IMF Staff Country Reports

<P>Context. The recovery is strengthening, underpinned by lower oil prices and the ECB’s<BR>expanded asset purchase program. But the medium-term outlook remains weak, weighed down by the <BR>legacies of insufficient demand, lagging productivity, and weak bank and corporate balance sheets.</P> <P>Policies. A concerted, collective effort is needed to sustain the recovery, avoid overburdening <BR>monetary policy, and lift potential growth over the medium term, which would have positive <BR>spillovers for the rest of the world:</P> <P>Demand support. Quantitative easing (QE) has boosted confidence and improved financial conditions. <BR>The ECB’s clear communication to stay the course on QE until inflation is on a sustained adjustment <BR>path will help anchor expectations. Countries should adhere to the SGP, but those with fiscal space <BR>should use it to support investment and structural reforms.</P> <P>Balance sheet repair. High non-performing loans (NPLs) in some banks are eroding profitability and <BR>discouraging new lending. Complementary policies are needed to incentivize NPL resolution through <BR>strengthened prudential supervision, insolvency reforms, and development of distressed debt <BR>markets. Asset management companies (AMCs) could help banks to offload NPLs and assist with <BR>corporate<BR>restructuring.<BR>Productivity-enhancing structural reforms. Labor and product market reforms<BR>should be combined with faster implementation of the Services Directive, further improvements of <BR>insolvency regimes, and a greater push toward a single market in capital, transport, energy, and <BR>the digital economy. A capital markets union would help diversify funding sources and reduce <BR>reliance on bank lending.</P> <P>Better economic governance. A more effective and simpler governance framework, including a move towards "outcome-based" benchmarking, could help advance <BR> <BR>structural reforms, while the fiscal framework could be simplified and strengthened.</P> <P> </P>