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Downloaded from Eurostat THE MECHANICS OF A STRONG EURO AREA IMF Policy Analysis Editors Petya Koeva Brooks and Mahmood Pradhan INTERNATIONAL MONETARY FUND ©International Monetary Fund. Not for Redistribution © 2015 International Monetary Fund Cover design: IMF Multimedia Services Division Cataloging-in-Publication Data Joint Bank-Fund Library The mechanics of a strong Euro area / editors: Petya Koeva Brooks and Mahmood Pradhan. – Washington, D.C. : International Monetary Fund, 2015. pages; cm. Includes bibliographical references and index. ISBN 978-1-49830-553-2 (paper) ISBN 978-1-51356-676-4 (ePub) ISBN 978-1-51357-943-6 (Mobipocket) ISBN 978-1-51357-224-6 (PDF) 1. Euro. 2. Monetary policy – European Economic Community countries. 3. Currency question – European Economic Community countries. 4. Global Financial Crisis, 2008–2009. I. Koeva, Petya. II, Pradhan, Mahmood, 1957– III. International Monetary Fund. HG930.5.M43 2015 Disclaimer: The views expressed in this book are those of the authors and do not necessarily represent the views of the International Monetary Fund, its Executive Board, or management. Please send orders to: International Monetary Fund, Publication Services P.O. Box 92780, Washington, DC 20090, U.S.A. Tel.: (202) 623-7430 Fax: (202) 623-7201 E-mail: [email protected] Internet: www.elibrary.imf.org www.imfbookstore.org ©International Monetary Fund. Not for Redistribution Contents Foreword v Acknowledgments vii Preface ix Contributors xiii Abbreviations and Acronyms xvii PART I THE LEGACIES OF THE CRISIS 1 Investment in the Euro Area: Why Has It Been Weak? �������������������������������������������������������������������� 3 Bergljot Barkbu, S. Pelin Berkmen, Pavel Lukyantsau, Sergejs Saksonovs, and Hanni Schoelermann 2 Indebtedness and Deleveraging in the Euro Area �������������������������������������������������������������������������25 Fabian Bornhorst and Marta Ruiz-Arranz 3 Rebalancing: Where Do We Stand and Where to Go?�������������������������������������������������������������������49 Thierry Tressel and Shengzu Wang PART II THE ROLE OF MONETARY POLICY AND THE FISCAL FRAMEWORK 4 Fragmentation, the Monetary Transmission Mechanism, and Monetary Policy in the Euro Area ������������������������������������������������������������������������������������������������75 Ali Al-Eyd and S. Pelin Berkmen 5 Possible Subordination Effects of Eurosystem Bond Purchases �����������������������������������������������95 Nico Valckx, Kenichi Ueda, and Manmohan Singh 6 An Early Assessment of Quantitative Easing ��������������������������������������������������������������������������������� 107 S. Pelin Berkmen and Andreas (Andy) Jobst 7 Fiscal Consolidation under the Stability and Growth Pact: Some Illustrative Simulations ������������������������������������������������������������������������������������������������������������� 139 Derek Anderson, Marialuz Moreno Badia, Esther Perez Ruiz, Stephen Snudden, and Francis Vitek 8 Fiscal Governance in the Euro Area: Progress and Challenges ����������������������������������������������� 149 Luc Eyraud and Tao Wu PART III COMPLETING THE ECONOMIC AND MONETARY UNION (EMU) 9 A Banking Union for the Euro Area ��������������������������������������������������������������������������������������������������� 173 Rishi Goyal, Petya Koeva Brooks, Mahmood Pradhan, Thierry Tressel, Giovanni Dell’Ariccia, Ross Leckow, and Ceyla Pazarbasioglu 10 Toward a Fiscal Union for the Euro Area ����������������������������������������������������������������������������������������� 195 IMF Staff Team Led By Céline Allard iii ©International Monetary Fund. Not for Redistribution iv Contents PART IV THE ROLE OF STRUCTURAL POLICIES AT THE EURO AREA LEVEL 11 Capital Market Development: Financing of Small and Medium-Sized Enterprises in the Euro Area ������������������������������������������������������������������������� 219 Ali Al-Eyd, Bergljot Barkbu, S. Pelin Berkmen, John Bluedorn, Andreas (Andy) Jobst, and Alexander Tieman 12 Youth Unemployment in Europe: Okun’s Law and Beyond ����������������������������������������������������� 239 Angana Banerji, Huidan Lin, Sergejs Saksonovs, and Rodolphe Blavy Index ������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 259 ©International Monetary Fund. Not for Redistribution Foreword In line with its mandate, the International Monetary Fund has over the years been reviewing the design of and developments in the Economic and Monetary Union (EMU) in Europe. With the introduction of the euro as the single currency in 11 European Union member states at the begin- ning of 1999, the IMF faced the new challenge of having to conduct surveillance for a systemi- cally important monetary union. It has addressed this situation by pursuing a dual-track approach: conducting a surveillance exercise of the euro area’s policies that provides an adequate context for national Article IV consultations with the now 19 members of the euro area. Furthermore, with the introduction of the euro and the single monetary and exchange rate policy conducted by the European Central Bank (ECB), the bilateral relationship with the ECB has been reinforced, as reflected in the granting of IMF observer status to the ECB in 1998. The ECB, the European Commission, and other European institutions and bodies responsible for policies falling within the purview of the IMF participate in regular consultations with Fund staff as part of the IMF’s surveillance for the annual report on euro area policies. As such, the IMF is an important counterpart on macroeconomic, macro-financial, and macro-critical structural policy issues that are crucial to the functioning of the euro area as a whole and of its member states. The Fund has also given increased attention to further improvements to the institutional framework governing the euro area. Following the global financial crisis in 2008, IMF surveillance of the euro area has been especially useful in the challenging environment facing the euro area. The subsequent euro area sovereign debt crisis added to the challenges the EMU had to cope with. In this more recent period, the Fund has significantly intensified its surveillance, including of the euro area and its constituent countries. It has responded to the shortcomings exposed by the crisis with new initiatives and a strengthening of practices in key areas, for example, with better analysis of spillovers, macro- financial linkages, and risk assessment. In addressing the imperfections of the euro area gover- nance framework as designed at the outset of the EMU, a shift from national toward more coordinated or centralized policymaking has been taking place. The Fund has actively made suggestions about how to reinforce the institutional architecture of the EMU, advocating in particular more financial and fiscal integration. This book presents a vivid example of Fund staff contributions of pertinent advice to euro area policymakers based on sound analytical underpin- nings reflecting broad cross-country experiences. Looking to the future, IMF surveillance of the euro area will inevitably adjust in light of strength- ened EMU architecture. The main elements of a banking union have already been put in place, most notably the Single Supervisory Mechanism and the Single Resolution Mechanism. The recent Five Presidents’ Report on Completing Europe’s Economic and Monetary Union sets out various ideas for a further deepening of the EMU. Based on the experience of the past few years, as illustrated in this book, I have no doubt that the assessments and advice provided by Fund staff will continue to be highly appreciated by euro area policymakers as they strive toward a more complete EMU. Peter Praet Member of the Executive Board European Central Bank v ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution Acknowledgments This book is the product of a long period of collaboration among many departments at the IMF. In addition to numerous colleagues in the European Department, including our Director Poul Thomsen and his predecessor Reza Moghadam, we are extremely grateful to our colleagues in the Fiscal Affairs Department; the Legal Department; the Monetary and Capital Markets Department; the Research Department; and the Strategy, Policy, and Review Department. All these departments have played an active role not only in reviewing the chapters in this volume, but also as energetic participants in the policy discussions at the Fund that have ultimately shaped the agenda for the annual Article IV consultations with the euro area institutions. Many of our colleagues worked very closely with us and are authors of some of the chapters in this volume. We are also extremely grateful to numerous officials—certainly way too many to mention indi- vidually here—in Europe. During the past four years we have benefited from extensive discus- sions on all of the topics covered here with officials at the European Commission, the European Central Bank, the European Stability Mechanism, the European Investment Bank, and the European Banking Authority. They have all been exceptionally generous with their time and, without assigning any responsibility, their detailed comments have undoubtedly improved all of the chapters herein. vii ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary
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