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International Monetary Fund
The Future of EMU
Gita GopinathIMF Economic Counsellor
ECB Economic Forum on Central Banking
June 19, 2019 – Sintra, Portugal
Several lessons for the EMU since the GFC
1
➢ Problems get amplified with heterogeneity
• Heterogeneity in shocks
• Heterogeneity in MP transmission
• Self-fulfilling crises
➢Two types of structural reforms needed to bolster resilience
• Union-wide architectural changes
• National structural reforms
➢The international role of the euro
Source: IMF, World Economic Outlook database.
1/ Only countries that were part of the Euro Zone in each given year are included.
2
Euro Area: Unemployment rate 1/(percent)
Heterogeneity in macroeconomic variables
0
5
10
15
20
25
30
99 03 07 11 15
United States California New York
Min
Max
18
Sources: U.S. Census Bureau; and US Bureau of Economic Analysis.
2/ 50 states.
United States: Unemployment rate 2/(percent)
0
5
10
15
20
25
30
99 03 07 11 15
Euro Area France Germany
Min
Max
18
Low degree of risk sharing
12 8
45
2912
9
27
24
7581
18 20
0
20
40
60
80
100
EA EU28 US Canada
Risks not
shared
Other
Savings
Capital
market
income
Source: European Commission (2016) for the US; Balli and others (2012) for Canada;
and IMF staff estimates.
Risk-Sharing Channels(percent)
3
Heterogeneity in MP transmission
Sources: Haver Analytics; and upcoming April 2019 IMF GFSR.
4
0
1
2
3
4
5
6
7
8
06 08 10 12 14 16 18
Germany Spain Italy France ECB policy rate
Mar. 2017
NFC lending rates and ECB policy rate(percent)
TLTROs Allowances and Outstanding
Amount by Country (percent)
0
50
100
150
200
250
300
350
400
450
ITA ESP FRA DEU PRT GRC IRL Other
euro
area
TLTRO 2 unused allowance Outstanding amount of TLTRO 2s
TLTRO 3 allowance estimated
450
500
450
500
A need for a lender of last resort
• Lender of Last
Resort: Outright
Monetary
Transactions (OMT)
• European Stability
Mechanism
0
2
4
6
8
10
12
14
16
Jan-10 Jan-12 Jan-14 Jan-16 Jan-18
France Italy Spain Portugal Ireland
“whatever it takes” speech
July 26, 2012
European risk(spread; 10yr sovereign vs. Germany bund)
June 10,
2019
5
Union Wide Reforms
Banking UnionCapital Market
Union
• Strengthen Single Supervisory Mechanism
• Implement Single Resolution Fund with credible backstop
• Start European Deposit Insurance Scheme
• Minimum standard for insolvency regime
• Centralize supervisory power in some areas
• Improve transparency and disclosure of products
To do
Central Fiscal Capacity
• Develop Euro Area Fiscal Stabilization Instrument
6
National and euro area structural reforms are both needed
7
➢National structural reforms would
reduce the burden on MP
• Lower likelihood of hitting effective lower
bound and need for UMP
• Less cyclical divergence across countries
➢National structural reforms would
reinforce euro area architectural
improvements
• Labor and product market regulations, as well
as corporate insolvency regimes are key
➢Reforms would benefit
internationalization of the euro
AUT
FINFRADEU GRCITA
NLDSVK
ESP
SWE
GBR
USA
R² = 0,7278
0,4
0,5
0,6
0,7
0,8
0,1 0,3 0,5 0,7
Sta
nd
ard
devia
tio
n o
f l p
rod
uct
ivit
y
Insolvency quality index
Insolvency regime and sectoral
misallocation
Sources: SDN/XX/19, based on OECD Insolvency Indicators; EU
KLEMS; and IMF staff calculations.
The international role of the euro
8
Composite index of the international role of the euro(percentages; at current and Q4 2018 exchange rates; four-quarter moving averages)
Sources: ECB (2019).
A currency’s role in trade, finance and reserve asset complement each other
9
Dollar Share in Trade Invoicing and Banks Local Foreign Currency Liabilities(in percent)
Source: Gopinath and Stein (2018).
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