Euro Area Economic and Monetary Policy Perspectives

Economic and Monetary Policy
Perspectives for Europe

and the Euro Area
Peter Mooslechner
Executive Director and Member of the Governing Board
Oesterreichische Nationalbank
Roundtable Discussion, Austrian Consulate General

New York City, November 8, 2017
www.oenb.at -0- oenb.info@oenb.at
Outline
● Prologue:
ECB Monetary Policy Decisions of October 26,
2017
● Where Do We Stand?
● Where Do We Come From?
● Where Are We Heading To?
● The (forthcoming) „New Normal“:

Important Issues Ahead

Prologue:
ECB: Monetary Policy Expansion Continued…

Where Do We Stand?
The Euro Area Economy is Recovering
Euro area: Real GDP 2016 (2007=100)

140
135
130
125
120
115
110
105
100
95
90
85
80
75
70
EA19
LV
CY
LU
ES
EL
EE
PT
DE
SI
BE
AT
NL
FI
SK
MT
IE
IT
FR
Source: Eurostat.
Source: September 2017 ECB staff macroeconomic projections.

Domestic Demand and Employment Up…

Sustainable Improvement in Labor Market
Conditions
Employment development in selected euro area countries Unemployment in selected euro area countries
Index: 2007Q1=100 Eurostat unemployment rate in %

112 30
Austria
Germany
109
25
106
France Greece
103
Euro area 20
100
Spain
Italy
97 15
Ireland
Portugal
94
Italy
Spain 10 Portugal
91 Euro area
88
Ireland
5 Austria
Greece
Germany
85
82 0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Eurostat.

Headline Inflation Low But Rising Oil Prices
Will Lead to Upward Correction
Inflation and core inflation in the euro area

annual change of HICP in %
3,5
3,0
2,5
2,0
1,5
1,0
0,5
0,0
-0,5
-1,0
Jän.10 Jän.11 Jän.12 Jän.13 Jän.14 Jän.15 Jän.16 Jän.17
HICP HICP without energy and unprocessed food

Source: Eurostat.
Sept. 2017 ECB staff macroeconomic projections.

Underlying Inflation Picking Up

Investment Still Below Pre-crisis Level
EU investment by country group (2008=100)
110
105
100
95
90
85
80
75
70
65
60
2008 2009 2010 2011 2012 2013 2014 2015 2016
CESEE (EU) EU periphery Core EU EU
Source: European Commission.

Where Do We Come From:
The Euro Area Had to Overcome Two Crises -
The Great Recession and a Sovereign Debt Crisis
• In the Great Recession (2007-2008) euro
Real GDP in selected countries area countries lost on aggregate almost 5%
Index 2008 = 100 of GDP.
120,0 • After a short-lived recovery the euro area
was hit by another shock: a sovereign debt
115,0
crisis.
110,0 • The sovereign debt crisis hit some
countries, e.g. Spain and Italy, as hard as the
105,0 Great Recession: between 2011 and 2013
Italy and Spain lost another 4% of GDP,
100,0 respectively.
95,0 • Monetary policy reacted with
expansionary conventional and
90,0 unconventional measures (see next slide).
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
• Have these measures been successful? Do
Euro area Germany Spain France we see a proper pass-through to financing
Italy Austria USA conditions? Did the transmission from
easier financial conditions to economic
Source: European Commission and European Commission Economic Forecast for 2017.
activity and from economic activity to
prices work?
Growth Falling Behind Potential Significantly
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Interest rates Cut to Record Low Levels
Monetary policy interest rates worldwide

in %
8,0
7,0
6,0
5,0
4,0
3,0
2,0
1,0
0,0
-1,0
Jän.07 Jän.08 Jän.09 Jän.10 Jän.11 Jän.12 Jän.13 Jän.14 Jän.15 Jän.16 Jän.17
Euro area USA Japan

UK Sweden Switzerland
China
Source: Macrobond.
The Eurosystem’s Monetary Policy Measures:
An Overview
• Reduction of monetary policy rates to
Excess liquidity, EONIA and the interest corridor 0.25%, 0.00%, –0.40%.
%
• Forward guidance: (…) policy rates are expected “to
EUR billion
2.5 remain at their present levels for an extended period
of time, and well past the horizon of our net asset
2.0 purchases.”
• Continuation of fixed rate full allotment in all tender
1.5 operations at least until the end of 2017.
• Provision of targeted longer-term refinancing
1.0 operations (TLTROs II) with a maturity of four years
(2016/17–2020/21).
0.5 • The Expanded Asset Purchase Programme (APP),
with monthly purchases worth EUR 60 billion, is
0.0 intended to run until the end of December 2017, or
beyond, if necessary, and in any case until the
Governing Council of the ECB sees a sustained
-0.5
01/2010 01/2011 01/2012 01/2013 01/2014 01/2015 01/2016 01/2017 adjustment in the path of inflation consistent with its
inflation aim.
Excess liquidity (rhs) Main refinancing facility
• Reinvestment of the principal payments from
Lending facility Deposit facility
maturing securities purchased under the APP for as
EONIA long as necessary.
Source: ECB, Thomson Reuters.
Balance Sheet Expansion as Monetary Policy
Instrument
Non-standard Monetary Policy Measures of the
Eurosystem
• Forward guidance (on rates and QE volumes)

• Ample liquidity for the banking system
• Fixed rate full allotment
• TLTRO: Long maturities, “funding for lending”
• Change of eligibility rules for collateral
• Change of interest rate corridor
• Asset purchase program (APP)
• Sovereign bonds, covered bonds, ABS, corporate bonds
• EUR 60 billion per month until end-2017, EUR 30 billion
thereafter
Some Details on the Eurosystem‘s Monetary
Policy Operations
Liquidity provision in the euro area
MP operations (29.09.2017) in EUR billions
in EUR billions CBPP 1 7.0
3000
2800 SMP 91.4
2600
2400 CBPP 2 4.8
2200
2000 CBPP 3 231.3
1800 ABSPP 24.1
1600
1400 PSPP 1748.1
1200
1000 CSPP 114.7
800
600 Tender operations 768.3
400 Sum 2989.7
200
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
APP SMP (non-sterilized) Currently the Eurosystem creates
TLTROs LTROs nearly EUR 3 trillions of central bank
6-months 3-months
1-month 1-week
liquidity. Approximately 75% thereof
Liquidity demand are created through various asset
Source: ECB, own calculations. purchase programmes.
Inflation Surprises: A Simple Illustration
Balance Sheet Expansion By All Major Central
Banks
Central bank balance sheets Composition of APP program
January 2007 = 100
900
5,1% 1,2%
800 11,1%
700
600
500
400
300
200
100
0 82,6% CBPP 3
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Eurosystem ABSPP
Bank of England (published sterling liabilities) PSPP
Federal Reserve Bank
Bank of Japan CSPP
Schweizerische Nationalbank
Source: Thomson Reuters. OeNB Source: ECB.
Structural Change in Eurosystem Tender
Operations
Quantitative Easing – European Style
As of 12.10. 2017
Adverse feedback loops and the role of the
central bank
Lower growth
Lower bank
asset
Fiscal
quality
consolidation Worsening Provide Deleveraging &
fiscal monetary less bank
balance stimulus lending
Central
Ease
Ease fiscal bank funding
strains
strains
Sovereign risk
Government: Financial sector:
Unsustainable fiscal exposure
Inadequate capital, need for
trajectory, deteriorating
public sector support
creditworthiness
Need for public
support
Where Are We Heading To?
Euro Area GDP (per capita) Growth Outpaces
the US
Real GDP per capita

Annual percentage change, in PPP international currency
Average Average 2016 2017 2018 2022
1999-2008 2009-2015
Euro area 1.7 –0.1 1.4 2.0 1.8 1.4
U.S.A. 1.5 0.8 0.8 1.5 1.7 1.1
Source: IMF World Economic Outlook, October 2017.
Comparing annual GDP per capita growth rates, the picture looks somewhat different.
The euro area has been outpacing the U.S.A. since the introduction of the euro in most years, with the exception of the crisis
years 2009 to 2015.
Recovery Is Increasingly Investment-driven …
Looking Ahead: The Economic Recovery
in the Euro Area Will Remain Robust
Euro area real GDP (including projections) • The economic expansion in the euro area is
projected to continue over the projection
horizon at growth rates well above potential.
• Over the medium term, domestic demand,
supported by favorable financing conditions and
improving labor markets, will continue to drive
the growth outlook.
• Business investment is projected to continue its
recovery, as financing conditions are expected
to remain very supportive over the projection
horizon.
• At the same time, despite the recent
appreciation of the euro, the global recovery is
expected to support euro area exports.
• Following a post-crisis peak of 2.2% in 2017,
annual real GDP growth is expected to average
around 1.8% in 2018 and 2019.
• Risks surrounding the euro area growth
Source: ECB (September 2017, ECB staff macroeconomic outlook remain broadly balanced.
projections for the euro area).
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Currency union
- 24 -
Currency union
Currency union
Towards a Complete Monetary Union
Economic union
Financial union
EMU 3.0
Fiscal union
oenb.info@oenb.at
Political union
In Addition: The Capital Market Union Project
Startups &
SMEs
Saving &
Banks
investing
Large Infrastructure
enterprises projects
First Money Market Implied ECB-Rate Hike
Expected in May 2019
“well past” estimated at about 5-7 months
Note: Euro-area OIS forward

curves.
Last updated: 16/10/2017
Some Forthcoming Issues:
International „Imbalances“?
Does Expansionary Fiscal Policy Explain
Faster Recovery in the US
Why a Debt Crisis in Europe But Not in
US/UK/Japan?
Public debt 2007 vs. 2016
in % of GDP
Gov. bond yields (10y) for selected major economies
300 in %
8
250 7
6
200
5
4
150
3
100 2
1
50
0
0 -1
JP UK US EA19 DE FR IT ES AT EL IE PT 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
2007 2016 DE ES FR IT UK US JP
Source: EC. Source: Thomson Reuters.
European Corporate Sector Much More Bank
Dependent Than in the US
Market-based corporate financing Bank-based corporate (and private) financing

% of GDP % of GDP
160% 350%
140% 147% 300%

294%
120% 250%
251%
100%
200%
80%
150%
60%
65%
100%
40%
98% 100%
85%
20% 31% 31% 50%
11% 11% 39% 36% 21% 52%
0% 0%
Corporate bonds (2016) Stock market capitalization Bank credit to non- Bank credit to the Size of banking sector
(2016) financial firms (2016) private sector (2016) (2015)
Austria Euro area U.S.A. Austria Euro area U.S.A.

Source: BIS, World Bank. Source: BIS, ECB, Federal Reserve Bank of St. Louis
Small and Medium-sized Enterprises (SMEs)
Play a More Significant Role in Europe
Enterprise distribution by size class Enterprise distribution by number of employees
% of total number of firms % of total number of firms
0.3% 0.2% 0.6% 100%
100% 1.0%
1.6%
3.4%
5.9% 31.1% 33.2%
95% 80%
10.8%
56.3%
90%
60% 19.2% 16.8%
17.2%
85%
40% 24.2% 20.1%
93.0% 16.9%
80%
87.3%
20% 16.5%
75% 78.9% 25.6% 29.9%
10.3%
70% 0%
Austria EU-28 U.S.A. Austria EU-28 U.S.A.
Micro Small Medium Large Micro Small Medium Large
Source: Eurostat, U.S. Small Business Administration. Source: Eurostat, U.S. Small Business Administration.
Banking Union is Most Significant Step of Economic and
Institutional Integration in Europe Since the Launch of the Euro
Scope Status Challenges
 4 Nov 2014: ECB assumed  Continue to harmonise banking supervision

Uniform supervision of responsibility for direct  Continue to promote a common supervisory
SSM
124 significant banking supervision of 124 SIs in EEA culture

groups in EEA  important steps to harmonize
supervision (JSTs, SREP,  Improving proportionality
stress test...)  Improving incentives for „opt-in“
 1 Jan 2016: SRB taking  Determination of MREL und adaption MREL to

decisions and setting TLAC
measures for resolution cases
 Consistent application bail-in-rules
SRM
Uniform rules and  1 Jan 2016: SRF is being set

procedures for recovery up and financed by  Uniform hierachy of creditors (bail-in)
and resolution contributions from banks  Harmonization moratorium
(target in 2024: EUR 55bn)
 Common SRF-Backstopp
 For the time being: Harmonization of DGSs
 EC put forward proposal on Further prerequisites:

EDIS
Cross-border depositor EDIS in Nov 2015

protection  Risk-reductions:
  EDIS builds on DGS  Harmonization of insolvency regimes
 „Sovereign exposures“
Legend: SSM:Single Supervisory Mechanism; SRM :Single Resolution Mechanism; EDIS :European Deposit Guarantee Scheme; MREL: Minimum Requirement for own funds and
Eligible Liabilities; TLAC: Total Loss Absorbing Capacity; ONDs: Options and national discretion. CRR/CRD-IV: Capital Requirement Regulation/Direc; JST: Joint Supervisory Team;
SREP: Supervisory Review and Evaluation Process.
ECB-RESTRICTED
Different Design of Liquidity Provision

Balance sheet structure
100% 0,8%
0,7%
• Eurosystem: open 27%

80%
market operations
(41%) and securities
24%
(59%) 60%
Other assets
Foreign reserves
98,5%
• Federal Reserve: Monetary policy assets
40%
almost exclusively
Treasury and MBS 49%
20%
(99.9%)
0%
Eurosystem
Federal Reserve
2015
2015
FED and Eurosystem Balance Sheet Structure
Developments Compared
Federal Reserve Eurosystem
Economic and Monetary Policy
Perspectives for Europe
and the Euro Area
Peter Mooslechner
Executive Director and Member of the Governing Board
Oesterreichische Nationalbank
Roundtable Discussion, Austrian Consulate General

New York City, November 8, 2017

Euro Area Economic and Monetary Policy Perspectives

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Euro Area Economic and Monetary Policy Perspectives

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Economic and Monetary Policy

Perspectives for Europe

Roundtable Discussion, Austrian Consulate General

● Where Do We Come From?

● Where Are We Heading To?

● The (forthcoming) „New Normal“:

www.oenb.at -1- oenb.info@oenb.at

www.oenb.at -2- oenb.info@oenb.at

Euro area: Real GDP 2016 (2007=100)

Source: September 2017 ECB staff macroeconomic projections.

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Index: 2007Q1=100 Eurostat unemployment rate in %

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Inflation and core inflation in the euro area

HICP HICP without energy and unprocessed food

Sept. 2017 ECB staff macroeconomic projections.

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Source: European Commission.

Monetary policy interest rates worldwide

Euro area USA Japan

• Forward guidance (on rates and QE volumes)

Real GDP per capita

Note: Euro-area OIS forward

Market-based corporate financing Bank-based corporate (and private) financing

140% 147% 300%

Austria Euro area U.S.A. Austria Euro area U.S.A.

 4 Nov 2014: ECB assumed  Continue to harmonise banking supervision

124 significant banking supervision of 124 SIs in EEA culture

 1 Jan 2016: SRB taking  Determination of MREL und adaption MREL to

Uniform rules and  1 Jan 2016: SRF is being set

 For the time being: Harmonization of DGSs

 EC put forward proposal on Further prerequisites:

Cross-border depositor EDIS in Nov 2015

  EDIS builds on DGS  Harmonization of insolvency regimes

Different Design of Liquidity Provision

• Eurosystem: open 27%

Roundtable Discussion, Austrian Consulate General

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