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).