1. The excessive imbalances procedure (EIP)
Declan COSTELLO
European Commission
Directorate General for Economic and Financial Affairs
DNB and IMF workshop on «Preventing macroeconomic imbalances in the euro area »
Amsterdam, October
European Commission

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

3. 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)
Public sector indebtedness
Assets markets (e.g. housing)
External imbalances
Internal imbalances

4. Example of ‘test’ early warning scoreboard: Portugal 2001-2010
Threshold
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
EXTERNAL
Current Account balance as a percent of GDP
[+]/-4%
-9,6
-9,7
-8,4
-7,7
-9,8
-10,4
-11,2
-11,1
Net IIP as % of GDP, BoP data
-35%
-47,6
-54,8
-56,7
-63,0
-67,6
-78,5
-88,2
-96,1
-109,0
-107,6
% Change (3 years) of Real Effective Exchange Rate (REER) with HIPC deflators
+/-5% & +/-11%
-0,3
2,3
9,6
8,1
5,3
1,4
1,5
2,7
1,3
-2,4
% change (5 years) in Export Market Shares
-6%
-6,2
1,6
-2,7
-2,9
-4,0
-5,6
-5,4
-13,1
-9,3
-8,5
ULC index (% change over 3 years) – thresholds 9% (EA) and 12% (non EA)
+9% & +12%
11,1
12,0
11,4
8,3
8,6
5,5
5,7
6,0
8,7
5,4
INTERNAL
% y-o-y change in House Prices
+6% 
1,9
-2,2
-1,9
-0,4
3,3
15,4
1,2 .
Private sector Credit flow as percent of GDP
15%
22,5
12,7
9,8
10,7
14,5
17,2
24,9
21,0
7,1
3,0
Private sector debt as percent of GDP
160%
187
192
197
198
206
215
229
245
252
248
Public sector debt as percent of GDP
60% 51 54 55 56 62 64 63 65 76 83

5. The preventive arm of the EIP
Policy response
No problem Procedure stops.
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
Imbalance exists
Commission/Council recommendations under Article 121.2
Severe imbalance
Commission/Council recommendation under Article 121.4

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

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

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

9. 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
greater awareness of the costs of inaction and spillover effects;
not easy to form blocking minorities;
macro challenges with euro area spillovers that require micro policy responses in areas of national competence
… hinge on effective governance reforms of the Euro area

10. Additional slides

11. How the EIP fits into the European semester (indicative based on timing of 1st year)

13. Formal links between the EIP and ESRB in the draft legsialtion
Commission recommendation – in depth studies "any early warnings or recommendations from the ESRB relevant to the Member States under review" into account
European Parliament has proposed additional cross references
choice of indciators in the scoreboard
alert mechanism report

14. Exploring the interlinkages between the EIP and ESRB
Scope of surveillance
External imbalances, competitiveness, internal imbalances
-macro-prudential oversight of the financial system
Nature/approach of surveillance
Prevention/correction of unsustainable macroeconomic imbalances
Country specific
Systemic risks to the financial system
Thematic
Monitoring and enforcement
Annual exercise linked to European semester
Legal policy recommendations can be addressed to Member States
Scope for financial sanctions on euro area Member States
Continuous process of surveillance
Possibility to address non-legally binding warnings and recommendations to Member States, EU institutions, national/EU supervisory authorities – which can be made public
This table gives a simple comparative perspective of ESRB’s surveillance and Commission’s surveillance under the EIP. In terms of scope of surveillance, there are certainly interlinkages between the two. While performing macro-prudential oversight of the financial system, ESRB will have to take into account macroeconomic imbalances. Under the EIP, the Commission will have to take into account how financial risks could contribute to macroeconomic imbalances.
At the time when the legal basis of the ESRB have been established, the interactions with the EIP could not be considered since the EIP did not yet exist. The EIP draft regulation attempted to shed some light on the interactions, and therefore in its draft article 5 it is mentioned that “any early warning or recommendations from the ESRB relevant to the Member State under review” shall be taken into account under the EIP.
The following scenarios could be envisaged:
When ESRB issues warnings and recommendations that become at a later stage relevant to the built up of macroeconomic imbalances, the Commission may use these as an input in its preventive arm. In a second stage, ESRB’s warnings and recommendations can be supported by a legal follow up in the corrective arm of the EIP where sanctions can be used.
The Commission decides that potentially harmful imbalances may build up in a MS, which may however do not seem to be linked to macro-prudential issues (e.g. competitiveness issues). In this case the ESRB will not intervene.
The Commission launches an in-depth review and the ESRB issues recommendations when a Member State’s situation signals macroeconomic imbalances and risks to the macro-financial stability. In this case, timely cooperation between the Commission and ESRB will be the most important.
Relations between the two institutions are ensured:
Via a member of the Commission participating with voting rights in the Steering board of the ESRB
Via the EFC, which channels all ESRB warnings and recommendations to the Council
At a technical level
The Commission provides the ESRB with quarterly analyses covering macroeconomic imbalances as well.
It would be useful if ESRB offers the Commission:
Analyses of the resilience of the financial system with respect to the risks of identified macroeconomic imbalances and possible amplification mechanisms;
Analyses of possible contagion or spillover effects to other countries through different components of the financial system;
Advice regarding possible macro-prudential policy measures to address macro-economic imbalances with systemic risk implications.

15. Ensuring synergies
Commission-ESRB: ECFIN Commissioner is permanent member with voting rights on ESRB Steering Board and provides inputs
ECOFIN-EFC-ESRB: Council can be a recipient of ESRB recommendations or warnings and EFC President is a non-voting member of ESRB
EIP-ESRB-Parliament: ESRB required to present annual report to Parliament and there will be regular meetings with ECON Committee. Parliament is co-legislator for EIP and will be involved at various steps of the procedure
Cooperation at technical level between Commission, ESRB and ECB

16. Scope of surveillance under the EIP
External imbalances
current account balance
net international investment position
change in REERs
change in nominal ULC
change in export market shares
Internal imbalances
Private sector credit flow
Private sector debt
Change in house prices
General government sector debt
[financial/banking sector]