OECD economic surveys : Euro area.

121 Pages·2007·2.583 MB·English

by  OECD

Euro area V
o
lu
m
Economic Surveys Non-Member Economies e OECD

Most recent editions Most recent editions 2
0
Australia, July 2006 Baltic States, February 2000 0 Economic Surveys
6
Austria, July 2005 Brazil, November 2006 /
1
Belgium, May 2005 Bulgaria, April 1999 6

Canada, June 2006 Chile, November 2005
Euro area
Czech Republic, June 2006 China, September 2005
Denmark, May 2006 Romania, October 2002
Euro area, January 2007 Russian Federation, November 2006
Finland, May 2006 Slovenia, May 1997
France, September 2005 Federal Republic of Yugoslavia,
Germany, May 2006 January 2003
Greece, September 2005
Hungary, July 2005
Iceland, August 2006
Ireland, March 2006
Italy, November 2005
Japan, July 2006
Korea, November 2005
Luxembourg, July 2006
Mexico, November 2005
Netherlands, December 2005
New Zealand, September 2005
Norway, October 2005
Poland, June 2006
Portugal, April 2006
Slovak Republic, September 2005
O
Spain, April 2005
E
Sweden, August 2005 C
D
Switzerland, January 2006

E
Turkey, October 2006 c
o
United Kingdom, November 2005
n
United States, December 2005 o
m
ic

S
u
r
v
e
y
s

Subscribers to this printed periodical are entitled to free online access. If you do not yet have online access E
via your institution’s network, contact your librarian or, if you subscribe personally, send an e-mail to: U
R
[email protected] O

A
R
E
www.oecd.org
A
ISSN 0376-6438
2006 SUBSCRIPTION
(18 ISSUES)
J
a
-:HSTCQE=UW^]]U: n
u
a
Volume 2006/16 – January 2007 I1S0B 2N0 0962 -1664 -10 P2988-5 ry 2 Volume 2006/16 – January 2007
0
0
7
OECD
Economic Surveys
Euro area
2007
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT
The OECD is a unique forum where the governments of 30 democracies work together to
address the economic, social and environmental challenges of globalisation. The OECD is also at
the forefront of efforts to understand and to help governments respond to new developments and
concerns, such as corporate governance, the information economy and the challenges of an
ageing population. The Organisation provides a setting where governments can compare policy
experiences, seek answers to common problems, identify good practice and work to co-ordinate
domestic and international policies.
The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic,
Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea,
Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic,
Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Commission of
the European Communities takes part in the work of the OECD.
OECD Publishing disseminates widely the results of the Organisation’s statistics gathering and
research on economic, social and environmental issues, as well as the conventions, guidelines and
standards agreed by its members.
This survey is published on the responsibility of the Economic and Development Review
Committee of the OECD, which is charged with the examination of the economic situation
of member countries.
Also available in French
© OECD 2007
No reproduction, copy, transmission or translation of this publication may be made without written permission. Applications should be sent to
OECD Publishing [email protected] or by fax [phone]. Permission to photocopy a portion of this work should be addressed to the Centre français
d’exploitation du droit de copie (CFC), 20, rue des Grands-Augustins, 75006 Paris, France, fax [phone], [email protected] or (for US only) to
Copyright Clearance Center (CCC), 222 Rosewood Drive Danvers, MA 01923, USA, fax [phone], [email protected].
TABLE OF CONTENTS
Table of contents
Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Assessment and recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Chapter 1. Managing diversity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Recent economic performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Is monetary union fostering economic union? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
The gains from the single currency are being offset by a lack of resilience . . . . . . . 36
Summing up: making monetary union a smoother ride . . . . . . . . . . . . . . . . . . . . . . . 38
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Annex 1.A1. Entry criteria for the euro area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Chapter 2. Monetary policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
The monetary stance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Global imbalances may adversely affect the euro area . . . . . . . . . . . . . . . . . . . . . . . . 56
The transmission mechanism could be made more powerful . . . . . . . . . . . . . . . . . . 62
The role of monetary aggregates in monetary policy. . . . . . . . . . . . . . . . . . . . . . . . . . 65
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Annex 2.A1. Headline and core inflation: what attracts what? . . . . . . . . . . . . . . . . . 76
Annex 2.A2. Is money a useful indicator? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Chapter 3. Putting fiscal policy back on track. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
There has been no improvement in the area-wide fiscal position since1999 . . . . . 88
Policy changes are needed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Conclusion: a daunting agenda for national and EU authorities . . . . . . . . . . . . . . . . 111
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Boxes
1.1. Has monetary union helped or hindered structural reform? . . . . . . . . . . . . . . . . 28
2.1. Whose current accounts are out of line? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
2.2. What to do when one size does not fit all? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
2.3. Should central banks respond to asset price booms?. . . . . . . . . . . . . . . . . . . . . . . 69
3.1. Fiscal surgery without killing the patient. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
OECD ECONOMIC SURVEYS: EURO AREA – ISBN 92-64-02988-5 – © OECD 2007 3
TABLE OF CONTENTS
3.2. Multi-annual national expenditure limits would usefully
supplement the SGP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
3.3. Structural reform and the budget: little short-term pain
forlargelong-term gains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
3.4. When might structural reform justify temporarily relaxing fiscaltargets? . . . . 108
3.5. The political economy of fiscal consolidation: howlarge
is thecostofinaction?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Tables
1.1. Demand and output. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
1.2. Employment growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
1.3. Short-term outlook. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
1.4. Long-term scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
1.5. Dispersion of real GDP growth rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
1.6. Summary indicators for EU-10countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
2.1. Measures of inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
2.2. Change in net foreign assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
2.A1.1. Parameter estimates of headline and core inflation equations. . . . . . . . . . . . . . . 77
2.A2.1. Inflation forecast errors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
3.1. The debt-GDP ratio is set to remain high in the euro area
in the medium-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
3.2. Projected changes in public spending on health care, long-termcare
and pensions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
3.3. Status of euro area countries regarding the reformed SGP . . . . . . . . . . . . . . . . . . 98
3.4. Planned speed of progress towards the medium-term objective
forpublic finances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
3.5. Large structural primary surpluses are required to stabilise debt . . . . . . . . . . . . 102
3.6. The four scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
3.7. Estimated error-correction equation fortheprimaryexpenditureratio . . . . . . . 107
3.8. The political cost of delaying consolidation is large in many countries . . . . . . . 109
3.9. Credit ratings and spreads reflect fiscal conditions . . . . . . . . . . . . . . . . . . . . . . . . 110
Figures
1.1. Contributions to GDP growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
1.2. Export performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
1.3. Labour market indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
1.4. Household saving rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
1.5. Short-term indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
1.6. The income gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
1.7. Differentials in GDP per capita and their decomposition. . . . . . . . . . . . . . . . . . . . 26
1.8. Product market regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
1.9. Divergences in growth and inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
1.10. Dispersion in levels of prices and unit labour costs . . . . . . . . . . . . . . . . . . . . . . . . 30
1.11. Internal and external trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
1.12. Cross-border lending by financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
1.13. Foreign direct investment outflows from euro area countries . . . . . . . . . . . . . . . 34
4 OECD ECONOMIC SURVEYS: EURO AREA – ISBN 92-64-02988-5 – © OECD 2007
TABLE OF CONTENTS
1.14. A comparison of recoveries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
1.15. Real effective exchange rate and gross exports. . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
1.16. Relative unit labour cost levels in industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
2.1. Inflation has been comparatively stable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
2.2. Contributions to inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
2.3. Industrial producer prices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
2.4. Money and credit growth have picked up. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
2.5. House price growth varies widely across the union . . . . . . . . . . . . . . . . . . . . . . . . 54
2.6. Monetary and financial conditions have been tightening . . . . . . . . . . . . . . . . . . . 55
2.7. Global current account balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
2.8. Saving and investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
2.9. Whose current accounts are out of line? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
2.10. The velocity of circulation has become less stable. . . . . . . . . . . . . . . . . . . . . . . . . 67
2.A1.1. Impact of a 50% increase in oil prices on inflation rate . . . . . . . . . . . . . . . . . . . . . 78
2.A1.2. Inflation forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
3.1. Fiscal indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
3.2. Fiscal policy has been pro-cyclical. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
3.3. The expenditure ratio has fallen in many countries. . . . . . . . . . . . . . . . . . . . . . . . 93
3.4. Consumption and transfers make up a rising share of public spending. . . . . . . 93
3.5. Labour taxation has been reduced. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
3.6. Balancing the budget: regular annual good resolutions. . . . . . . . . . . . . . . . . . . . . 96
3.7. Belgium apart, high-debt countries tend to have larger deficits. . . . . . . . . . . . . . 101
3.8. Consumption per capita under different scenarios . . . . . . . . . . . . . . . . . . . . . . . . 105
OECD ECONOMIC SURVEYS: EURO AREA – ISBN 92-64-02988-5 – © OECD 2007 5
This Survey is published on the responsibility of the Economic and
Development Review Committee (EDRC) of the OECD, which is charged with the
examination of the economic situation of member countries.
The economic situation and policies of the euro area were reviewed by the
Committee on 23October2006. The draft report was then revised in the light of the
discussions and given final approval as the agreed report of the whole Committee on
13December2006.
The Secretariat’s draft report was prepared for the Committee by David Rae
and BorisCournède under the supervision of PeterHoeller.
The previous Survey of the euro area was issued in September2005.
BASIC STATISTICS (2005)
Euro area UnitedStates Japan
LAND AND PEOPLE
Area (thousand km2) 2456 9167 395
Population (million) 313.6 296.4 127.8
Number of inhabitants per km2 128 32 323
Population growth (1995-2005, annual average % rate) 0.4 1.1 0.2
Labour force (million) 147.9 149.3 66.5
Unemployment rate (%) 8.6 5.1 4.4
ACTIVITY
GDP (billion USD, current prices and exchange rates) 9947.6 12397.9 4559.0
Per capita GDP (USD, current prices and PPPs) 29848 41789 30541
In per cent of GDP:
Gross fixed capital formation 20.5 19.5 23.2
Exports of goods and services 20.2 10.5 14.3
Imports of goods and services 19.1 16.2 12.9
PUBLIC FINANCES (per cent of GDP)
General government:
Revenue 44.5 32.7 30.3
Expenditure 47.5 36.6 37.0
Balance –2.4 –3.7 –5.2
Gross public debt (end-year) 77.5 61.8 173.1
EXCHANGE RATE (national currency per euro)
Average2005 1.24 136.9
October2006 1.26 149.7
EURO AREA–EXTERNAL TRADE IN GOODS (main partners, % of total flows, in2004)
Exports Imports
Denmark, Sweden, UnitedKingdom 22.9 17.4
New European Union member countries 11.0 9.8
Other Europe 16.8 15.9
OECD America 17.4 12.6
OECD Asia/Pacific 5.5 8.6
Non-OECD dynamic Asian1 and China 7.8 14.4
1. Chinese Taipei; Hong Kong, China; Indonesia; Malaysia; Philippines; Singapore and Thailand.
SHARE IN EURO AREA GDP
Current market prices, 2005
30 30
28.0
25 25
21.4
20 20
17.7
15 15
11.3
10 10
6.3
5 3.7 3.1 5
2.3 2.0 2.0 1.8
0.4
0 0
DEU FRA ITA ESP NLD BEL AUT GRC IRL FIN PRT LUX
EXECUTIVE SUMMARY
Executive summary
A
fter several false starts, the economic recovery has taken hold. Activity was strong in 2006, firms
and households are more confident about the future, business investment has picked up and
unemployment has fallen below 8% for the first time since2001. There are encouraging signs that the
recovery is broadening to embrace household consumption as well. If in addition structural reforms
continue, the expansion will become durable and self-sustaining, a prospect also supported by sound
corporate and household balance sheets and favourable financing conditions. All this is good news,
though it should be kept in perspective. Growth of around 2¼per cent per annum projected for2007
and2008 is still modest by OECD standards, although the growth gap is smaller when measured on a
per capita basis. Still, it could take until2008 for cyclical slack to be fully absorbed.
With the recovery underway, attention can shift back to the euro area’s longer-term challenges:
subdued potential growth and a lack of resilience due to structural shortcomings. The early years of
monetary union have shown that less flexible economies can have a rough ride, missing out on the full
benefits of the single currency. Structural rigidities tend to reduce growth, make inflation more persistent
and reduce the economy’s ability to absorb shocks. Some countries are more flexible than others, and this
matters because it implies that the common monetary policy will often be too loose for some and too tight
for others. For that reason, the single currency would be more beneficial for everyone if structural reforms
were put in place so that economies became more flexible and more tightly integrated.
The priorities for national and European authorities include: i)reducing labour market rigidities
so that economies can cope with change more easily. A key part of this is to make wages more
flexible; ii)boosting competition, especially in the protected service sector, to make inflation less
sticky and take some of the pressure off monetary policy; and iii)continuing to integrate and develop
financial markets. Some countries are already a long way down the road of structural reform, and
are performing well as a result. Others have some catching up to do.
Monetary policy has succeeded in anchoring inflation expectations around the price stability
objective, despite the energy price shock. The monetary and economic analyses composing the ECB’s
strategy are intended to complement each other and thereby aim to develop a deeper insight into the
risks to price stability at various horizons in order to ensure that the most appropriate policy
decisions are made. However, the framework poses communication challenges, so the ECB should
continue to enhance its communication strategy.
The recovery creates a golden opportunity to get fiscal policy back on track. Budget plans are
falling short of what is needed to sustain welfare systems over the long-term. Member states need to
make greater efforts to achieve budget balance and pay down debt. An important tool to help achieve
this would be to improve budgeting practices and national fiscal frameworks, for example with
expenditure, deficit and debt targets, greater transparency and more focus on the medium-term. It is
too early to say whether the revisions to the Stability and Growth Pact in2005 have helped. They
have the potential to deliver better fiscal outcomes because the Pact may have more “ownership” by
member states. However, it could also be less effective by making it easier to postpone adjustment.
Thorough implementation is therefore important.
8 OECD ECONOMIC SURVEYS: EURO AREA – ISBN 92-64-02988-5 – © OECD 2007
ISBN 92-64-02988-5
OECD Economic Surveys: Euro area
© OECD 2007
Assessment and recommendations
E
conomic and monetary union (EMU) has promoted prosperity and encouraged
economic integration. However, the euro area as a whole has experienced low growth and
a lack of resilience. These issues are related. Many of the structural rigidities that restrain
growth also reduce the economy’s ability to absorb shocks. In the public debate, the union’s
poor performance in these two areas has often been blamed on the single currency itself.
However, this criticism is misguided. The economic problems are mainly structural; the
solutions therefore are largely in the hands of individual member governments. Thus, the
primary policy challenge for the euro area is to improve growth and resilience by boosting
economic flexibility. The second challenge is to get fiscal policy back on track. Population
ageing will hold back growth in coming decades and will have large implications for fiscal
policy in all euro area countries. This Survey discusses all these issues, but puts more
emphasis on the macroeconomic factors. The more structural issues will be dealt with in
greater depth in the2007Economic Survey of the European Union.
The recovery is underway and is becoming
morerobust
The latest economic news is encouraging and bodes well for the immediate future. The
economic rebound is clearly under way and there are signs that it has begun to embrace
households as well. Growth in the first half of 2006 was well above potential, driven to a
large extent by a rebound in business investment. It seems that the pent-up investment
demand that had been put on hold in2005 due to economic and political uncertainty is
now coming on stream. The recovery has been broad-based, with most member countries
growing at a healthy pace. Employment growth has also picked up, albeit modestly, and the
unemployment rate has fallen below 8%. While business and consumer confidence have
eased back a little from their peaks in mid-2006, they remain fairly high. Incoming orders
are strong and employment expectations are healthier than they have been for many
years. All in all, this points to growth rates in the near term at or slightly above the
economy’s potential rate. Further out, the durability of the recovery depends on how
consumers react and on progress made with structural reforms. Consumers should
become more willing to spend so long as there are no more negative shocks, although
consumption growth could remain constrained by fairly modest wage growth. Moreover,
the consumption path may not be smooth as consumption in Germany is likely to be
shuffled around by its value-added tax (VAT) increase in January 2007. There are always
risks, of course, the main ones being a sharper-than-expected slowdown in the
UnitedStates, another jump in oil prices, a slump in construction activity if housing
markets deteriorate and an abrupt appreciation of the euro if global current account
9