Book Description

On 14 February 2012, the European Commission presented its first Alert Mechanism Report (AMR), prepared in accordance with Article 3 of Regulation (EU) No. 1176/2011 on the prevention and correction of macroeconomic imbalances. The AMR serves as an initial screening device, helping to identify Member States that warrant further in-depth analysis to determine whether imbalances exist or risk emerging. According to Article 5 of Regulation No. 1176/2011, these country-specific ?in-depth reviews? should examine the nature, origin and severity of macroeconomic developments in the Member State concerned, which constitute, or could lead to, imbalances. On the basis of this analysis, the Commission will establish whether it considers that an imbalance exists and what type of policy follow-up it will recommend to the Council. The AMR suggested the need to look more closely at whether the UK is suffering from macroeconomic imbalances of an internal and external nature. The AMR noted that, on the internal side, the high level of private debt is a concern, also in a context of a weak public finance situation with high and increasing government debt. The high value of private debt largely reflects household mortgages in a context of high accumulated increases in house prices. While both the levels of real household debt and real house prices have reduced, they still remain comparatively high which suggests that their unwinding has further to go where the speed of adjustment is an important aspect. On the external side, the UK lost export market share over the last decade, although some stabilisation can be noted in recent years. This loss of market shares took place despite a substantial depreciation of sterling between 2007 and 2009. At the same time and since 1997, the UK recorded small but significant current account deficits albeit below the indicative threshold. The purpose of the present in-depth review is to investigate the findings presented in the AMR and to ascertain whether macroeconomic imbalances of either an internal or external nature effectively exist in the UK and, if so, whether they are excessive in the meaning of Regulation no. 1176/2011. Sections 2 and 3 of this review analyse the existence and nature of potential macroeconomic imbalances in the UK. Section 2 takes a broad perspective of the UK economy, while section 3 focuses on two potential areas of concern for the UK: household debt and the housing market on the one hand, and external competitiveness on the other hand. Section 4 presents possible policy considerations.