1. iAGS 2016 independent Annual Growth Survey www.iags-project.org Give Recovery a Chance 23rd meeting of the Europe 2020 Steering Committee press contact : press@iags-project.orgpress@iags-project.org economics@iags-project.org

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

3. www.iags-project.org 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

4. www.iags-project.org 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 20102011201220132014201520162017 GDP2.0 1.7-0.8-0.20.91.62.01.9 effect of … on GDP Oil price deviation from 100$/b 0.0-0.3-0.20.00.10.50.30.2 Price competitiveness 0.30.40.50.1-0.20.30.40.2 Financial conditions 0.0-0.1-0.9-0.30.00.10.0-0.2 Fiscal policy -0.2-1.3-2.4-1.3-0.6-0.2 -0.3 2014 Emerging countries slowdown 0.0 -0.2-0.4-0.2 Carry on (quarterly profile) 0.10.4-0.2-0.4-0.3-0.5-0.30.3 Other -0.10.00.10.0 Sum of above effects0.2-3.1-1.8-1.1-0.10.10.0 Growth in the absence of effects 2.13.22.82.11.61.71.9 Potential growth0.9 0.8 0.9 1.1 Output gap-2.0-0.8-2.0-2.9 -2.2-1.1-0.3 Figure 5. Inflation expectations Inflation expectations are measured using 5 Years Forward 5 Years Swap. Source: Datastream Figure 1. GDP per head

5. www.iags-project.org iAGS 2016 Euro area is lagging behind Figure 2. EA vs USA vs UK

6. www.iags-project.org iAGS 2016 2008200920102011201220132014 Germany0000000 France-21-18 -21-22-17-21 Italy-35-29-40-38-22-13-10 Spain-63-40-37-35-25-16-20 Netherlands-5664571 Belgium-40-36-17-37-27-25-27 Portugal-116-106-90-56-37-18-24 Ireland-31-34-29-31-33-22-16 Finland5-8-34-37-33-28 Austria1815121361 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.

7. www.iags-project.org 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

8. www.iags-project.org 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

9. www.iags-project.org 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