flows. This is evidenced in the table below, where country A (country of origin) is not a member of the union, and countries B (country of consignment) and C (country of last known destination) are members of the union. Country A Country B Country C Country A records export: 10 Country B records import: 10 export: 10 Country C records import: 10 Extra union trade data: import = 20 (instead of 10) Intra union trade data : export = 10 (without corresponding import)

Use of Country of Consignment If, instead, the concept of country of consignment is used, this results in an appropriate recording of extra union trade, but not a proper recording of intra union trade which is artificially inflated. In addition, in balance of payments of member countries, the geographic allocation of flows is inaccurate. Country A Country B Country C Country A records export: 10 Country B records import: 10 export: 10 Country C records import: 10 Extra union trade data: import = 10 Intra union trade data : import/export = 10 (instead of 0)

Combination of the Two Methods Economies record all goods transactions of the economy of origin and the economy of last destination as imports/exports. Additionally, goods transactions with intermediary economies are recorded as arrivals/dispatches. Arrivals and dispatches are disregarded when compiling the extra/intra goods transactions of the union. Country A Country B Country C Country A records dispatch 10 export 10 Country B records arrival 10 dispatch 10 Country C records import 10 arrival 10 Conclusion: only a combination of the two methods will achieve proper recording of trade flows.