On July 24, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Euro Area.
The recovery is strengthening, driven by rising domestic demand and
supported by lower oil prices, the ECB’s quantitative easing under the
expanded asset purchase program, and a weaker euro. The improving
sentiment, rising inflation expectations, and easing credit conditions
suggest that the recovery is likely to continue in the near term. In
this context, euro area GDP is expected to accelerate from 1.5 percent
this year to 1.7 percent next year. Headline inflation is expected to
remain close to zero this year and rise to 1.1 percent next year,
reflecting a still large output gap.
Risks to growth are now more balanced than in recent years when they
were clearly to the downside. On the upside, low oil prices,
quantitative easing, a weaker euro, and rising confidence could bring
larger-than-anticipated benefits. Downside risks include lingering
weakness and low inflation, a potential slowdown in emerging markets,
geopolitical tensions, and financial market volatility, whether from
asymmetric monetary policies or contagion from events in Greece.
But the medium-term outlook is subdued, as a chronic lack of demand,
impaired corporate and bank balance sheets, and weak productivity
continue to hold back employment and investment. Potential growth,
estimated to average around only 1 percent over the medium term, is well
below what is needed to reduce unemployment to acceptable levels in
many countries. Because growth prospects are subdued and policy space is
limited, the euro area is vulnerable to negative shocks and prolonged
low growth, with negative spillovers.
Addressing the weak medium-term outlook requires a comprehensive
policy response. Cleaning up bank balance sheets would encourage banks
to lend and firms to invest, while accelerating structural reforms and
strengthening further the economic governance framework would help
secure lasting growth for Europe and create positive spillovers for the
global economy.
Executive Board Assessment2
Executive Directors welcomed the strengthening of the recovery in the
euro area on the back of lower oil prices and a weaker euro, supported
by strong policy actions, notably by the European Central Bank.
Directors noted, however, that the medium-term outlook remains subdued,
held back by insufficient demand, still high unemployment, impaired
balance sheets, and persistent structural weaknesses.
Directors considered that, while risks to the outlook are more
balanced than in recent years, the euro area remains exposed to
vulnerabilities. Although market reaction to the recent reform package
passed in Greece has been broadly positive, further episodes of
significant uncertainty and volatility arising from the situation cannot
be ruled out. Directors urged policymakers to use all the available
instruments, if needed, to manage contagion risks that might originate
from Greece. They also highlighted the need to continue enhancing the
architecture of the monetary union and European firewalls...
Directors recommended a concerted, comprehensive approach to bolster
domestic demand, especially in surplus countries, clean up bank balance
sheets, accelerate structural reforms to raise productivity, and
strengthen the economic governance framework. They noted the
complementarities among these priorities and the benefits of a more
balanced policy mix in generating growth, employment, and positive
external spillovers. These efforts would also facilitate further
external rebalancing within the euro area.
Directors noted that quantitative easing under the expanded asset
purchase program has improved confidence and financial conditions, and
raised inflation expectations. They supported full implementation of the
expanded asset purchase program, with flexibility in asset purchases,
until there is a sustained adjustment in inflation consistent with
meeting the medium-term price stability objective, while addressing
potential financial stability concerns through macro-prudential
policies.
Directors saw room for growth-friendly fiscal measures to lessen the
burden on monetary policy and its potential spillover concerns. They
considered that countries with fiscal space and low public debt should
make full use of the flexibility embedded in the Stability and Growth
Pact to support investment and structural reforms. They welcomed efforts
underway to swiftly implement the centralized investment plan,
carefully select high-return projects, and remove regulatory barriers. 3 Directors underscored the urgency of repairing bank balance sheets
and severing bank-sovereign links, crucial for credit growth and
effective monetary policy transmission. They encouraged comprehensive
action to reduce the high level of non-performing loans, tighten
supervision, improve insolvency regimes, and develop distressed debt
markets. Directors stressed the need for common deposit insurance with
an effective fiscal backstop, a well-resourced Single Resolution Fund,
and ease of access to direct bank recapitalization from the European
Stability Mechanism. They looked forward to further advancement toward a
complete banking union.
Directors urged further reforms to improve labor markets and
productivity, the business climate, and potential growth. They
recommended focusing regional efforts on implementing the Services
Directive, and establishing a single market in transport, energy, and
the digital economy. Directors looked forward to an action plan to
deepen the integration of capital markets, aimed at diversifying funding
sources and enhancing cost efficiency.
Directors welcomed proposals for a more effective governance
framework, including a consideration of outcome-based benchmarks for
setting priorities in structural reforms. They noted that independent
councils could help enhance monitoring and innovation. Directors also
saw scope for simplifying the fiscal framework, based on a single fiscal
anchor and a single operational target.
1
Under Article IV of the IMF's Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff team
visits the country, collects economic and financial information, and
discusses with officials the country's economic developments and
policies. On return to headquarters, the staff prepares a report, which
forms the basis for discussion by the Executive Board.
2
At the conclusion of the discussion, the Managing Director, as Chairman
of the Board, summarizes the views of Executive Directors, and this
summary is transmitted to the country's authorities. An explanation of
any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
