Ligjërata master 2012-2013 syllabusi 2012-2013

Economic policy

Economic reforms

Economic reforms in the goods, capital and labour markets which remove barriers to competition and increase market flexibility are key for the smooth functioning of the Economic and Monetary Union (EMU). Such reforms are key to raise productivity and employment in the euro area, thereby supporting the growth potential of the euro area in the long run. At the same time, through enhancing competition and fostering innovation, such reforms will contribute to lowering price pressure. By making the euro area markets more flexible, such reforms also help countries to adapt faster and at lower cost to economic shocks. The case for structural economic reforms is very strong in a monetary union, such as the euro area, since there are no longer national monetary and exchange rate policies to respond to country-specific shocks.

Lisbon Strategy for Growth and Jobs

Launch in March 2000: economic, social and environmental reforms

The economic reform agenda for Europe has been laid down in the so-called Lisbon Strategy for Growth and Jobs. In this context, the EU Heads of State or Government (European Council) launched a wide-ranging and ambitious programme of economic, social and environmental reforms in March 2000 covering policies at both the national and the EU level to enhance the standard of living of European citizens. To achieve this goal, the Lisbon Strategy aimed to transform the European Union into a highly competitive and knowledge-based economy while maintaining a high degree of social cohesion and environmental sustainability.

Relaunch in March 2005: refocused on four priorities

As the results obtained in the first five years of implementation were rather mixed, partly due to a lack of clear focus, the Lisbon Strategy was relaunched in March 2005. While acknowledging the continuing relevance of the social and environmental pillars, the European Council streamlined the governance framework (see below) and refocused the strategy on ‘growth and jobs’ by identifying four main priority areas:

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  Promoting knowledge and innovation
  
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  Making the EU an attractive area to invest and work in
  
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  Fostering growth and employment based on social cohesion
  
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  Promoting sustainable development.
  

Institutional arrangements

The institutional framework for implementing the Lisbon Strategy consists mainly of two processes spelled out in Articles 121 and 148 of the Treaty on the Functioning of the European Union (TFEU). These pertain to the EU Council of Ministers' adoption of Broad Economic Policy Guidelines (BEPGs) and Employment Guidelines (EGs), which are proposed by the European Commission and cover macroeconomic, microeconomic and employment policies.

In order to improve the consistency of the BEPGs and EGs, and to focus on the implementation of structural reforms, the 2005 reform of the Lisbon Strategy brought the two sets of guidelines together under the single heading of the Integrated Guidelines. The guidelines are endorsed for a three-year period (see below for details). The first three-year period was 2005-07. The second three-year period is 2008-10.

On the basis of the Integrated Guidelines, each EU Member State draws up its National Reform Programme describing key priorities for economic reforms, planned reforms and own targets in a single document. National parliaments, social partners and civil society are invited to participate in the formulation of the programme. This is intended to improve the national ownership of the structural reform agenda of each Member State.

As a complement to the National Reform Programmes, the Commission presents a Community Lisbon Programme covering all actions to be undertaken at the Community level. The implementation of the Community Lisbon Programme largely entails the adoption of Community legislation by the EU Council and European Parliament, on the basis of proposals by the Commission.

The Heads of State or Government hold a Spring European Council every year in order to provide political impetus and direction to the strategy. back to top

The three-year EU economic policy cycle

In March 2008, a new policy cycle started. The general set-up is always the same: each cycle begins with a strategic report by the Commission which puts forward the priorities of EU economic policy for the ensuing three years. The report is accompanied by a proposal for a set of Integrated Guidelines which is adopted by the Council.

On the basis of the Integrated Guidelines, each Member State puts forward a National Reform Programme and gives account of its progress in autumn of each year in an Implementation Report. The Commission assesses the Implementation Reports in its Annual Progress Report in December. If deemed necessary, the country-specific recommendations (including euro area specific recommendations), which are an essential part of the Integrated Guidelines, may be adopted in the course of the annual review process.

At the end of the third year, the Integrated Guidelines, the National Reform Programmes and the Community Lisbon programme are renewed, on the basis of an overall assessment of progress during the cycle.

The EU 2020 strategy

With the deadline of the current Lisbon Strategy approaching, the European Institutions are currently debating a successor strategy, called the EU 2020 Strategy. The new strategy will build on the achievements of the Lisbon Strategy and aim at, inter alia, raising potential growth and creating high levels of employment.

At the end of 2009, the Commission organised a public consultation on the strategy, to which the ECB sent in its own contribution. The discussions on the EU 2020 Strategy are expected to be finalised by the June 2010 European Council."

3. 
   Fiscal policies
   

Fiscal policies have a significant impact on economic growth, macroeconomic stability and inflation. Key aspects in this respect are the level and composition of government expenditure and revenue, budget deficits and government debt. Fiscal discipline is a pivotal element of macroeconomic stability. The need for fiscal discipline is even stronger in a monetary union, such as the euro area, which is made of sovereign states that retain responsibility for their fiscal policies. There are no longer national monetary and exchange rate policies to respond to country-specific shocks, and fiscal policies can better cushion such shocks if they start from a sound position.

Institutional arrangements

A number of institutional arrangements for sound fiscal policies have been agreed at the EU level, also with a view to limiting risks to price stability.

These include:

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  the prohibition of monetary financing (Article 123 of the Treaty on the Functioning of the European Union),
  
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  the prohibition of privileged access to financial institutions (Article 124 of the Treaty on the Functioning of the European Union),
  
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  the no-bail-out clause (Article 125 of the Treaty on the Functioning of the European Union),
  
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  the fiscal provisions to avoid excessive government deficits (Article 126 of the Treaty on the Functioning of the European Union, including the excessive deficit procedure), and
  
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  the Stability and Growth Pact (secondary legislation based on Articles 121 and 126 of the Treaty on the Functioning of the European Union). back to top
  

Excessive deficit procedure

The basic rule of budgetary policy enshrined in the Treaty is that Member States shall avoid excessive government deficits. Compliance with this rule is to be examined on the basis of reference values for the general government deficit (3%) and gross debt (60%) in relation to GDP, whereby a number of qualifications can be applied.

In particular, only an exceptional and temporary excess of the deficit over the reference value can be exempt from being considered excessive, and then only if it remains close to the reference value.

The decision as to whether a Member State is in a situation of excessive deficit lies with the ECOFIN Council, acting upon a recommendation from the European Commission.

If the Council decides that a Member State is in a situation of excessive deficit, the excessive deficit procedure provides for the necessary steps to be taken. These could ultimately lead to imposing sanctions on the country concerned. back to top

Stability and Growth Pact

The Stability and Growth Pact provides an operational clarification of the Treaty's budgetary rules. It defines the procedures for multilateral budgetary surveillance (preventive arm) as well as the conditions under which to apply the excessive deficit procedure (corrective arm). The Pact is an essential part of the macroeconomic framework of the Economic and Monetary Union. By requesting Member States to coordinate their budgetary policies and to avoid excessive deficits, it contributes to achieving macroeconomic stability in the EU and plays a key role in securing low inflation and low interest rates, which are essential contributions for delivering sustainable economic growth and job creation.

The main rationale of the Stability and Growth Pact is to ensure sound budgetary policies on a permanent basis. The Pact lays down the obligation for Member States to adhere to the medium term objectives for their budgetary positions of 'close to balance or in surplus', as defined under country-specific considerations. Adjusting to such positions will allow Member States to deal with normal cyclical fluctuations without breaching the 3% of GDP reference value for the government deficit.

4. 
   External trade
   

The euro area economy is relatively open, particularly when compared with the world’s two other leading economies, the United States and Japan. Moreover, the trade openness of the euro area has increased noticeably since 1998, particularly as a result of growing trade with new EU Member States and China. Yet, the euro area is far less open than the economies of the individual euro area countries.

Trade in goods accounts for about 80% of euro area imports and exports. Comparing the sectoral composition of extra-euro area exports and imports, imports tend to have a larger share of energy and raw materials, while exports tend to be more heavily focused on processed goods. This reflects the international division of labour and the scarcity of raw materials in the euro area.

Geographical composition of euro area trade

The top 20 trade partners of the euro area account for 80% of overall euro area trade. The United Kingdom and the United States are the two largest trade partners of the euro area, At the same time, trade with new EU Member States and emerging economies has increased noticeably over the past decade.

External trade in goods of the euro area in 2009 (share of total as a percentage)
Sources: Eurostat and ECB calculations.
	Exports		Imports
Machinery and transport equipment	41.0		31.4
Chemicals	17.5		10.8
Raw materials	2.3		4.0
Energy	4.2		20.1
Food, drink and tobacco	7.2		6.7
Other manufactured articles	24.8		24.5
Other	3.1		2.6
Total	100		100
Trade weights ^1) of the euro area's 20 main trading partners (percentage points)
Sources: ECB calculations based on Eurostat trade data. 1) Trade weights are the sum of exports and imports expressed as total of extra-euro area exports and imports and are average figures for the period 1996 - 2009. 2) The other EU Member States comprise of Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Romania. 3) Special administrative region. Valorised
1		United Kingdom		15.43
2		United States		13.01
3		Other EU Member States ^2)		10.58
4		China		5.80
5		Switzerland		5.53
7		Russia		4.36
6		Japan		3.93
8		Sweden		3.67
9		Denmark		2.30
10		Turkey		2.22
11		Norway		2.09
12		Korea		1.58
13		Brazil		1.48
14		Taiwan		1.23
15		India		1.16
16		Canada		1.16
17		Saudi Arabia		1.10
18		Algeria		1.06
19		Singapore		1.06
20		Hong Kong ^3)		0.97

Effective exchange rates

Nominal EER: a geometric weighted average of the bilateral exchange rates of the euro against the currencies of a selection of trading partners.
Real EER: takes into account developments in relative prices between the euro area and its trading partners. They are calculated on the basis of consumer price indices, producer price indices, GDP deflators and unit labour cost indices - the latter for the total economy as well as for the manufacturing sector. It provides a measure of international cost and price competitiveness of the euro area.

Computation: nominal and real EER indices are currently computed against:

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  a narrow group of 12 partner countries (EER-12),
  
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  a group of 21 partner countries (EER-21), comprising the EER-12 plus China and the eight non-euro area EU Member States not included in the EER-12,
  
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  a broad group of 41 partner countries (EER-41), comprising the EER-21 plus 20 additional relevant trading partners (see table below for the complete list).
  

The EERs are constructed using moving weights, calculated on the basis of shares in euro area external trade in manufactured goods. The scheme combines information on exports and imports and accounts for so-called third-market effects, i.e. competition faced by euro area products in a partner country from products of a third country. The weighting schemes for the EERs are calculated on the basis of trade data referring to four periods: averages of 1995-97 are used in the construction of the series up to 1997; data from 1998-2000 and 2001-03 are used in the corresponding periods and weights based on data for 2004-06 are used in the calculation of the series from 2004 to the current period (see Box 5 in January 2010 ECB Monthly Bulletin). Developments in the EER-21 set of indices are regularly commented in the ECB Monthly Bulletin.

Trade weights used in the calculation of the EERs of the euro (2004-2006)
	EER-12	EER-21	EER-41
EER-12	100.0	71.3	57.2
Australia	1.5	1.0	0.8
Canada	2.5	1.7	1.3
Denmark	3.7	2.7	2.2
Hong Kong	3.1	2.0	1.6
Japan	11.6	8.3	6.7
Norway	1.9	1.3	1.0
Singapore	2.5	1.8	1.4
South Korea	5.4	3.9	3.2
Sweden	6.5	4.8	3.9
Switzerland	8.7	6.4	5.3
United Kingdom	24.7	17.8	14.3
United States	27.9	19.6	15.6
EER-21		28.7	23.4
Bulgaria		0.6	0.4
Czech Republic		4.1	3.4
Estonia		0.3	0.2
Hungary		3.1	2.5
Latvia		0.2	0.1
Lithuania		0.3	0.3
Poland		4.9	3.9
Romania		1.7	1.4
China		13.6	11.1
EER-41			19.4
Algeria			0.4
Argentina			0.3
Brazil			1.2
Chile			0.4
Croatia			0.5
Iceland			0.1
India			1.8
Indonesia			0.6
Israel			0.7
Malaysia			1.1
Mexico			1.2
Morocco			0.6
New Zealand			0.1
Philippines			0.4
Russia			2.9
South Africa			1.0
Taiwan			1.8
Thailand			1.0
Turkey			3.0
Venezuela			0.2

For details on the methodology underpinning the computation of the euro EER indices, see the Statistics section
 Background on the daily nominal effective exchange rate of the euro.

5. 
   Financial structure
   

The financial system channels funds from those who are net savers (i.e. who spend less than their income) to those who are net spenders (who spend more than their income).

The two main routes to channel funds from savers to borrowers are:

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  direct or market-based finance via financial markets (see top route in the chart below), and
  
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  indirect or bank-based finance via financial intermediaries (see the bottom of the chart below).
  

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Assets and liabilities in the euro area

As regards financial assets of the non-financial sector in the euro area, currency and deposits accounted for around 42% of total assets at the end of 2009, while securities and shares accounted together for around 31%. Insurance technical reserves accounted for the remaining 27%.

Loans accounted for 59% of total liabilities, whereas securities, including quoted shares, comprised around 40% of the financing sources of the non-financial sector.

6. 
   Financial markets
   

Financial markets can be divided into

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  money,
  
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  debt, and
  
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  equity markets.
  

Money market

The money market consists of the unsecured and secured ‘cash’ segments and derivatives segments. The money market in a broader sense also includes the market for short-term debt securities.

back to topDebt market

The amount outstanding of euro-denominated short-term debt securities issued by euro area residents totalled 16% of GDP at the end of 2009. For the first time since year 2000, all private sectors reduced their outstanding amount of short-term debt securities issued. By contrast, the outstanding amount of short-term debt issued by the public sector continued to increase.

back to topIn contrast, long-term debt securities accounted for more than 100% of GDP at the end of 2009. In this market, the public sector is the most important issuer, followed by the MFI sector and the other issuers of the private sector.

Equity market

Turning to the equity market, a commonly used indicator of its importance is the market capitalisation of stocks traded in terms of GDP. This indicator, albeit affected by movements in stock prices, shows that the equity market is less important than the debt securities market in the euro area. back to top

11.1.7.

1.