GCEE Business Cycle Update, March 2018: “In the euro area, the level of indebtedness of many member states remains very high. This is particularly true of Italy where the national debt stands at over 130 % of GDP. Should financial markets lose confidence in the sustainability of public debt on account of the political uncertainty resulting from the outcome of the election, given the size of the Italian economy a return of the euro crisis cannot be ruled out. Furthermore, risks to financial stability continue to persist in certain member states due to the fragility of many banks, particularly with regard to the extent of non-performing loans.”

1. 17
18
The Economic Situation in EMU –
Where Do We Stand?
Berlin, July 18, 2018
University of Freiburg and Walter Eucken Institut
Prof. Dr. Dr. h.c. Lars P. Feld

2. 2
Economic growth in the euro area
Euro area
7
100 2.3 2.3 (0.2) 1.9 1.5 1.5 (0.0) 1.6 9.1 8.3 (– 0.3) 7.9
including:
Germany 29.2 2.2 2.3 (0.1) 1.8 1.7 1.7 (0.0) 1.7 3.8 3.5 (– 0.2) 3.4
France 20.7 1.8 2.1 (0.2) 1.8 1.2 1.6 (0.3) 1.5 9.4 8.6 (– 0.5) 8.1
Italy 15.5 1.5 1.4 (0.0) 1.2 1.3 0.9 (– 0.3) 1.2 11.3 10.7 (– 0.1) 10.3
Spain 10.3 3.1 2.5 (0.2) 2.1 2.0 1.6 (0.0) 1.6 17.2 15.6 (– 0.5) 14.7
Netherlands 6.5 3.1 2.8 (0.1) 2.1 1.3 1.8 (0.2) 2.4 4.9 3.9 (– 0.4) 3.6
Belgium 3.9 1.7 1.7 (0.1) 1.6 2.2 2.0 (0.2) 2.0 7.2 6.4 (– 0.9) 6.3
Austria 3.2 2.9 2.8 (0.3) 2.1 2.2 2.3 (0.4) 2.0 5.5 5.2 (– 0.2) 5.0
Ireland 2.6 7.8 6.6 (2.9) 3.8 0.3 1.0 (– 0.2) 1.2 6.7 5.5 (0.1) 5.0
Finland 2.0 2.7 2.4 (0.3) 2.1 0.8 1.0 (– 0.2) 1.3 8.6 8.3 (– 0.1) 7.9
Portugal 1.7 2.7 2.3 (0.4) 1.9 1.6 1.6 (– 0.2) 1.7 9.0 7.5 (– 0.7) 6.8
Greece 1.6 1.4 2.0 (0.0) 2.0 1.1 1.0 (– 0.1) 1.4 21.4 19.4 (– 0.6) 18.3
memorandum:
Euro area without
Germany 70.8 2.4 2.3 (0.2) 1.9 1.4 1.5 (0.1) 1.6 11.0 10.0 (– 0.4) 9.5
20195
Update
Diff. to AR
2017/186 Update
Diff. to AR
2017/186 Update
Diff. to AR
2017/186
20195
2017
20185
20195
2017
20185
Gross domestic product, consumer prices and unemployment rates in the Euro area
Country/
country group
Weight
in %
1
Gross domestic product2
Consumer prices (HICP)
3
Unemployment rate
4
Change on previous year in % %
2017
20185

3. 3
Economic growth in the euro area
Assessment of factors limiting production by companies¹
0
5
10
15
20
25
30
2006 08 10 12 14 16 2018
Shortage of labour
%²
0
10
20
30
40
50
60
70
80
90
2006 08 10 12 14 16 2018
Insufficient demand
%²
1 – Quarterly survey of industrial companies conducted by the European Commission. Companies are asked about the factors limiting production.
Possible answers are: none, insufficient demand, shortage of labour, shortage of space and/or equipment, financial constraints, others. Multiple
answers are possible. Seasonally adjusted data. In total about 24,000 industrial companies are surveyed in the euro area. Usually, about 18,000 of
them respond. 2 – Share of companies.
Source: European Commission
© Sachverständigenrat | 18-052
Germany France Italy Spain Euro area

4. 4
Economic growth in the euro area
80
120
140
160
180
200
100
1991 94 97 00 03 06 09 12 15 2018
Germany
Real GDP
© 8 138Sachverständigenrat | 1 -Sources: OECD, own calculations
1991 = 100
France
United Kingdom
Italy Japan
United States
90
110
120
130
140
150
160
100
1991 94 97 00 03 06 09 12 15
Germany
Real GDP per capita
© 8 139Sachverständigenrat | 1 -Sources: OECD, own calculations
1991 = 100
France
United Kingdom
Italy Japan
United States
2017

5. 5
Large Euro countries and Japan lag
behind the U.S. and the U.K.
Particularly bad performance of Italy
 No or even slightly negative productivity
growth between 1997 and 2007
 Clearly negative productivity growth since
2007.
Productivity in the euro area
90
110
120
130
140
150
100
1991 94 97 00 03 06 09 12 15 2018
Germany
Labour productivity
© 8 137Sachverständigenrat | 1 -Sources: OECD, own calculations
1991 = 100
France
United Kingdom
Italy Japan
United States

6. 6
GDP per capita: Regional development
40
50
60
70
80
90
100
110
120
130
140
2000 2002 2004 2006 2008 2010 2012 2014 2016
Deutschland
Deutschland = 100
Max-Min Bayern Nordrhein-Westfalen
Hessen Sachsen
© Sachverständigenrat | ns-gdp
40
50
60
70
80
90
100
110
120
130
140
2000 2002 2004 2006 2008 2010 2012 2014 2016
Italien
Deutschland = 100
Max-Min Lombardei Latium
Umbrien Kalabrien Italien
© Sachverständigenrat | ns-gdp

7. 7
Differences in competitiveness in
different member states still exist
Structural reforms to increase productivity
 Particularly in good times
Responsibility of national governments
Convergence in the euro area
Real effective exchange rates
vis-a-vis the euro area
80
85
90
95
105
110
115
120
100
2000 02 04 06 08 10 12 14
1 quarter of 2000 = 100st
ItalyGermany France
© 7 455Sachverständigenrat | 1 -
Sources: European Commission, own calculations
Portugal Spain
2017

8. 8
Almost all member states comply with the 3 % deficit Maastricht limit by now
But: Public debt ratios exceed the 60 % limit in 13 of 19 member states in 2016
High public debt ratios (not only) in the euro area
Debt-to-GDP ratios of selected countries
Largest member states of the EMU
0
50
100
150
200
1970 75 80 85 90 95 00 05 10 15
% of GDP
G7 excluding member state fo the EMU
0
50
100
150
200
0
70
140
210
280
1970 75 80 85 90 95 00 05 10 15
% of GDP
United States
Canada United Kingdom
Japan (right hand scale)
© 7 425Sachverständigenrat | 1 -
Sources: IMF, Mauro et al. (2015), own calculations
2017
ItalyGermany France Spain
2017
%
Maastricht criterion

9. 9
Almost all member states comply with the 3 % deficit Maastricht limit by now
But: Public debt ratios exceed the 60 % limit in 13 of 19 member states in 2016
High public debt ratios (not only) in the euro area
Debt-to-GDP ratios of selected countries
© 7 425Sachverständigenrat | 1 -Sources: IMF, Mauro et al. (2015), own calculations
Other selected member states of the EMU
0
50
100
150
200
1970 75 80 85 90 95 00 05 10 15
% of GDP
Programme countries in the EMU excluding
Spain
0
50
100
150
200
1970 75 80 85 90 95 00 05 10 15
% of GDP
2017
BelgiumGreece Ireland PortugalCyprus
2017
Finland Netherlands
Maastricht criterionMaastricht criterion
Austria

10. 10
Sustainabilty gaps in the euro area
-2
2
4
6
8
10
0
14
16
S1 S2 S1 S2 S1 S2 S1 S2 S1 S2 S1 S2 S1 S2 S1 S2 S1 S2 S1 S2 S1 S2
AT BE CY DE ES FI FR IE IT NL PT
Sustainability gaps in selected euro area countries¹
% of GDP
1 – Calculations by the European Commission (Debt Sustainability Monitor 2016). The S1 indicator corresponds to the constant annual im-
provement in the structural primary balance that is required over the next five years to reduce the current level of debt to 60 % of nominal
GDP within fifteen years. The S2 indicator shows the percentage of GDP by which the structural primary balance would have to be adjusted
compared to the status quo in the case of an infinite horizon to stabilize the debt-to-GDP ratio at its current level. AT-Austria, BE-Belgium, CY-
Cyprus, DE-Germany, ES-Spain, FI-Finland, FR-France, IE-Ireland, IT-Italy, NL-Netherlands, PT-Portugal. No figures are provided for Greece.
2 -No-fiscal policy change scenario (assuming that the structural primary balance remains constant at the last forecast value), and taking
into account the costs of demographic change. 3 - As a result of non-demographic factors such as technological change (new treatment
methods). 4 - Structural primary balance gradually converges to the historical average for the past 15 years within four years.
Source: European Commission © 7 282Sachverständigenrat | 1 -
Baseline scenario2 Scenario with higher health and long-term care costs3 Scenario with historical values of the primary balance4

11. 11
Sustainabilty gaps in the euro area
1 – In relation steady-state GDP. 2 – Parameterization of the baseline scenario based on the values from Bi (2012) for the average of a group
of 19 OECD member states. 3 – In the steady state, the ratio of government final consumption expenditure to GDP is 21.3 % in the baseline
scenario, 18 % in the scenario with lower expenditure, and 24 % in the scenario with higher expenditure. 4 – Results for the baseline scenario.
The diagram shows the values for the steady state of productivity (average productivity), as well as for realizations of the productivity shock,
which are two standard deviations above or below this value.
Simulation of the fiscal limit according to Bi (2012)
Sources: Bi (2012), own calculations
%
0
10
20
30
40
50
60
70
80
90
100
%
Baseline scenario2
Higher government final
consumption expenditure3
Probability of exceeding the fiscal limit for dif-
ferent levels of government final consumption
tion expenditure
Probability of exceeding the fiscal limit for dif-
ferent realizations of the productivity shock
© 7 402Sachverständigenrat | 1 -
Lower government final
consumption expenditure³
0
10
20
30
40
50
60
70
80
90
100
Debt-to-GDP ratio (%)1Debt-to-GDP ratio (%)1
Average productivity4 High productivity4
Low productivity4
80 100 120 140 160 180 200 220 80 100 120 140 160 180 200 220

12. 12
Spreads in the euro area
0
300
600
900
1 200
1 500
2008 09 10 11 12 13 14 15 16 17 2018
Ireland
10 year government bonds spreads
© 8 142Sachverständigenrat | 1 -
Sources: Thomson Reuters, own calculations
Base points
Italy Portugal Spain

13. 13
Spreads in the euro area

14. 14
Target2 Balances
-600
-400
-200
0
200
400
600
800
1000
2001Jan 2002Jan 2003Jan 2004Jan 2005Jan 2006Jan 2007Jan 2008Jan 2009Jan 2010Jan 2011Jan 2012Jan 2013Jan 2014Jan 2015Jan 2016Jan 2017Jan 2018Jan
Target2-Balances (Mrd €)
ECB AUS BEL CYP DE EST ES FIN FR GR IRE
IT LIT LUX LAT MA NET PT SLV SLK Out-NCBs

15. 15
GCEE Business Cycle Update, March 2018: “In the euro area, the
level of indebtedness of many member states remains very high.
This is particularly true of Italy where the national debt stands at
over 130 % of GDP. Should financial markets lose confidence in
the sustainability of public debt on account of the political
uncertainty resulting from the outcome of the election, given the
size of the Italian economy a return of the euro crisis cannot be
ruled out. Furthermore, risks to financial stability continue to
persist in certain member states due to the fragility of many
banks, particularly with regard to the extent of non-performing
loans.”
Don‘t say, we‘ve not warned….

16. 16
Hoping for the best in Italy, but …
 Markets will further punish Italian political chaos: hence stop it.
 Ortherwise, it will bring us to the brink of the next Euro crisis.
Ringfencing the Italian problem as good as it gets.
 ECB will only have restricted possibilities.
 Completion of banking union (fiscal backstop) is key.
 No further steps, rather defining conditions of access to the fiscal backstop
restrictively, such that countries with low ratings are not allowed.
For the time being, the Italian situation prevents Europe from further
reforms.
The Way Ahead….

17. 17
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