The European Commission (EC) presented reports under the so-called European Semester — a procedure for coordinating economic policy in EU Member States. This procedure concerns structural and fiscal policies and the prevention of macroeconomic imbalances. In addition, for 13 countries the reports presented to the Economic and Financial Affairs Council also contain in-depth analyses of macroeconomic imbalances, for which the European Commission identified the existence of imbalances in a separate publication “Alert Mechanism Report”. For 11 of them (in the vast majority the Eurozone countries), this is at least the second in-depth analysis.
For seven countries, the EC found that the scale of the reduction of imbalances in at least one area was unsatisfactory. The EC has also carried out in-depth analyses of the situation in two additional countries, Greece and Romania. In the case of Greece, this was due to the termination of the stabilization assistance program. Participation in the program has so far excluded Greece from the EC’s activities under the European Semester. According to the EC’s assessment, Romania is facing a loss of price competitiveness due to the dynamic growth of the minimum wage in previous years. Both countries are likely to be analyzed in depth next year as well.
However, as in the previous year, it is already possible to check what the available data for most of 2018 say about imbalances in the EU countries. In 2018, GDP growth in almost 70 per cent of Member States was lower than in the previous year. According to the IMF’s World Economic Outlook economic growth in the Eurozone is expected to decline to 1.3 per cent in 2019 from 1.8 per cent in 2018 to 1.5 per cent in the following years. According to the EC’s reports the process of reducing the scale of imbalances in the EU countries is slightly slower than right after the European debt crisis in 2010-2012.
The number of exceedances of the reference values set by the European Commission has been stable for four years now, after the imbalances in the labor market in the Member States of the Union have significantly decreased.
Improvement in the labor market and competitiveness
As a consequence of the improvement in the labor market, unit labor costs started to increase faster, but this was compensated for by narrowing other imbalances, including in the public finance sector.
Thanks to the favorable economic climate, labor market imbalances have virtually disappeared in recent years in almost all Member States. In 2018, the criterion of the unemployment rate, set by the EC at the level of 10 per cent, was exceeded only in the southern European countries (the highest unemployment rate was in Greece and Spain). None of the EU countries breached the criterion of the long-term unemployment rate and the youth unemployment rate. These criteria are exceeded if the long-term unemployment rate increases by more than 0.5 percentage points within three years and the youth unemployment rate by more than 2 percentage points.
All countries have seen their long-term unemployment rates and, with the exception of Malta, youth unemployment rates fall. Long-term unemployment has fallen by as much as 10 percentage points in Greece and Spain. However, the labor force participation rate decreased in Spain and Croatia (by more than 0.2 percentage points), which means that these countries, as the only ones in the EU, did not meet the criterion set by the EC for this rate.
The improvement in the labor market in the previous years was reflected in an increase in employment costs, which led to a certain deterioration in cost competitiveness. In 2018, nominal unit labor cost growth accelerated in all EU Member States except Bulgaria and Latvia, where it remained one of the highest. As a result, the reference value for nominal unit labor cost growth (9 per cent or 12 per cent in the last three years, depending on the Eurozone membership) was exceeded by more countries than in the previous year. These were almost all the countries of the Central and Southeast Europe (CSE) (the cumulative increase in unit labor costs in the last three years in the case of Romania was close to 30 per cent), but also one of the countries of southern Europe — Portugal — where the increase was 11 per cent.
However, it is too early to say to what extent the weaker competitiveness affects the position of EU Member States in world trade. In the H2’18, the EU’s share in international trade was lower than two years earlier. To the greatest extent, i.e. by 0.24 per cent, it decreased in Germany, which may be partly related to the problems of the automotive sector.
However, the EC is analyzing the change of position in international trade over the last five years. In the meantime, 19 out of 28 EU countries have increased their share in world trade. In particular, Germany (by 7.2 per cent), and economically related CSE countries have improved their position in world trade since the crisis, by 8.9 per cent. (Slovakia) to 36.6 per cent (Croatia). In the years 2013-2018, the number of countries with too significant — in the EC’s opinion — loss of markets was systematically decreasing (by 6 per cent within five years). The strongest (over 10 per cent) decline in international trade in the last five years was observed in the United Kingdom (except for Luxembourg, where data may be distorted by the activity of international corporations).
As a result of the improved position in international trade over the last five years, the majority of EU countries recorded current account surpluses in 2018. In four of them, the current account surpluses were higher than the criterion adopted by the EC (6 per cent of GDP on the average in the last three years). Among these countries were Germany, where the current account surplus in the last three years averaged over 8 per cent of GDP. In the remaining Member States, the current account balance was only slightly negative, and in most of them even slightly deteriorated. In 2018, however, it turned out to be too low in the light of the Commission’s criteria (-4 per cent of GDP on the average over the last three years) only for the UK and Cyprus.
In 2018, as in the previous year, the net international investment position improved, with few exceptions. However, this improvement was less spectacular than previously, and the reference value (-35 per cent of GDP) was exceeded by more than 70 per cent of the EU countries, mainly from the CSE and the Eurozone Member States most affected by the debt crisis. In some cases — Ireland, Greece or Portugal — the ratio of net international investment position to GDP exceeded 100 per cent.
Still significant debt
The ratio of public and private debt to GDP remains particularly high in many European countries. The reference value set by the EC for public debt (60 per cent of GDP) is exceeded in as many as half of the EU Member States, wherein in seven cases by more than 1.5 times. The same applies to private debt, for which the EU criterion is 133 per cent of GDP. In two countries (Luxembourg and Cyprus) it exceeds 300 per cent of GDP, partly due to intra-group debt.
In 2015-2018, the level of public and private sector debt of the more indebted EU Member States decreased systematically, which was facilitated by the reduction of the scale of imbalances in the public finance sector and the deleveraging process, and in earlier years also by relatively high GDP growth.
Public debt in 2018 increased in only two EU countries, Greece and Cyprus, both reaching its highest level ever. In Greece, it is as high as 182 per cent of. GDP. Private debt increased in Scandinavian countries — in Sweden it is approaching 200 per cent of GDP — and in the CSE countries, where it is still almost half the reference value set by the Commission.
The rise in private indebtedness in some economies has been accompanied in recent years by rising housing prices. After the European debt crisis, property prices have also risen in all EU countries except Italy. In the last two years, the dynamics of real estate prices in developed European countries has weakened. However, the prices of flats in these countries are even about 30-40 per cent higher than at the height of the European debt crisis in 2011.
The increase in the real estate prices in the CSE was maintained in 2018, and in some of them even accelerated, but — except for Slovenia — to a still moderate level, below 5 per cent, y/y in real terms (a measure adopted by the EC). As a result, in 2018, the reference value set by the Commission for the dynamics of housing prices (6 per cent y/y in real terms) was exceeded by only four EU Member States, all from the Eurozone.
Poland is stable on a macro-sustainable basis
Since the start of the excessive imbalance procedure in 2011, Poland has remained one of the most balanced European countries in terms of macroeconomic balance.
The scale of the increase in the labor force participation rate and the decrease in the unemployment rate, including long-term unemployment and youth unemployment, is clearly higher than the average in the Union. The labor force participation rate has risen by 2.3 percentage points over the last three years, in comparison with the EU average of 1.6 percentage points. According to the EC’s measure, Poland’s long-term unemployment rate is only 1 per cent, which means that, along with the Czech Republic and Denmark, it has the lowest unemployment rate in the whole Europe.
At the same time, current account balance — despite some decline at the end of 2018 — remains only slightly negative. The negative net international investment position, the only indicator that in the case of Poland exceeds the reference value set by the EC since the beginning of the survey, narrowed significantly in 2018. Recently published NBP (Poland’s central bank) data indicate that the net international investment position decreased to 55.6 per cent of GDP in Q4’18. from 61 per cent of GDP a year earlier. Foreign debt has also been reduced. Similarly, as in other EU countries, the good economic situation in Poland, which has lasted for several years, translates into some balance indicators analyzed in annual reports by the EC.
This applies in particular to the real estate prices in Poland, whose dynamics has increased in recent years, but remains slightly lower than the average for the CSE. Nevertheless, in the light of data on financial accounts, private debt on an unconsolidated basis increased in 2018, but was stable in relation to GDP (81.6 per cent of GDP in Q3’18 in relation 81.2 per cent of GDP at the end of 2017). The stable ratio of private debt to GDP has been accompanied in recent years by a gradual decline in this ratio for public debt, to the level of 48.9 per cent of GDP in 2018. As a result, the levels of public and private debt in relation to GDP are among the lowest in the EU.
The favorable situation on the labor market has contributed to an increase in the dynamics of unit labor costs (up to 8.3 per cent cumulatively over the last three years), but also in this case the dynamics remains lower than the EU thresholds. Despite the rising costs of employment, Poland was still a country with one of the fastest growths in the share of world trade among the EU countries. Over the last five years it has increased by 25 per cent. (i.e. up to 1.4 per cent from 1.1 per cent).
Both Poland and the vast majority of European countries are entering a phase of economic slowdown with a much more sustainable economy than before the global financial crisis and the European debt crisis. However, there are some question marks. In many European countries, the imbalances built up during this crisis are persisting, in particular, public and private debt is high. Moreover, real estate prices in the 11 Member States are higher in real terms than they were just before the global financial crisis. European economies may therefore be more vulnerable to external shocks, especially leading to higher financing costs.
Patrycja Beniak is an economist in Poland’s central bank, NBP.
The views expressed in this article are the private views of the author and are not an expression of the official position of the NBP.