The excessive imbalances procedure (EIP) Declan COSTELLO & Aurora MORDONU DG ECFIN 29 November 2011 European Commission

Outline A description of the EIP Monitoring housing market developments: analyical approaches and future work

Part I A description of surveillance under the preventive and corrective arms of the EIP

Overall changes to economic governance European Systemic Risk Board financial stability and macro & micro level Excessive Imbalances Procedure external and internal imbalances European semester and the 2020 strategy growth enhancing structural reforms Stability and Growth Pact fiscal policy AND …. the ongoing debate on EFSF/ESM and Eurogroup goverance

Broad scope of surveillance External positions (e.g. current accounts, net international investment positions) Competitiveness developments (e.g. REERs, ULCs)Export performance (e.g. export market shares) Private sector indebtedness (e.g. credit, debt) Assets markets (e.g. housing) External imbalances Internal imbalances

Alert mechanism Economic reading of early warning scoreboard indicators to identify Member States with potential risks In-depth review Analysis to distinguish between benign and harmful macroeconomic developments and to identify policy options No problem Procedure stops. Imbalance exists Commission/Council recommendations under Article Severe imbalance Commission/Council recommendation under Article The preventive arm of the EIP Policy response

The Corrective Arm Member State is placed in “Excessive Imbalance Position” Corrective Action Plan Surveillance of compliance with reform commitments Sufficient abeyance Insufficient: interest bearing deposit Insufficient: Fine 0.1% of GDP Insufficient fine 0.1% of GDP

The Corrective Arm is INTRUSIVE and FOCUSSED Member State is placed in an Excessive Imbalance Position Corrective Action Plan Surveillance of compliance with reform commitments Sufficient abeyance Insufficient: interest bearing deposit Insufficient: Fine 0.1% of GDP Fine 0.1% of GDP

… and works by reverse Qualified Majority Voting Member State is placed in an Excessive Imbalance Position Corrective Action Plan Surveillance of compliance with reform commitments Sufficient abeyance Insufficient: interest bearing deposit Insufficient: Fine 0.1% of GDP Fine 0.1% of GDP

Challenges in applying the EIP Analytical –large degree of qualitative judgement especially if acting early –requires considerable country specific knowledge; –data limitations –limited consensus on policy responses. Political –Positive : greater awareness of the costs of inaction and spillover effects, and not easy to form blocking minorities; –Challenge: macro challenges with euro area spillovers that require micro policy responses in areas of national competence –… hinge on effectiveness of overall governance package and ongoing discussion to overhaul the Eurogroup

Next steps Finalising the scoreboard design. ECOFIN supported the envisaged design on 7 November 2011, and comments expected from the European Parliament and ESRB by mid December Commission will present its Alert Mechanism Report (expected either 20 December or 4 January) for discussion in ECOFIN-Eurogroup in January

Part II Monitoring housing market developments

The choice of indicators: main considerations Limited SET of indicators that capture external and internal imbalances at an early stage, and take account of stocks and flows Timely availability and broad coverage of Member States Aim to respect the principles of the European Statistics Code of Practice of the European Statistical System (ESS)

The angle of surveillance under the EIP: potential house price bubbles, due to concerns linked to: o Wealth and collateral effects (Consumption) o Reallocation of resources towards the construction sector (Investment, employment) o Bank balance sheets, impact on macro-economic stability Broad scope: general access to affordable housing, labour mobility, spatial developments, energy efficiency Equity and efficiency policy goals (study) Public policy intervention in housing markets

Hinging on a broad set of policies: Monetary policy Macro-prudential policies (Loan to Value Ratio, forex borrowing) Taxation policy (mortgage interest rate deductibility) Regulatory issues affecting supply (building permits) Policies affecting housing markets

development of analytical frameworks conceptual indicators, e.g. equilibrium house prices, affordability measures, asset-pricing models statistical datasets, e.g. the EIP database analytical frameworks useful for identifying policy responses to imbalances information sets on institutional settings at Member State level Types of tools/frameworks needed to conduct surveillance on macroeconomic imbalances

18 LIME workshop on housing – 8-9 December 1. Stock taking: Methodologies and tools  Methodological approaches to assess equilibrium house prices  The house price cycle and the real economy 2. Policies and structural features  Structural features and policies of housing markets  Demand and Supply-side policies interaction 3.Case studies involving experts from the Member States and country desks: SE, IE, ES

19 Thank you for your attention!