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Spring 2014 economic forecast: Growth becoming broader-based
The European Commission’s spring forecast, which was issued on 5 May, points to a continuing economic recovery in the EU that is now expected to become broad-based across countries. Real GDP growth is set to reach 1.6% in the EU and 1.2% in the euro area in 2014, and to improve further in 2015 to 2.0% and 1.7% respectively. The forecast rests on the assumption that agreed policy measures will be implemented by Member States and the EU. Overall, domestic demand is expected to become the key driver of growth over the forecast horizon. Consumer spending should progressively add to growth as real income benefits from lower inflation and the stabilising labour market. The recovery in investment should continue to support growth, with gains in both equipment and construction investment. While financing conditions remain benign on average, substantial differences persist across Member States and across firms of different size. Inflation is expected to remain low, both in the EU and in the euro area. The largest downside risk to the growth outlook remains a loss of confidence due to a stalling of reforms.
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| The recovery has now taken hold. Deficits have declined, investment is rebounding and, importantly, the employment situation has started improving. Continued reform efforts by Member States and the EU itself are paying off. |
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Siim Kallas, acting Vice-President for Economic and Monetary Affairs and the Euro
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Portugal to exit financial assistance programme as planned and without a pre-arranged precautionary credit facility
The Portuguese Government has decided to exit Portugal’s financial assistance programme on 17 May as planned and to do so without a pre-arranged precautionary credit facility. The decision comes on the back of a positive assessment of Portugal’s programme by the European Commission, European Central Bank and the International Monetary Fund. The three institutions conducted the twelfth and final review mission to Portugal from 22 April to 2 May. The mission concluded that Portugal’s programme remains on track to be concluded. During the past three years, Portugal’s external current account has moved from a large deficit into surplus, the budget deficit has been more than halved, and access to sovereign debt markets has improved markedly. Moreover, Portugal is experiencing a moderate economic recovery and unemployment is declining, on the back of improved competitiveness, financial stability and sounder public finances.
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Post-programme surveillance mission finds Ireland’s outlook continues to improve
Following the successful completion of the EU/International Monetary Fund (IMF) financial assistance programme at the end of 2013, staff teams from the European Commission and European Central Bank, visited Ireland to carry out post-programme surveillance (PPS) from 29 April to 2 May. This was coordinated with the IMF's first post-programme monitoring mission. The European Stability Mechanism also participated in the meetings on aspects related to its Early Warning System. Overall, the mission concluded that Ireland’s outlook has continued to improve since the conclusion of the EU/IMF-supported programme. Demand for Irish assets from private investors is high and the authorities are resuming normal market borrowing. The economic recovery and the decline in headline budget deficits continue, while structural and financial sector reforms advance. Nonetheless, high public and private sector indebtedness weigh on the speed of the recovery, especially of private consumption. The next PPS mission will take place in late 2014.
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Council continues work on FTT after UK’s action for annulment dismissed by European Court of Justice
European finance ministers continued their work on the Financial Transaction Tax (FTT) during their meeting on 6 May. Since not all Member States wished to participate in the original FTT, which was proposed by the Commission in September 2011, a smaller group of 11 Member States decided in September 2012 to proceed with the FTT through enhanced cooperation. Based on a proposal of the Commission, the Council on 22 January 2013 authorised the requested enhanced cooperation. However, the United Kingdom challenged elements of the potential FTT at the European Court of Justice claiming that it would impose costs and produce unjustifiable adverse effects on non-participating Member States. The UK’s action was dismissed by the Court on 30 April 2014, as the two arguments put forward were directed at elements of a future tax and not at the authorisation to establish enhanced co-operation. The objectives of the FTT are to prevent fragmentation of the Single Market that could result from uncoordinated national approaches to financial taxation, to ensure that the financial sector makes a fair contribution to public revenues, and to create a disincentive to transactions that do not enhance the efficiency of financial markets. The Council noted the intention of participating countries to work on a progressive implementation of the FTT, focusing initially on the taxation of shares and some derivatives. The first steps would be implemented by 1 January 2016 at the latest.
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MoU on Macro-Financial Assistance Programme for Ukraine signed
European Commission Vice-President Siim Kallas signed the Memorandum of Understanding (MoU) for the new EUR 1 billion Macro-Financial Assistance (MFA) loan programme to Ukraine on 28 April. The new MFA programme was approved by the EU Council of Ministers on 14 April, and is part of the package to support Ukraine that was announced by the European Commission on 5 March and endorsed by the European Council on 6 March. It is designed to help Ukraine cover part of its urgent external financing needs, thereby reducing the economy’s short-term balance of payments and fiscal vulnerabilities. Disbursement of the assistance will depend upon specific economic policy conditions outlined in the MoU as well as on the successful implementation of an IMF Stand-By Arrangement that is likely to soon be approved by the IMF Executive Board. The new EUR 1 billion programme will be implemented in parallel with the programme of EUR 610 million. The latter programme was approved in 2010 but was not released because of non-compliance with the required conditions by the previous Ukrainian administration.
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April 2014: Economic Sentiment slips in the euro area, rises further in the EU
In April the Economic Sentiment Indicator (ESI) decreased slightly in the euro area (by 0.5 points to 102.0), while it continued to increase in the EU (by 0.9 points to 106.2). In the euro area, the slight decrease in sentiment was mainly due to a worsening of confidence in services and construction, the two sectors where confidence still scores below its long-term average. In industry and retail trade, sentiment remained virtually unchanged compared to March, while consumer confidence improved slightly (+0.7). Amongst the five largest euro area economies the ESI declined in the Netherlands (-1.0), Spain (-1.0) and Germany (-0.4), remained broadly stable in France (-0.3) and increased slightly in Italy (+0.5). In contrast to the euro area, the headline indicator for the EU improved (+0.9), thanks to a strong increase in sentiment in the largest non-euro area EU economy (UK, +6.7). Sentiment in Poland remained broadly unchanged (-0.1). As in the euro area, confidence in the EU improved among consumers and declined in construction. However, it improved in all other business sectors.
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Euro area and EU government 2013 deficits decrease to 3.0% and 3.3% of GDP respectively; Greece achieves primary surplus
In 2013, the government deficits of both the euro area and the EU decreased in absolute terms compared with 2012, while government debt rose in both areas. The figures released on 24 April by Eurostat, the EU statistical agency, show that in the euro area the government deficit to GDP ratio decreased from 3.7% in 2012 to 3.0% in 2013, while in the EU it decreased from 3.9% to 3.3%. The government debt to GDP ratio increased in both areas, from 90.7% at the end of 2012 to 92.6% at the end of 2013 in the euro area, and from 85.2% to 87.1% in the EU. According to calculations made jointly by the European Commission, the European Central Bank and the International Monetary Fund, Greece achieved a primary surplus of EUR 1.5 billion or 0.8% of GDP in 2013, well ahead of its 2013 target. In their statement on 5 May, the Eurogroup of euro area finance ministers welcomed the recent positive developments in the Greek economy and the strong fiscal performance as reflected in the primary surplus for 2013. Ministers also reaffirmed their commitment to provide adequate support until Greece regains full market access, as long as Greece fully complies with the requirements and objectives of the adjustment programme. The relative merits of possible debt sustainability measures, as stated by the Eurogroup on 27 November 2012, would be considered in the context of the next review.
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Zero tolerance for euro counterfeiting: European Commission proposal clears final hurdle
EU finance ministers on 6 May backed measures that will reinforce the protection of the euro and other currencies through criminal law measures. The new measures were first proposed by the Commission on 5 February 2013. They include tougher sanctions for criminals and improved tools for cross-border investigation. Since the euro was introduced in 2002, counterfeiting is estimated to have cost the EU at least EUR 500 million. The directive was backed by the European Parliament on 16 April 2014 and is expected to enter into force in June 2014. Member States will then have two years to transpose the new rules into national law.
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Integration in European financial markets improved, but still worse than before crisis, new Commission and ECB reports show
The European Commission and the European Central Bank (ECB) have published reports analysing financial integration and stability in Europe. The two annual publications, “Financial Integration in Europe” and the “European Financial Stability and Integration Report”, were presented at a conference at the ECB headquarters in Frankfurt. The reports show that significant financial fragmentation remains in the EU and euro area compared to before the crisis, despite considerable improvements in recent years. On the positive side, however, there is no longer risk linked to the perception of a possible euro area break-up. Moreover, banks’ balance sheets have continued to improve and financial institutions have started to increase their exposure to cross-border sovereign debt instruments. Both reports conclude, however, that there is room to promote further integration in specific segments such as corporate bonds, equity and banking markets. They illustrate the importance of implementing the banking union.
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ECB to give banks six to nine months to cover capital shortfalls following comprehensive assessment
The European Central Bank (ECB) has informed banks how capital shortfalls must be addressed following the ECB's ongoing comprehensive assessment. The announcement made on 29 April follows release by the European Banking Authority (EBA) of the methodology and scenarios for the EU-wide stress test. Together with the asset quality review, the stress test is a key pillar of the comprehensive assessment that the ECB performs before taking on supervision of the largest banks in the euro area in November 2014. It will identify remaining vulnerabilities in the EU banking sector and will provide a high level of transparency into EU banks’ exposures. According to the ECB, banks will be expected to cover capital shortfalls within six to nine months after the disclosure of the results of the comprehensive assessment. Moreover, capital shortfalls arising from the asset quality review and baseline stress test scenario must be covered only by Common Equity Tier 1 capital. The ECB will publish the results of the comprehensive assessment in after October 2014, before it takes over its supervisory tasks within the Single Supervisory Mechanism (SSM).
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Published by President Barroso, “A Record of Achievements” outlines Commission’s major achievements
On the eve of European elections, European Commission President Manuel Barroso has published “A Record of Achievements”, a publication that outlines the major achievements of the European Commission from 2010-2014. In a section entitled “Protecting financial and economic security”, Vice-President Olli Rehn, who is currently on electoral leave, notes that the EU has created the world’s largest financial firewall and financial support programmes that have given countries the breathing room to regain stability. According to Rehn, the EU now also has more effective systems of oversight and safety nets – including stronger budgetary rules, better coordinated economic policies, and a Banking Union with a single supervisor and one single mechanism to restructure or close banks if necessary. In addition, the euro area has continued to expand with Estonia and Latvia joining in 2011 and 2014 respectively, and Lithuania planning to join in 2015. The revamped Economic and Monetary Union is now in a good position to act and react early on, to correct imbalances, and to coordinate fiscal and economic policies.
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Poverty developments in the EU after the crisis: a look at main drivers. European Commission. Economic Briefs 31/2014
This paper examines the main determinants of poverty in the EU after the crisis. It notes that poverty increases were recorded mostly in terms of severe material deprivation and low work intensity rates starting from 2010, and were concentrated in those countries most severely hit by the crisis. Econometric estimates suggest that while the drivers of relative poverty are not clearly identifiable, income per capita and unemployment may explain much of the severe material deprivation and poverty risk rates. The share of long-term unemployment to total unemployment stands out as the most significant driver. The analysis also shows that social expenditure helps to curb poverty, and that as a percentage of GDP it did not change significantly during the crisis. Social expenditure was largely sheltered from fiscal consolidation policies.
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| Directorate-General for Economic and Financial Affairs |
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