On July 8, 2019, the Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation
on euro area policies with member countries.
Euro area growth slowed in 2018 but is expected to firm up over the
course of 2019. Domestic demand is expected to remain resilient on the
back of tight labor markets and external demand is projected to improve
in the second half of the year. Growth is forecast to pick up from 1.3
percent in 2019 to 1.6 percent in 2020, before moderating to slightly
below 1½ over the medium term. Headline inflation continues to exhibit
some volatility, mainly due to energy price fluctuations, but core
inflation remains subdued. Inflation is projected to take several years
to durably converge to the European Central Bank’s objective of below,
but close to 2 percent.
There are significant downside risks to the outlook. Prolonged or
elevated trade tensions could undermine exports and investment. The
risk of a no-deal Brexit remains high. If realized, this could cause
short-term disruptions for the euro area, as well as longer-term output
losses. Countries with high public debt have not consolidated
sufficiently leaving them vulnerable to shocks. Even in the absence of
a major shock, there is a risk the euro area could experience a
prolonged period of anemic growth and inflation.
Executive Board Assessment
Directors welcomed the projected growth recovery, while noting that
inflation remained subdued despite stronger wage growth. However, they
expressed concerns about risks from rising trade tensions, a possible
no-deal Brexit, and vulnerabilities in high-debt countries, and called
for appropriately tailored monetary and fiscal policies supported by
acceleration of structural and architectural reforms.
Directors agreed that monetary policy should remain accommodative until
inflation is sustainably converging to the ECB’s objective. They
welcomed the recent extension of forward guidance to help achieve a
sustained pickup in inflation. Targeted macroprudential policies could
be used to address any financial stability risks.
Directors called for fiscal policy to be tailored to country
circumstances. While high-debt countries should rebuild lost fiscal
space, countries with ample fiscal space should use it to invest in
potential growth enhancing areas, such as infrastructure, innovation,
and education. Directors encouraged better compliance with the fiscal
rules and looked forward to the planned review of the current rules.
Directors advised that, in the event of a severe downturn, fiscal
policy should more actively support growth, with the fiscal response
appropriately differentiated across countries, depending on the
severity of the shock, fiscal space, and financing conditions.
Directors called for the acceleration of national structural reforms to
address deep-seated productivity and competitiveness gaps and improve
economic resilience. They urged deepening the EU Single Market for
services and implementing proposals for EU financial support for
Directors supported the policy efforts to reduce external imbalances.
They called on net external creditor countries to implement policies to
incentivize domestic investment, which would contribute to reducing
external surpluses. They welcomed the EU’s efforts to modernize the
rules-based global trading system.
Directors welcomed the further increase in the banking sector’s capital
buffers and the reduction of nonperforming loans, but were concerned
about the sector’s structurally low profitability. They welcomed
progress in implementing the FSAP recommendations, but noted that the
overhaul of bank supervision and the review of the bank resolution
framework have been delayed. Directors saw merit in consolidating the
anti-money laundering oversight at the EU level over the medium term.
Directors urged EU policymakers to find a consensus on completing the
architecture of the monetary union. They welcomed the agreement on a
backstop for the Single Resolution Fund from the European Stability
Mechanism and encouraged EU leaders to agree on a common deposit
insurance scheme in conjunction with further risk reduction. Directors
supported efforts in improving capital markets by enhanced
transparency, better regulatory oversight, and more efficient
insolvency regimes. Directors welcomed the proposed euro area budget
for convergence and competitiveness but saw merit in a central
instrument for macroeconomic stabilization.