European Economics Analyst - tau.ac.ilyashiv/ecb_policy_gs_nov26.pdf · European Economics Analyst ... or fiscal policy incognito ... the crisis. Relative to pre-crisis levels (as

November 26, 2015

Issue No: 15/42

European Economics Analyst

Economics Research

Monetary policy in crisis mode, or fiscal policy incognito

The severity of the GFC has led major central banks to

expand their balance sheets substantially

The severity of the Global Financial Crisis (GFC) has led central banks to

place the expansion of their balance sheets at the heart of their response to

the crisis. Relative to pre-crisis levels (as a share of GDP), the balance

sheets of the US Federal Reserve, the Bank of England, the European

Central Bank and the Bank of Japan have increased by around (or more

than) three times over this period.

GFC has challenged the pre-crisis orthodoxy in the conduct

of monetary policy

As central banks recognised that financial frictions could be more

important (in magnitude and duration) than previously thought, they

adopted unconventional measures to ease the monetary policy stance

further when conventional instruments (namely setting the key policy

rates) had reached their (zero) lower bound and/or to overcome the

malfunctioning of financial market segments.

Unconventional measures have short-term macroeconomic

benefits but are not immune from ‘fiscal’ risks

Based on a simple macroeconomic model, we show that unconventional

measures by central banks (namely the active use of their balance sheets)

lead to greater macroeconomic stability in the short run (by limiting

dispersion of real output and inflation). In the long run, however, a

persistent and extensive use of unconventional ‘balance-sheet policy’ is

likely to blur the distinction between fiscal and monetary policies. In a

unitary system (like the UK and the US), the main long-term risk is

inflation. In a decentralised monetary union (like the Euro area), moving

towards a more ‘fiscalised monetary policy’ can put at risk the political

equilibrium underpinning Economic and Monetary Union (EMU).

Huw Pill +44(20)7774-8736 [email protected] Goldman Sachs International

Kevin Daly +44(20)7774-5908 [email protected] Goldman Sachs International

Dirk Schumacher +49(69)7532-1210 [email protected] Goldman Sachs AG

Andrew Benito +44(20)7051-4004 [email protected] Goldman Sachs International

Alain Durré +33(1)4212-1127 [email protected] Goldman Sachs Paris Inc. et Cie

Lasse Holboell Nielsen +44(20)7774-5205 [email protected] Goldman Sachs International

Matteo Leombroni +44(20)7552-0411 [email protected] Goldman Sachs International

Pierre Vernet +44(20)7552-0428 [email protected] Goldman Sachs International

Investors should consider this report as only a single factor in making their investment decision. For Reg AC certificationand other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.

The Goldman Sachs Group, Inc. Global Investment Research

November 26, 2015 European Economics Analyst

Goldman Sachs Global Investment Research 2

Monetary policy in crisis mode, or fiscal policy incognito

In the eight years since the onset of the financial crisis, the size and composition of central

banks’ balance sheets has changed significantly, as a consequence of the introduction of

unconventional monetary policy measures (notably asset purchase programmes). As a

share of GDP, the balance sheets of the US Federal Reserve, the Bank of England, the

European Central Bank and the Bank of Japan have increased by around (or more than)

three times over this period (Exhibit 1). In consequence, central bank sovereign bond

holdings now represent a significant share of total public debt outstanding (Exhibit 2).

There is little sign of a reversal in these trends. On our forecasts, both the ECB and the

Bank of Japan are set to announce further asset purchases in the coming months. Other

central banks are yet to entertain running down the asset holdings they accumulated in the

past. To illustrate, former Fed Chairman Bernanke last year argued that “there is absolutely

no need or requirement for the balance sheet to go back to normal as monetary policy

normalizes. The balance sheet could be kept where it is for a very long time if necessary”.

The expansion of their balance sheets has been at the heart of central banks’ response to

the financial crisis. Thankfully, a breakdown of the global financial system akin to what

happened during the Great Depression in the early 1930s has been avoided. Balance sheet

measures have been to the fore in this achievement. But large central bank purchases of

sovereign debt come with their own risks, in particular by blurring the distinction between

monetary and fiscal policies.

Exhibit 1: Central bank balance sheets expanded as non-

standard policies were introduced to address the crisis …Total central bank assets as a percentage GDP

Exhibit 2: … leaving central banks holding a large share

of outstanding public debt % of total public debt outstanding. * Predicted levels by end-

2017 assuming extension of current programme1

]

Source: Haver Analytics, Goldman Sachs Global Investment Research

Source: Haver Analytics, Goldman Sachs Global Investment Research

1 We expect an extension of the current asset purchase programme for both the European Central Bank (by 2017Q3) and the Bank of Japan (by the end of 2017). For a description of the respective assumptions, see “ECB asset purchases, now and later”, European Economics Daily, November 3, 2015 and “2016 Japan Outlook: Politics set to play a key role”, Japan Economics Analyst: 15/28.

0

10

20

30

40

50

60

70

80

1999 2001 2003 2005 2007 2009 2011 2013 2015

assets % of GDP

US Federal Reserve

European Central Bank

Bank of England

Bank of Japan

0

5

10

15

20

25

30

35

40

45

50

EuropeanCentral Bank

US FederalReserve

Bank of England Bank of Japan

% 2014 outstanding public debt

15.4%

45.0%

Predicted levels by end 2017*



In this European Economics Analyst, we discuss the economic, political and institutional

risks associated with the potential ‘quasi-fiscal’ impact of central bank balance sheet

expansion. While central banks are uniquely well-placed to address liquidity crises, in real

time it is likely to prove difficult – and potentially impossible – to distinguish liquidity issues

from solvency problems. And measures originally seen as an emergency response in the

face of an exceptional crisis have now become a standard part of the central bank

armoury.2 Designing a policy framework to manage the risks stemming from the growing

‘fiscalisation’ of monetary policy is an important challenge.

The structure of central bank balance sheets

Pre-crisis orthodoxy

Before the financial crisis, the orthodoxy prevailing among monetary policymakers

worldwide reflected two (interrelated) assumptions: (i) financial frictions (and thus financial

institutions and flows) were not central to understanding the behaviour of the macro-

economy and monetary policy transmission; and (ii) (by implication) ‘efficient’ financial

markets represented a satisfactory working hypothesis in the design of monetary policy.

These two assumptions led to the view that financial quantities, in general – and the size

and composition of the central bank’s balance sheet, in particular – are not central to an

analysis of how the economy and macroeconomic policies worked.3 Rather, within the pre-

crisis orthodoxy, the design and structure of the central bank’s balance sheet should be

geared towards serving the goal of steering short-term market interest rates via the

operational framework for monetary policy implementation. Short-term interest rates were

viewed as the key instrument of monetary policy.

This strand of thinking in turn led to concrete implications for the implementation of

monetary policy. Legitimate central bank actions were as follows:

Do satisfy private-sector demand for liquidity (given that producing the money

balances to achieve this is costless, i.e., follows the so-called ‘Friedman rule’4).

Do stand ready to provide (emergency) liquidity against collateral (as long as this

collateral is ‘good enough’ – this is the so-called ‘Bagehot’s rule’5).

Do use the central bank’s balance sheet, but only to steer and smooth short-term

interest rates.

Similarly, within this pre-crisis orthodoxy the following central bank actions were forbidden

so as to safeguard ‘monetary dominance’ over price developments (and thus preserve the

ability of the central bank to pursue its price stability mandate):

Do not take on risk (especially credit risk).

2 See “Defining the ECB’s ‘neutral’ balance sheet,” European Economics Analyst: 15/28. 3 These assumptions are epitomised in the work of Michael Woodford. The Sargent and Wallace ‘irrelevance

theorem’, in particular, states that because long-term bonds and short-term bonds are perfect substitutes, asset purchase policies will have no real effects. See in particular Sargent, T. and N. Wallace (1975), “Rational Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule”, Journal of Political Economy, Vol.83, April), pp. 241-254.

4 The Friedman rule states that transactions balances should be fulfilled because these balances are costless to produce. The corollary is that the interest rate representing the opportunity cost of holding transactions balances should be set equal to zero. See Friedman, M. (1968), “The Role of Monetary Policy”, American Economic Review, March, Vol. 58, pp.1-17, and Bagehot, W. (1873), Lombard Street, a description of the money market, Third Edition, Henry S. King & Co, London.

5 More precisely, Bagehot’s rule states that the central bank should stand ready to lend freely, against good collateral, at a penalty rate. There is, however, some dispute over what Bagehot actually meant. De Long, for example, argues that Bagehot did not assert that central banks should lend only against good collateral, but rather that central banks should lend against collateral that would be good “in ordinary times” – that is, lend to institutions that would be solvent if the crisis were to ease, not merely to institutions that are immediately solvent.



Do not finance the government (either directly or indirectly).

Do not assume fiscal responsibilities vis-à-vis third parties (for example, by

subsidising specific sectors).

Do not interfere in market functioning (implying a ‘hands-off’ approach to the

implementation of monetary policy).

On these principles, the pre-crisis monetary policy regime thus embodied three

characteristics: (i) a narrowly-defined mandate focused on price stability (typically in the

form of an inflation target); (ii) central bank independence – by which monetary

policymakers were insulated from any ‘political’ influence which would deflect the central

bank from its mandate; and (iii) a ‘narrow’ central bank balance sheet, oriented to steering

short-term market interest rates close to the policy rate.

Challenges to the pre-crisis orthodoxy

Experience of the financial crisis challenged the pre-crisis orthodoxy in many respects:

The crisis demonstrated the importance of financial frictions (and thus financial

institutions, capital markets and financing flows) to the evolution of the economy.

The initial liquidity stress morphed into a more severe ‘adverse selection’ problem,

causing a seizing up of (mostly interbank) transactions owing to uncertainties over

counterparty credit risk.

The 2007-08 episode amply demonstrated the potential for costly episodic financial

stress.

The unconventional monetary policy responses to the challenges of the financial crisis

reflect the departures from the pre-crisis orthodoxy listed above. They have resulted in a

significant increase in the size and change in the composition of the ECB’s balance sheet

over time (Exhibit 3).

Exhibit 3: The implementation of the asset purchase programme has changed both the

size and the composition of the ECB’s balance sheet

Source: ECB, Goldman Sachs Global Investment Research

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Jan 07 Aug 07 Sep 08 Oct 08 Jul 10 Jun 12 Jun 15 Sep 16*

Other Securities of EA Residents LTRO MRO Asset purchases

€1.1tr APP

EURbn

Change in SIZE andCOMPOSITION of ECB's balancesheet

Change in COMPOSITIONof ECB's balance sheet (size remained unchanged)



Post-crisis challenges

In Box 1, we outline our framework for thinking about the post-crisis challenges to the pre-

crisis orthodoxy. In short, we take a standard macroeconomic model (similar in spirit to

those used by central bank research departments) and we introduce three new elements

(the interbank market as a part of banks’ funding, financial frictions due to concerns about

a counterparty’s solvency and fiscal limit) that capture the deficiencies exposed by recent

events.

This framework allows us to distinguish between the real effects of three distinct financial

shocks: (i) a pure liquidity shock, (ii) a pure credit shock and, most importantly, (iii) a hybrid

shock – neither a pure liquidity shock nor a pure credit shock, but rather a shock where

credit and liquidity issues are inextricably linked – in which concerns about counterparty

credit risk lead to adverse selection in the money market and a seizing up of interbank

transactions.

Box 1: Analytical framework to simulate monetary policy responses to economic shocks

The theoretical framework we use to analyse the responses of the central bank to (liquidity, credit and hybrid)

shocks relies on a dynamic stochastic general equilibrium model. This type of model is used by central banks

to discuss policy scenarios based on a set of assumptions representing the functioning of the economy.

In our setting,6 we add a banking system in which banks collect funds from households (through deposits), the

central bank and the interbank market in order to invest in private projects (with a varying degree of risk). As

some private projects can default – thereby weakening the profitability of banks – increased concerns about the

solvency of banks facing unprofitable investments lead households to withdraw their deposits (banks have

private information about the riskiness of their assets, and this asymmetric information can instigate liquidity

hoarding). It also encourages the other financial intermediaries to reduce their transactions in the interbank

market due to the adverse selection phenomenon. We also introduce a ‘fiscal limit’ on the government (it

cannot either raise taxes and/ or cut public spending further to respect its intertemporal budget constraint).

When financial frictions occur in the banking sector, actions by both the central bank (to substitute for the

disruptive interbank market) and the government (to tackle insolvency in the banking sector) are able to contain

the disruption in loan markets and thereby prevent the collapse of the economy. However, if the government

reaches the fiscal limit, fiscal space for its actions is reduced, forcing the central bank to do more.

The exhibits in the main text illustrate the reaction of the central bank balance sheet (Exhibit 4) and inflation

(Exhibit 5) when the central bank faces a credit shock. Similarly, in the presence of a hybrid shock, Exhibits 6

and 7 show the reaction of real output and inflation respectively. The reactions of these macroeconomic

variables to both shocks are simulated in two different policy scenarios: (a) when the central bank only uses its

conventional (policy-rate) instrument, or (b) when it complements it with unconventional measures (namely

asset purchases).

6 In practice, we extend the theoretical setting discussed in Gertler and Karadi (2013) by introducing an interbank market (offering funding alternatives to banks) and by complementing the conventional monetary policy measures (namely, the setting of the interest rate) with unconventional measures (namely, an active use of the central bank balance sheet through an asset purchase programme). Finally, the escalation of concerns about counterpart solvency leading eventually to a seizing up of interbank transactions is inspired by the analysis in Heider et al. (2015). See Gertler, M. and P. Karadi (2013), “A model of unconventional monetary policy,” Journal of Monetary Economics, Vol. 58, pp. 17-34; and Heider, F., M. Hoerova and C. Holthausen (2015), “Liquidity hoarding and interbank market rates: The role of counterparty risk,” Journal of Financial Economics, forthcoming.



Each of these three shocks has different effects in our model. Although we use a highly

stylised description of the Euro area economy, our three central results illustrate that –

depending on the root cause of the crisis – unconventional measures taken by the central

bank to mitigate its aftermath can have quite distinct implications in the long run.

In the case of a pure liquidity shock (e.g., failure of the computing that matches

demand and supply of interbank liquidity), it is optimal for the central bank to satisfy

liquidity demand by banks. Thus, the Friedman rule holds and unconventional

monetary policy (responding to this shock) has no real effects. In this situation, the

liquidity provision by the central bank reflects fluctuations in liquidity demand. No

excess liquidity emerges and the size of the central bank balance sheet does not

matter.

In the case of a pure credit shock, concerns about the capital position (solvency) of

banks disrupt the interbank market through which banks fund themselves. This raises

the cost of credit while restricting its amount, which would ultimately flow to

productive firms. Unconventional measures in the form of buying risky assets can

then stabilise macroeconomic variables. If undertaken by the central bank, the change

in the size of its balance sheet is greater (than just relying on (conventional) interest

rate tools) and the price stability objective can be maintained as long as the

intertemporal budget constraint on the consolidated government and central balance

sheet is respected (Exhibit 4-5).

In the case of a hybrid shock – that is, a shock to the economy which is neither a

pure liquidity shock nor a pure credit shock, but leads to a loss of market liquidity

owing to tensions stemming from concerns about the solvency of individual banks

and uncertainty over which banks are sound and which are not – the central bank has

incentives to intervene to continue the flow of funds between the initial saver and the

final borrower. Unconventional monetary policy (in the form of an asset purchase

programme), possibly complemented by the use of the (conventional) interest rate

instrument, will have real (positive) effects. A hybrid shock increases the probability of

default on real investments, which decreases the value of private assets and thereby

affects (negatively) output and inflation. Therefore, the central bank may have an

interest in implementing unconventional monetary policy measures to ensure

transmission of its monetary policy stance through both the liquidity and the credit

channels. This would reduce further dispersion of both real output and inflation

(Exhibits 6-7). Despite the undisputable macroeconomic benefits in the short run, if

the central bank satisfies banks’ demand in the presence of a hybrid shock, this

inevitably has fiscal implications, which may erode the integrity of monetary policy

over time.

The exhibits below illustrate the main results of our macroeconomic model in the case of

both a pure credit shock (Exhibits 4-5) and a hybrid shock (Exhibits 6-7). In short, rising

concerns in the market about counterparty solvency are reducing the funds of banks as

deposits are decreasing and the interbank market is seizing up, as explained in Box 1.

Then, the central bank has the choice between two options in responding to each shock:

either to decrease its policy rate only (namely the conventional monetary policy) or to

bear credit risk through (unconventional) asset purchases in addition to the policy rate cut

(namely unconventional and conventional monetary policy as labelled in the exhibits

below). In essence, these charts show that the use by the central bank of both

conventional and unconventional monetary policies brings more stabilisation of

macroeconomic variables (namely real output and inflation) than when the central bank

solely uses the (conventional) interest rate instrument (the pink lines in the exhibits below

are smoother than the dark red lines in practice).



Exhibit 4: In a credit shock, the central bank’s balance

sheet increases substantially with asset purchases … Reaction of the central bank balance sheet to credit shock

when conventional (change in policy rate) and/or

unconventional (asset purchases) monetary policy is used

(percentage point)

Exhibit 5: … but asset purchases limit more inflation

dispersion Reaction of inflation to credit shock when conventional

(change in policy rate) and/or unconventional (asset

purchases) monetary policy is used (percentage point)

Source: Goldman Sachs Global Investment Research


Exhibit 6: In the case of a ‘hybrid’ shock, asset purchases

also smooth both real output … Reaction of real output to hybrid shock when conventional



Exhibit 7: … and inflation dynamics more than in the case

of a conventional policy reaction alone Reaction of inflation to hybrid shock when conventional





The fiscalisation of central bank balance sheets

As we have illustrated through the lens of our simple macroeconomic model, any shock

other than a pure liquidity shock inevitably introduces fiscal considerations into the actions

used to combat it. There are clear short-term benefits from the stabilisation of

macroeconomic variables (i.e., lower dispersion of both real output and inflation) when the

central bank uses both conventional and unconventional measures to respond to a credit

or a hybrid shock. However, this situation is not immune from risks in the long run. In

particular, a persistent and extensive use of unconventional ‘balance-sheet policy’ would

blur the lines between fiscal and monetary policy responsibilities. This would also have the

potential to threaten the policy objective of the central bank over time.

-0.5

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1 2 3 4 5 6 7 8 9 10

ConventionalMonetary Policy

Unconventional +ConventionalMonetary Policy

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ConventionalMonetary Policy

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Conventional Monetary Policy

Unconventional + ConventionalMonetary Policy

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Conventional Monetary Policy

Unconventional + ConventionalMonetary Policy



In such an environment, what really matters is the resilience of the consolidated public

sector balance sheet – that is, the combined balance sheet of the monetary authority (the

central bank) and the fiscal authority (the government). Unconventional measures used

during the recent crisis, such as ‘quantitative easing’ and ‘credit easing’ policies, imply

different intertemporal transfers. The former operates an intertemporal transfer within the

consolidated public-sector balance sheet (with a risk of weakening fiscal discipline). By

contrast, the latter implies a transfer from the public-sector balance sheet to that of the

private sector, by which the central bank directly influences the consolidated fiscal situation.

But both measures contain quasi-fiscal ingredients.

As long as the intertemporal budget constraint on the consolidated government and

central bank balance sheet is respected, the integrity of monetary policy can be maintained.

But this can be hard to achieve in practice, especially when fiscal authorities face a fiscal

limit, which in turn reduces fiscal space. When fiscal space is more limited – that is, public

debt levels are already high and the resilience of fiscal institutions is low – the risks to

macroeconomic stability stemming from unconventional monetary policy are greater.

Among the various risks that could emerge from such a situation (e.g., threatening the

credibility and accountability of the central bank), the most immediate one is a gradual

move towards a ‘fiscalised monetary policy’. In a unitary monetary system (such as in the

UK and the US) the threat of fiscalisation is inflation, which is quite some way off. In a

decentralised monetary system (like the Euro area, where monetary policy is ‘global’ but

fiscal policy is ‘local’), the threat of the fiscalisation of monetary policy puts at risk the

political equilibrium underpinning the monetary union. Indeed, fiscalisation can be seen as

leading institutions to deviate from the original separation of responsibilities embodied in

the Treaty, which has the potential, in turn, to create severe political tensions. Our analysis

suggests that this risk is nearer and would be more difficult to counter.

Alain Durré, Cristina Manea* and Adrian Paul*

*The underlying analysis was conducted when Cristina and Adrian were summer interns in

the European Economics team.



Key European Indicators

Financial conditions have stabilised in the Euro area over

the past few months, having tightened in the summer European financial conditions

Business sentiment has moved sideways in the Euro area

recently European business sentiment

Source: Goldman Sachs Global Investment Research. Source: Markit, SVME, Swedbank, Goldman Sachs Global Investment Research.

Our Euro area Current Activity Indicator points to growth

of 1.6%qoq annualised Euro area GDP, Current Activity Indicator

Our UK Current Activity Indicator is consistent with

growth of 2.6%qoq annualised UK GDP and Current Activity Indicator

Source: Haver Analytics, Goldman Sachs Global Investment Research. Source: Haver Analytics, Goldman Sachs Global Investment Research.

Having converged significantly, bank lending rates

remain somewhat volatile % pa, interest rates on business loans up to €1mn with

maturity between 1 and 5 years

We expect inflation to rise at the end of 2015, owing to

base effects in both the Euro area and the UK Inflation forecasts

Source: Goldman Sachs Global Investment Research. Source: Eurostat, ONS, Goldman Sachs Global Investment Research.

91

93

95

97

99

101

103

10 11 12 13 14 15 16

Euro areaUKSwedenNorway

TighterConditions

IndexJul. 2008=100

30

35

40

45

50

55

60

65

70

09 10 11 12 13 14 15 16

Index

Euro area Composite PMI

UK Composite PMI

Switzerland Manufacturing PMI

Sweden Manufacturing PMI

-12

-10

-8

-6

-4

-2

0

2

4

6

07 08 09 10 11 12 13 14 15 16

% qoqannl.

Euro cai - full set

gdp qoq annl

-12

-10

-8

-6

-4

-2

0

2

4

6

07 08 09 10 11 12 13 14 15 16

% qoqannl.

UK cai - full set

gdp qoq annl

2.0

3.0

4.0

5.0

6.0

7.0

06 07 08 09 10 11 12 13 14 15 16

GermanyFranceItalySpain

%

-1

0

1

2

3

4

5

6

08 09 10 11 12 13 14 15 16 17 18

% yoy Euro area HICP

UK CPI

GS Forecast



Main Forecasts

Economic Forecasts

*Mainland GDP growth Source: Goldman Sachs Global Investment Research

Interest Rates

Source: Goldman Sachs Global Investment Research, Bloomberg. Close 25 November 2015. *GS end-year forecast

2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 2016

Euro area 0.9 1.5 1.7 0.4 0.1 1.1 2.4 3.2 3.0 -2.6 -2.4 -1.7Germany 1.6 1.5 1.7 0.8 0.2 1.9 7.4 8.2 7.9 0.3 -0.5 0.1

France 0.2 1.2 1.4 0.6 0.1 0.8 -0.9 -0.2 -0.1 -3.9 -3.8 -3.4

Italy -0.4 0.8 1.6 0.2 0.2 0.6 2.0 2.1 1.9 -3.0 -2.8 -2.2

Spain 1.4 3.1 2.5 -0.2 -0.6 0.5 1.0 1.1 1.7 -5.9 -4.4 -3.0

UK 2.9 2.5 2.7 1.5 0.1 1.1 -5.1 -3.5 -2.5 -4.8 -3.6 -2.6Switzerland 1.9 0.9 1.3 0.0 -1.1 -0.1 7.3 6.9 5.6 0.0 0.1 0.4Sweden 2.4 3.1 3.4 -0.2 0.0 1.4 6.2 7.0 6.2 -1.9 -1.7 -0.8Denmark 1.1 1.8 2.3 0.3 0.4 1.3 7.8 8.4 8.7 1.8 -3.0 -2.8Norway* 2.3 1.4 1.8 2.0 2.3 2.8 9.4 8.9 10.3 - - -Poland 3.3 3.6 3.4 0.0 -0.9 1.2 -2.0 -0.4 -1.2 -3.3 -3.0 -2.9Czech Republic 2.0 4.5 2.7 0.4 0.4 1.2 0.6 1.0 -0.5 -1.9 -1.9 -1.9Hungary 3.6 2.6 2.6 -0.2 -0.1 2.2 2.3 3.5 1.3 -2.6 -2.7 -2.7

Consumer Prices GDP Current Account Budget Balance (Annual % change) (Annual % change) (% of GDP) (% of GDP)

(%)Spot Forecast* Forward Forecast* Forward Forecast* Forward Forecast* Forward

Germany 3M -0.1 0.0 -0.2 -0.1 -0.3 -0.1 -0.1 0.2 0.110Y 0.5 0.5 0.5 0.8 0.6 1.2 0.8 1.8 1.0

UK 3m 0.6 0.6 0.6 1.1 0.9 1.6 1.3 2.1 1.610Y 1.9 2.0 1.9 2.4 2.1 2.8 2.3 3.3 2.5

Switzerland 3M -0.8 -0.3 -1.0 -0.3 -1.1 0.0 -1.0 0.5 -0.810Y -0.3 -0.2 -0.4 0.3 -0.2 0.7 -0.1 1.3 0.1

Sweden 3M -0.4 -0.3 -0.4 0.0 -0.3 0.5 0.1 1.3 -10Y 0.7 0.9 0.7 1.3 0.9 1.8 1.2 2.3 1.4

Norway 3M 1.2 0.8 0.7 0.7 0.7 1.1 0.8 1.6 -10Y 1.5 1.6 1.5 1.9 1.6 2.2 1.7 2.8 1.7

2015 2016 2017 2018



European Calendar

Focus for the Week Ahead

On Thursday, the ECB Governing Council will meet in

Frankfurt for its regular monetary policy meeting. We

expect the Governing Council to ease monetary policy.

More specifically, we expect the ECB’s deposit facility to be

lowered by 10bp to -30bp and the Asset Purchase

Programme (APP) to be extended through the end of 2017.

The flash estimates of Headline CPI Inflation will be

released for Spain, Italy, Germany and the Euro area next

week.

On Thursday December 3, the November final PMIs are

released for a number of countries.

Euro area composite PMI data have been choppy of late

Sources: Eurostat, Goldman Sachs Global Investment Research

Economic Releases and Other Events

30

35

40

45

50

55

60

65

70

07 08 09 10 11 12 13 14 15 16

Index

Euro area

Germany

France

Country Economic Statistic GS Cons. mom/qoq yoy

Fri 27 Nov

United Kingdom 00:05 GFK Consumer Confidence Nov — — 2 —France 07:45 Consumer Spending Oct — — +0.0%mom +2.6%Spain 08:00 Harmonised CPI Nov P — — +0.3%mom -0.9%Italy 09:00 Business Confidence Nov — 106 105.9 —Euro area 10:00 Consumer Confidence Nov F — — -6 —Euro area 10:00 Business Confidence Nov — 0.45 0.44 —

Mon 30 Nov

United Nations — Climate Change Conference — — — — —Switzerland 08:00 KOF Leading Indicator Nov — — 99.8 —Sweden 08:30 GDP 3Q — — +1.1%qoq +3.3% wdaUnited Kingdom 09:30 Mortgage Approvals Oct — — +GBP68.9k —Italy 10:00 Harmonised CPI Nov P — — +0.5%mom +0.3%Germany 13:00 Harmonised CPI Nov P — — +0%mom +0.2%

Tue 1 Dec

Switzerland 06:45 GDP 3Q — — +0.2%qoq —Sweden 07:30 PMI - Manufacturing Nov — — 53.5 —Spain 08:15 PMI - Manufacturing Nov — — 51.3 —Switzerland 08:30 PMI - Manufacturing Nov — — 50.7 —Italy 08:45 PMI - Manufacturing Nov — — 54.1 —France 08:50 PMI - Manufacturing Nov F 50.8 — 50.8 —Germany 08:55 Unemployment Rate Nov — — 6.4% —Germany 08:55 PMI - Manufacturing Nov F 52.6 — 52.6 —Italy 09:00 Unemployment Rate Oct P — — 11.8% —Euro area 09:00 PMI - Manufacturing Nov F 52.8 — 52.8 —United Kingdom 09:30 PMI - Manufacturing Nov — — 55.5 —Euro area 10:00 Unemployment Rate Oct — — 10.8% —

Wed 2 Dec

Euro area 10:00 Harmonised CPI Nov — — — +0.1%

Thu 3 Dec

Spain 08:15 PMI - Composite Nov — — 55 —Spain 08:15 PMI - Services Nov — — 55.9 —Italy 08:45 PMI - Composite Nov — — 53.9 —Italy 08:45 PMI - Services Nov — — 53.4 —France 08:50 PMI - Services Nov F — — 51.3 —France 08:50 PMI - Composite Nov F 51.3 — 51.3 —Germany 08:55 PMI - Composite Nov F 54.9 — 54.9 —Germany 08:55 PMI - Services Nov F 55.6 — 55.6 —Euro area 09:00 PMI - Services Nov F 54.6 — 54.6 —Euro area 09:00 PMI - Composite Nov F 54.4 — 54.4 —United Kingdom 09:30 PMI - Composite Nov 53.3 — 55.4 —United Kingdom 09:30 PMI - Services Nov — — 54.9 —Euro area 10:00 Retail Sales Oct — — +2.9%Euro area 12:45 ECB Meeting — — — —

Fri 4 Dec

Germany 07:00 Factory Orders Oct — — — -1% wdaSpain 08:00 Industrial Production Oct — — — +3.8% saSwitzerland 08:15 Consumer Prices Nov — — — -1.4%Sweden 08:30 Industrial Production Oct — — — +6.3%

Source: Bloomberg, Goldman Sachs Global Investment Research. Economic data releases are subject to change at short notice in calendar. Complete calendar available via the Portal — https://360.gs.com/gs/portal/events/econevents/.

Time (UK)

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