Eurochallenge – December 2014

Delegation of the European Union to the United States

www.euro-challenge.org

The euro area economy:

an update

What this presentation will cover

• Update on the economic situation in the

euro area

• Building blocks for growth to resume

• Moving towards a more integrated

economic and financial area

1. Growth is gradually returning

• On an annual basis, real

GDP growth this year is

estimated at 1.3 % in the EU

and 0.8 % in the euro area.

• Economic growth is forecast

to gradually gather pace over

2015 and 2016.

• After several years of

negative growth in countries

hardest hit by the crisis, some

countries are experiencing

robust growth.

Growth map, EU

Source: European Commission, Autumn forecast, Nov. 2014

In 2015, most EU/EA economies will

grow at more than 1%

4

GDP growth, 2015

Economic growth is

forecast to gradually

gather pace over 2015

and 2016.

Source: European Commission, Autumn forecast, Nov. 2014

2. Inflation is low

• Inflation is forecast to remain

low, at around 1 ½ % in 2015-16.

• This is consistent with modest

recovery in economic activity, and

also driven by low commodity

prices (energy and food) and

developments in the currency.

•Gradual increase is expected (as

economy strengthens, wages rise,

less declining energy prices and

relatively higher import prices)

• It is possible to see lower

monthly inflation rates in the near

term (e.g. October 2014: 0.4%),

thus below the ECB's monetary

target (below, but close to, 2%

over the medium term).

Inflation, EU

Source: European Commission, Autumn forecast, Nov. 2014

-1

0

1

2

3

4

5

07 08 09 10 11 12 13 14 15 16

%

Energy and unprocessed food [% points]

Other components (core inflation) [% points]

HICP, all items

forecast

3. Less favourable global conditions…

World trade and global manufacturing output

• After the financial and

economic crisis of 2008-09,

the global economy started to

recover but weakened again.

• Historically, economies

recover slowly following

financial crises.

• A slowing global economy is

not helping Europe grow

faster. (GDP growth lower in

H1 of 2014)

Source: European Commission, Autumn forecast, Nov. 2014,

Data: CPB – Markit Economics

30

40

50

60

70

-20

-15

-10

-5

0

5

10

15

20

25

08 09 10 11 12 13 14

World trade volume, CPB data (left scale)

Global PMI manufacturing output (right scale)

year on year % change 3-month moving average

4. …are affecting confidence

Economic actors are becoming more positive

• Surveys had improved

substantially since last year,

especially among managers in

all business sectors.

• But economic sentiment has

been declining since spring.

•Up-tick in October, but

consumer confidence edged

down in November.

• Manufacturing and services

output have expanded this year,

but have moderated somewhat

in the fall. Indicators are

consistent with very modest

growth in H2.

Source: European Commission, November 2014

45

50

55

85

95

105

10 11 12 13 14

Economic Sentiment Indicator (left scale)

PMI Composite Output Index (right scale)

index index

8

10-year government bond

spreads

Source: European Commission,

data: Bloomberg

30

80

130

180

230

280

10 11 12 13 14

BBB A AA

basis points

Corporate bond spreads, euro area

0

6

12

18

24

30

36

0

6

12

18

24

08 09 10 11 12 13 14

IT ES PT IE EL (right scale)

(level)

• Euro area countries have set up a permanent assistance fund; the European Central Bank played a large role.

• Easier borrowing conditions, and financing conditions for firms

• Less financial fragmentation (re: ECB's comprehensive assessment)

5. Financial market tensions have eased

9

• The European Central Bank (ECB) is the central

bank for the euro area. Its mandate is to keep

prices stable. This is done by steering interest

rates (affects borrowing/lending by

consumers/companies)

• The ECB operates independently from Member

State governments.

• Exceptional circumstances - exceptional

monetary policy measures, with a separation

between:

• Standard measures: key ECB interest rates

• Non-standard measures: to support the

effective transmission of decisions to the wider

euro area economy (dysfunctional segments)

• Announcement of Outright Monetary

Transactions (OMTs)

6. Aside: the ECB’s response:

standard and non-standard measures

7. Labour market: improving only slowly

• The unemployment rate

is gradually coming down

(youth)

• Employment growth is

recovering slowly (since

mid-2013).

•There are huge

differences between

countries’ unemployment

rates, which range from a

low of around 5% in to

highs around 25% in 2014.

Employment growth and unemployment rate, EU

Source: European Commission, Autumn forecast, Nov. 2014

6

7

8

9

10

11

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

07 08 09 10 11 12 13 14 15 16

Employment (quarter on quarter % change, left scale), forecast

(year on year % change, left scale)

Unemployment rate (right scale), forecast (right scale)

% % of the labour force

forecast

Forecast figures are annual data.

A broadly neutral fiscal stance

11

Budgetary developments, EU

-7

-6

-5

-4

-3

-2

-1

0

1

2

-7

-6

-5

-4

-3

-2

-1

0

1

2

09 10 11 12 13 14 15 16

General goverment balance (left scale)

Changes in structural balance (right scale)

forecast

% of GDP % points

Source: European Commission, Autumn forecast, Nov 2014

• General government

deficits are being

reduced

• Deficit to GDP ratios

are decreasing (3% in

EA and 2.6% in EU in

2014)

• Neutral stance in

2014-15

• Debt dynamics will

peak in 2015 (EA at

88.3%, EU at 94.7%)

Domestic demand to drive output growth

12

-5.5

-4.5

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

05 06 07 08 09 10 11 12 13 14 15 16

Net exports

Inventories

Investment

Government consumption

Private consumption

GDP (year on year % change)

forecast

% points

Real GDP growth and components, EU

Source: European Commission, Autumn forecast, Nov 2014

• Benefitting from

accommodative

monetary stance, low

financing costs, more

favourable credit

conditions, neutral fiscal

stance

• Private consumption to

expand moderately,

helped by low

commodity prices, rising

incomes, and a slowly

improving labour market

The Banking Union

Single Rulebook

Single

Supervisory

Mechanism

Single

Resolution

Mechanism

Deposit

Guarantees

14

Autumn forecast

Winter forecast

Spring forecast

15 October

In-Depth Reviews

May/June

November

Euro Area Member States: draft budgetary plans

Commission's opinions on draft budgetary plans

Commission's note on budgetary situation of euro area

Annual Growth Survey

15 April

Stability/Convergence Programmes National Reform Programmes

Country-Specific Recommendations

Alert Mechanism Report

Integrated Surveillance Cycle

Strengthening the “E” in EMU

RULES Stronger, more effective

fiscal rules and greater

coordination of

economic policies

BANKS Strengthen the banking

system, including better

financial supervision at

the EU level (ECB)

GROWTH Boost growth through structural

reforms and completing the

single market

PROGRAMS Financial backstops for

vulnerable countries

(cf. EC-ECB-IMF Troika)

FIREWALL A permanent

mechanism (ESM)

Europe is gradually solidifying

More economic and financial

integration, now and later on,

for a better "union"

How do you perceive having the Euro?

Source: European Commission, wave October 2013, released Nov. 2013

Thank you for your attention!

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