Lekcija: Eirozonas ekonomika un monetārā politika

Euro area economy and monetary policy
03.04.2017
Anete Kravinska
Economist in Bank of Latvia

2
Saturs
The Eurosystem
Structure of the euro area economy
Global environment
Monetary policy implementation in the euro area
Monetary policy instruments
The impact of monetary policy decisions

4
♦EURO AREA
♦OTHER EU COUNTRIES
♦UNILATERALLY ADOPTED EURO
Which countries use euro as their national currency?

6
Source: ECB
Functions of the Eurosystem
Collect and
centralize statistics
from national
authorities and
economic agents
Issue bank notes
in the Eurozone
International
cooperation • Define and implement
monetary policy in the
Eurozone
• Conduct foreign
exchange operations
• Hold and manage the
official foreign
exchange reserves of
each country
Contributes to the
stability of the
financial system
MAIN FUNCTIONS
Consultation of
stakeholders

7
Source: ECB
ECB's primary objective – price stability

8
 Each member of GovC has one wote,
since 2015 there is rotation
 ECB GovC meets once in 6 weeks to
discuss the economic and monetary
developments in order to take decisions
Source: ECB
Who is making decisions in euro area?

9
Where are the ECB
headquarters located?
a) Paris
b) Frankfurt
c) Brussels
d) Berlin
Question

2. STRUCTURE OF THE
EURO AREA ECONOMY

11
Population (mn)
Source: Eurostat, IMF WEO, World Bank
Euro are on global scene

12
EA population by country(%)
Eurostat
75% of EA population come from Germany, France, Italy or
Spain

13
World GDP, 2015 (%)
World Bank

14
EA GDP by country, 2016 (%)
Eurostat
France and Germany contribute 50% to the GDP of the euro
area

15
Value added in euro area by sector(%)
Eurostat
The largest sectors in euro area are public administration &
defence and industry

16
GDP per capita 2015 (thousand USD)
World Bank

17
GDP per capita (thousand EUR)
Eurostat
The levels of GDP per capita are very diverse across EA
countries
0
10
20
30
40
50
60
70
80
90
100
2005
2015

18
World exports (%)
Source: World Bank

19
Euro area export partners, 2016 (%)
Source: Eurostat
The largest EA export partners are USA, UK and China

20
Main product groups in euro area exports (%)
Eurostat
The largest export product group is machinery and
transport equipment

21
Which of euro area countries has the highest GDP per capita?
a) Latvia
b) Switzerland
c) Luxembourg
d) Monaco
Question

23
IMF predicts moderate growth in future
World GDP (yoy, %)
IMF
-4
-2
0
2
4
6
8
10
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Forecast Developed countries Emerging countries

24
Commodities' prices experienced big slump over 2014-2015,
now are recovering
Global commodities prices (food (index), crude oil
(USD/bar))
Bloomberg, Reuters
* forecast based on futures contracts
0
20
40
60
80
100
120
140
160
0
500
1000
1500
2000
2500
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Food
Crude oil (rhs)
-70%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
Oct-16
Jan-17
Apr-17
Jul-17
Oct-17
Actual data Forecast*
Crude oil price yoy (%)

25
Euro has stabilized lately
EUR/ USD exchange rate and NEER 38 (NEER 99Q1=100)
Bloomberg
0.6
0.8
1
1.2
1.4
1.6
1.8
80
85
90
95
100
105
110
115
120
125
130
NEER (38)
EUR USD

4. LATEST DEVELOPMENTS
IN EURO AREA ECONOMY

27
Euro area GDP growth (yoy, %)
Source: Eurostat, ECB
Moderate recovery continues in euro area
1.6
2.6
2.9 3.0
3.8
2.1
0.9
0.6
2.2
1.6
3.2
2.9
0.4
-4.5
2.1
1.6
-0.8
-0.3
0.9
1.6 1.7
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
1.8%
1.7% 1.6%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
2017 2018 2019
March-2016 June-2016
Sept-2016 Dec-2017
ECB's EA GDP growth projections (%)

28
Contributions to real GDP y/y growth rate, p.p.
Source: Eurostat
Domestic demand continues to be the main driver of the euro area GDP
growth
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
2013Q1
2013Q2
2013Q3
2013Q4
2014Q1
2014Q2
2014Q3
2014Q4
2015Q1
2015Q2
2015Q3
2015Q4
2016Q1
2016Q2
2016Q3
2016Q4
Net exports
Changes in inventories
Investment
Private consumption
Government consumption
GDP

29
Real GDP index, 2008Q1=100 Real GDP growth, %
Source: Eurostat, BoL calculations
Euro area has nearly returned to pre crisis level, Latvia has
still some catching up to do
70.0
75.0
80.0
85.0
90.0
95.0
100.0
105.0
110.0
2008 2009 2010 2011 2012 2013 2014 2015 2016
Euro area
Germany
Greece
Spain
France
Italy
Latvia
1.6
-0.9
-0.3
0.9
1.6 1.7
6.2
4.0
3.0
2.4
2.7 2.5
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2011 2012 2013 2014 2015 2016
Euro area Latvia

30
Inflation in euro area (yoy, %)
Source: Eurostat
Inflation close to ECB's target, mainly due to base effects
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Inflation Core inflation ECB target
ECB's inflation forecasts (yoy %)
1.7% 1.6% 1.7%
0.0%
0.5%
1.0%
1.5%
2.0%
2017 2018 2019
March-2016 June-2016
Sept-2016 Dec-2017

31
Now already all of the euro area countries have positive inflation
rates
Source: Eurostat
Inflation in euro area countries, %, yoy
3.1
2.9 2.9 2.8
2.5 2.5
2.1
1.9 1.8
1.6 1.6 1.5 1.5 1.4 1.3
1.0 0.9 0.9
0.7
0.2
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Belgium
Spain
Latvia
Estonia
Lithuania
Luxembourg
Austria
Germany
Euroarea
France
Netherlands
Greece
Slovenia
Malta
Portugal
Italy
Finland
Slovakia
Cyprus
Ireland
2016M11
2016M12
2017M01

32
Contribution to EA inflation by components, ppts
Source: Eurostat
Energy prices have had big impact on the inflation
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Services
Energy
NEIG
Food
All items

33
Source: Eurostat
Without stronger rebound of growth, there is little chance
for a substantial decline in unemployment rates
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Euro area
Germany
Greece
Spain
France
Italy
Latvia
Unemployment rate, %

34
General government debt, % of GDP
177
133 129
109 106
99 96 94
86 83
71
65 64 63
53
43
36
21
10
65
91
0
20
40
60
80
100
120
140
160
180
200
2007
2015
EA '07
EA '15
Source: Eurostat
The rapid increase in sovereign debt levels raises serious
concerns about its sustainability and future economic
growth

35
Fiscal balance, % of GDP
-15.2
-13.9
-11.0
-9.8 -9.3 -8.9
-7.9
-7.2
-6.1 -5.6 -5.5 -5.5 -5.3 -5.3
-3.3 -3.0 -2.5
-0.5
0
-13.1
-6.5
-1.6
-4.7 -4.4
-1.1 -1.6
-2.7
-3.8
-2.9
-0.7
-2.9
-1.8
-2.7
-1.4 -1.5
0.6
-3.1
0.6 0.4
-3.8
-16.0
-14.0
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0 2009
2015
Source: Eurostat
Budget deficit is still close to or above the 3% threshold in
several euro area countries

36
What is the main factor impacting inflation levels in the euro area recently?
a) ECB monetary policy
b) Drop in service prices
c) Lack of structural reforms
d) Global oil price developments
Question

5. MONETARY POLICY
IMPLEMENTATION IN THE
EURO AREA

38
Source: ECB
Monetary policy in the euro area
Monetary policy target
Price stability
Inflation close but below 2%
Standart instruments Non-standart instruments
Deposit/
lending facility
Requirements
on reserves
MRO, LTRO Asset buying
programs
(EAPP)
Additional
liquidity
support
Forward
guidance

39
Source: ECB
Provide liquidity
Provide collateral
Eurosystem
Banks
€ €
Return collateral
Return borrowed money+%
Eurosystem
Banks
€ %+€ %+
1. 2.
Refinancing operations

40
Main policy rates (% p.a.)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Hundreds
ECB Fed BoJ BoE
Source: Bloomberg
Since 2009 world’s major central banks have kept rates close
to zero

41
Main policy rates in Eurosystem (%)
Source: ECB
On June 2014 ECB became the first major central bank to
introduce negative rates
-1 %
0 %
1 %
2 %
3 %
4 %
5 %
6 %
Deposit rate MRO Lending rate
→ Stabilize the price level in
the monetary union
→ Enhance the monetary
transmission mechanism
→ Lower the short term rates
in the euro zone interbank
market
→ Promote credit to the real
economy

42
Main monetary policy decisions since 2014
Sep -2014
Jun -
2014
Jan-2015 Dec-2015 Mar-2016
0.15% 0.05% 0.05% 0.05% 0.00%
-0.1% -0.2% -0.2% -0.3% -0.4%
TLTRO (up to 4
years)
Private sector
asset
purchases
(ABS, CBPP3)
Public sector asset
purchases (PSPP)
extend PSPP
till march 2017
CSPP
expand PSPP
TLTRO II
MRO
Depo
Dec-2016
extend PSPP till end
2017
0.00%
-0.4%
Source: ECB

43
Source: ECB, BBC
How does the EAPP work?
Euosystem buys
securities…
1. 3.
2.
4.
5.
…allowing companies and
HHs to borrow more…
… % rates go down… …supporting the spending…
…stimulating the
economy and GDP

44
Source: ECB
82% of EAPP have been made in the public sector
PSPP to date
€1'762 bn
13%
1%
73%
9%
4%
CBPP3
ABSPP
Government
securities
Supranational
securities

45
Central bank balance sheets - % of GDP*
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
US
UK
EA
Japan
*For BoE – last reported BS values at February 2015, since then BS value assumed to be constant
Source: Reuters, Fathom Consulting, BoL calculations
Euorsystem's balance sheet to GDP has reached the size of
Fed, still far from Japan

46
What is the ECB's primary objective?
a) Price stability in medium term
b) Sustainable growth in the long term
c) Enlarging the euro area
d) Low interest rates
Question

6. The impact of monetary
policy decisions

48
Source: ECB, Bloomberg
Money market rates at historic lows, in negative territory
Eurosystem’s excess liquidity and money market interest rates (€ bn, % p.a.)
-0.4%
-0.3%
-0.2%
-0.1%
0.0%
0.1%
0.2%
0.3%
0.4%
-1,400 bn
-1,200 bn
-1,000 bn
-800 bn
-600 bn
-400 bn
-200 bn
0 bn
200 bn
400 bn
600 bn
800 bn
1,000 bn
1,200 bn
1,400 bn
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Excess liquidity (lhs)
Eonia
Euribor 3m
Euribor 6m

49
10y government bond yields (%)
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
2009 2010 2011 2012 2013 2014 2015 2016 2017
Italy
Portugal
Greece
France
Germany
USA
Spain
ECB lowers interest rates
and announce non-
standart stimulus
Source: Bloomberg, ECB
APP has provided huge financing relief for governments
ECB announce
and start APP

50
Euro area AAA yield curve over time (% p.a.)
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3M 6M 9M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
Range over 3 years 3 years ago March-2017
Source: Bloomberg
The EA Yield curve based on Fitch AAA- rated government bonds (currently: Germany, Luxembourg, Netherlands)
EA yield curve close to historic lows

51
EUR/USD and NEER38(NEER 99Q1=100)
Source: Bloomberg
0.6
0.8
1
1.2
1.4
1.6
1.8
80
85
90
95
100
105
110
115
120
125
130
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
NEER (38)
EUR USD
1
1.05
1.1
1.15
1.2
1.25
1.3
1.35
1.4
1.45
95
100
105
110
115
120
NEER (38)
EUR USD
and announce non-
standart stimulus ECB announce
and start APP
Divergence in monetary policy stance is having an impact on
exchange rates

52
USA, European and World stock market indices (Index: 01.01.2008=100)
40
60
80
100
120
140
160
180
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
USA S&P 500 MSCI World Eurostoxx 50
Source: Bloomberg, BoL calculations
Post-APP stock indices rallied, recently – more global
uncertainty – markets are volatile
and announce non-
standart stimulus
ECB announce
and start APP

53
Nominal MFI bank lending rates to NFCs in selected euro area countries, new business (% p.a.)
Source: ECB
NFC lending rates at historic lows
0%
1%
2%
3%
4%
5%
6%
7%
8%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
DE
EE
ES
FR
IT
LT
LV
NL
PT
EA
EA lending rate
1.6%
and announce non-
standart stimulus

54
Nominal MFI bank lending rates to HHs for house purchase in selected euro area countries, new
business (% p.a.)
Source: ECB
HHs lending rates at historic low
0%
1%
2%
3%
4%
5%
6%
7%
8%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
DE
EE
ES
FR
IT
LT
PT
EA
EA lending rate
1.8%
and announce non-
standart stimulus

55
MFI lending to NFCs and HHs (annual growth rate, %, s.a., adjusted for sales and securitisation)
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
HHs NFCs
Source: ECB
Lending to the private sector has recovered since the
introduction of non-standard measures
and announce non-
standart stimulus

56
Which of the following is true?
a) Eurosystem monetary policy has had no impact on the real economy
b) ECB has intentionally weakened the euro exchange rate to increase the
competitiveness of the economy
c) Although due to the monetary policy response some economic variables have
improved, in order to achieve a sustainable growth in longer term responsible fiscal
policy and structural reforms are needed
Question

57
Thank you for your attention!
Disscussion
Questionnaire

ZINĀTNISKI PĒTNIECISKO DARBU KONKURSS
 Konkursa mērķis: veicināt Latvijas tautsaimniecības makroekonomisko problēmu
apzināšanu un analīzi, kā arī stimulēt augstāko mācību iestāžu studentu pētnieciskās
domas attīstību.
 Tēmas: piedāvāts plašs makroekonomisko tēmu loks, kas aplūkojamas Latvijas, Baltijas
valstu vai eiro zonas tautsaimniecības kontekstā.
 Konkurss notiek pavasarī, darbi iesniedzami 2017. gada 15.-29. maijā
 Vairāk informācijas un ieskats tēmās:
https://www.makroekonomika.lv/konkursi/zinatniski-petniecisko-darbu-konkurss

59
 Aktuālie dati, to analīze
 Ekonomistu viedoklis
 Pētījumi
 Arī izcilāko studentu zinātniskie darbi un šī lekcija 
Viss par aktuālo Latvijas tautsaimniecībā un eirozonā
vienuviet:
www.makroekonomika.lv

Lekcija: Eirozonas ekonomika un monetārā politika

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