Conclusion of 12 in-depth reviews - correcting macroeconomic imbalances

30 May 2012
by eub2 -- last modified 30 May 2012

The in-depth reviews are part of the Macroeconomic Imbalance Procedure, which was introduced to prevent and correct macroeconomic imbalances and which is being implemented for the first time this year. They cover twelve EU Member States, which were identified in the Alert Mechanism Report of 14 February 2012 as warranting further economic analysis in order to determine whether macroeconomic imbalances exist or risk emerging. These Member States are Belgium, Bulgaria, Cyprus, Denmark, Finland, France, Italy, Hungary, Slovenia, Spain, Sweden and the United Kingdom. Each of the twelve in-depth reviews examines the origin, nature and severity of possible macroeconomic imbalances. They assess whether the country is affected by an imbalance or not, and if it is, what the nature of the imbalance is. The reviews confirm that the twelve Member States concerned face macroeconomic imbalances which need to be corrected and closely monitored. They also conclude that the adjustment of economic imbalances is broadly proceeding, as reflected in reductions in current account deficits, convergence in unit labour costs, retrenchment in credit flows or corrections in housing prices. However, in some cases it is not clear to what extent the adjustment is complete and durable, or whether the speed of adjustment is adequate. In many cases, the accumulated internal and external imbalances continue to pose a formidable challenge, for example with regard to private and public sector indebtedness.

What was the purpose of the in-depth reviews?

The in-depth reviews are part of the Macroeconomic Imbalance Procedure (MIP) which was introduced to prevent and correct macroeconomic imbalances and which is being implemented for the first time this year. They cover twelve Member States, which were identified in the Alert Mechanism Report (AMR) of 14 February 2012 as warranting further economic analysis in order to determine whether macroeconomic imbalances exist or risk emerging. These Member States are Belgium, Bulgaria, Cyprus, Denmark, Finland, France, Italy, Hungary, Slovenia, Spain, Sweden and the United Kingdom. Each of the twelve in-depth reviews examines the origin, nature and severity of possible macroeconomic imbalances. They assess whether the country is affected by an imbalance or not, and if it is, what the nature of the imbalance is.

What are the overall findings of the in-depth reviews?

The analysis in the in-depth reviews confirms that the twelve Member States concerned face macroeconomic imbalances which need to be corrected and closely monitored. Many of the steps that need to be taken involve the adoption of measures that promote economic growth. Against this background, the EU's strategy to boost growth, employment and investment already encompasses many of the policy responses that should be adopted.

The reviews conclude that the adjustment of economic imbalances is making progress. This is reflected in witnessed by reductions in current account deficits, convergence in unit labour costs, retrenchment in credit flows or corrections in housing prices. However, in some cases it is not clear to what extent the adjustment is complete and durable, or whether the speed of adjustment is adequate. In many cases, the accumulated internal and external imbalances continue to pose a formidable challenge, for example with regard to private and public sector indebtedness. In this context of on-going adjustment, in some cases associated with a large stock of accumulated imbalances, the in-depth reviews explored specific challenges faced by the Member States concerned. The results underline the broad variety of the economic situations in Member States and the need for a country-specific approach.

Is the degree of imbalance comparable for the twelve EU Member States and which ones present bigger risks?

The nature of internal and external imbalances is specific for each country, so they cannot be compared. On the basis of the in-depth reviews, the Commission has concluded that each of the twelve countries has imbalances which are not excessive but need to be addressed nonetheless. Spain and Cyprus have serious imbalances, which are not excessive but need to be addressed urgently. The next most significant imbalances are in Slovenia and Hungary. The recommendations under the European Semester indicate the response needed for the policy challenges every Member State faces.

What are the main conclusions for each country?

The analysis of the in-depth reviews shows that all the Member States concerned are experiencing imbalances, which need to be addressed under the preventive arm of the Macroeconomic Imbalance Procedure.

• Belgium is experiencing imbalances, which are not excessive but need to be addressed. In particular, macroeconomic developments in the areas of external competitiveness of goods and indebtedness, especially the high level of public debt, deserve further attention so as to reduce the risk of adverse effects on the functioning of the economy.
• Bulgaria is experiencing imbalances, which are not excessive but need to be addressed. In particular, the level of external indebtedness as well as certain macroeconomic developments related to corporate sector deleveraging and the labour market adjustment process deserve attention so as to reduce the risk of adverse effects on the functioning of the economy.
• Denmark is experiencing imbalances, which are not excessive but need to be addressed. In particular, certain macroeconomic developments, notably underlying its external competitiveness and potential risks related to household indebtedness, deserve attention so as to reduce the risk of adverse effects on the functioning of the economy.
• Spain is experiencing very serious imbalances, which are not excessive but need to be urgently addressed. In particular, macroeconomic developments, notably related to the significant level of private sector debt, the large negative external position and the financial sector, which were influenced by housing market developments, require close monitoring and urgent economic policy attention in order to avert any adverse effects on the functioning of the economy and of economic and monetary union.
• France is experiencing serious imbalances, which are not excessive but need to be addressed. In particular, certain macroeconomic developments in the areas of export performance and competitiveness deserve attention so as to reduce the risk of adverse effects on the functioning of the economy.
• Italy is experiencing serious imbalances, which are not excessive but need to be addressed. In particular, high public indebtedness and macroeconomic developments in the area of export performance deserve attention as Italy has been losing external competitiveness since euro adoption. Given the high level of public debt, enhancing the growth potential should be a key priority so as to reduce the risk of adverse effects on the functioning of the economy.
• Cyprus is experiencing very serious imbalances, which are not excessive but need to be urgently addressed. In particular, macroeconomic developments as reflected in the current account, public finances and the financial sector require close monitoring and urgent economic policy attention in order to avert any adverse effects on the functioning of the economy and of economic and monetary union.
• Hungary is experiencing serious imbalances, which are not excessive but need to be addressed. In particular, certain macroeconomic developments such as the highly negative size of the net international investment position and public debt deserve very close attention so as to reduce the important risks of adverse effects on the functioning of the economy. Further to the assessment of effective action, and in line with the provisions of the EU Cohesion Fund regulation, the Commission has also adopted a proposal for a Council decision to lift the March 2012 suspension of the Cohesion Fund commitments.
• Slovenia is experiencing serious imbalances, which are not excessive but need to be addressed. In particular, macroeconomic developments related to corporate sector deleveraging and banking stability and unfavourable but less pressing development in external competitiveness deserve to be closely monitored, so as to reduce the important risks of adverse effects on the functioning of the economy.
• Finland is experiencing imbalances, which are not excessive but need to be addressed. In particular, macroeconomic developments relating to competitiveness deserve attention so as to reduce the risk of adverse effects on the functioning of the economy.
• Sweden is experiencing imbalances, which are not excessive but need to be addressed. In particular, certain macroeconomic developments regarding private sector debt and the housing market deserve attention so as to reduce the risk of adverse effects on the functioning of the economy.
• The UK is experiencing imbalances, which are not excessive but need to be addressed. In particular, macroeconomic developments in the areas of household debt and the housing market deserve attention, as do unfavourable but less pressing developments in external competitiveness, so as to reduce the risk of adverse effects on the functioning of the economy.

How is the enforcement of recommendations of the Macroeconomic Imbalance Procedure monitored?

The recommendations under the preventive arm of the Macroeconomic Imbalance Procedure form part of the package of country-specific recommendations put forward by the Commission for adoption by the Council under the European Semester. The implementation of the recommendations will be monitored closely and on an on-going basis by the Commission services. Moreover, there will be peer pressure from other EU Member States as the recommendations will be endorsed at the highest political level. In addition, the close scrutiny by financial markets is a strong incentive for governments to pursue structural reforms and to tackle unsustainable economic developments. Finally it should be noted that in the country-specific recommendations macroeconomic imbalances are addressed, with the aim of avoiding that they become excessive.

Are there sanctions foreseen in order to ensure the enforcement of the Macroeconomic Imbalance Procedure?

There are no fines foreseen under the preventive arm of the Macroeconomic Imbalance Procedure. However, if the Member State concerned do not take sufficient action to address the imbalances identified in the scope of the in-depth reviews, they risk that the imbalances build up further and that they will be placed under an Excessive Imbalance Procedure.

Under the Excessive Imbalance Procedure, financial sanctions (up to 0.1% of GDP) are foreseen if the Member States concerned fail to comply with the recommended corrective action. However, it should be highlighted that it is the failure to take agreed action that could be sanctioned, not the fact that the imbalance has not disappeared. A sanction can also be imposed for twice failing to submit a sufficient corrective action plan.

Will the Macroeconomic Imbalance Procedure from now on only cover twelve EU Member States?

No, the Commission will again assess all EU Member States, except the programme countries, in the next annual Alert Mechanism Report (AMR). Moreover, as signalled already in this year's AMR, the Commission will present, this autumn, a study on the drivers and policy implications of large and sustained current account surpluses. The results will be taken into account in next year's exercise.

On which criteria were the Member States selected for the in-depth reviews?

The in-depth reviews follow up on the result of the Alert Mechanism Report (AMR) presented on 14 February 2012. The Commission carried out an economic analysis on the basis of a scoreboard of ten economic indicators in the scope of the AMR to identify internal and external imbalances in EU Member States related inter alia to the export performance, competitiveness, indebtedness and asset price developments. There was no automatic interpretation of the results of the scoreboard indicators in the AMR, but rather a qualitative assessment. The analysis also took into account additional relevant information and economic indicators beyond the scoreboard with a view to getting a comprehensive picture.

What is the legal basis of the Macroeconomic Imbalance Procedure?

The Macroeconomic Imbalance Procedure is based on two regulations. The first (Regulation 1176/2011) sets out the details of the new surveillance procedure and covers all 27 Member States. The second (Regulation 1174/2011) focuses on enforcement, including the possibility of sanctions, and only applies to euro area Member States.

Europe 2020 website (for the Country-Specific Recommendations)

Source: European Commission