Reforms for a stronger and more integrated Europe OECD Economic Surveys EU euro area June 2018

1. 2018 OECD ECONOMIC
SURVEYS OF THE EURO AREA
and the EUROPEAN UNION
@OECD
@OECDeconomy
http://www.oecd.org/eco/surveys/economic-survey-european-union-and-euro-area.htm
Reforms for a stronger and
more integrated Europe
Brussels, 19 June 2018

2. The economy is expanding
2
1. Euro area member countries that are also members of the OECD (16 countries).
Source: OECD (2018), OECD Economic Outlook: Statistics and Projections (database).
-6
-4
-2
0
2
4
-6
-4
-2
0
2
4
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Real GDP growth in the Euro area¹, year-on-year % changes

3. Unemployment continues to fall
3
1. Euro area member countries that are also members of the OECD (16 countries).
Source: OECD (2018), OECD Economic Outlook: Statistics and Projections (database).
4
6
8
10
12
14
4
6
8
10
12
14
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Unemployment rate in the Euro area¹, as a % of the labour force

4. Inflation is still below target
4
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).
Harmonised consumer price indices in the Euro area¹, year-on-
year % changes
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2010 2011 2012 2013 2014 2015 2016 2017 2018
Headline inflation Core inflation²

5. ECB policy has remained accommodative
5
Source: Thomson Reuters (2018), Datastream Database and OECD (2018), OECD Economic
Outlook: Statistics and Projections (database).
Stock of central banks’ total liabilities (% of GDP)
0
20
40
60
80
100
0
20
40
60
80
100
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Euro area Japan United States

6. Public debt remains high
6
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
20
40
60
80
100
120
140
160
180
200
0
20
40
60
80
100
120
140
160
180
200
EST LUX LTU LVA SVK NLD FIN DEU IRL SVN AUT EA FRA ESP BEL PRT ITA GRC
2017 2007
Public debt (% of GDP)

7. Non-performing loans are still high
7
1. Or latest observation available.
Source: IMF (2018), Financial Soundness Indicators (database), International Monetary Fund,
Washington, D.C.
-10
0
10
20
30
40
50
60
70
80
90
-10
0
10
20
30
40
50
60
70
80
90
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
Non-performing loans as a percentage of capital (net of provisions)
Q4 2017¹

8. Private debt remains high
8
1. 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).
Private debt (% of GDP)
0
50
100
150
200
250
300
350
400
0
50
100
150
200
250
300
350
400
LTU SVN GRC SVK DEU LVA AUT ITA EST EA¹ ESP OECD FIN FRA NLD PRT BEL IRL LUX
2017² 2007
407 484

9. 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

10. 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

11. 11
Reforms to strengthen the monetary
union

12. The crisis halted convergence
12
1. Euro area member countries that are also members of the OECD (16 countries), population-
weighted average (PPP-adjusted).
Source: The Conference Board (2018), Total Economy Database.
GDP per capita relative to EA16=100¹, per cent
60
70
80
90
100
110
120
60
70
80
90
100
110
120
1990 1995 2000 2005 2010 2015
Germany France Italy Spain Portugal

13. Cross-border risk sharing is limited
13
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.
Percentage of absorbed shocks through private and public risk sharing
0
10
20
30
40
50
60
70
80
90
0
10
20
30
40
50
60
70
80
90
Euro area United States
Risk sharing through fiscal transfers Risk sharing through private financial flows

14. Reforms should reduce links between
banks and their own State
14
Source: OECD calculations based on ECB (2018), “Balance Sheet Items statistics”, Statistical
Data Warehouse, European Central Bank.
Share of domestic sovereign bonds in banks portfolios, March 2018 (%)
0
10
20
30
40
50
60
70
80
90
100
0
10
20
30
40
50
60
70
80
90
100
LUX IRL EST FIN NLD BEL AUT SVN LVA DEU PRT EA ESP GRC FRA ITA SVK LTU

15. The supply of European safe assets is
limited
15
1. Sovereign debt securities issued by the governments of Germany, Luxembourg and the Netherlands.
2. 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.
Debt securities issued by governments and European institutions
As a percentage of euro area GDP, 2016
0
5
10
15
20
25
30
0
5
10
15
20
25
30
Triple A-rated national debts ¹ European Institutions ²

16. Most countries would benefit from the
unemployment re-insurance scheme
16
Source: : Claveres and Stráský (2018) based on OECD (2018), OECD Economic Outlook:
Statistics and Projections (database) .
Cumulative payments received from the unemployment reinsurance scheme
2002-2016 (% of GDP)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
FIN BEL FRA LUX AUT DEU NLD ITA SVN GRC ESP PRT IRL

17. European capital markets need to expand
17
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.
Outstanding loans and bonds of non-financial corporations as a % of GDP
0
5
10
15
20
25
30
35
40
45
50
0
5
10
15
20
25
30
35
40
45
50
Loans Bonds Loans Bonds
Euro area United States

18. 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

19. 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

20. 20
Improving growth and living standards

21. Productivity growth has declined
21
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.
Output per hour worked¹, annualised growth rates (%)
0
1
2
3
4
5
6
0
1
2
3
4
5
6
EU OECD Non-OECD
1990-2000 2000-2007 2007-2016

22. There is room to ease regulatory burdens
22
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).
STRI index¹ for professional services, from completely open (0) to
completely closed (1), 2017
0
0.1
0.2
0.3
0.4
0.5
0.6
0
0.1
0.2
0.3
0.4
0.5
0.6
EUROPEAN UNION¹ OECD 3 best performing countries 3 worst performing countries
More
restrictive
Less
restrictive

23. Many individuals still lack digital skills
23
Source: Eurostat (2018), "Individuals' level of digital skills", Eurostat Database.
Percentage of 16-74 year-olds who lack basic digital skills, 2017
0
10
20
30
40
50
60
0
10
20
30
40
50
60
ISL
LUX
NLD
NOR
SWE
FIN
DNK
GBR
DEU
AUT
BEL
CZE
EST
SVK
EU28
FRA
LTU
ESP
SVN
HUN
IRL
LVA
PRT
GRC
POL
ITA

24. 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

25. 25
Reforming the EU budget

26. The EU budget is small
26
Source: European Commission.
0
2
4
6
8
10
12
14
16
0
2
4
6
8
10
12
14
16
EU gross national income EU Member States' total public
expenditure
EU annual budget
EUR thousand of billions, 2016

27. The EU budget has declined over time
27
Source: European Commission.
Per cent of gross national income
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
Average
1993-1999
Average
2000-2006
Average
2007-2013
Average
2014-2020

28. Producer support to agriculture remains
high
28
1. European Union refers to all 28 members of the European Union.
Source: OECD (2018), OECD, Producer Support Estimate Database.
Percentage of farm receipts, 2016
0
5
10
15
20
25
0
5
10
15
20
25
EUROPEAN UNION¹ Best performing non EU OECD countries

29. There is scope to increase the EU research
and innovation budget
29
Source: European Commission.
39%
34%
13%
14%
Agriculture, rural
development and
fisheries
Research and
innovation,
education
Cohesion policy
Others
2014-2020 multiannual financial framework

30. 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

31. 31
Reducing regional divides

32. Regional convergence stopped after the
crisis
32
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.
Coefficient of variation in regional GDP per capita¹ , %
Convergence
Divergence

33. Spending of structural funds is slow
33
Source: European Commission (2018), Open Data Portal for the European Structural and
Investment Funds (https://cohesiondata.ec.europa.eu/)
Spending as a % of planned investment in the 2014-2020 programming
period, as of end 2017
0
5
10
15
20
25
30
35
40
0
5
10
15
20
25
30
35
40
ITA ESP SVK SVN CZE BEL POL HUN GBR LVA GRC FRA EU28 DNK EST LTU DEU NLD PRT SWE IRL AUT LUX FIN

34. The management of structural funds could
improve
34
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.
Implementation errors found by the European Court of Auditors¹
29%
49%
22%
Serious errors
Significant errors
Minor errors

35. 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

36. 36
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