Spring 2004 Forecast Presentation UK

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Preliminary assessment of progress in
implementing the EERP
Alexandr Hobza, Directorate General for Economic
and Financial Affairs European Commission Brussel
s, 17 June 2009
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Part 1. Economic situation and challenges
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Economic situation

• The deepest and most widespread recession in the
  post-war era. GDP is forecast to contract by 4
  in the EU.
• all EU Member States share the recession
  experience, but it plays out differently across
  Member States
• The differential impact is strongly linked to
  weaknesses that pre-date the onset of the crisis.

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The EU forecast an overview
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Part 2. EU response to the slowdown
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• Europes response to the crisis
• Around 5 of EU GDP of overall support over
  2009-10 national Recovery plans (1.8) plus
  automatic stabilisers (2.7) plus extra budgetary
  measures (0.5)
• ECB key rate cut by 300 basis points to 1.25 in
  half a year
• Bank rescue plans in 19 countries (around 300
  bn in recapitalisation operations and 3 tln in
  bank guarantees)

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Macro-economic and fiscal policy

• Coordinated fiscal stimulus based on the
  principles for effective budgetary impulse
  timely, targeted and temporary
• Flexibility in applying the SGP rules
• EU sources providing 30 billion, including the
  EIB support to SMEs and automotive sector
• Lower interest rates and provision of liquidity
  by the ECB
• Balance of payment support HU, LV, RO

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Structural policy measures

• Measures compatible with long-term Lisbon
  objectives but also relevant in the short term
  toolbox of measures in the EERP
• State aid rules for sectoral aid (e.g. automotive
  sector)
• Guidelines for structural measures in the 4 March
  Communication ensure functioning of the
  internal market
• Guidelines for the design of labour market
  measures (dos and donts)
• Monitoring and follow-up to ensure effective
  coordination

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Part 3. Policy responses to support the real
economy
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Overview of recovery measures
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(No Transcript)
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Policy responses on labour market

• Labour market policies have been rather effective
  at stopping unemployment from shooting up.
• Large variation in composition of MS responses
  and large scope for policy learning between them.
• Few measures that might be difficult to reverse
  or undesirable in the short run.
• However, on current trends, policies would need
  to be intensified to avoid a very sharp rise in
  unemployment over 2009-2010.

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Policy responses to support investment and RD

• Most stimulus packages are considering
  traditional types of physical public investment.
• Significant packages to stimulate investment and
  energy efficiency but need to improve the skills
  of the workforce as an accompanying measure.
• More emphasis on smart investment, incl. high
  speed internet.
• Best performing MS are taking the most actions in
  RD ?Widening of gap between leaders and
  followers could be expected. Importance of
  implementing the ERA agenda.

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Policy responses to support the business
environment and sectors

• Sectoral support schemes are consistent with
  internal market and state aid rules however they
  could have important impact on the internal
  market through their differential effects on
  corporations.
• Need for more coordination at EU level if MS
  maintain sectoral support in the future.
• Design of measures to improve access to finance
  seems largely appropriate

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Part 3. Policy conclusions
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Future policy directions devising exit strategies

• Exit strategies are now needed for fiscal policy
  (towards sustainable paths), monetary policy
  (discontinuation of unconventional policy ad
  anchoring inflation expectations) and structural
  reforms (temporary working time reductions,
  sectoral support)
• Reform priorities have shifted. More focus on
  financial market regulation. Avoiding hysteresis
  in labour markets and tackling insider-outside
  problems. Support for RD and innovation to
  tackle the EUs productivity
• Background conditions for reforms have worsened
  need to undertake difficult fiscal consolidation.
  Effects of ageing population start to take hold.
  Political economy of requires a new narrative for
  a sceptical public.

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The impact of the crisis on potential growth

• Different scenarios are possible i.e. a full
  return to earlier path, a permanent loss in level
  terms only or a permanent loss on growth rates
• Critical challenges for the EU are to prevent
  hysteresis effects on the labour market and to
  avoid permanent damage to RD, innovation and
  risk taking
• Past crises (e.g. SE and FI) show that policy
  responses matter