iAGS 2016 independent Annual Growth Survey Give Recovery a Chance 23rd meeting of the Europe 2020 Steering Committee press contact :

iAGS 2016 independent Annual Growth Survey iAGS is an independent project under creative commons license with the financial support from the S&D Group of the European Parliament

iAGS 2016 Some positive factors  Monetary policy&exchange rate; oil prices  Slow down of emerging markets, war of currencies (somehow linked to positive factors)  Less fiscal consolidation But  Persistant risk of deflation, monetary policy alone  Growing inequalities in the EA A too slow recovery Source: LFS, Eurostat, lfsa_eppgai, lfsa_eppgan, lfsa_pganws Source: EU Silk, 2016 iAGS calculations

iAGS 2016 Strong external push  Oil, exchange rates  Emerging economies slowdown not yet completely accounted for  Pause in fiscal policy  Agressive monetary stance Recovery remains weak and uneven  Regional divergence is still there  Italy is lagging A too-slow recovery GDP effect of … on GDP Oil price deviation from 100$/b Price competitiveness Financial conditions Fiscal policy Emerging countries slowdown Carry on (quarterly profile) Other Sum of above effects Growth in the absence of effects Potential growth Output gap Figure 5. Inflation expectations Inflation expectations are measured using 5 Years Forward 5 Years Swap. Source: Datastream Figure 1. GDP per head

iAGS 2016 Euro area is lagging behind Figure 2. EA vs USA vs UK

iAGS Germany France Italy Spain Netherlands Belgium Portugal Ireland Finland Austria Internal and external rebalancing are fueling deflationary pressures Table 4: Nominal adjustment for value added prices (relative to Germany) Figure 3. Current account in % of EA GDP Upward shift of current account is a consequence of lower raw material prices, low internal demand and unconventional monetary policy. Source: national accounts, ECB, iAGS 2016 calculations. Current account is cumulated over 4 quarters.

iAGS 2016 Current account surplus and exchange rate : a war of currencies Figure 4. EA Nominal Effective Exchange Rate versus EA current account Source: Effective Exchange Rate, broad partners, ECB. EER is 100 in Q1 1999, increase shows appreciation of euro against trade partners currencies. Current account is for Euro area countries, in % of EA GDP, from national accounts (Eurostat). Real exchange rate of euro brings the same pattern. Figure 4. EA Nominal Effective Exchange Rate versus EA current account

iAGS 2016 Current half recovery is not sufficient to prevent deflationary pressure  Scarfication of labor market, inequalities rising  Monetray policy is buying some time but in the next 2 years, its normalization will trigger a sharp appreciation of euro against dollar (and other currencies)  Fiscal consolidation pause is not enough to stimulate demand  Internal adjustment is still necessary The 3 leg strategy of the AGS will not change the game  Monetray policy alone can do the trick  Demand stimulation through Junker Plan is far from being macro significant  Fiscal consolidation may in the near future come back (low inflation, TSCG, debt rule)  Structural reforms especially on the labour market can increase deflationary pressure on the short term  Capital market Union, Bank Union won’t be short term patches Active demand stimulation and internal rebalancing  Reducing external surplus, so to limit future euro appreciation and boost short term demand  Use any mean to rebalance, differential minimun wages norms being a partial answer Wrap-up: a deflationary recovery is not a recovery

iAGS 2016 #1: Monetary policy is opening a window of opportunity  It will be limited in time for various reasons (currency war, side effect, distributional effect, institutional pressures)  It should also aim at reducing sovereign spreads inside the EA #2: demand management is needed  Investment is key (building assets). Public Investment, golden rule  Social investment is also necessary to fight against the social scars  Fiscal policy should be complemented with fiscal coordination (fight against tax heavens, tax competition, fiscal devaluation)  Fiscal space has to be used as it is in the interest of surplus countries and is necessary to Euro stability  Juncker Plan may not be enough (and should be closely monitored) #3: internal rebalancing may have repercussion on deflation  Wage push in surplus countries is a way to avoid that (minimum wage norms as a lever)  Non cost competitiveness has to be implemented Main policy proposals