economic and monetary policy perspectives for europe and...

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Economic and Monetary Policy Perspectives for Europeand the Euro Area

Peter MooslechnerExecutive Director and Member of the Governing BoardOesterreichische Nationalbank

Roundtable Discussion, Austrian Consulate GeneralNew York City, November 8, 2017


Outline

● Prologue:ECB Monetary Policy Decisions of October 26, 2017

● Where Do We Stand?

● Where Do We Come From?

● Where Are We Heading To?

● The (forthcoming) „New Normal“:Important Issues Ahead


Prologue:ECB: Monetary Policy Expansion Continued…


Source: September 2017 ECB staff macroeconomic projections.

70

75

80

85

90

95

100

105

110

115

120

125

130

135

140

EL IT PT FI LV

CY

EE

ES SI

EA

19

FR NL

AT BE

DE

LU

SK IE

MT

Euro area: Real GDP 2016 (2007=100)

Source: Eurostat.

Where Do We Stand?The Euro Area Economy is Recovering


Domestic Demand and Employment Up…


Sustainable Improvement in Labor Market Conditions

82

85

88

91

94

97

100

103

106

109

112

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Employment development in selected euro area countries

Index: 2007Q1=100

AustriaGermany

Euro area

Greece

Spain

Portugal

ItalyIreland

France

Source: Eurostat.

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Unemployment in selected euro area countries

Eurostat unemployment rate in %

Greece

Euro area

AustriaGermany

Spain

PortugalItaly

Ireland

www.oenb.at [email protected] 6 -Sept. 2017 ECB staff macroeconomic projections.

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

Jän.10 Jän.11 Jän.12 Jän.13 Jän.14 Jän.15 Jän.16 Jän.17

HICP HICP without energy and unprocessed food

Inflation and core inflation in the euro areaannual change of HICP in %

Source: Eurostat.

Headline Inflation Low But Rising Oil Prices Will Lead to Upward Correction


Underlying Inflation Picking Up


Investment Still Below Pre-crisis Level

Source: European Commission.

60

65

70

75

80

85

90

95

100

105

110

2008 2009 2010 2011 2012 2013 2014 2015 2016

CESEE (EU) EU periphery Core EU EU

EU investment by country group (2008=100)


Where Do We Come From:The Euro Area Had to Overcome Two Crises -The Great Recession and a Sovereign Debt Crisis

• In the Great Recession (2007-2008) euro area countries lost on aggregate almost 5% of GDP.

• After a short-lived recovery the euro area was hit by another shock: a sovereign debt crisis.

• The sovereign debt crisis hit some countries, e.g. Spain and Italy, as hard as the Great Recession: between 2011 and 2013 Italy and Spain lost another 4% of GDP, respectively.

• Monetary policy reacted with expansionary conventional and unconventional measures (see next slide).

• Have these measures been successful? Do we see a proper pass-through to financing conditions? Did the transmission from easier financial conditions to economic activity and from economic activity to prices work?

90,0

95,0

100,0

105,0

110,0

115,0

120,0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Euro area Germany Spain France

Italy Austria USA

Real GDP in selected countries

Index 2008 = 100

Source: European Commission and European Commission Economic Forecast for 2017.


Growth Falling Behind Potential Significantly


Interest rates Cut to Record Low Levels

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

Jän.07 Jän.08 Jän.09 Jän.10 Jän.11 Jän.12 Jän.13 Jän.14 Jän.15 Jän.16 Jän.17

Euro area USA JapanUK Sweden SwitzerlandChina

Monetary policy interest rates worldwidein %

Source: Macrobond.


The Eurosystem’s Monetary Policy Measures: An Overview

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

01/2010 01/2011 01/2012 01/2013 01/2014 01/2015 01/2016 01/2017

Excess liquidity (rhs) Main refinanc ing facility

Lending facility Deposit facility

EONIA

Excess liquidity, EONIA and the interest corridor

%

Source: ECB, Thomson Reuters.

EUR billion

• Reduction of monetary policy rates to 0.25%, 0.00%, –0.40%.

• Forward guidance: (…) policy rates are expected “to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases.”

• Continuation of fixed rate full allotment in all tender operations at least until the end of 2017.

• Provision of targeted longer-term refinancing operations (TLTROs II) with a maturity of four years (2016/17–2020/21).

• The Expanded Asset Purchase Programme (APP), with monthly purchases worth EUR 60 billion, is intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council of the ECB sees a sustained adjustment in the path of inflation consistent with its inflation aim.

• Reinvestment of the principal payments from maturing securities purchased under the APP for as long as necessary.


Balance Sheet Expansion as Monetary Policy Instrument


• Forward guidance (on rates and QE volumes)

• Ample liquidity for the banking system

• Fixed rate full allotment

• TLTRO: Long maturities, “funding for lending”

• Change of eligibility rules for collateral

• Change of interest rate corridor

• Asset purchase program (APP)

• Sovereign bonds, covered bonds, ABS, corporate bonds

• EUR 60 billion per month until end-2017, EUR 30 billion thereafter

Non-standard Monetary Policy Measures of the Eurosystem


Currently the Eurosystem creates nearly EUR 3 trillions of central bank liquidity. Approximately 75% thereof are created through various asset purchase programmes.

Some Details on the Eurosystem‘s Monetary Policy Operations

MP operations (29.09.2017) in EUR billions

CBPP 1 7.0

SMP 91.4

CBPP 2 4.8

CBPP 3 231.3

ABSPP 24.1

PSPP 1748.1

CSPP 114.7

Tender operations 768.3

Sum 2989.7

0200400600800

10001200140016001800200022002400260028003000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

APP SMP (non-sterilized)TLTROs LTROs6-months 3-months1-month 1-weekLiquidity demand

Liquidity provision in the euro area

in EUR billions

Source: ECB, own calculations.


Inflation Surprises: A Simple Illustration


Balance Sheet Expansion By All Major Central Banks

11,1%

1,2%

82,6%

5,1%

CBPP 3

ABSPP

PSPP

CSPP

Composition of APP program

Source: ECB.

0

100

200

300

400

500

600

700

800

900

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

EurosystemBank of England (publi shed sterl ing liabilities)Federal Reserve BankBank of JapanSchweizerische NationalbankOeNB

Central bank balance sheets

January 2007 = 100

Source: Thomson Reuters.


Structural Change in Eurosystem Tender Operations


Quantitative Easing – European Style

As of 12.10. 2017


Lower growth

Government: Unsustainable fiscal

trajectory, deteriorating creditworthiness

Financial sector: Inadequate capital, need for

public sector support

Worsening fiscal balance

Sovereign risk exposure

Lower bank asset

qualityDeleveraging & less bank lending

Central bank Ease fiscal

strainsEase

funding strains

Provide monetary stimulus

Adverse feedback loops and the role of the central bank

Need for public support

Fiscal consolidation


Where Are We Heading To?Euro Area GDP (per capita) Growth Outpaces the US

Average 1999-2008

Average 2009-2015

2016 2017 2018 2022

Euro area 1.7 –0.1 1.4 2.0 1.8 1.4 U.S.A. 1.5 0.8 0.8 1.5 1.7 1.1

Real GDP per capitaAnnual percentage change, in PPP international currency

Source: IMF World Economic Outlook, October 2017.

Comparing annual GDP per capita growth rates, the picture looks somewhat different.

The euro area has been outpacing the U.S.A. since the introduction of the euro in most years, with the exception of the crisisyears 2009 to 2015.


Recovery Is Increasingly Investment-driven …


Looking Ahead: The Economic Recoveryin the Euro Area Will Remain RobustEuro area real GDP (including projections) • The economic expansion in the euro area is

projected to continue over the projection horizon at growth rates well above potential.

• Over the medium term, domestic demand, supported by favorable financing conditions and improving labor markets, will continue to drive the growth outlook.

• Business investment is projected to continue its recovery, as financing conditions are expected to remain very supportive over the projection horizon.

• At the same time, despite the recent appreciation of the euro, the global recovery is expected to support euro area exports.

• Following a post-crisis peak of 2.2% in 2017, annual real GDP growth is expected to average around 1.8% in 2018 and 2019.

• Risks surrounding the euro area growth outlook remain broadly balanced. Source: ECB (September 2017, ECB staff macroeconomic

projections for the euro area).


Curr

ency

uni

on

Curr

ency

uni

on

EMU 3.0

Curr

ency

uni

on

Econ

omic

uni

on

Fina

ncia

l uni

on

Fisc

al u

nion

Polit

ical

uni

on

Towards a Complete Monetary Union


In Addition: The Capital Market Union Project

Startups & SMEs

Saving & investing

Infrastructure projects

Large enterprises

Banks


First Money Market Implied ECB-Rate HikeExpected in May 2019

“well past” estimated at about 5-7 months

Note: Euro-area OIS forward curves.Last updated: 16/10/2017


Some Forthcoming Issues:International „Imbalances“?


Does Expansionary Fiscal Policy Explain Faster Recovery in the US


Why a Debt Crisis in Europe But Not in US/UK/Japan?

-1

0

1

2

3

4

5

6

7

8

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

DE ES FR IT UK US JP

Gov. bond yields (10y) for selected major economies

in %

Source: Thomson Reuters.

0

50

100

150

200

250

300

JP UK US EA19 DE FR IT ES AT EL IE PT

2007 2016

Public debt 2007 vs. 2016in % of GDP

Source: EC.


European Corporate Sector Much More Bank Dependent Than in the US

11%31%

11%

65%

31%

147%

0%

20%

40%

60%

80%

100%

120%

140%

160%

Corporate bonds (2016) Stock market capitalization(2016)

Austria Euro area U.S.A.

Market-based corporate financing% of GDP

Source: BIS, World Bank.

39%

98%

251%

36%

100%

294%

21% 52%

85%

0%

50%

100%

150%

200%

250%

300%

350%

Bank credit to non-financial f irms (2016)

Bank credit to theprivate sector (2016)

Size of banking sector(2015)

Austria Euro area U.S.A.

Bank-based corporate (and private) financing% of GDP

Source: BIS, ECB, Federal Reserve Bank of St. Louis


Small and Medium-sized Enterprises (SMEs) Play a More Significant Role in Europe

87.3%

93.0%

78.9%

10.8%

5.9%

17.2%

1.6% 1.0%3.4%

0.3% 0.2% 0.6%

70%

75%

80%

85%

90%

95%

100%

Austria EU-28 U.S.A.Micro Small Medium Large

Enterprise distribution by size class% of total number of firms

Source: Eurostat, U.S. Small Business Administration.

25.6% 29.9%

10.3%

24.2% 20.1%

16.5%

19.2% 16.8%

16.9%

31.1% 33.2%

56.3%

0%

20%

40%

60%

80%

100%

Austria EU-28 U.S.A.Micro Small Medium Large

Enterprise distribution by number of employees% of total number of firms

Source: Eurostat, U.S. Small Business Administration.


Legend: SSM:Single Supervisory Mechanism; SRM :Single Resolution Mechanism; EDIS :European Deposit Guarantee Scheme; MREL: Minimum Requirement for own funds andEligible Liabilities; TLAC: Total Loss Absorbing Capacity; ONDs: Options and national discretion. CRR/CRD-IV: Capital Requirement Regulation/Direc; JST: Joint Supervisory Team; SREP: Supervisory Review and Evaluation Process.

Banking Union is Most Significant Step of Economic and Institutional Integration in Europe Since the Launch of the Euro

Scope Status Challenges

SSM

Uniform supervision of 124 significant banking

groups in EEA

4 Nov 2014: ECB assumed responsibility for direct supervision of 124 SIs in EEA

important steps to harmonize supervision (JSTs, SREP, stress test...)

Continue to harmonise banking supervision Continue to promote a common supervisory

culture Improving proportionality Improving incentives for „opt-in“

SRM Uniform rules and

procedures for recovery and resolution

1 Jan 2016: SRB taking decisions and setting measures for resolution cases

1 Jan 2016: SRF is being set up and financed by contributions from banks (target in 2024: EUR 55bn)

Determination of MREL und adaption MREL toTLAC

Consistent application bail-in-rules Uniform hierachy of creditors (bail-in) Harmonization moratorium

Common SRF-Backstopp

EDIS Cross-border depositor

protection

EC put forward proposal on EDIS in Nov 2015

EDIS builds on DGS

For the time being: Harmonization of DGSs

Further prerequisites:

Risk-reductions: Harmonization of insolvency regimes „Sovereign exposures“


Different Design of Liquidity Provision

ECB-RESTRICTED

• Eurosystem: open market operations (41%) and securities (59%)

• Federal Reserve: almost exclusively Treasury and MBS (99.9%)

Balance sheet structure

0%

20%

40%

60%

80%

100%

Eurosystem2015 Federal Reserve

2015

49%

98,5%

24%

0,7%

27%

0,8%

Other assets

Foreign reserves

Monetary policy assets


FED and Eurosystem Balance Sheet StructureDevelopments Compared

Federal Reserve Eurosystem


Economic and Monetary Policy Perspectives for Europeand the Euro Area

Peter MooslechnerExecutive Director and Member of the Governing BoardOesterreichische Nationalbank

Roundtable Discussion, Austrian Consulate GeneralNew York City, November 8, 2017

economic and monetary policy perspectives for europe and...

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