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

2. 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)

3. 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

5. 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)

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

7. 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

8. 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

9. 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

10. 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%

11. 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%

12. 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: %
A very broad measure of the expansion of the exposure to potential risks in the financial sector

13. 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

14. 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)

15. 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

16. Print handout of this slide

17. 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

18. 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

19. 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.

20. 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.

21. 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

22. 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.

23. 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

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

25. 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

26. Flashes per indicator

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. Any questions?