The EU’s new rules on economic governance, the so-called "six-pack" has two legs: fiscal and macroeconomic surveillance. The macroeconomic imbalances procedure is a new tool that helps detect and correct risky economic developments.
Its first ever annual Alert Mechanism Report (AMR), adopted today, kicks-off the surveillance. The European Commission identifies 12 EU Member States whose macroeconomic situation needs to be analysed in more depth. It is only these subsequent in-depth reviews that will assess whether or not imbalances exist and whether or not they are harmful.
Based on a scoreboard of 10 macroeconomic indicators, such as a loss of competitiveness, a high level of indebtedness or assets price bubbles and taking into account other economic data, the Alert Mechanism Report identifies Member States whose macroeconomic situation needs to be scrutinised in more depth. This is the starting point of the new Macroeconomic Imbalance Procedure (MIP) that will deepen the dialogue on economic policy making with the Member States. If necessary, the European Commission will issue a recommendation to the Member State concerned to take appropriate action to correct the situation or prevent imbalances from persisting.
The European Commission considers that the macroeconomic situation in the following countries needs to be investigated further (in alphabetical order): Belgium, Bulgaria, Cyprus, Denmark, Finland, France, Italy, Hungary, Slovenia, Spain, Sweden and the UK.
The Report concludes that the following countries do not require a further in-depth review at this point in time: Austria, the Czech Republic, Estonia, Germany, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, and Slovakia. However, for these countries, there will be recommendations on fiscal and macroeconomic policies within the scope of the European Semester.
In-depth reviews have not been proposed for Greece, Ireland, Portugal and Romania, as these countries benefit from a conditional financial assistance programme by the EU and IMF, and are therefore already subject to enhanced economic surveillance.
Among the reasons for calling for in-depth analysis on these twelve countries are the following:
Belgium: Important loss in export market share, going hand-in-hand with deterioration in the current account balance and declining cost-competitiveness. The level of gross private sector debt should be seen in conjunction with high levels of public debt.
Bulgaria: Very fast accumulation of both external and internal imbalances but now the country is experiencing rapid and sizeable corrections. As the levels of accumulated imbalances are still high, the prospects for further adjustment require a closer examination.
Denmark: The pre-crisis housing boom, which started to be corrected in 2007, was associated with rapid credit growth and a surge of private sector debt, in particular in the household sector. While credit and house prices have partially adjusted in recent years, the stock of private sector debt remains very high.
Spain: Is currently going through an adjustment period, following the build-up of large external and internal imbalances during the extended housing and credit boom.
France: There has been a gradual deterioration of the trade balance, and this is reflected in a deterioration of the current account balance and important losses in export market shares.
Italy: Significant deterioration in competitiveness since the mid-1990s which is also seen through the persistent losses of export market shares. While private sector indebtedness is relatively contained, the level of public debt is a concern, especially given the weak growth performance and structural weaknesses.
Cyprus: Wide-ranging challenges as regards both the external and internal side. The Cypriot economy combines persistent current account deficits and losses in export market shares with high private sector indebtedness.
Hungary: A sharp adjustment of large imbalances has taken place. The levels of indebtedness, particularly of the public sector but also of the private one, continue to be high. Also, the level of external indebtedness is the highest in the EU.
Slovenia: Fast accumulation of internal imbalances with high increase in unit labour costs, private sector credit and house prices. The highly leveraged banking sector is under considerable strain as the economy is now in the early stages of a difficult deleveraging process.
Finland: Important loss in export market shares. The level of private sector indebtedness has been steadily increasing during the last decade, driven to a large extent by increasing mortgages.
Sweden: Increasing household indebtedness, which is now at high levels despite recent slower credit growth. This reflects very strong increases in house prices over the last fifteen years which have started to stabilise only recently.
UK: Important loss in export market shares over the last decade, despite some recent stabilisation. The high level of private debt should be seen in conjunction with a weak public finance situation. The household debt largely reflects mortgages in a context of high accumulated increases in house prices.
Moreover, the economic reading of the scoreboard points to the need for further analysis of the drivers and policy implications of large and sustained current account surpluses.