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de Marin Pana 12.12.2016
In terms of economic balances, we rank 2nd, tied with Poland and behind the Czech Republic, the only country that successfully met all the requirements imposed by the procedure for macroeconomic imbalance.
The Macroeconomic Imbalance Procedure (MIP) is a supervisory mechanism aimed at early identifying the risks of macroeconomic instability in a country and correcting them. Precisely the stable position that we hardly won in the recent years by meeting almost all criteria required made us attractive, beyond the well-known deficiencies that we have in infrastructure and the functioning of the business environment.
First, a few technical explanations
The scoreboard that initially included ten indicators considered essential to describe the evolution of a national economy. They increased later to 11 and currently there are 14 performance criteria used for warning on potential problems; problems that might underlie a move to a more thorough analysis for the states where that is a need.
Besides the preventive side, MIP also comprises a corrective aspect translated into the Excessive Imbalance Procedure. Under this procedure, there is a series of gradual measures taken for bringing the key indicators within the accepted limits and they might extend to applying sanctions to the Eurozone countries, if they repeatedly violate the recommendations.
The mechanism for monitoring the potential macroeconomic issues has been established in December 2011 as part of the so-called “six-pack” package. It is noted that the assessment of whether a country falls within the limits set is based on an analysis that takes into account the correlations of the moment, by separating between the benign slippages and those having potential to escalate and cause systemic shortcomings.
The European Commission can approve preventive recommendations to the member states, in accordance with Article 121.2 of the EU Treaty even in the early stage of the imbalances, before they develop. Recommendations can be made at the end of May each year in the context of the so-called European Semester for coordinating the economic and budgetary policies at the EU level.
A member state that falls under the macroeconomic imbalance procedure must submit a corrective action plan comprising clear objectives and deadlines. The implementation of this plan will be monitored and recorded by regular reports. A first failure in achieving the objectives is to be sanctioned by opening an interest bearing deposit that can turn into a fine.
What the scoreboard indicators are and how many countries are within the limits required
The 14 indicators initially set for the scoreboard refer to:
- External and competitiveness imbalances:
- The average current account balance of the past 3 years (allowed values between -4% of GDP and + 6% of GDP)
Noteworthy is that 5 countries do not comply with this criterion, but three of them because they have a too large surplus from the foreign trade (Netherlands with + 9.1%; Denmark, with + 8.8% and Germany with +7.5%). On the opposite side are the UK with -4.8% and Cyprus with -4.1%. Romania registered -1%.
- Net international investment position (liability stock below 35% of GDP)
No fewer than 15 EU countries fail to meet this criterion, because of the substantial foreign investment and their own relatively low investment in other countries, including Romania (-51.9%). This is the criterion where the Czech Republic narrowly surpassed us, a country that reached -30.7%, while Poland is a little weaker though than us, with -62.8%.
- Change of the effective real exchange rate in the last three years compared to 42 foreign trade partner countries (between -5% and + 5% for the Eurozone and between -11% and + 11% for the rest of the EU member states)
Five countries fell outside the required limits, including the UK that exceeded a little the limit with + 11.3%, but the pound devalued in the meantime, and Estonia with + 6.4%. At this criterion, Romania has an optimum level of + 2.7%, while the other 16 countries that met the criterion were within the negative range.
- The share of country exports in the world exports to not decrease by more than 6% in the last five years
Surprisingly, 11 EU member states have not passed this criterion (including Belgium, Denmark, the Netherlands, Austria, Sweden and Finland, which marked a value of -20.5%, almost identical to the red flashlight Greece, with -20.6 %). Romania is again very well, with + 21.1%, which would be the best performance in the EU if we excluded Ireland’s statistical adventures, of little relevance, and a mini-country as Luxembourg. Maybe we should be more attentive to this aspect, to value correctly what brought us out of the crisis and recalibrate again the growth from the domestic toward the foreign markets.
- Nominal unitary costs of workforce (expressed as a ratio between the average pay of an employee and real GDP divided by the number of employed people) to not increase by more than 9%, for the Eurozone countries, and 12% for the rest of the EU members, over the last 3 years.
Only four countries have not done their homework at this chapter, namely the Baltics and our Bulgarian neighbours, accidentally or not all of them being connected to the euro currency as fixed baseline. Unfortunately, although we took a correct decision at the time of the crisis in 1997 – 1998 for the controlled leu floating regime, it seems that now we want to jeopardize this indicator through the populist measures adopted lately.
- Internal imbalances:
- Real increase of housing prices (below 6% per year)
Six EU countries fail to meet this criterion, the highest increases being registered in Sweden somewhat naturally, by 12.0%, but carefully, also at our Hungarian neighbours, by + 11.6%. We are for now at + 1.7%, but the increased revenues of the households could change the situation quite quickly.
- Private flow of credit, consolidated (below 14% of GDP)
Only Luxembourg does not fit this criterion and we are at + 0.2%.
- Private sector debt (allowed level of below 160% of GDP)
13 countries do not fall under this level and the private sector’s over-indebtedness is obvious in many Western economies, including France, the Netherlands, Spain, Sweden, Finland. Romania is at 59.1%.
- Public debt (below 60% of GDP)
With 37.9% based on the European methodology, we are apparently well at a criterion that raises the biggest problems in the EU. No fewer than 17 states do not meet the requirements, including Germany, with 71.2%, despite the efforts made in the recent years to reduce public debt against a background of a current account surplus of over seven percent of which we can only dream. Therefore, we should hold on this asset that we have, but that would require a budget deficit of maximum 1.8% of GDP (according to the EU estimates) to not unleash the increase of public debt.
- Average unemployment rate (recent three-year average below 10%)
12 states do not fall under this threshold, while we are at a reasonable 6.9%.
- Total liabilities of the financial sector, non-consolidated (change from the previous year below 16.5%)
All EU countries meet this criterion, even Greece, at a pinch. We are at + 4.1%.
- Employment indicators
- Total activity rate for people aged between 15-64 (3-year change below -0.2%)
The situation based on this criterion also looks good across all member states, with Romania being at a fair level of + 1.3%.
- Long term unemployment, as% of active population aged between 15-74 (3-year change below 0.5%)
7 member states do not comply with this requirement. Romania is on a stationary position with 0%.
- Youth unemployment, as% of active population aged between 15-24 years (3-year change below 2%)
Only 3 countries do not fit with Italy and Cyprus having an increase by about 5 percent, and the surprising occurrence of Finland (+ 3.4%). As for us, although we meet (yet) this criterion, the figures from the previous two criteria explain the minus 0.9 percent that illustrates the evolution for the future in terms of economic growth and higher pensions for the elderly.
Situation of the EU countries based on the requirements of the macroeconomic scoreboard:
- 14 of 14 – the Czech Republic
- 13 of 14 – Romania, Poland
- 12 of 14 – Germany, Slovenia, Slovakia
- 11 of 14 – Austria, Sweden, Luxembourg, Malta, Croatia, Bulgaria, Latvia, Lithuania
- 10 of 14 – France, Spain, Portugal, UK, Denmark, Estonia, Hungary
- 9 of 14 – Italy, Belgium, Holland, Finland
- 8 of 14 – Ireland *, Greece
- 5 of 14 – Cyprus
* Eurostat discount data on IrelandAltogether, we marked a very good evolution in 2015 and we should keep these balances at all costs to a level that would make us attractive for investment and support a long-term robust growth.
Unfortunately, given a partially incompetent political establishment, partially irresponsible, we move – because of the populist measures taken last year and this year – towards reactivating certain imbalances that can put us out of the path.
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