EEAG Report 2016 Europe: What next?

John Driffill

22 February 2016

Figure 1. 1

Contents

• Macroeconomic conditions and outlook

• Intergenerational Fairness

• Tuning Secondary Education

• Denmark: Too good to be true?

• The Western Balkans: Coming together

Figure 1. 2

Macroeconomic Outlook

Figure 1. 3

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

70

80

90

100

110

120

130

08 09 10 11 12 13 14 15

Regional contributions to world trade

and industrial production

Index (2008Q1=100) %

a) Three month moving average level. b) Contribution to annualised monthly growth rate thereof.

Source: CPB Netherlands Bureau for Economic Policy Analysis, World Trade Monitor: October

2015.

World tradea)

(left-hand scale) Advanced economiesb)

(right-hand scale)

Emerging and developing

countriesb)

(right-hand scale)

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

65

70

75

80

85

90

95

100

105

110

115

08 09 10 11 12 13 14 15

World industrial productionIndex (2008Q1=100) %

World industrial

productiona)

(left-hand scale)

Advanced economiesb)

(right-hand scale)

Emerging and developing countriesb)

(right-hand scale)

World trade

Figure 1. 4

-60

-40

-20

0

20

40

60

80

100

120

140

-3

-2

-1

0

1

2

3

4

5

6

7

06 07 08 09 10 11 12 13 14 15

% change over previous year's month % change over previous year's month

Source: International Monetary Fund, International Financial Statistics, last accessed on 1 January 2016.

Inflation in the world and oil price movements

Oil price changes

(dollar) (right-hand scale)

Inflation in the

world (left-hand scale)

Inflation in the euro area (left-hand scale)

Figure 1. 5

06 07 08 09 10 11 12 13 14 15 16

Ifo World Economic Survey

Economic situation

Source: Ifo World Economic Survey IV/2015.

North

America

Western

Europe

Asia Latin

America

bad

good

satisfactory

Figure 1. 6

-10

-8

-6

-4

-2

0

2

4

6

06 07 08 09 10 11 12 13 14 15

-10

-8

-6

-4

-2

0

2

4

6

Change in inventories

Foreign balance

Final domestic demand (excl. inventories)

a) Annualised quarterly growth.

Source: US Bureau of Economic Analysis, last accessed on 1 January 2016; EEAG calculations.

Contributions to GDP growtha) in the United States

%

Seasonally adjusted data

Real GDP

growth

%

Figure 1. 7

a) In constant prices, seasonally adjusted and work-day adjusted.

Source: US Bureau of Economic Analysis, last accessed on 1 January 2016.

Business cycle developments in the United States

-6

-4

-2

0

2

4

6

8

9750

10000

10250

10500

10750

11000

11250

11500

2008 2009 2010 2011 2012 2013 2014 2015

Consumption(left-hand scale)

Annualised quarterly

growth rates (right-hand scale)

Private consumptiona)

Billion US dollars %

-30

-20

-10

0

10

20

30

1800

2000

2200

2400

2600

2800

3000

2008 2009 2010 2011 2012 2013 2014 2015

Annualised quarterly

growth rates (GFCF)(right-hand scale)

Gross fixed capital formation (left-hand scale)

Gross capital formation (left-hand scale)

Gross fixed capital formationa)

Billion US dollars %

-600

-500

-400

-300

-200

-100

0

100

1500

1600

1700

1800

1900

2000

2100

2200

2008 2009 2010 2011 2012 2013 2014 2015

Trade balance (right-hand scale)

Imports(left-hand scale)

(left-hand scale)

Exports

Foreign tradea)

Billion US dollars Billion US dollars

Figure 1. 8

3

5

7

9

11

13

3

5

7

9

11

13

06 07 08 09 10 11 12 13 14 15

% of labour force

Japan

Euro area

United Kingdom

United States

Source: OECD, Main Economic Indicators, Ministry of Human Resources and Social Security, China, last

accessed on 11 January 2016.

Unemployment rates% of labour force

Figure 1. 9

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

2008 2009 2010 2011 2012 2013 2014 2015

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

United States China

Japan United Kingdom

Euro area

% change over previous year's month

Source: US Bureau of Labor Statistics, Statistics Bureau of Japan, National Bureau of Statistics of China, Eurostat;

last accessed on 1 January 2016.

Inflation rates

% change over previous year's month

-2

-1

0

1

2

3

4

2008 2009 2010 2011 2012 2013 2014 2015

-2

-1

0

1

2

3

4

United States

China

Japan

United Kingdom

Euro area

% change over previous year's month

Source: US Bureau of Labor Statistics, Statistics Bureau of Japan, National Bureau of Statistics of China, Eurostat;

last accessed on 1 January 2016.

Core inflation rates

% change over previous year's month

Figure 1. 10

-12

-9

-6

-3

0

3

6

06 07 08 09 10 11 12 13 14 15

-12

-9

-6

-3

0

3

6

Change in inventories

Foreign balance

Final domestic demand (excl. inventories)

Contributions to GDP growtha) in the European Union

%

Seasonally adjusted data

Real GDP growth

a) Annualised quarterly growth.

Source: Eurostat, last accessed on 1 Janaury 2016; EEAG calculations.

%

Figure 1. 11

Source: Eurostat, last accessed on 1 Janaury 2016.

Business cycle developments in the European Union

-4

-3

-2

-1

0

1

2

3

4

1810

1820

1830

1840

1850

1860

1870

1880

1890

08 09 10 11 12 13 14 15

Consumption(left-hand scale)

Annualised quarterly growth rates (right-hand scale)

Private consumptiona)

Billion euros %

-25

-20

-15

-10

-5

0

5

10

600

625

650

675

700

725

750

775

08 09 10 11 12 13 14 15

Annualised quarterly growth rates (GFCF) (right-hand scale)

Gross fixed capital formation (left-hand scale)

Gross capital formation(left-hand scale)

Gross fixed capital formationa)

Billion euros %

-50

0

50

100

150

200

250

300

350

400

450

1050

1100

1150

1200

1250

1300

1350

1400

1450

1500

1550

08 09 10 11 12 13 14 15

Trade balance (right-hand scale)

(left-hand scale)

ExportsImports

(left-hand scale)

Foreign tradea)

Billion euros Billion euros

a) In constant prices, chain-linked volumes, reference year 2010, seasonally adjusted and work-day adjusted.

Figure 1. 12

-1

0

1

2

3

4

2008 2009 2010 2011 2012 2013 2014 2015

-1

0

1

2

3

4

% change over previous year's month

a) Harmonised Index of Consumer Prices (HICP). b) HICP excluding energy, food, alcohol and tobacco.

Source: Eurostat, last accessed on 11 January 2016.

Price developments in the euro area

HICPa)

Core inflation rateb)

% change over previous year's month

GDP deflator

Figure 1. 13

0

5

10

15

20

25

30

0

5

10

15

20

25

30

05 06 07 08 09 10 11 12 13 14 15

Germany France

Italy Spain

Greece Portugal

Ireland Cyprus

Unemployment rates in selected countries of the euro area

Source: Eurostat, last accessed on 1 January 2016.

% of labour force % of labour force

Figure 1. 14

-12

-10

-8

-6

-4

-2

0

06 07 08 09 10 11 12 13 14 15 16

-12

-10

-8

-6

-4

-2

0% of GDP

United States

Euro area

Japan

Source: OECD, OECD Economic Outlook, Vol. 2015 issue 2, November.

Government structural budget balances

United

Kingdom

% of GDP

Forecast

period

Figure 1. 15

-50

0

50

100

150

200

250

300

350

400

0

20

40

60

80

100

120

140

160

180

2009 2010 2011 2012 2013 2014 2015

Persons (in thousands) % change over previous year's month

Source: Eurostat, last accessed on 1 January 2016.

First-time asylum applicants in the European Union

Growth in first-time asylum applicants(right-hand scale)

Number of first-time asylum

applicants (left-hand scale)

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

First-time asylum applicants in 2014 and 2015

0.00

0.50

1.00

1.50

2.00

2.50

First-time asylum applicants in 2014 and 2015 as percentage of the population

Share EU

Figure 1. 16

-15

-10

-5

0

5

10

15

-15

-10

-5

0

5

10

15

2015 2010-2014 2008/2009 Total improvement during 2010-2015

% of GDP in 2007 % of GDP in 2007

Changes in the primary fiscal balances relative to pre-crisis GDPa)

a) Below the horizontal axis at zero deteriorations of the primary fiscal balance are reported; above this line

improvements are shown. The sum of the three bars result in the overall change during 2008-2015.

Source: European Commission, DG ECFIN, General Government Data and AMECO, Autumn 2015.Figure 1. 17

0

1

2

3

4

5

6

06 07 08 09 10 11 12 13 14 15 16

0

1

2

3

4

5

6%

Main refinancing

rate (ECB, euro area)

Federal target rate

(Fed, United States)

Bank rate (BoE,

United Kingdom)

Target policy rate

(BoJ, Japan)

Source: European Central Bank; Federal Reserve Bank of St. Louis, Bank of England, Bank of Japan,

last accessed on 1 January 2016.

Central bank interest rates%

Figure 1. 18

0

200

400

600

800

1,000

1,200

1,400

1,600

0

200

400

600

800

1,000

1,200

1,400

1,600

08 09 10 11 12 13 14 15

Billion euros Billion euros

Liquidity provision by the ECB

a) Monthly average of main and longer-term refinancing operations, marginal lending facility and securities

held for monetary policy purposes. b) Monthly average of the use of fixed-term deposits at the ECB. c) Monthly

average of excess reserves at the ECB. d) Monthly average of all securities held for monetary purposes.

Source: European Central Bank, last accessed on 1 January 2016.

Net liquidity provision

Fixed-term depositsb)

Liquidity providing measuresa)

Direct Purchasesd)

Excess reservesc)

Figure 1. 19

-4

-2

0

2

4

6

8

10

12

98

100

102

104

106

108

110

112

114

08 09 10 11 12 13 14 15a) These indexes of adjusted outstanding amounts are calculated according to It = It-1(1+Ft/Lt-1), where L stands for

the outstanding nominal amount of credit and F the amount of transactions (credit granted). The transactions F are

calculated from differences in outstanding amounts adjusted for reclassifications, other revaluations, exchange rate

variations and other changes which do not arise from transactions (see European Central Bank, 2010, for details). A

specific securitisation operation in France has led to a downward level shift in mortgages in May 2014.

Source: European Central Bank, last accessed on 1 January 2016.

Index (2007=100) % change over previous year's month

Corporate credit

Credit developments in the euro areaa)

Mortgages

Consumer credit

Bars: year-on-year growth

Lines: indexed levels

Figure 1. 20

0

1

2

3

4

5

6

0

1

2

3

4

5

6

08 09 10 11 12 13 14 15 16

10-year government bond yields

%

a) The synthetic euro area benchmark bond refers to the weighted average yield of the benchmark bond series

from each European Monetary Union member.

Source: Datastream, last accessed on 1 January 2016.

Japan

United States

China

Euro areaa)

%

United Kingdom

Figure 1. 21

-4

0

4

8

12

16

-10

0

10

20

30

40

08 09 10 11 12 13 14 15 16

Greece (left-hand scale)

Portugal

Ireland

Italy

Spain

Belgium

France

Austria

Finland

Netherlands

Germany

% points

Source: Datastream, last accessed on 1 January 2016.

Regional disparties w.r.t. government bond yields in the euro areaDifferences between 10-year national and synthetic euro area benchmark bond yields

% points

Figure 1. 22

0

1

2

3

4

5

6

7

8

9

0

1

2

3

4

5

6

7

8

9

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

France Germany Greece Ireland Italy Portugal Spain Euribor

%

a) New loans to non-financial corporates up to one million euros using floating rates or up to 1 year initial rate

fixation. The Euribor rate is based on secured interbank loans with a maturity of one year.

Source: European Central Bank, last accessed on 1 January 2016.

Interest rates on loans to businesses

in selected countries of the euro areaa)

%

Figure 1. 23

40

60

80

100

120

140

160

180

40

60

80

100

120

140

160

180

08 09 10 11 12 13 14 15 16

DJ Industrial Average

Shanghai SE Composite

Nikkei 225

FTSE 100

Euro STOXX 50

Index (2007=100)

a) Stock market indexes outside the euro area are first converted into euros.

Source: Datastream, last accessed on 1 January 2016.

Developments in international stock markets

from an euro-area perspectivea)

Index (2007=100)

Figure 1. 24

0

20

40

60

80

100

120

140

160

0

20

40

60

80

100

120

140

160

08 09 10 11 12 13 14 15 16

CAC 40 (France) DAX (Germany)

MIB (Italy) IBEX 35 (Spain)

Athex (Greece) PSI (Portugal)

ISEQ (Ireland)

Index (2007=100)

Source: Datastream, last accessed on 1 January 2016.

Developments of selected stock markets within the euro areaIndex (2007=100)

Figure 1. 25

70

80

90

100

110

120

130

140

150

70

80

90

100

110

120

130

140

150

08 09 10 11 12 13 14 15

Index (2007=100)

Real effective exchange rates around the world

Euro area

United Kingdom

United States

JapanChina

Source: Bank for International Settlements, last accessed on 1 January 2016.

Index (2007=100)

Figure 1. 26

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

06 07 08 09 10 11 12 13 14 15 16

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70US dollars per euro

a) The nominal exchange rate is based on monthly data, while the exchange rate based on purchasing power parity

(PPP) is given at a quarterly frequency. The US dollar-euro PPP rate is calculated as the GDP-weighted average of

the euro country-specific PPP estimates vis-à-vis the US dollar. The PPP upper bound represents the 90th percentile

of the euro country-specific PPP estimates vis-à-vis the US dollar; the lower bound the 10th percentile. In calculating

these bounds the 11 euro area member countries with the largest GDP weights are used. Source: OECD, OECD

Economic Outlook, Vol. 2015 issue 2, November , European Central Bank, last accessed on 1 January 2016.

US dollars per euro

Exchange rate of the euro against the US dollar and PPPa)

Exchange rate

Purchasing

Power

Parity

Lower bound

Upper bound

Figure 1. 27

Figure 1. 28

4.95.5 5.7

3.1

0.0

5.4

4.23.4 3.3 3.4 3.1

3.6

40

60

80

100

120

05 06 07 08 09 10 11 12 13 14 15 16

-2

0

2

4

6

Real GDP growth

Ifo World Economic Climate

World economic growth and the Ifo World Economic Climate

% Index (2005=100)

(left-hand scale)

(right-hand scale)

a)Arithmetic mean of judgements of the present and expected economic situation.

Source: IMF, World Economic Outlook, October 2015; GDP 2015 and 2016: EEAG forecast;

Ifo World Economic Survey IV/2015.

a)

Figure 1. 29

-3

-2

-1

0

1

2

3

4

5

06 07 08 09 10 11 12 13 14 15 16-3

-2

-1

0

1

2

3

4

5

Other countries

Latin America and Russia

Asia

North America

Western and Central Europe

World GDP growth

Regional contributions to world GDP growtha)

%

a) Based on market weights.

Source: IMF; EEAG calculations. 2015 and 2016: EEAG forecast.

%

Forecast

period

Figure 1. 30

06 07 08 09 10 11 12 13 14 15 16

Source: Ifo World Economic Survey IV/2015.

Ifo World Economic SurveyEconomic expectations for the next six months

North

America

Western Europe

Latin America

Asia

worse

better

about the

same

Figure 1. 31

3

5

7

9

11

13

15

06 07 08 09 10 11 12 13 14 15 16-6

-4

-2

0

2

4

6

United States

Japan

European Union

China (right-hand scale)

Economic growth by regionReal GDP percentage change from previous year

% %

Source: BEA; Eurostat; ESRI; National Bureau of Statistics of China; 2015 and 2016 EEAG forecast.

Forecast

period

Figure 1. 32

33

-45

-35

-25

-15

-5

5

15

25

35

-45

-35

-25

-15

-5

5

15

25

35

08 09 10 11 12 13 14 15 16

Confidence indicatorsa) for different sectors

in the European Union

a) Arithmetic means of selected (seasonally adjusted) balances on business and consumer tendency survey

questions. Balances are constructed as the difference between the percentages of respondents giving positive and

negative replies. Source: European Commission, last accessed on 11 January 2016.

Balance Balance

(Non-fin.)

services

Financial

services

Construction

Retail trade

Industry

Consumers

Figure 1.

-12

-8

-4

0

4

8

12

94

96

98

100

102

104

106

08 09 10 11 12 13 14 15 16

Annualised quarterly growth (right-hand scale)

Annual growth

GDP (left-hand scale)

Source: Eurostat; EEAG calculations and forecast.

Index (2007=100) %

Real GDP in the European Union

Seasonally adjusted data

1.4

-4.4

1.82.1

-0.5 0.2

Forecast

period

1.8

0.5

Figure 1. 34

-5

-4

-3

-2

-1

0

1

2

3

4

06 07 08 09 10 11 12 13 14 15 16-5

-4

-3

-2

-1

0

1

2

3

4

External balance

Changes in inventories

Gross fixed capital formation

Government consumption

Private consumption

GDP growth

Demand contributions to GDP growth in the European Uniona)

a) Gross domestic product at market prices (prices of the previous year). Annual percentage change.

Source: Eurostat; EEAG calculations and forecast.

%

Forecast

period

%

Figure 1. 35

-4

-2

0

2

4

101

103

105

107

109

111

05 06 07 08 09 10 11 12 13 14 15 16 17

Annualised quarterly growth (right-hand scale)

Annual growth

Employment (left-hand scale)

Employment in the European UnionSeasonally and work-day adjusted data

Index (2002=100) %

Source: Eurostat; EEAG calculations and forecast.

Forecast

period

-1.6

-0.7

1.3

1.0

1.7

1.91.1

0.2 -0.4-0.3

1.0

Figure 1. 36

6

7

8

9

10

11

12

13

6

7

8

9

10

11

12

13

06 07 08 09 10 11 12 13 14 15 16

%

Unemployment rates in the euro area and the European Union

Source: Eurostat; EEAG calculations and forecast.

Seasonally adjusted data

Forecast

period

European

Union

Euro area

%

Figure 1. 37

-3

-2

-1

0

1

2

3

4

Source: Eurostat, last accessed on 1 January 2016; 2015 and 2016: EEAG forecast.

-1

0

1

2

3

4

5

6

7

-1

0

1

2

3

4

Economic growth in the EU member countries

Average real GDP growth, 2005–2014

Real GDP growth, 2015

Real GDP growth, 2016

European Union

European Union

European Union

%

%

%

Figure 1. 38