|
|
The euro area economy grew at its fastest pace in a decade in 2017, but growth has moderated since then and the outlook is now less favourable as documented in the Winter Economic Forecast of the European Commission. The loss of momentum since last summer reflects the euro area’s sensitivity to weakening world trade as well as country- and sectorspecific developments in recent months. Barring major shocks, we expect GDP to continue expanding, but at a slower pace, and the road ahead is fraught with uncertainty and numerous, interconnected risks. Most of these risks are political in nature (trade dispute between US and China, Brexit, fiscal policy uncertainty) so the right policies will help to defuse them. Against this background our economic policy recommendations for the euro area call for reforms to boost GDP potential and economic resilience, achieve an appropriate fiscal stance, differentiating according to available space, and promoting investment in countries with large current account surpluses. These actions will prepare the euro area economy to tackle future shocks.
This Quarterly Report on the Euro Area provides policy-oriented research on some important developments that affect the proper functioning of the euro area. Specifically, it examines the drivers and the dynamics of sovereign bond yields and flows over the past two decades, and it explores how completing the Capital Markets Union (CMU) could strengthen economic resilience in the euro area. Finally, it provides analysis of developments in the labour income share at national and sectoral level over the 2000-2017 period and considers the policy implications based on these trends.
The first section provides a retrospective of sovereign bond dynamics in the euro area Member States since the introduction of the euro, taking stock of both the price and flow dimensions. The crisis period was characterised by highly asymmetric dynamics across groups of euro area countries, which according to model-based results, appear to have been driven partly by fundamentals (e.g., differences in debt ratios) but also by other factors exacerbated by bouts of illiquidity and divergent and time-varying market sensitivities with respect to the fundamentals. The latter are, among other things, suggestive of flights to safety. Unconventional monetary policy was as an important driver of yields in recent years, contributing to stabilising sovereign debt markets and bringing down overall bond yields. The empirical evidence also points to important instances of cross-border reversals in debt and bond flows in the wake of the 2007-2008 financial crisis, both within the euro area and with respect to the US.
The second section examines how a well-functioning, diversified and integrated Capital Markets Union can contribute to the strengthening of economic resilience in the euro area. The most direct positive effect of the CMU on resilience would come from the greater opportunities for risk dispersion and diversification that the cross-border holding of assets in a CMU will provide. A Capital Markets Union could also accelerate recoveries by facilitating the reallocation of resources and reducing financial market fragmentation and frictions that hamper the transmission of monetary policy in the euro area. However, in order to achieve this, certain barriers still need to be overcome including the corporate sector’s over-reliance on bank financing, the strong ‘home bias’ of credit and capital markets, a lack of transparency, and the fragmented nature of regulatory and institutional frameworks. The Capital Markets Union should also be complemented by other euro area level reforms, such as the introduction of a common budgetary capacity, further deepening of the Single Market and the completion of the Banking Union.
The third section analyses the evolution of the labour income share at the national and sectoral levels across euro area Member States for the 2000-2017 period. National labour income shares are strongly countercyclical, but there differences among countries and some evidence of convergence. For most euro area Member States, the evolution of the national labour share observed is attributable to intra-sectoral changes, particularly the reduction in the manufacturing sector and the increase in the business services sector. The results confirm that technological progress and capital deepening are the main Marco Buti Director-General 6 | Quarterly Report on the Euro Area determinants of sectoral labour shares. The findings reported in this section highlight the complexity of targeting the labour share directly using existing labour market policy instruments– if such a policy were desired.
Overall, the evidence provided in this edition of the QREA points to the need to boost the “indigenous” engines of domestic growth - and relying less on the external environment – and to underpin the monetary union by a strong national and euro area institutional framework while also tackling challenges of inclusiveness more effectively. This would make the economy of the euro area more resilient and less exposed to external shocks.