2016 OECD ECONOMIC SURVEYSEUROPEAN UNION & EURO AREA

Enhancing European cooperationParis, 10 June

@OECD@OECDeconomy

http://www.oecd.org/eco/surveys/economic-survey-european-union-and-euro-area.htm

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• Macro policies have become more supportive, but demand is still weak and unemployment very high.

• Inflation remains well below 2%.• Financing for firms remains a problem in

several countries.• Investment is still well below pre-crisis

levels.• Barriers to intra-EU labour mobility remain

high.

Main findings

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• Countries with fiscal space should use budgetary support to raise growth.

• Commit to keep monetary policy accommodative until inflation is clearly rising to near the target.

• Speed up the resolution of non-performing loans and complete banking union. Promote non-bank financing.

• Increase targeted public support to investment. Prioritise Trans-European networks.

• Reduce administrative burdens and regulatory barriers in the services sector.

• Speed up recognition of professional qualifications and legislate effective portability of pension rights.

Main recommendations

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• Broad reforms in tax structure, R&D expenditure, active labour market policies and PMR could increase EU GDP by 6% in 10 years (Varga and in’t Veld, 2014)*

• Sectoral reforms are also important:– Single market in services would increase EU GDP by 2.6%, with only

0.9% reaped so far (Monteagudo et al., 2012; EU Commission, 2015)– Digital single market reforms that are in place could raise EU GDP by

1%, while planned reforms could add another 3% of EU GDP (Lorenzani and Varga, 2014). Civic Consulting (2011) and European Parliament (2014) find similar gains of 1 to 2% of EU GDP.

– External trade agreements could also increase EU GDP, by an amount depending on the trading partner: 0.1% in the case of Canada, 0.3% in the case of Japan and 0.5% in the case of the US.

* For references see the bibliography of Annex 1.A.1. in OECD (2016), OECD Economic Surveys: European Union 2016.

GDP gains from EU structural reforms can be large

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Losses from fragmentation can be large, too

Source: R. Kierzenkowski et al. (2016), “The economic consequences of Brexit: A taxing decision”, OECD Economic Policy Papers, No. 16.

Brexit is a large negative shock, which would spill over to the EU

EU GDP would decline by 1% in 2018 and still be almost 1% lower in 2023 than without Brexit

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Growth has picked up only gradually

1. European Union member countries that are also members of the OECD (21 countries).Source: OECD (2016), OECD Economic Outlook: Statistics and Projections (database).

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Tensions in financial markets have receded

1. Ten-year government bond yields relative to the German rate.Source: OECD (2016), Main Economic Indicators (database).

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Unemployment is still high

1. European Union member countries that are also members of the OECD (21 countries).2. Unweighted average.Source: OECD (2016), OECD Economic Outlook: Statistics and Projections (database).

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Investment is weak

1. European Union member countries that are also members of the OECD (21 countries).Source: OECD (2016), OECD Economic Outlook: Statistics and Projections (database).

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Supporting the recovery

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Countries with fiscal space should use budgetary support to raise growth.

Ensure that the application of the debt reduction rule of the Stability and Growth Pact does not threaten the recovery.

Demand is still weak

Source: Eurostat (2016), “Government deficit and debt”, Eurostat Database.

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Commit to keep monetary policy accommodative until inflation is clearly rising to near the target.

Inflation remains well below 2%

Source: Eurostat (2016), “Harmonised indices of consumer prices”, Eurostat Database.

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2012 2013 2014 2015 2016

Y-o-y % changeY-o-y % changeEuro area consumer prices

Total Core (excluding energy, food, alcohol and tobacco)

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Easing financing constraints

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When NPLs create a serious economic disturbance, facilitate their resolution by waiving some of the requirements of state aid rules, such as triggering bail-in obligations.

Consider setting up asset management companies, possibly at the European level.

Take supervisory measures (e.g. capital surcharges) to encourage banks to resolve NPLs.

NPLs are still very high in some countries, which hampers credit

Non-performing loans (NPLs)1

1. Gross non-performing debt instruments as a percentage of total gross debt instruments. 2015 is an average of the first three quarters.Source: ECB (2016), “Monetary and financial statistics”, Statistical Data Warehouse, European Central Bank.

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Collect and share internationally comparable credit information on smaller firms

Ease the regulatory treatment of simple, transparent and standardised securitisation to unlock lending to SMEs

Lower the regulatory barriers in corporate bond markets

Finance is largely bank-based

Source: Eurostat, European Central Bank, US Bureau of Economic Analysis, Board of Governors of the Federal Reserve System, and Securities Industry and Financial Markets Association.

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Complete banking union by: Implementing a European Deposit Insurance Scheme Creating a common fiscal backstop to the Single Resolution Fund Further harmonising banking regulation in Europe

During the crisis, financial markets became fragmented along national lines

Interest rates on loans for non-financial corporations1

1. New business loans of up to and including EUR 100 million with an initial rate fixation period of less than one year. Loans other than revolving loans and overdrafts, convenience and extended credit card debt.Source: ECB (2016), “MFI interest rate statistics”, Statistical Data Warehouse, European Central Bank.

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Increasing investment

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Increase targeted public support to investment Further upgrade national budgetary frameworks

Adopt national expenditure rules and conduct spending reviews linked to budget preparation

Ensure that national independent fiscal institutions have resources to fulfil their mandate

Public investment has taken deep cuts

1. Consolidation episodes considered are those starting in 2009 or later. Source: See Figure 21 of OECD (2016), OECD Economic Surveys: Euro area 2016 for further details and source information.

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Reduce administrative burdens and regulatory barriers in the services sector

Improve the quality of impact assessment of legislative proposals and the quality of ex post evaluation of policies

Regulatory burdens are high in much of Europe

1. European Union member countries that are also members of the OECD (21 countries).Source: OECD (2015), ”Sectoral regulation”, OECD Product Market Regulation Statistics (database).

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Prioritise the Trans-European transport and energy network projects

Take advantage of the guarantees under the Juncker Plan to finance higher-risk projects

Network sectors are fragmented

1. 2014 for Germany, Greece, Netherlands and United Kingdom. Aggregates are unweighted averages of latest data available. The European Union covers member countries that are also members of the OECD (21 countries) excluding Spain (no data available) and the OECD covers 29 countries.Source: IEA (2016), IEA Energy Prices and Taxes Statistics and OECD (2016), OECD Economic Outlook: Statistics and Projections (databases).

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Harmonise national regulations and technical specifications in network sectors, with the target of transferring decision powers in technical matters to a single EU regulator.

Competition in network sectors is uneven

1. European Union 28 countries.Source: OECD (2015), OECD Product Market Regulation Statistics (database).

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Enhancing labour mobility

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Labour market mobility is low

Increase portability of supplementary pension schemes and social benefits

Simplify the eligibility requirements and procedures for the Blue Card scheme

1. Population mobility for Australia, Canada and the United States; labour mobility for the European Union.2. NUTS: Nomenclature of territorial units for statistics.Source: Eurostat, Australian Bureau of Statistics, Statistics Canada and US Census Bureau.

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Use electronic procedures to reduce administrative burdens for recognition of professional qualifications

Use electronic services passports to reduce administrative burdens for service providers and regulatory barriers in the services sector

The recognition of professional qualifications is still a challenge

1. Within European Union applications only. The European Union aggregate is an unweighted average of data for the 28 member countries.Source: European Commission (2016), Regulated Professions Database, http://ec.europa.eu/growth/tools-databases/regprof (accessed on 11 May).

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Strengthen joint protection of external borders Speed up administrative decisions on asylum

applications and ease labour market access for recognised refugees

Asylum applications have surged

1. Resident population at 1 January.2. 2014 only for Austria, 2012-14 for Finland and 2013-14 for Hungary.3. European Union 28 countries.Source: Eurostat (2016), “Asylum and managed migration” and “Demography and migration”, Eurostat Database.

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For more information

Disclaimers:

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

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