Presentation of the 2018 OECD Economic Survey for the European Union and the Euro Area

2018 OECD ECONOMIC SURVEYS OF THE EURO AREA and the EUROPEAN UNION

Reforms for a stronger and more integrated Europe Brussels, 19 June 2018 http://www.oecd.org/eco/surveys/economic-survey-european-union-and-euro-area.htm

@OECDeconomy @OECD

The economy is expanding Real GDP growth in the Euro areaยน, year-on-year % changes 4

4

2

2

0

0

-2

-2

-4

-4

-6

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

1. Euro area member countries that are also members of the OECD (16 countries).

Source: OECD (2018), OECD Economic Outlook: Statistics and Projections (database).

2017

-6

2

Unemployment continues to fall Unemployment rate in the Euro areaยน, as a % of the labour force 14

14

12

12

10

10

8

8

6

6

4

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

4

1. Euro area member countries that are also members of the OECD (16 countries).

Source: OECD (2018), OECD Economic Outlook: Statistics and Projections (database).

3

Inflation is still below target Harmonised consumer price indices in the Euro areaš, year-onyear % changes 3.5

Headline inflation

3.5

Core inflation²

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

-0.5

2010

2011

2012

2013

2014

2015

2016

1. Euro area member countries that are also members of the OECD (16 countries).

2. excluding energy, food, alcohol, and tobacco.

Source: OECD (2018), OECD Economic Outlook: Statistics and Projections (database).

2017

-0.5 2018

4

ECB policy has remained accommodative Stock of central banks’ total liabilities (% of GDP) 100

100 Euro area

Japan

United States

80

80

60

60

40

40

20

20

0

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

0 2018

Source: Thomson Reuters (2018), Datastream Database and OECD (2018), OECD Economic Outlook: Statistics and Projections (database).

5

Public debt remains high Public debt (% of GDP) 200

2017

180

200

2007

180

160

160

140

140

120

120

100

100

80

80

60

60

40

40

20

20

0

EST

LUX

LTU

LVA

SVK

NLD

FIN

DEU

IRL

SVN

AUT

EA

FRA

ESP

BEL

PRT

ITA

GRC

Note: Maastricht definition. Euro area member countries that are also members of the OECD (16 countries) and Lithuania; weighted average.

Source: OECD (2018), OECD Economic Outlook: Statistics and Projections (database).

0

6

Non-performing loans are still high Non-performing loans as a percentage of capital (net of provisions) Q4 2017ยน 90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0

-10

MEX CHL ISR LVA KOR TUR GBR EST CHE LUX CAN ISL HUN USA SVN NOR AUS JPN POL SWE SVK FIN AUT CZE DEU DNK FRA BEL OECD ESP LTU NLD IRL EA PRT ITA GRC

90

-10

1. Or latest observation available.

Source: IMF (2018), Financial Soundness Indicators (database), International Monetary Fund, Washington, D.C. 7

Private debt remains high Private debt (% of GDP) 400

2017²

400

2007

350

407

484

350

300

300

250

250

200

200

150

150

100

100

50

50

0

LTU SVN GRC SVK DEU LVA AUT

ITA

EST

EA¹

ESP OECD FIN

FRA NLD PRT BEL

Euro area member countries that are also members of the OECD (16 countries) and Lithuania; weighted average.

2. Or latest year available.

Source: OECD (2018), OECD Economic Outlook: Statistics and Projections (database).

IRL

LUX

0

1.

8

Macroeconomic policies to ensure a sustainable expansion 1. Keep committing to accommodative monetary policy until headline inflation is durably back to the objective, but gradually reduce support.

2. As the expansion continues, euro area countries should ensure their fiscal position improves, gradually reducing debt ratios.

3. Eventually, countries should follow an expenditure objective that ensures a sustainable debt-to-GDP ratio.

4. The European Fiscal Board could assess the appropriate fiscal stance for each country consistent with the optimal stance at the euro area level.

9

Recommendations to strengthen financial stability 1. To limit side effects of accommodative monetary policy, encourage policy measures such as lower loan-to-value or add-on capital requirements.

2. To better gauge commercial real estate price dynamics, systematically collect harmonised data.

10

Reforms to strengthen the monetary union

11

The crisis halted convergence GDP per capita relative to EA16=100ยน, per cent Germany

France

Italy

Spain

Portugal

120

120

110

110

100

100

90

90

80

80

70

70

60

1990

1995

2000

2005

2010

2015

1. Euro area member countries that are also members of the OECD (16 countries), populationweighted average (PPP-adjusted).

Source: The Conference Board (2018), Total Economy Database.

60

12

Cross-border risk sharing is limited Percentage of absorbed shocks through private and public risk sharing 90

Risk sharing through fiscal transfers

Risk sharing through private financial flows

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

Euro area

United States

0

Source: European Commission (2016), "Cross-Border Risk Sharing after Asymmetric Shocks: Evidence from the Euro Area and the United States", Quarterly Report on the Euro Area 15(2), Brussels.

13

Reforms should reduce links between banks and their own State Share of domestic sovereign bonds in banks portfolios, March 2018 (%) 100

100

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

LUX

IRL

EST

FIN

NLD

BEL

AUT

SVN

LVA

DEU

PRT

EA

ESP

GRC

FRA

ITA

SVK

LTU

0

Source: OECD calculations based on ECB (2018), “Balance Sheet Items statistics”, Statistical Data Warehouse, European Central Bank.

14

The supply of European safe assets is limited Debt securities issued by governments and European institutions As a percentage of euro area GDP, 2016

30

30

25

25

20

20

15

15

10

10

5

5

0

1.

2.

Triple A-rated national debts š

European Institutions ²

0

Sovereign debt securities issued by the governments of Germany, Luxembourg and the Netherlands.

Triple A-rated securities issued by the EU institutions and authorities (EIB, ESM, EFSM, BOP Facility and the Macro-Financial Assistance Programs.

Source: Brunnermeier, M. et al. (2017). ESBies: Safety in the tranches. Economic Policy, 32(90), 175-219; OECD calculations based on public information released by European Institutions.

15

Most countries would benefit from the unemployment re-insurance scheme Cumulative payments received from the unemployment reinsurance scheme 2002-2016 (% of GDP) 6.0

6.0

5.0

5.0

4.0

4.0

3.0

3.0

2.0

2.0

1.0

1.0

0.0

FIN

BEL

FRA

LUX

AUT

DEU

NLD

ITA

SVN

GRC

ESP

PRT

IRL

0.0

Source: : Claveres and Stráský (2018) based on OECD (2018), OECD Economic Outlook: Statistics and Projections (database) .

16

European capital markets need to expand Outstanding loans and bonds of non-financial corporations as a % of GDP 50

50

45

45

40

40

35

35

30

30

25

25

20

20

15

15

10

10

5

5

0

Loans

Bonds Euro area

Loans

Bonds

0

United States

Note: Average 2015-2017.

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.

17

Recommendations to reduce financial fragmentation and increase private risk-sharing 1. Implement swiftly the ECOFIN action plan on non-performing loans and facilitate the creation of asset management companies.

2. Building on progress in risk-reduction, develop a pre-funded common deposit insurance scheme with risk-based contributions by banks.

3. Use the European Stability Mechanism as a fiscally-neutral backstop for the Single Resolution Fund that can be deployed rapidly.

4. Diversify banks’ exposure to sovereign bonds, including by sovereign concentration charges in parallel with a European safe asset.

18

Recommendations to strengthen resilience through a common fiscal capacity 1. Set up a fiscal stabilisation capacity in the form of an unemployment benefit reinsurance scheme that can borrow in financial markets.

2. Make access to the common fiscal stabilisation capacity conditional on past compliance with fiscal rules.

19

Improving growth and living standards

20

Productivity growth has declined Output per hour workedยน, annualised growth rates (%) 6

6 1990-2000

2000-2007

2007-2016

5

5

4

4

3

3

2

2

1

1

0

EU

OECD

Non-OECD

1. Productivity is measured as output per employee for Non-OECD countries.

Source: OECD estimations using OECD National Accounts database; OECD Productivity database; International Labour Organisation database.

0

21

There is room to ease regulatory burdens

0.6

STRI indexยน for professional services, from completely open (0) to completely closed (1), 2017

More restrictive

0.6

0.5

0.5

0.4

0.4

0.3

0.3

0.2

0.2

0.1

0.1

0 Less restrictive

EUROPEAN UNIONยน

OECD

3 best performing countries

3 worst performing countries

0

1. Services Trade Restrictiveness Index.

2. EU countries that are also members of the OECD (22 countries) and Lithuania.

Source: OECD (2018), OECD STRI Index (database).

22

Many individuals still lack digital skills Percentage of 16-74 year-olds who lack basic digital skills, 2017

ITA

POL

GRC

PRT

LVA

IRL

HUN

SVN

ESP

LTU

FRA

EU28

SVK

0

EST

0

CZE

10

BEL

10

AUT

20

DEU

20

GBR

30

DNK

30

FIN

40

SWE

40

NOR

50

NLD

50

LUX

60

ISL

60

Source: Eurostat (2018), "Individuals' level of digital skills", Eurostat Database.

23

Recommendations to improve long-term growth 1. Address barriers in the business services sector through simplified administrative formalities.

2. Pursue cross-border co-operation on energy through better power system operation and trade.

3. Develop tools to help member states monitor digital skill needs. Set EU standards for the monitoring of digital skills and task content of occupations.

24

Reforming the EU budget

25

The EU budget is small EUR thousand of billions, 2016 16

16

14

14

12

12

10

10

8

8

6

6

4

4

2

2

0

EU gross national income

EU Member States' total public expenditure

EU annual budget

0

Source: European Commission.

26

The EU budget has declined over time Per cent of gross national income 1.3

1.3

1.2

1.2

1.1

1.1

1.0

1.0

0.9

0.9

0.8

0.8

0.7

0.7

0.6

0.6

0.5

Average 1993-1999

Average 2000-2006

Average 2007-2013

Average 2014-2020

0.5

Source: European Commission.

27

Producer support to agriculture remains high Percentage of farm receipts, 2016 25

25

20

20

15

15

10

10

5

5

0

EUROPEAN UNIONยน

Best performing non EU OECD countries

0

1. European Union refers to all 28 members of the European Union.

Source: OECD (2018), OECD, Producer Support Estimate Database.

28

There is scope to increase the EU research and innovation budget 2014-2020 multiannual financial framework Others

Research and innovation, education

14% 39%

13%

Cohesion policy

Agriculture, rural development and fisheries

34%

Source: European Commission.

29

Recommendations to reform the EU budget 1. Consider enhancing the efficiency of spending and increasing revenues, and reassess how the European budget is financed 2. Phase out production-based payments in the Common Agricultural Policy 3. Increase research and development (R&D) spending 4. Increase spending on mobility programmes such as Erasmus+, and facilitate access irrespective of socio-economic background

30

Reducing regional divides

31

Regional convergence stopped after the crisis Coefficient of variation in regional GDP per capitaยน , %

Convergence Divergence

1. Disparities in GDP per capita (in PPS) between NUTS-2 EU regions; population-weighted.

Source: European Commission (2018), DG for Regional and Urban Policy, calculations based on Eurostat data.

32

Spending of structural funds is slow Spending as a % of planned investment in the 2014-2020 programming period, as of end 2017 40

40

35

35

30

30

25

25

20

20

15

15

10

10

5

5

0

ITA ESP SVK SVN CZE BEL POL HUN GBR LVA GRC FRA EU28 DNK EST LTU DEU NLD PRT SWE IRL AUT LUX FIN

0

Source: European Commission (2018), Open Data Portal for the European Structural and Investment Funds (https://cohesiondata.ec.europa.eu/) 33

The management of structural funds could improve Implementation errors found by the European Court of Auditorsยน Serious errors Significant errors

22%

Minor errors

29%

49% 1. Errors detected between 2009 and 2013.

Source: European Court of Auditors (2015), "Efforts to address problems with public procurement in EU cohesion expenditure should be intensified", Special Report N0. 10.

34

Recommendations to reduce regional divides 1. Prioritise cohesion funding to less developed regions.

2. Better target cohesion funding on human capital, innovation and network infrastructure.

3. Consider increasing national co-financing rates to encourage better project selection.

4. Create a “single rule book� for EU funding programmes to facilitate spending.

5. Use e-government and e-procurement more often to facilitate control of spending.

35

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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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