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Putting the euro area on 
a road to recovery 
Paris, 25th November 2014 
11h30 Paris time 
Catherine L. Mann 
OECD Chief Economist
Key messages 
The euro area continues to hinder global growth, which remains modest 
Europe is doing poorly above all because of the lack of demand 
Structural factors braking potential growth are interacting with demand weakness, 
raising the risk of prolonged stagnation 
Constrained demand management policies explain part of this weakness 
Some countries have made good progress on structural reforms to reverse the 
decline in growth, but others have to make greater efforts 
Monetary, fiscal and structural policies are complementary tools to promote a 
faster and more widely shared recovery 
2
The global economy is stuck in low gear 
World GDP growth1 
Per cent, seasonally adjusted annualised rate 
1. GDP calculated at PPP exchange rates. 
2. Weighted average of the Czech Republic, Hungary and Poland, where weights are moving nominal GDP measured at USD PPP. 
3. Weighted average of Denmark, Norway and Sweden, where weights are moving nominal GDP measured at USD PPP. 
Source: November 2014 Economic Outlook database. 
-8 
-6 
-4 
-2 
0 
2 
4 
6 
8 
-8 
-6 
-4 
-2 
0 
2 
4 
6 
8 
Average, 1995-2007 
GDP 
Volume, percentage change 
3 
Column1 2013 2014 2015 2016 
World 3.1 3.3 3.7 3.9 
United States 2.2 2.2 3.1 3.0 
Euro area -0.4 0.8 1.1 1.7 
Japan 1.5 0.4 0.8 1.0 
BRIICS 5.5 5.1 5.4 5.6 
OECD Europe excl. euro area 2.0 2.8 2.7 3.0 
Of which: 
- UK 1.7 3.0 2.7 2.5 
- CEE32 1.2 3.1 2.7 3.1 
- Scandinavia3 0.8 1.6 2.1 2.6
Sluggishness is not evenly spread – the 
euro area is a locus of weakness 
GDP per capita 
Volume index, 2008 = 100 
Source: November 2014 Economic Outlook database. 
4 
94 
96 
98 
100 
102 
104 
106 
108 
110 
94 
96 
98 
100 
102 
104 
106 
108 
110 
Euro area Japan OECD Europe excl. euro area United States
Slow growth in Europe matters for 
world trade and output 
Share of world trade (2013) 
Per cent 
Source: November 2014 Economic Outlook database. 
Share of world GDP (2013) 
Per cent 
5 
Euro area 
22% 
Non-euro 
area EU 
Rest of the 8% 
world 
70% 
Euro area 
25% 
Non-euro 
area EU 
11% 
Rest of the 
world 
64%
The expected follow-through to the initial 
recovery has been repeatedly delayed 
Source: November 2010, 2011, 2012, 2013 and 2014 Economic Outlook databases. 
Past Economic Outlook projections of euro area GDP 
Volume index, Q1 2008 = 100 
6 
92 
94 
96 
98 
100 
102 
92 
94 
96 
98 
100 
102 
Nov-10 Nov-11 Nov-12 Nov-13 Nov-14
The realisation of downside risks would 
leave the euro area in stagnation 
1. Downside scenario shown in red. The shocks modelled in the downside scenario are a 50 basis point reduction in inflation 
expectations, a 10% decline in equity prices and a 100 basis point increase in the corporate bond spread, the equity risk premium 
and the spread between household borrowing and lending rates. 
Source: November 2014 Economic Outlook database; and OECD calculations. 
7 
Growth, inflation and unemployment in a downside scenario1 
Inflation 
Per cent 
GDP 
Annual percentage change 
Unemployment rate 
Per cent 
-1 
0 
1 
2 
3 
-1 
0 
1 
2 
3 
0 
1 
2 
3 
0 
1 
2 
3 
Average 1999-2007 
ECB's inflation target 
8 
9 
10 
11 
12 
8 
9 
10 
11 
12 
Average 1999-2007 
Average 1999-2007
Source: November 2014 Economic Outlook database. 
GDP, exports, consumption and investment 
Volume indices, Q2 2009 = 100 
Post-crisis euro area output weakness: not 
export performance, but domestic demand 
8 
90 
100 
110 
120 
130 
90 
100 
110 
120 
130 
Real GDP Consumption Fixed investment Exports
Part of the euro area’s relative demand 
weakness reflects constrained policies 
Central bank assets 
Per cent of broad money (M3) 
Source: Datastream; National Central Banks; and November 2014 Economic Outlook database. 
Change in underlying primary balance 
Per cent of potential GDP 
9 
0 
5 
10 
15 
20 
25 
30 
35 
40 
45 
0 
5 
10 
15 
20 
25 
30 
35 
40 
45 
United States Euro area 
Japan United Kingdom 
-7 
-6 
-5 
-4 
-3 
-2 
-1 
0 
1 
2 
3 
4 
5 
-7 
-6 
-5 
-4 
-3 
-2 
-1 
0 
1 
2 
3 
4 
5 
United States United 
Kingdom 
Japan Euro area 
2007-2009 2009-2011 2011-2013
Macroeconomic policies in the euro area: 
now becoming less of a drag on demand 
ECB assets 
Trillions of euros 
Source: Datastream; and November 2014 Economic Outlook database. 
10 
Underlying primary balance 
Annualised change during period, per cent of potential GDP 
-1 
0 
1 
2 
3 
4 
5 
6 
7 
8 
-1 
0 
1 
2 
3 
4 
5 
6 
7 
8 
2012-2013 2014-2016 
0 
1 
2 
3 
4 
0 
1 
2 
3 
4 
ECB's target
The overall euro area story masks 
divergences in performance 
GDP 
Volume index, Q1 2008 = 100 
Source: November 2014 Economic Outlook database. 
11 
60 
70 
80 
90 
100 
110 
80 
85 
90 
95 
100 
105 
2008 2009 2010 2011 2012 2013 2014 
Germany France Italy Spain Portugal Ireland Greece (RHS)
Structural reform intensity in recent years 
has been highest in the euro area periphery 
Note: The responsiveness rate is calculated as the share of recommendations in Going for Growth 2011 for which 'significant' 
action has been taken, where each recommendation is weighted by the inverse of average responsiveness to priorities in this 
area in non-crisis circumstances, in order to reflect the fact that some areas of reform are more difficult than others. Aggregates 
are unweighted averages. Periphery includes Estonia, Greece, Ireland, Italy, Portugal, the Slovak Republic, Slovenia and 
Spain. Core is other euro area countries. Non-euro area OECD Europe includes the UK, Switzerland the Czech Republic, 
Poland, Hungary, Sweden, Norway, Turkey, Iceland, and Denmark. 
Source: Going for Growth (2015, forthcoming; figures are preliminary); and OECD calculations. 
Responsiveness to Going for Growth reform priorities 
Responsiveness rate (per cent) 
12 
0 
10 
20 
30 
40 
50 
60 
70 
0 
10 
20 
30 
40 
50 
60 
70 
Periphery euro area Core euro area Non-euro area OECD Europe 
2011-12 2013-14
1. Inflation to October 2014, unemployment rate as of September 2014. 
Source: Eurostat. 
13 
Inflation1 
HICP ,12-month percentage change 
Unemployment rate1 
Per cent 
Inflation is too low across the euro area, and 
where it is lowest unemployment is very high 
0 
5 
10 
15 
20 
25 
30 
0 
5 
10 
15 
20 
25 
30 
-2 
-1 
0 
1 
2 
-2 
-1 
0 
1 
2 
ECB's target
Note: Non-euro area countries shown in red. 
Source: November 2014 Economic Outlook database. 
Fiscal consolidation in a slow-growth 
environment: significant employment pain 
14 
Change in underlying primary balance and unemployment, 2007-14 
AUT 
BEL 
FIN 
FRA 
DEU 
GRC 
IRL 
LUX ITA 
NLD 
PRT 
SVK 
SVN 
USA 
JPN 
GBR 
-5 
0 
5 
10 
15 
20 
-5 0 5 10 15 20 
Change in underlying primary balance, 
% potential GDP 
Change in unemployment rate, percentage points
Structural flaws like incomplete banking union 
help explain the persistence of weak demand 
1. Nominal interest rate minus latest 12-month inflation (HIPC). 
Source: ECB. 
Real interest rates1 on bank lending to enterprises 
Per cent 
15 
-2 
0 
2 
4 
6 
8 
10 
-2 
0 
2 
4 
6 
8 
10 
Germany Spain France Greece Italy
Credit has failed to revive in the periphery 
Note: OECD Europe excl. euro area is aggregated in USD at Q1 2010 exchange rates. Euro area periphery is Greece, Italy, 
Portugal and Spain. Core euro area is Austria, Belgium, Finland, France, Germany, Luxembourg and the Netherlands. 
Source: BIS. 
Credit to non-financial corporations 
Index, 2010 = 100 
16 
90 
95 
100 
105 
110 
115 
120 
125 
90 
95 
100 
105 
110 
115 
120 
125 
Core euro area countries Periphery euro area countries 
United States Japan 
OECD Europe excl. euro area
Existing ECB Measures ECB Policy Options 
Very low policy rates (incl. negative 
deposit rates) 
Open-ended or large-scale asset purchases: 
Long-Term Refinancing Operations 
(LTROs) 
• Increased outright purchases of asset-backed 
securities and covered bonds 
Targeted Longer-Term Refinancing 
Operations (TLTROs) 
• Outright purchase of sovereign bonds 
Outright purchases of asset-backed 
securities and covered bonds 
• Outright purchase of investment-grade 
corporate bonds 
Forward guidance 
The ECB must act decisively to support 
growth and head off deflation 
Monetary policy stimulus – beyond measures already 
announced – is needed in combination with banking union and 
structural reforms 
17
Fiscal policy: all available flexibility 
should be used 
Flexibility and discretion within the EU fiscal rules should be 
used to reduce the drag on demand 
Germany: higher spending (e.g. childcare facilities, 
infrastructure) would add to euro area demand while addressing 
structural weaknesses 
France and Italy: delayed consolidation can be justified in a 
context of weak growth and new structural reforms 
Automatic stabilisers should be allowed to play fully 
18
Fiscal policy: a reversal of the compression 
of public investment would help 
Government investment 
Volume index, 2009=100 
Source: November 2014 Economic Outlook database. 
19 
0 
20 
40 
60 
80 
100 
120 
140 
0 
20 
40 
60 
80 
100 
120 
140 
Germany 
United Kingdom 
France 
Spain 
Greece 
Portugal
Structural policies: making full use of 
demand management tools is not enough 
20 
Structural flaws are impeding the effectiveness of demand 
management tools 
The longer-term deterioration in potential output growth needs to 
be addressed by structural policies
Some structural reforms could boost 
potential without widening the output gap 
21 
There is scope to make the composition of government revenues 
and expenditures more growth-friendly (e.g. in Italy, Spain) 
Reducing labour tax wedges can boost labour demand (e.g. in 
France) 
Liberalising services regulation can stimulate investment (e.g. in 
Germany) 
More ambitious action to complete the Single Market would have a 
major impact (all countries) 
Credible reform packages can improve confidence, giving an 
immediate boost to demand
Deficient demand (especially investment) 
has in turn sapped potential output 
Note: The chart shows the level of potential output in 2014 relative to a counter-factual based on pre-crisis trends. For the majority of 
countries, the crisis has clearly been associated with lower potential output. Nevertheless, for a few countries the difference is 
positive or only slightly negative, which is explained by a variety of factors: structural reforms (e.g. Germany); and in a number of 
countries labour force participation has been much stronger than would have been anticipated on the basis of pre-crisis trends. 
Source: OECD calculations. 
22 
Level of potential output in 2014 relative to pre-crisis trend 
Percentage points of pre-crisis trend potential GDP 
-30 
-25 
-20 
-15 
-10 
-5 
0 
5 
10 
-30 
-25 
-20 
-15 
-10 
-5 
0 
5 
10
Key messages 
The euro area continues to hinder global growth, which remains modest 
Europe is doing poorly above all because of the lack of demand 
Structural factors braking potential growth are interacting with demand weakness, 
raising the risk of prolonged stagnation 
Constrained demand management policies explain part of this weakness 
Some countries have made good progress on structural reforms to reverse the 
decline in potential growth, but others have to make greater efforts 
Monetary, fiscal and structural policies are complementary tools to promote a 
faster and more widely shared recovery 
23
24 
More information… 
data visualization tool 
OECD Economic Outlook, November 
2014 
• Website with additional information 
• Read this publication online 
• Compare your country with OECD data 
www.oecd.org/eco/economicoutlook.htm 
OECD 
OECD Economics 
Disclaimers: 
The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without 
prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. 
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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Putting the-euro-area-on-a-road-to-recovery

  • 1. Putting the euro area on a road to recovery Paris, 25th November 2014 11h30 Paris time Catherine L. Mann OECD Chief Economist
  • 2. Key messages The euro area continues to hinder global growth, which remains modest Europe is doing poorly above all because of the lack of demand Structural factors braking potential growth are interacting with demand weakness, raising the risk of prolonged stagnation Constrained demand management policies explain part of this weakness Some countries have made good progress on structural reforms to reverse the decline in growth, but others have to make greater efforts Monetary, fiscal and structural policies are complementary tools to promote a faster and more widely shared recovery 2
  • 3. The global economy is stuck in low gear World GDP growth1 Per cent, seasonally adjusted annualised rate 1. GDP calculated at PPP exchange rates. 2. Weighted average of the Czech Republic, Hungary and Poland, where weights are moving nominal GDP measured at USD PPP. 3. Weighted average of Denmark, Norway and Sweden, where weights are moving nominal GDP measured at USD PPP. Source: November 2014 Economic Outlook database. -8 -6 -4 -2 0 2 4 6 8 -8 -6 -4 -2 0 2 4 6 8 Average, 1995-2007 GDP Volume, percentage change 3 Column1 2013 2014 2015 2016 World 3.1 3.3 3.7 3.9 United States 2.2 2.2 3.1 3.0 Euro area -0.4 0.8 1.1 1.7 Japan 1.5 0.4 0.8 1.0 BRIICS 5.5 5.1 5.4 5.6 OECD Europe excl. euro area 2.0 2.8 2.7 3.0 Of which: - UK 1.7 3.0 2.7 2.5 - CEE32 1.2 3.1 2.7 3.1 - Scandinavia3 0.8 1.6 2.1 2.6
  • 4. Sluggishness is not evenly spread – the euro area is a locus of weakness GDP per capita Volume index, 2008 = 100 Source: November 2014 Economic Outlook database. 4 94 96 98 100 102 104 106 108 110 94 96 98 100 102 104 106 108 110 Euro area Japan OECD Europe excl. euro area United States
  • 5. Slow growth in Europe matters for world trade and output Share of world trade (2013) Per cent Source: November 2014 Economic Outlook database. Share of world GDP (2013) Per cent 5 Euro area 22% Non-euro area EU Rest of the 8% world 70% Euro area 25% Non-euro area EU 11% Rest of the world 64%
  • 6. The expected follow-through to the initial recovery has been repeatedly delayed Source: November 2010, 2011, 2012, 2013 and 2014 Economic Outlook databases. Past Economic Outlook projections of euro area GDP Volume index, Q1 2008 = 100 6 92 94 96 98 100 102 92 94 96 98 100 102 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14
  • 7. The realisation of downside risks would leave the euro area in stagnation 1. Downside scenario shown in red. The shocks modelled in the downside scenario are a 50 basis point reduction in inflation expectations, a 10% decline in equity prices and a 100 basis point increase in the corporate bond spread, the equity risk premium and the spread between household borrowing and lending rates. Source: November 2014 Economic Outlook database; and OECD calculations. 7 Growth, inflation and unemployment in a downside scenario1 Inflation Per cent GDP Annual percentage change Unemployment rate Per cent -1 0 1 2 3 -1 0 1 2 3 0 1 2 3 0 1 2 3 Average 1999-2007 ECB's inflation target 8 9 10 11 12 8 9 10 11 12 Average 1999-2007 Average 1999-2007
  • 8. Source: November 2014 Economic Outlook database. GDP, exports, consumption and investment Volume indices, Q2 2009 = 100 Post-crisis euro area output weakness: not export performance, but domestic demand 8 90 100 110 120 130 90 100 110 120 130 Real GDP Consumption Fixed investment Exports
  • 9. Part of the euro area’s relative demand weakness reflects constrained policies Central bank assets Per cent of broad money (M3) Source: Datastream; National Central Banks; and November 2014 Economic Outlook database. Change in underlying primary balance Per cent of potential GDP 9 0 5 10 15 20 25 30 35 40 45 0 5 10 15 20 25 30 35 40 45 United States Euro area Japan United Kingdom -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 United States United Kingdom Japan Euro area 2007-2009 2009-2011 2011-2013
  • 10. Macroeconomic policies in the euro area: now becoming less of a drag on demand ECB assets Trillions of euros Source: Datastream; and November 2014 Economic Outlook database. 10 Underlying primary balance Annualised change during period, per cent of potential GDP -1 0 1 2 3 4 5 6 7 8 -1 0 1 2 3 4 5 6 7 8 2012-2013 2014-2016 0 1 2 3 4 0 1 2 3 4 ECB's target
  • 11. The overall euro area story masks divergences in performance GDP Volume index, Q1 2008 = 100 Source: November 2014 Economic Outlook database. 11 60 70 80 90 100 110 80 85 90 95 100 105 2008 2009 2010 2011 2012 2013 2014 Germany France Italy Spain Portugal Ireland Greece (RHS)
  • 12. Structural reform intensity in recent years has been highest in the euro area periphery Note: The responsiveness rate is calculated as the share of recommendations in Going for Growth 2011 for which 'significant' action has been taken, where each recommendation is weighted by the inverse of average responsiveness to priorities in this area in non-crisis circumstances, in order to reflect the fact that some areas of reform are more difficult than others. Aggregates are unweighted averages. Periphery includes Estonia, Greece, Ireland, Italy, Portugal, the Slovak Republic, Slovenia and Spain. Core is other euro area countries. Non-euro area OECD Europe includes the UK, Switzerland the Czech Republic, Poland, Hungary, Sweden, Norway, Turkey, Iceland, and Denmark. Source: Going for Growth (2015, forthcoming; figures are preliminary); and OECD calculations. Responsiveness to Going for Growth reform priorities Responsiveness rate (per cent) 12 0 10 20 30 40 50 60 70 0 10 20 30 40 50 60 70 Periphery euro area Core euro area Non-euro area OECD Europe 2011-12 2013-14
  • 13. 1. Inflation to October 2014, unemployment rate as of September 2014. Source: Eurostat. 13 Inflation1 HICP ,12-month percentage change Unemployment rate1 Per cent Inflation is too low across the euro area, and where it is lowest unemployment is very high 0 5 10 15 20 25 30 0 5 10 15 20 25 30 -2 -1 0 1 2 -2 -1 0 1 2 ECB's target
  • 14. Note: Non-euro area countries shown in red. Source: November 2014 Economic Outlook database. Fiscal consolidation in a slow-growth environment: significant employment pain 14 Change in underlying primary balance and unemployment, 2007-14 AUT BEL FIN FRA DEU GRC IRL LUX ITA NLD PRT SVK SVN USA JPN GBR -5 0 5 10 15 20 -5 0 5 10 15 20 Change in underlying primary balance, % potential GDP Change in unemployment rate, percentage points
  • 15. Structural flaws like incomplete banking union help explain the persistence of weak demand 1. Nominal interest rate minus latest 12-month inflation (HIPC). Source: ECB. Real interest rates1 on bank lending to enterprises Per cent 15 -2 0 2 4 6 8 10 -2 0 2 4 6 8 10 Germany Spain France Greece Italy
  • 16. Credit has failed to revive in the periphery Note: OECD Europe excl. euro area is aggregated in USD at Q1 2010 exchange rates. Euro area periphery is Greece, Italy, Portugal and Spain. Core euro area is Austria, Belgium, Finland, France, Germany, Luxembourg and the Netherlands. Source: BIS. Credit to non-financial corporations Index, 2010 = 100 16 90 95 100 105 110 115 120 125 90 95 100 105 110 115 120 125 Core euro area countries Periphery euro area countries United States Japan OECD Europe excl. euro area
  • 17. Existing ECB Measures ECB Policy Options Very low policy rates (incl. negative deposit rates) Open-ended or large-scale asset purchases: Long-Term Refinancing Operations (LTROs) • Increased outright purchases of asset-backed securities and covered bonds Targeted Longer-Term Refinancing Operations (TLTROs) • Outright purchase of sovereign bonds Outright purchases of asset-backed securities and covered bonds • Outright purchase of investment-grade corporate bonds Forward guidance The ECB must act decisively to support growth and head off deflation Monetary policy stimulus – beyond measures already announced – is needed in combination with banking union and structural reforms 17
  • 18. Fiscal policy: all available flexibility should be used Flexibility and discretion within the EU fiscal rules should be used to reduce the drag on demand Germany: higher spending (e.g. childcare facilities, infrastructure) would add to euro area demand while addressing structural weaknesses France and Italy: delayed consolidation can be justified in a context of weak growth and new structural reforms Automatic stabilisers should be allowed to play fully 18
  • 19. Fiscal policy: a reversal of the compression of public investment would help Government investment Volume index, 2009=100 Source: November 2014 Economic Outlook database. 19 0 20 40 60 80 100 120 140 0 20 40 60 80 100 120 140 Germany United Kingdom France Spain Greece Portugal
  • 20. Structural policies: making full use of demand management tools is not enough 20 Structural flaws are impeding the effectiveness of demand management tools The longer-term deterioration in potential output growth needs to be addressed by structural policies
  • 21. Some structural reforms could boost potential without widening the output gap 21 There is scope to make the composition of government revenues and expenditures more growth-friendly (e.g. in Italy, Spain) Reducing labour tax wedges can boost labour demand (e.g. in France) Liberalising services regulation can stimulate investment (e.g. in Germany) More ambitious action to complete the Single Market would have a major impact (all countries) Credible reform packages can improve confidence, giving an immediate boost to demand
  • 22. Deficient demand (especially investment) has in turn sapped potential output Note: The chart shows the level of potential output in 2014 relative to a counter-factual based on pre-crisis trends. For the majority of countries, the crisis has clearly been associated with lower potential output. Nevertheless, for a few countries the difference is positive or only slightly negative, which is explained by a variety of factors: structural reforms (e.g. Germany); and in a number of countries labour force participation has been much stronger than would have been anticipated on the basis of pre-crisis trends. Source: OECD calculations. 22 Level of potential output in 2014 relative to pre-crisis trend Percentage points of pre-crisis trend potential GDP -30 -25 -20 -15 -10 -5 0 5 10 -30 -25 -20 -15 -10 -5 0 5 10
  • 23. Key messages The euro area continues to hinder global growth, which remains modest Europe is doing poorly above all because of the lack of demand Structural factors braking potential growth are interacting with demand weakness, raising the risk of prolonged stagnation Constrained demand management policies explain part of this weakness Some countries have made good progress on structural reforms to reverse the decline in potential growth, but others have to make greater efforts Monetary, fiscal and structural policies are complementary tools to promote a faster and more widely shared recovery 23
  • 24. 24 More information… data visualization tool OECD Economic Outlook, November 2014 • Website with additional information • Read this publication online • Compare your country with OECD data www.oecd.org/eco/economicoutlook.htm OECD OECD Economics Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. 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.