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2014.05.20_OECD-ECLAC-PSE Forum_mojon
The document summarizes the challenges facing the Euro area in 2014 regarding monetary policy. It discusses: 1) Where the Euro area has come from, noting the financial crisis is mainly behind but private and public debt remain high. 2) Where the Euro area currently stands, with a slow and fragile recovery and inflation remaining too low. 3) Where the Euro area is headed, with the ECB pursuing resolute monetary policy to ensure inflation does not fall into deflation or remain too low for too long.
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2014.05.20_OECD-ECLAC-PSE Forum_mojon
- 1. Euro area 2014monetary policy challenges Benoit Mojon Banque de France Europe and Latin America in an ever-changing global economy OECD Headquarters ,20 Mai 2014 1
- 2. European challenges &global interactions I’ll focus on the Euro Zone : 1. Where we come from: main stress is behind 2. Where we are: slow and fragile recovery with too low inflation 3. Where we are headed: resolute monetary policy => neither deflation nor too low inflation for too long 2
- 3. 1… Where wecome from… 7 6 5 4 3 2 1 0 Non financial corporations' spreads with German Bund EZ GER FRA ITA SPA 2007m1 2009m1 2011m1 2013m1 Source: Banque de France (DEMFI) calculations 3 Reference sovereign rates (%) 7 6 5 4 3 2 1 EZ GER SPA 01/2007 01/2008 01/2009 01/2010 01/2011 01/2012 01/2013 01/2014 Source: OECD; last point: February 2014
- 4. 1… Where wecome from 4 Non banking private debt/GDP (top) and public (down) debt/GDP (source : BoF, Statistics General Directorate) USA JAP EZ UK GER FRA ITA SPA
- 5. 5 1… Crisisfactors and answers: the role of debt
- 6. 1… Where wecome from EZ Factors of crisis Answers Lack of banking union Single Supervisory Mechanism & Single Resolution Mechanism (03.20.14: agreement on an agency to shut failing EZ banks) Constraints on budget policies (Moderate) fiscal consolidations Excess of private debt followed by an increase of public debt Deleveraging & ECB actions (MRO, FRFA, VLTRO, OMT …) Rigid labor/product markets Structural reforms (increase of flexisecurity: Spain, France …) 6
- 7. 7 2... Wherewe are: slow and fragile recovery GDP growth projections (source: IMF WEO, April 2014) 4 3 2 1 0 -1 -2 -3 -4 -5 United States Eurozone 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
- 8. 2. Where weare: low inflation Since 2011, inflation has decreased in most advanced countries As of 2014, according to IMF (WEO), it will increase everywhere Source: IMF, April 2014 WEO 8
- 9. 2 Where weare … EZ: low inflation and rise of lowflation EZ Members: HICP growth rate (yoy, %) 8 6 4 2 0 -2 -4 8 6 4 2 0 -2 -4 ZE DE FR IT ES MIN MAX 2007 2008 2009 2010 2011 2012 2013 2014 9 1.0 0.8 0.6 0.4 0.2 0.0 1.0 0.8 0.6 0.4 0.2 0.0 Weight of countries inside the EZ HICP depending on the range of inflation HICP yoy <=0 0< HICP yoy <=0.5 2007 2008 2009 2010 2011 2012 2013 2014 Source: Eurosystem
- 10. 2… Where weare Stable long-term expectations, but need to monitor short run 2,5 2,0 1,5 1,0 0,5 2 years 2 years/2 years 5 years/5 years 01/08/2013 01/10/2013 01/12/2013 01/02/2014 3,5 3,0 2,5 2,0 1,5 2 years 2 years/2 years 5 years/5 years 01/08/2013 01/10/2013 01/12/2013 01/02/2014 10 Inflation expectations via ILS (Inflation Linked Swaps): - in the US : all stable in the EZ : 5y/5y OK, 2y/2y ?
- 11. Contribution of therecent € appreciation half due to EMEs 11 107 106 105 104 103 102 101 100 99 NEER of € (22th May 2013=100) NEER-12 NEER-39 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 2… Where we are : import prices to HICP: -0.6pp, including -0.5pp due to the rise of NEER of € between Dec. 2012 and Dec. 2013 12 8 4 0 -4 -8 -12 -16 12 8 4 0 -4 -8 -12 -16 Total NEIG 2006 2007 2008 2009 2010 2011 2012 2013 EZ: index of goods import prices (yoy, %)
- 12. 3. Where weare headed The extent of (de)coupling: USA versus EZ Since 2011, business cycles are not as synchronized as before. This applies to EMEs versus AEs, but also among AEs, between the USA & EZ. Thus policies (and rates) should differ 12 United States Eurozone Source: IMF, April 2014 WEO 4 3 2 1 0 -1 -2 -3 -4 -5 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
- 13. 3. Global (de)couplingversus spillovers Banque de France Direction générale des Études et des Relations internationales
- 14. 3. Where weare headed Some decoupling in long term rates between the EZ and the US EZ fragmentation (OMT) but (relative) of core interest rates due to tapering Reference sovereign bond rates (%) OMT announced 14 7 6 5 4 3 2 1 USA UK EZ GER SPA 01/2007 01/2008 01/2009 01/2010 01/2011 01/2012 01/2013 01/2014 Source: OECD; last point: February 2014
- 15. 4 3 2 1 0 -1 June '13 Jul'13 - Feb'14 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y Source: Altavilla and Motto (2013). Note: Positive values indicate above-average sensitivity, negative values below-average sensitivity of forward rates to surprises. Dates are before (dark grey) and after the introduction of forward guidance (light grey). Last observation: 20 February 2014. 15 3. Where we are headed the ECB Forward guidance Observed & forward 3-month interest rates (USA & EZ) (%) (extraction date: 3rd April 2014) 1,8 1,6 1,4 1,2 1 0,8 0,6 0,4 0,2 0 EONIA Fed Funds Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Source: Bloomberg, Banque de France (DEMFI) calculations EZ: sensitivity of forward rates to surprises
- 16. Conclusion The Europeanrecovery is under way Current low inflation should be transitory and does not mean deflation ECB policy is focused on delivering price stability and it will, whatever happens to US interest rates 16
- 17.
- 18. 18 Fiscal consolidationbut keeping in mind growth Source: IMF, April 2014 WEO
- 19. 19 Current accountsimbalances: EZ surplus will remain moderate
- 20. 20 Imports ofLatin America 12,7% 91,0% From Euro Area From the Rest of the World Source : Datastream, FMI-IFS Q3 2013 Exports of Euro Area 2,1% 97,9% 15 10 5 To Latin America To the Rest of the World 30 000 20 000 10 000 Source : Datastream, Eurostat Q4 2013 Imports of Euro Area 1,9% 98,1% From Latin America From the Rest of the World Source : Datastream, Eurostat Q4 2013 Trade between LAC and EZ 0 0 Latin America*: Exports to Euro Area USD Bn % of total Latin America exports (RS) Source : Datastream, FMI-IFS * Aggregate of Brazil, Mexico, Argentina, Peru, Colombia, Chile and Venezuela
- 21. Spanish banks’ expositionto Latin America is > 4 times that of the rest of the Euro Area 500 450 400 350 300 250 200 150 100 50 0 Euro Area claims on Latin America -USD Bn (Consolidated cross-border banking statistics, ultimate risk basis) Greece Belgium Ireland Austria Italy PortugalNetherl. France Germany Spain Sep.08 Sep.13 Sources: BIS, SERMI's calculations 60 40 20 0 Euro Area banks hold 55% of worlds’ claims on Latin America % of Euro Area claims over World's** claims on Latin America (Consolidated cross-border banking statistics, ultimate risk basis) Euro Area excluding Spain* Spain * Reporting EA countries: Austria, Belgium, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal ** World are reporting to BIS countries outside LatAm, ie: EA, Australia, Canada, India, Japan, Sweden, Switzerland, Turkey, U.K., U.S.A. Sources: BIS, SERMI's calculations 21 Exposition of EZ & Spanish banks to LAC
Editor's Notes
- #17 There may be another financial risk, linked to exchange rates. As the IDB (IDB (2014) “Global Recovery and Monetary Normalization”, 2014 Latin American and Caribbean Macroeconomic Report (coord. A. Powell), pp. 30,31) shows, in countries like Brazil, Chile, Colombia and Peru financial firms are increasingly relying on international capital markets, where most of bond issuances are denominated in hard currencies, among which the Euro. Thus, the ongoing depreciation of local currencies against the Euro may give rise to private sector net wealth losses due to balance-sheet currency mismatches.
- #21 The share of Euro Area in Latin American exports has grown in trend since 2000, reaching a level close to the pre-crisis peak , but it remains limited to less than 10%.