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The excessive imbalances procedure (EIP)

The excessive imbalances procedure (EIP). Declan COSTELLO European Commission Directorate General for Economic and Financial Affairs DNB and IMF workshop on «Preventing macroeconomic imbalances in the euro area » Amsterdam, 13-14 October. European Commission.

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The excessive imbalances procedure (EIP)

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  1. The excessive imbalances procedure (EIP) Declan COSTELLO European Commission Directorate General for Economic and Financial Affairs DNB and IMF workshop on «Preventing macroeconomic imbalances in the euro area » Amsterdam, 13-14 October European Commission

  2. Overall changes to economic governance • Excessive Imbalances Procedure • external and internal imbalances Stability and Growth Pact fiscal policy The Europe 2020 Strategy growth enhancing structural reforms European Systemic Risk Board financial stability and macro & micro level AND …. the ongoing debate on the EFSF and ESM as well as Eurogroup goverance

  3. Broad scope of surveillance • External positions (e.g. current accounts, net international investment positions) • Competitiveness developments (e.g. REERs, ULCs) • Export performance (e.g. export market shares) • Private sector indebtedness (e.g. credit, debt) • Public sector indebtedness • Assets markets (e.g. housing) External imbalances Internal imbalances

  4. Example of ‘test’ early warning scoreboard: Portugal 2001-2010

  5. The preventive arm of the EIP Policy response No problem Procedure stops. Alert mechanism Economic reading of early warning scoreboard indicators to identify Member States with potential risks In-depth review Analysis to distinguish between benign and harmful macroeconomic developments and to identify policy options Imbalance exists Commission/Council recommendations under Article 121.2 Severe imbalance Commission/Council recommendation under Article 121.4

  6. The Corrective Arm Sufficient abeyance Member State is placed in “Excessive Imbalance Position” Corrective Action Plan Surveillance of compliance with reform commitments Insufficient fine 0.1% of GDP Insufficient: interest bearing deposit Insufficient: Fine 0.1% of GDP

  7. The Corrective Arm is INTRUSIVE and FOCUSSED Sufficient abeyance Member State is placed in an Excessive Imbalance Position Corrective Action Plan Surveillance of compliance with reform commitments Fine 0.1% of GDP Insufficient: interest bearing deposit Insufficient: Fine 0.1% of GDP

  8. … and works by reverse Qualified Majority Voting Sufficient abeyance Member State is placed in an Excessive Imbalance Position Corrective Action Plan Surveillance of compliance with reform commitments Fine 0.1% of GDP Insufficient: interest bearing deposit Insufficient: Fine 0.1% of GDP

  9. Challenges in applying the EIP • Analytical • large degree of qualitative judgement especially if acting early • requires considerable country specific knowledge; • data limitations • limited consensus on policy responses. • Political • greater awareness of the costs of inaction and spillover effects; • not easy to form blocking minorities; • macro challenges with euro area spillovers that require micro policy responses in areas of national competence • … hinge on effective governance reforms of the Euro area

  10. Additional slides

  11. How the EIP fits into the European semester (indicative based on timing of 1st year)

  12. Formal links between the EIP and ESRB in the draft legsialtion • Commission recommendation – in depth studies "any early warnings or recommendations from the ESRB relevant to the Member States under review" into account • European Parliament has proposed additional cross references • choice of indciators in the scoreboard • alert mechanism report

  13. Ensuring synergies • Commission-ESRB: ECFIN Commissioner is permanent member with voting rights on ESRB Steering Board and provides inputs • ECOFIN-EFC-ESRB: Council can be a recipient of ESRB recommendations or warnings and EFC President is a non-voting member of ESRB • EIP-ESRB-Parliament: ESRB required to present annual report to Parliament and there will be regular meetings with ECON Committee. Parliament is co-legislator for EIP and will be involved at various steps of the procedure • Cooperation at technical level between Commission, ESRB and ECB

  14. Scope of surveillance under the EIP • External imbalances • current account balance • net international investment position • change in REERs • change in nominal ULC • change in export market shares • Internal imbalances • Private sector credit flow • Private sector debt • Change in house prices • General government sector debt • [financial/banking sector]

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