IMF Executive Board Concludes Article IV Consultation on Euro Area Policies

Public Information Notice (PIN) No. 11/91
July 19, 2011

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2011 Article IV Consultation on Euro Area is also available.

On July 18, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation on Euro Area Policies.1


The euro area recovery is broadly sound, even though growth remains uneven and moderate overall. A majority of members is experiencing solid economic activity supported by increasingly healthy labor markets and relatively sound balance sheets of households and firms. Their economies are pulling away from those suffering from sovereign debt crises and working through various combinations of a correction of pre-crisis imbalances, high debt, unemployment and tensions in financial markets, alongside balance sheet adjustment, and deep fiscal austerity measures. Member states’ current account imbalances have been reduced since the crisis mainly reflecting the contraction in domestic demand in deficit countries. However, in many deficit countries private capital inflows have largely been replaced with European Central Bank (ECB) and official financing, which is unsustainable.

The euro area aggregate budget deficit deteriorated sharply since 2007 and public debt has reached record highs in many countries. Discretionary fiscal measures accounted for about half of the deterioration in the euro area deficit. The 2010 fiscal deficit for the euro area remained at the previous year’s level of about 6 percent of GDP. Consolidation is now proceeding at a differentiated pace.

Monetary policy remains very accommodative. The ECB has raised its policy rate slightly in the face of higher inflation and an accelerating economy. Several of the nonstandard policy measures have been extended as a safeguard against lingering financial and sovereign market tensions.

These sovereign tensions constitute a key risk to the outlook with possible large regional and global implications. Indeed, a year after Greece first sought financial support from the official international community, its adjustment problems are once again dominating headlines and many solutions—orderly and disorderly—are still possible. Despite adjustment efforts and support from euro area member states and the ECB, market participants remain unconvinced that a sustainable solution is at hand.

The euro area’s banking system continues to display weaknesses. Leverage and dependence on wholesale funding remain high. Banks in the periphery are vulnerable from large exposures to their governments and real estate and from high marginal wholesale funding costs. Across the region, banks are significantly exposed to sovereign risks, with a weak tail of banks with low profitability and very thin capital levels remaining particularly vulnerable to further shocks.

Measures are being taken to strengthen the euro area’s governance framework. With the European Systemic Risk Board (ESRB) and European Supervisory Authorities (ESAs), key elements of the new EU financial sector architecture are now in place, while proposals for crisis management and resolution rest on harmonization of national frameworks and tools. Fiscal and structural governance is set to improve with the new Euro Plus Pact and Excessive Imbalances Procedure, the European semester, and the reforms being agreed on the Stability and Growth Pact (SGP) and Excessive Deficit Procedure (SDP).

Executive Board Assessment

Executive Directors noted the risks that the euro area sovereign debt crisis poses to both the European and the global recoveries, and called for strong policy implementation in the program countries, a more consistent effort across the euro area to restore market confidence, and a significant strengthening of economic governance, building on current efforts.

Directors agreed that growth has rebounded but noted the increasing disparities among member states and the large tail risk from sovereign stresses combined with pockets of financial fragility. They noted that, if these stresses remain contained and the recovery stays on track, planned fiscal consolidation should continue and there would be room for gradually phasing out monetary policy accommodation. However, given the continued tensions in some sovereign markets, Directors saw a need to maintain unconventional monetary support as long as necessary and raise bank capital buffers beyond the requirements of Basel III.

Directors urged a comprehensive and concerted approach for effectively addressing the sovereign debt crisis. Strong implementation of existing commitments should be supported with adequate financing on terms supporting debt sustainability and private sector based solutions to banking problems. At the euro-area level, Directors stressed a number of essential actions. First, they urged a rapid implementation of the commitment to scale up the capacity of the European Financial Stability Facility (EFSF) and supported a more flexible use of the EFSF as a backstop for sovereign and banking problems. Second, Directors called for clarity in the approach to private sector involvement with regard to ongoing programs and in the context of the European Stability Mechanism. And third, they called for immediate measures to strengthen the financial system through adequate capitalization and a strong follow up to the stress-test.

Directors saw the establishment of the ESAs and the ESRB as an opportunity to bolster the economic governance framework by building a strong and harmonized regulatory and supervisory environment for the single financial market. They called for improving institutions for crisis management and resolution, with an agreed burden sharing solution and common backstop. They also saw a need for a flexible macro-prudential toolkit, coordinated by the ESRB to support reciprocity and address home-host coordination.

Directors emphasized the need to push forward with fiscal consolidation and structural reforms. In this context, they welcomed the efforts to strengthen the SGP and improve national fiscal frameworks, coordinate policies, foster structural reform, and reduce imbalances, underscoring that more binding procedures would be helpful. They saw deeper financial and economic integration, including by closing the competitiveness gaps, as a precondition for unleashing the euro area’s growth potential.

Directors concurred with the findings of the spillovers analysis that spillovers could be large if stress in euro-area crisis countries spreads to other members. They emphasized the need to stem contagion through a cohesive and cooperative approach, noting that delays in resolving the crisis could be costly for the euro area and the global economy. Directors also noted that the rest of the world would profit from policies that lift the euro area’s growth potential.

Euro Area: Main Economic Indicators
(Percent change)
  2005 2006 2007 2008 2009 2010 2011 2012
            Staff projection

Demand and Supply


Real GDP

1.7 3.1 2.9 0.4 -4.1 1.8 2.0 1.7

  Private consumption

1.8 2.1 1.7 0.4 -1.1 0.8 1.0 1.2

  Public consumption

1.6 2.2 2.2 2.3 2.5 0.7 -0.1 0.0

  Gross fixed investment

3.2 5.4 4.7 -0.8 -11.4 -0.8 3.7 2.8

Final domestic demand

2.1 2.8 2.4 0.5 -2.7 0.5 1.3 1.3

  Stockbuilding 1/

-0.2 0.1 0.2 -0.2 -0.9 0.5 0.0 -0.1

Domestic Demand

1.9 3.0 2.6 0.4 -3.4 0.9 1.2 1.2

Foreign balance 1/

-0.2 0.1 0.2 0.1 -0.7 0.8 0.8 0.6

  Exports 2/

5.1 8.6 6.3 0.9 -13.1 11.2 6.9 4.8

  Imports 2/

5.8 8.5 5.8 0.8 -11.9 9.3 5.3 3.8

Resource Utilization


Potential GDP

1.6 1.6 1.8 1.5 0.5 0.9 1.1 1.3

Output gap

-0.3 1.2 2.3 1.2 -3.5 -2.7 -1.9 -1.4


1.0 1.7 1.8 0.7 -1.9 -0.5 0.3 0.5

Unemployment rate 3/

9.1 8.4 7.6 7.7 9.5 10.1 10.0 9.6



GDP deflator

2.0 1.9 2.4 2.1 1.0 0.8 1.4 1.6

Consumer prices

2.2 2.2 2.1 3.3 0.3 1.6 2.6 1.8

Public Finance 4/


General government balance

-2.5 -1.3 -0.6 -2.0 -6.3 -5.9 -4.2 -3.3

General government structural balance

-2.7 -2.3 -2.1 -2.6 -4.3 -4.0 -3.0 -2.4

General government gross debt

70.1 68.5 66.3 69.9 79.4 85.5 87.8 88.3

Interest Rates 3/ 5/


EURIBOR 3-month offered rate

2.2 3.1 4.3 4.6 1.2 0.8 1.4

10-year government benchmark bond yield

3.4 3.9 4.3 4.4 4.0 3.8 4.4

Exchange Rates 5/


U.S. dollar per euro

1.24 1.26 1.37 1.47 1.39 1.33 1.4

Nominal effective rate (2000=100)

126.6 127.0 132.3 138.8 140.6 130.9 133.8

Real effective rate (2000=100) 6/

121.5 120.8 124.4 128.4 128.9 118.6 119.8

External Sector 4/ 7/


Current account balance

0.1 -0.1 0.1 -1.5 -0.3 -0.4 0.1 0.3

Sources: IMF, World Economic Outlook; Global Data Source; DataStream; Eurostat; and ECB Monthly Bulletin.

1/ Contribution to growth.

2/ Includes intra-euro area trade.

3/ In percent.

4/ In percent of GDP.

5/ Latest available data for 2011.

6/ CPI based.

7/ Based on ECB data, which excludes intra-euro area flows.

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. At the conclusion of the discussion, the Acting 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:


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