## 1eurea2019001

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### Growth, inflation, and outlook
- Real GDP growth:
  - 2018: 1.9
  - 2019 (projected): 1.3
  - 2020 (projected): 1.6
  - 2021: 1.5
  - 2022: 1.4
  - 2023: 1.4
  - 2024: 1.3
- Headline inflation:
  - 2018: 1.8
  - 2019 (projected): 1.3
  - 2020 (projected): 1.6
  - 2021: 1.6
  - 2022: 1.8
  - 2023: 1.9
  - 2024: 1.9
- Core inflation:
  - 2018: 1.2 (described as subdued despite wage growth)
  - Expected to rise slightly in 2019 and adjust upwards gradually thereafter
- GDP deflator:
  - 2018: 1.4
  - 2019 (projected): 1.5
  - 2020 (projected): 1.6
  - 2021: 1.7
  - 2022: 1.8
  - 2023: 1.9
  - 2024: 2.0
- Potential GDP and output gap:
  - Potential GDP: 2018: 1.3; 2019 (projected): 1.3; thereafter: 1.4
  - Output gap: 2018: 0.3; 2019: 0.2; 2020–2023: 0.4; 2024: 0.3
- Labor market and unemployment:
  - Employment growth: 2018: 1.5; 2019: 0.9; 2020: 0.6; 2021: 0.4; 2022: 0.3; 2023–2024: 0.2
  - Unemployment rate: 2018: 8.2; 2019: 7.7; 2020: 7.5; 2021: 7.3; 2022: 7.2; 2023–2024: 7.1
- Private sector loan growth: 3.6 percent (as of April 2019)
- Inflation convergence assessment:
  - "Inflation is projected to take several years to durably converge to the European Central Bank’s objective of below, but close to 2 percent."
  - Staff now expects inflation to converge to the ECB’s objective only in 2022.

### Key risks to the outlook
- High-probability/high-impact risks:
  - Prolonged or elevated trade tensions undermining exports and investment.
  - A no-deal Brexit causing short-term disruptions and longer-term output losses.
  - Shift in market sentiment against high-debt countries (e.g., Italy) raising sovereign and bank spreads.
- Other downside risks:
  - Prolonged anemic growth and low inflation absent stronger global demand or domestic resilience.
  - Heightened uncertainty from Brexit, Italy policy uncertainties, global trade tensions, and political cycles.
- Risk amplification:
  - Downside risks could amplify when materializing synchronously, possibly tipping the euro area into a hard landing.

### Recent developments and cyclical divergence
- Growth slowed from 2.4 percent (2017 peak) to 1.9 percent (2018).
- Contributors to weakness: weaker external demand; German car industry disruptions; social unrest in France; policy uncertainties in Italy.
- Capacity utilization and labor shortages reached record levels in 2018; unemployment declined to 7.6 percent in April 2019.
- Wage growth: wages rose by 2.2 percent in 2018 (up from 1.6 percent in 2017).
- Country divergences:
  - Germany output gap: 1 percent (2018)
  - France and Spain: small positive output gaps
  - Italy output gap: -1 percent (2018)
  - Core inflation 2018: Germany 1.3 percent; France, Italy, Spain below 1 percent.

### Monetary policy and financial conditions
- Policy stance:
  - Recommendation: monetary policy should remain accommodative "until inflation is sustainably converging to the ECB’s objective."
  - Monetary policy expected to remain strongly accommodative at least through the first half of 2020.
- ECB instruments and actions:
  - Full reinvestment of maturing securities under the asset purchases program until well beyond the first rate hike, implying a repurchase of about €20 billion per month.
  - In June 2019 the ECB Governing Council postponed the first rate hike to after mid-2020 at the earliest.
  - Pricing details of TLTRO III announced; to be offered between September 2019 and March 2021.
  - More than €700 billion of the previous TLTRO program will mature between June 2020 and March 2021.
  - TLTRO III applicable interest rates will range from a maximum of 10 basis points above the main refinancing operation rate to a minimum of 10 basis points above the deposit facility rate, depending on eligible net lending.
  - Staff view: appropriate to shorten maturity of new TLTROs (two years instead of four) and offer less generous pricing than TLTRO II.
- Financial conditions and banking sector:
  - Short-term money market rates below zero; long-term sovereign yields and high-yield corporate spreads came down in 2019; bank lending rates/credit standards broadly unchanged in Q1 2019.
  - Banking concerns: structurally low profitability despite increased capital buffers and reductions in NPLs; ROE of the 100 largest banks: 6 percent (2018Q3) versus 8–10 percent cost of equity.
  - Direct costs to euro area banks from excess liquidity estimated at about €7.5 billion (about 0.03 percent of total banking system assets).
  - Staff sees merit in consolidating AML oversight at the EU level over the medium term.

### Fiscal policy recommendations and public finances
- Fiscal policy guidance by country circumstances:
  - High-debt countries: pursue a prudent path of gradual fiscal adjustment to rebuild fiscal space; stronger enforcement of fiscal rules recommended.
  - Countries with fiscal space: use low borrowing costs to invest in potential growth-enhancing areas (infrastructure, innovation, education); invest to help reduce large external surpluses.
  - In a severe downturn: countries with fiscal space should be ready to implement stimulus; countries with limited fiscal space could temporarily slow consolidation if financing conditions permit and debt sustainability is preserved.
- General government balance and debt projections (percent of GDP):
  - General government balance: 2018: -0.5; 2019: -0.9; 2020: -0.8; 2021–2024: -1.0
  - General government structural balance: 2018: -0.6; 2019: -0.8; 2020: -1.0; 2021: -1.1; 2022: -1.2; 2023–2024: -1.1
  - General government gross debt: 2018: 85.1; 2019: 83.7; 2020: 81.9; 2021: 80.3; 2022: 78.7; 2023: 77.1; 2024: 75.6

### Structural and institutional reforms
- Priority reforms:
  - Accelerate national structural reforms to address productivity and competitiveness gaps and improve resilience.
  - Deepen the EU Single Market for services and implement proposals for EU financial support for reforms.
  - Support completion of EU banking union architecture: welcome ESM backstop agreement for the SRF; encourage agreement on a common deposit insurance scheme with risk reduction.
  - Merit in a central instrument for macroeconomic stabilization; improve capital markets via transparency, regulatory oversight, and efficient insolvency regimes.
- Boxed findings:
  - Box 2: Services—productivity in euro area services disappointing; uneven implementation of the 2006 Services Directive; policy recommendations include incentives (Reform Delivery Tool), harmonizing education/training requirements, and stronger enforcement.
  - Box 3: Structural reforms—flexible labor/product markets and efficient insolvency regimes improve resilience; countries lacking exchange rate flexibility benefit more from such reforms.

### External sector and imbalances
- Current account (percent of GDP):
  - 2016: 3.1
  - 2017: 3.2
  - 2018: 2.9 (actual CA reported: 2.9)
  - 2019 (projected): 2.8
  - 2020: 2.6
  - 2021: 2.5
  - 2022: 2.4
  - 2023: 2.3
  - 2024: 2.2
- Staff CA assessments and gaps:
  - Headline: "1.3 percent for 2018, with a range of 0.5 to 2.1 percent of GDP."
  - Reported/tabulated values for CA assessment:
    - Actual CA: 2.9
    - Cycl. Adj.: 2.9
    - EBA CA Norm: 1.1
    - EBA CA: 1.8
    - Staff Adj.: -0.5
    - Staff CA Gap: 1.3
- Real exchange rate (REER):
  - CPI-based REER appreciated by about 3.0 percent from 2017 to 2018 (nominal appreciation ~5.2 percent).
  - Estimated depreciation by May 2019: 3.1 percent relative to 2018 average.
  - Staff-assessed average euro REER gap: range -5 to -1 percent, mid-point -3 percent.
  - Country heterogeneity: REER gaps range from undervaluation of 8 to 18 percent in Germany to overvaluations of 0 to 10 percent in several small/mid-sized members.
- Capital flows:
  - Net capital outflows in 2018 driven largely by portfolio debt and FDI outflows; tempered by inflows into portfolio equity—linked to ECB asset purchases lowering debt yields.

### Policy preparedness and contingency
- Authorities should be ready to respond with additional measures if downside risks materialize.
- If the inflation outlook deteriorates, the ECB should consider further accommodative measures while monitoring financial stability risks.
- In a severe downturn, fiscal policy should support growth with country-differentiated responses depending on fiscal space and financing conditions.

### Risk Assessment Matrix (selected entries)
- Rising protectionism and retreat from multilateralism:
  - Likelihood: High
  - Expected impact: High
  - Policy responses: support multilateral rules-based trading system; scale up domestic public investment; support growth and productivity-enhancing measures.
- A disorderly Brexit:
  - Likelihood: High
  - Expected impact: High
  - Policy responses: contingency planning and collaboration to reduce cliff-edge effects.
- A shift in market sentiment against some high-debt countries:
  - Likelihood: High
  - Expected impact: High
  - Policy responses: fiscal consolidation in high-debt countries; risk reduction to sever sovereign-bank nexus; reform SGP to simplify rules and strengthen enforcement.
- Weaker-than-expected global growth:
  - Likelihood: Medium
  - Expected impact: High
  - Policy responses: accelerate structural reforms; more accommodative fiscal stance where fiscal space exists; continue accommodative monetary policy.
- Further pressure on traditional bank business models:
  - Likelihood: Medium
  - Expected impact: Medium
  - Policy responses: forceful supervisory actions; insolvency reform; banking consolidation; strict supervisory monitoring of NPLs.
- Intensification of security risks leading to sharp migrant flows:
  - Likelihood: Medium
  - Expected impact: Medium
  - Policy responses: rapid integration of refugees into labor markets; accommodate temporary refugee-related costs within fiscal targets case-by-case; develop relocation systems.

### Financial sector resilience, risks, and recommended actions
- Capital and NPLs:
  - Tier 1 ratios averaged 15.4 percent (June 2018).
  - NPLs fell to just under 4 percent of gross loans (2018Q3) though double-digit NPL ratios persist in four countries.
  - Asset share of banks with high NPLs or low price-to-book ratios: 15 percent of total assets of SSM-supervised banks (2018Q3).
- Profitability and costs:
  - ROE of 100 largest banks: 6 percent (2018Q3) — below the 8–10 percent cost of equity.
  - Operating costs higher than 65 percent of income on average for euro area banks; Nordic peers closer to 50 percent.
- Supervisory recommendations:
  - Encourage bold reforms to cut costs (branch reductions, IT modernization); assess viability of bank business models; incentivize consolidation and internal capital generation.
  - Use macroprudential and borrower-based tools more actively; explore corporate borrower-based tools (loan-to-value caps, debt/equity caps, minimum ICRs).
  - Improve comprehensive credit information systems and resolve data gaps for CRE and nonbank financial institutions.
- Brexit-related preparedness:
  - Most U.K. banks/firms secured licenses in EU-27; conditional recognition for U.K.-based CCPs until March 2020 (no-deal contingency); ESMA reduced costs of moving uncleared derivatives; some national laws provide temporary contract continuity.
- AML/CFT:
  - Multiple breaches underline need for stronger enforcement and better information-sharing; EBA strengthened mandate useful; medium-term establishment of EU-level AML supervisory function considered.

### Banking union, EMU, and Capital Markets Union (CMU)
- Banking union and deposit insurance:
  - Completing banking union requires risk reduction and political agreement on common deposit insurance (EDIS).
  - ESM backstop to SRF welcomed; could come into force before 2024 if sufficient risk reduction by 2020.
  - SRF and backstop combined resources cited: around €120 billion for small and medium-sized banks.
  - EBA estimate: EU banks need an additional EUR 39 billion of capital to meet Basel III needs in the next eight years.
- Central fiscal capacity:
  - Staff advocates a central fiscal capacity for macro stabilization; limited political support currently; EU leaders agreed to work toward a small euro area budget for convergence and competitiveness.
- CMU barriers and benefits:
  - Only 25 percent of risks shared across euro area countries vs. more than 80 percent across 50 U.S. states.
  - Staff estimates: better insolvency/regulatory/tax regimes could increase cross-border portfolio assets substantially; a 1 standard deviation combined improvement would almost double average cross-border portfolio assets.
  - Policy recommendations: increase information transparency; simplify withholding taxes; improve insolvency regimes; sharpen supervisory powers; centralize AML supervision; phase in EDIS with risk reduction.
- Box 4 contextual statistics:
  - Euro area NIIP (2018): -3.8 (% GDP)
  - Gross Assets: 228.0 (% GDP)
  - Debt Assets: 89.7 (% GDP)
  - Gross Liabilities: 231.8 (% GDP)
  - Debt Liabilities: 94.6 (% GDP)
  - Current account 2018: 3.0 percent of GDP (euro area)
  - Staff assessment CA norm (EBA model): 1.1 percent of GDP; staff CA gap: 1.8 percent (context preserved).

### Boxes of note
- Box 1 — "Is There A Bund Premium?"
  - Definition: difference in convenience yields between German government bonds and other sovereign safe assets adjusted for exchange rate, sovereign credit risk, liquidity, and swap frictions.
  - Findings: Bund premium has increased recently, reflecting extreme scarcity of German government bonds; negative relationship between Bund premium and relative Bund supply; effect stronger for longer maturities and in periods of high uncertainty.
  - Monetary policy implication: scarcity helps keep long-term yields low near term but may complicate normalization.
- Box 2 — "The Case for Strengthening the EU’s Single Market for Services"
  - Key findings: disappointing productivity growth in services; regulatory heterogeneity; reform resistance driven by political cycles and vested interests.
  - Recommendations: use CSRs and Reform Delivery Tool, improve transparency and data, harmonize education/training requirements, and step up enforcement (infringement proceedings).
- Box 3 — "Structural Reforms and Economic Resilience"
  - Findings: flexible labor and product markets and efficient insolvency regimes improve resilience and reduce output losses after crises; benefits larger for countries without independent exchange rates.

### Statistics, data quality, and ECB projects
- SDDS Plus adherence: By April 2019, 10 euro area countries (and 14 EU member states overall) have adhered to the SDDS Plus.
- Quality assurance and MIP statistics:
  - First harmonized domain specific quality reports for BOP and IIP published; quality-assurance visits to Luxembourg (July 2018), Poland (September 2018), Germany (January 2019).
  - Two auxiliary indicators from Consolidated Banking Data included in MIP Scoreboard starting 2018: leverage ratio and gross NPL amount.
- Timeliness and flash releases:
  - Preliminary (T+30) GDP flash estimates for EU and euro area introduced April 2016.
  - Employment flash estimates testing led to t+45 employment flash estimates starting November 2018.
- ECB statistical projects and enhancements:
  - Money Market Statistical Reporting (MMSR): aggregated indicators regular since 2017; secured segment added January 2019.
  - Euro short-term rate to be produced by the ECB from October 2, 2019 (selected as euro risk-free rate).
  - Securities holdings statistics: enhanced reporting from 2018-Q3 covering all banking groups directly supervised by the ECB with AnaCredit-consistent attributes.
  - AnaCredit: first reporting mid-November 2018 (data as of September 2018); some countries used transitional reporting to end-March 2019.
- Improvements to BOP/IIP and quarterly financial accounts:
  - ECB Guideline amendments (2021) to include more sectoral detail and currency denomination breakdowns; bilateral data vis-à-vis all G20 countries; instrument breakdowns.
  - Task forces and handbooks created for illegal economic activities, maritime cluster BOP guidance, and commercial real estate indicators (TF CREI).
- Public sector accounting modernization (EPSAS): work ongoing; draft EPSAS Conceptual Framework presented May 2018.
- Pension funds and FCLs:
  - New PF reporting regulation published February 2018; first PF data reporting expected by end-2019; first publication mid-2020.
  - FCLs annual data published September 2018 covering data up to 2017.

### Policy guidance summary (staff)
- Maintain prolonged monetary accommodation until inflation convincingly converges to the ECB’s objective, while using macroprudential instruments proactively.
- Ensure TLTRO III funding channels to private sector, limits on banks’ sovereign exposures, and design pricing/maturity to limit dependency.
- Monitor heterogeneity across countries closely and be prepared to deploy stronger accommodation if inflation expectations decline or outlook worsens.
- Consider resuming or broadening asset purchases and further credit easing in downside scenarios, with reinvestment strategy preserved flexibly given safe asset supply dynamics and Bund scarcity.
- Accelerate structural reforms to boost productivity, complete banking union elements (EDIS, SRF backstop), and deepen CMU to enhance private risk sharing.

*International Monetary Fund — Euro Area Policies, Staff Report for the 2019 Article IV Consultation (extract).*

### 1.3 percent in 2019 to 1.6 percent in 2020, before moderating to slightly below 1½ over the

### Euro Area Policies — Staff Report for the 2019 Article IV Consultation (extract)

### Growth, inflation, and outlook
- Real GDP growth: 1.9 (2018), projected 1.3 (2019), 1.6 (2020), then moderating to 1.5 (2021), 1.4 (2022), 1.4 (2023), 1.3 (2024).
- Headline inflation: 1.8 (2018), projected 1.3 (2019), 1.6 (2020), then 1.6 (2021), 1.8 (2022), 1.9 (2023), 1.9 (2024).
- Core inflation: 1.2 (2018) and described as subdued despite wage growth.
- GDP deflator: 1.4 (2018), projected 1.5 (2019), 1.6 (2020), 1.7 (2021), 1.8 (2022), 1.9 (2023), 2.0 (2024).
- Potential GDP and output gap: Potential GDP 1.3 (2018), projected 1.3 (2019), 1.4 thereafter; output gap estimated 0.3 (2018), 0.2 (2019), 0.4 (2020–2023), 0.3 (2024).
- Labor market and unemployment: Employment growth 1.5 (2018), 0.9 (2019), 0.6 (2020), 0.4 (2021), 0.3 (2022), 0.2 (2023–2024); Unemployment rate 8.2 (2018), 7.7 (2019), 7.5 (2020), 7.3 (2021), 7.2 (2022), 7.1 (2023–2024).
- Private sector loan growth: 3.6 percent as of April 2019.
- Inflation convergence: "Inflation is projected to take several years to durably converge to the European Central Bank’s objective of below, but close to 2 percent."

### Key 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, it could cause short-term disruptions and longer-term output losses for the euro area.
- Countries with high public debt "have not consolidated sufficiently leaving them vulnerable to shocks."
- Even without a major shock, the euro area faces the risk of "a prolonged period of anemic growth and inflation."
- Heightened uncertainty (Brexit, policy uncertainties in Italy, global trade tensions) could weigh on growth momentum.

### Recent developments and cyclical divergence
- Growth slowed from a cyclical peak of 2.4 percent in 2017 to 1.9 percent in 2018; weaker external demand and domestic factors (German car industry disruptions, social unrest in France, policy uncertainties in Italy) were contributors.
- Capacity utilization and labor shortages reached record levels in 2018; the unemployment rate declined to 7.6 percent in April 2019.
- Wage growth: wages rose by 2.2 percent in 2018, up from 1.6 percent in 2017.
- Country divergences: Germany’s output gap at 1 percent in 2018; France and Spain small positive output gaps; Italy output gap -1 percent. Core inflation 1.3 percent in Germany (2018) and below 1 percent in France, Italy, and Spain (2018).

### Monetary policy and financial conditions
- Recommendation: monetary policy should remain accommodative "until inflation is sustainably converging to the ECB’s objective."
- The staff welcomed the recent extension of forward guidance to help achieve a sustained pickup in inflation.
- Targeted macroprudential policies recommended to address specific financial stability risks.
- Financial conditions supportive overall: short-term money market rates below zero, long-term sovereign bond yields and high-yield corporate spreads came down in 2019, and bank lending rates/credit standards broadly unchanged in Q1 2019.
- Concerns remain about banking sector: structurally low profitability despite increased capital buffers and reductions in nonperforming loans; delays noted in overhaul of bank supervision and review of bank resolution framework.
- Merit seen in consolidating anti-money laundering oversight at the EU level over the medium term.

### Fiscal policy recommendations
- Fiscal policy should be tailored to country circumstances:
  - High-debt countries: pursue a prudent path of gradual fiscal adjustment to rebuild fiscal space even if growth has slowed; stronger enforcement of fiscal rules would support this.
  - Countries with fiscal space: use low borrowing costs to invest in potential growth-enhancing areas such as infrastructure, innovation, and education; invest to help reduce large external surpluses.
- In the event of a severe downturn: euro area countries with available fiscal space should be ready to implement stimulus; countries where fiscal space is at risk could temporarily slow fiscal consolidation relative to baseline recommendations, provided financing conditions remain amenable and debt sustainability is not put at risk.
- General government balance and debt projections (percent of GDP):
  - General government balance: -0.5 (2018), -0.9 (2019), -0.8 (2020), -1.0 (2021–2024).
  - General government structural balance: -0.6 (2018), -0.8 (2019), -1.0 (2020), -1.1 (2021), -1.2 (2022), -1.1 (2023–2024).
  - General government gross debt: 85.1 (2018), 83.7 (2019), 81.9 (2020), 80.3 (2021), 78.7 (2022), 77.1 (2023), 75.6 (2024).

### Structural and institutional reforms
- Urged acceleration of national structural reforms to address productivity and competitiveness gaps and improve economic resilience.
- Called for deepening the EU Single Market for services and implementing proposals for EU financial support for reforms.
- Supported progress on EU banking union architecture: welcomed 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.
- Saw merit in a central instrument for macroeconomic stabilization and supported efforts to improve capital markets via enhanced transparency, better regulatory oversight, and more efficient insolvency regimes.

### External sector and imbalances
- Current account balance (percent of GDP): 3.1 (2016), 3.2 (2017), 2.9 (2018), projected 2.8 (2019), 2.6 (2020), 2.5 (2021), 2.4 (2022), 2.3 (2023), 2.2 (2024).
- Directors supported policy efforts to reduce external imbalances and called on net external creditor countries to implement policies to incentivize domestic investment to help reduce external surpluses.
- Welcomed the EU’s efforts to modernize the rules-based global trading system.

### Policy preparedness and contingency
- Central and national authorities should be ready to respond with additional measures if downside risks materialize.
- If the inflation outlook deteriorates further, the ECB should consider further accommodative measures while monitoring financial stability risks.
- In a severe economic downturn, fiscal policy should more actively support growth, with responses differentiated across countries depending on severity of shock, fiscal space, and financing conditions.

_International Monetary Fund — Euro Area Policies, Staff Report for the 2019 Article IV Consultation (extract)._

### 0.4 percentage points lower than in the October 2018

### 1eurea2019001 - 0.4 percentage points lower than in the October 2018

### Inflation outlook and near-term dynamics
- Forecast: Tight labor markets and the forecast pickup in activity are expected to put upward pressure on inflation.
- Firms have compressed profits as labor costs have risen over the past years, thereby holding down inflation; given the projected strengthening in growth, firms are expected to adjust prices upwards.
- Adjustment is likely to be gradual, in line with the high degree of persistence of euro area inflation and the still modest size of the positive output gap.
- On this basis, inflation is now expected to converge to the ECB’s objective only in 2022.
- Headline inflation will moderate further in the next months, reflecting negative base effects from oil price developments.
- Core inflation is expected to rise slightly this year and adjust upwards gradually over the forecast horizon.

### Medium-term growth, productivity, and demographics
- Medium-term growth of around 1½ percent on average for the euro area is predicated on:
  - Persistently muted productivity growth, consistent with limited progress on structural reforms.
  - Low investment levels and subsequent sluggish growth of capital stocks in the aftermath of the crisis.
  - Demographic changes, including the aging of the population.
- Potential growth rates tend to be lower in lagging countries such as Italy and Greece—currently projected at about ½ percent—raising the prospect of further income divergence in the medium term absent substantial structural reforms.

### Downside risks (including near-term)
- Downside risks have increased and could amplify each other if they materialized synchronously, possibly tipping the euro area into a hard landing.
- Prolonged—or elevated—trade tensions could dent exports and investment:
  - An escalation of the U.S.-China trade dispute could result in some trade diversion to the euro area, but any positive growth impact would likely be outweighed by weaker global growth and deteriorating confidence.
  - If the U.S. implements tariffs on EU cars exports, ongoing EU-U.S. trade talks could be severely challenged, lowering exports, disrupting supply chains, and weakening investment through confidence channels.
- A no-deal Brexit could bring significant short-run disruptions and long-term losses:
  - Measures address most cliff-edge risks in the financial sector, but nonfinancial firms face significant disruptions (border delays, sudden increase in tariffs and nontariff costs, disruptions to just-in-time supply chains).
  - Higher barriers to trade with the U.K. will imply some loss in output for the EU even in the long term.
- Some euro area countries with both high sovereign debt and strong sovereign-bank linkages could come under market pressure:
  - Italy remains vulnerable to a shift in market sentiment; agreement with the European Commission in December 2018 on the 2019 deficit target reduced market pressure, but weak growth and policy tensions could raise the risk of policy slippages.
  - A change in market sentiment could send both sovereign and bank spreads higher, possibly necessitating sharp procyclical fiscal tightening and weighing on growth.
- Risk of prolonged anemic growth and low inflation if forecast uptick in global demand does not materialize and domestic demand is less resilient; compounded by reform fatigue or reversals.

### Authorities’ views (regional institutions)
- Authorities expect growth to firm up over the coming quarters, with the main impulse from domestic demand after resolution of temporary factors and supported by higher real income and accommodative policies.
- Net exports expected to contribute little to growth in 2019 due to weak global trade amid continued trade policy uncertainty.
- The EC expects potential growth to slow to about 1 percent over the medium term, driven mainly by the drag on labor supply from population aging.
- The ECB expects inflation to remain subdued in the near term, then gradually converge toward its medium-term objective.
- Authorities see risks tilted firmly to the downside (escalation of trade disputes, Brexit, renewed concerns about Italy); warned that simultaneous materialization of risks would be challenging and the euro area could become a “1 percent economy.”

### Monetary policy stance and instruments
- The undershooting of the inflation objective calls for prolonged monetary accommodation; macroprudential instruments should be used proactively to address potential financial stability concerns.
- Monetary policy is expected to remain strongly accommodative at least through the first half of 2020.
- The ECB intends to fully reinvest maturing securities under the asset purchases program until well beyond the first rate hike, implying a repurchase of about €20 billion per month.
- In June 2019 the ECB Governing Council postponed the first rate hike to after mid-2020 at the earliest, and announced pricing details of TLTRO III to be offered between September 2019 and March 2021.
- More than €700 billion of the previous TLTRO program will mature between June 2020 and March 2021; the new funding—for two years instead of four—addresses liquidity needs for banks, especially in countries with high reliance on TLTROs.
- Applicable interest rates for TLTRO III will range from a maximum of 10 basis points above the main refinancing operation rate to a minimum of 10 basis points above the deposit facility rate, depending on the volume of eligible net lending.
- It is appropriate for the ECB to shorten the maturity of the new TLTROs and to offer less generous pricing terms than on TLTRO II to limit banks’ dependency and provide incentives for banks to seek alternative funding solutions over time.

### Risks and trade-offs of prolonged accommodation
- Prolonged accommodation is not without risks due to heterogeneity among euro area countries in cyclical position; in economies with a positive output gap, financial stability risks could emerge earlier.
- Staff analysis: direct costs to euro area banks from excess liquidity amount to about €7.5 billion (about 0.03 percent of total banking system assets), though effects vary by bank and country.
- A regime of “tiering” would likely have a very small impact on aggregate bank profitability and a questionable impact on credit conditions, and could lead banks to further build up excess reserves rather than lending.
- If the inflation outlook were to be substantially downgraded or inflation expectations continued to decline, further and stronger accommodation may be necessary. The ECB toolkit includes forward guidance, negative policy rates, asset purchases, and bank liquidity facilities.
- Resuming balance sheet expansion in a downside scenario creates risks (more difficult unwind, complexity if asset purchases expand to new asset classes) but these are likely outweighed by the risks of doing too little (prolonged below-target inflation and anemic growth damaging ECB credibility).
- When normalization eventually occurs, the path of the ECB’s balance sheet should be flexibly calibrated while remaining anchored by the capital key.
- Staff research finds that relative scarcity of German bonds has increased their premium over other sovereign assets; projected decrease in the German government debt stock will exert downward pressure on the long end of the yield curve, potentially complicating monetary policy normalization.

### Policy guidance and recommendations
- Maintain prolonged monetary accommodation to support sustained convergence of inflation to the ECB’s objective, while using macroprudential instruments proactively to address financial stability concerns.
- Ensure new TLTRO III funding is channeled to the private sector and does not increase banks’ sovereign exposures; design pricing and maturity to limit dependency and encourage alternative funding.
- Monitor heterogeneity across countries closely and be prepared to deploy stronger accommodation if inflation expectations decline or the outlook worsens.
- Consider resuscitating the asset purchase program (anchored by the capital key and possibly broadened) and further credit easing measures (such as cheaper liquidity facilities) if necessary, acknowledging constraints from bank balance sheet weakness.
- Preserve flexibility on reinvestment strategy given safe asset supply dynamics and Bund scarcity.

*Italic line: Source: IMF — EURO AREA POLICIES (excerpt).*

### Box 1. Is There A Bund Premium?

### Box 1. Is There A Bund Premium?

### Definition and estimation
- The “Bund premium” is estimated as the difference in convenience yields between German government bonds and other sovereign safe assets (the G10 currency countries and large euro area countries) adjusted for exchange rate and sovereign credit risk, liquidity as well as swap market frictions.
- A larger wedge implies a price premium (equivalent to an interest rate discount) and hence less substitutability of sovereign bonds.
- Source study cited: Paret and Weber, 2019, “German Bond Yields and Debt Supply: Is There A ‘Bund Premium’?” IMF Working Paper (forthcoming).
- Countries included in the comparator set: Australia, Canada, Denmark, France, Italy, Japan, New Zealand, Norway, Spain, Sweden, Switzerland, U.K., and U.S.

### Evolution and recent trends
- Prior to and at the beginning of the global financial crisis, the German bond premium was negative, with U.S. treasuries being more attractive.
- More recently, the Bund premium has increased both vis-à-vis other G10 currency countries overall and large euro area countries.
- The European debt crisis stands out as a period associated with increases in the Bund premium, possibly reflecting periodic redenomination risk in the euro area.

### Drivers and empirical findings
- The rising premium reflects the extreme scarcity of German government bonds.
- There is a negative relationship between the Bund premium and the supply of Bunds relative to other advanced economy debt.
- Panel analysis confirms that this relationship is robust and more pronounced:
  - for longer-dated German bonds; and
  - when uncertainty and volatility are high.
- These findings are consistent with a model where preferred-habitat investors (preferring bonds from a specific sovereign and maturity) and arbitraguers coexist.
- German Bunds have become the most highly sought-after collateral, with financial institutions preferring them over cash for collateral purposes, indicating significant preferred clienteles.

### Monetary policy implications
- German bond yields serve as eurozone benchmark yields.
- German sovereign debt is projected to shrink over the coming years, further compressing Bund yields.
- Near-term effect: scarcity effects help the ECB maintain low long-term yields.
- Longer-run concern: scarcity could complicate the process of monetary policy normalization.

*Source: IMF staff (Box 1, “Is There A Bund Premium?”) — data and analysis drawn from Bloomberg, Markit, WEO, and IMF staff.*

### Box 2. The Case for Strengthening the EU’s Single Market for Services

### Box 2. The Case for Strengthening the EU’s Single Market for Services

### Key findings
- Productivity growth in the euro area services sector has been disappointing and the gap with the U.S. has widened.
- Low productivity in services weighs on the manufacturing sector, given its increased reliance on service sector inputs.
- Unduly restrictive regulations on services trade and cross-border investment have been linked in the literature to political economy factors and the influence of vested interests.
- Implementation of key EU initiatives (e.g., the 2006 Services Directive) has been uneven and incomplete, resulting in substantial regulatory heterogeneity within the Single Market, as shown by the new OECD Services Trade Restrictions index measuring within-EU service sector restrictions.
- Staff analysis finds no evidence of a systematic relationship between services sector deregulation and consumer satisfaction, casting doubt on the argument that reforms systematically reduce service quality ex post.

### Determinants of reform resistance
- Political cycle effects:
  - Service sector reforms tend to occur when governments have strong political capital (e.g., majority in parliament; beginning of legislature term).
- Vested interests:
  - Reforms are strongly resisted in sectors characterized by disproportionally high rents, confirming a key role for vested interests.

### Policy recommendations — Two-pronged approach
- Incentives:
  - Continued focus on services sector reform in the Country-Specific Recommendations (CSR s) is important.
  - The proposed Reform Delivery Tool could further incentivize countries, including by providing financial support to offset any costs associated with reforms.
  - Recently created National Productivity Boards could help by guaranteeing effective public communication of the reforms, including by showcasing examples of EU best practices.
  - More EU-wide transparency and comparable data could help national competition authorities to play a larger role in evaluating whether a regulation is in line with public interest.
  - Harmonizing education and training requirements within the EU would also help facilitate the provision of services in a truly internal market.
- Enforcement:
  - Formal infringement proceedings against member states to address gaps in implementing the Services Directive remains an important tool.
  - Use of enforcement tools to date has been limited; the European Court of Auditors (2016) argues that it has been insufficient.
  - The recent stepping up of infringement procedures with respect to both the Services Directive and the Professional Qualification Directive appears appropriate.

*Source: Box 2, "The Case for Strengthening the EU’s Single Market for Services," from IMF staff analysis.*

### Box 3. Structural Reforms and Economic Resilience

### Box 3. Structural Reforms and Economic Resilience

### Structural reforms and macroeconomic resilience — key findings
- Euro area countries have fared worse than other advanced economies after the global financial crisis, with many experiencing double-dip recessions and slower, weaker recoveries; marked heterogeneity across countries points to differences in economic resilience.
- An economy's resilience is its ability to withstand and adjust to shocks; the lack of an independent nominal exchange rate makes euro area economies more reliant on alternative adjustment mechanisms.
- Structural reforms that increase price flexibility, ease of entry and exit, and the scope for labor market adjustment strengthen an economy’s ability to weather shocks.
- Staff analysis finds:
  - More stringent employment protection for regular workers and excessive product market regulation are generally associated with more severe recessions on average.
  - Over the past four decades, output losses after financial crises or major recessions were smaller in advanced economies that had reformed labor and product markets.
  - Model simulations show benefits from flexible labor and product markets are even greater for countries lacking independent exchange rates (e.g., individual euro area countries).

### Insolvency regimes and resource reallocation
- Efficient and flexible corporate insolvency regimes improve resilience by facilitating reallocation of resources toward more productive sectors and firms.
- Cross-sectoral factor misallocation (captured by dispersion of sectoral productivity) tends to be greater in countries with lower-quality insolvency regimes.
- Regression analysis shows capital reallocation toward more productive sectors and firms is larger in countries with higher-quality insolvency regimes.

### External imbalances and trade policy implications
- Euro area external current account surplus:
  - Declined to 2.9 percent in 2018 from 3.2 percent in 2017.
  - CPI-based real effective exchange rate (REER) appreciated by 3 percent on average in 2018.
  - The euro area’s external position remains moderately stronger than implied by medium-term fundamentals and desirable policies, with a small REER undervaluation of about 3 percent.
- Country-level imbalances persist:
  - Germany and the Netherlands: external positions remain substantially stronger than levels consistent with fundamentals and desirable policies; limited wage growth relative to labor market tightness has led to materially undervalued REERs.
  - Excess saving net of investment by nonfinancial corporations and households explains the bulk of these surpluses.
  - Policy recommendations for surplus countries: use fiscal space and structural reforms to incentivize investment, foster entrepreneurship, support SMEs, advance digitalization, and communicate to encourage faster wage growth to aid internal rebalancing.
  - Net debtor countries (e.g., Spain and Portugal): external positions remain weaker than warranted given large stocks of external liabilities; post-crisis wage moderation improved competitiveness but productivity gaps remain.
  - Policy recommendations for debtor countries: faster implementation of product and service market reforms (Italy and Spain), align wages with productivity at the firm level (Italy), enhance education outcomes and worker training (Spain), and streamline regulations/enhance business conditions (Portugal).
- Trade policy:
  - The EU-Japan free trade agreement entered into force in February, creating the largest open trade zone in the world.
  - Staff supports EC initiatives to strengthen the WTO, including enforceability of commitments and tightening rules on subsidies and notification obligations.

### Financial sector resilience, risks, and recommended actions
- Capital and asset quality:
  - Tier 1 ratios averaged 15.4 percent in June 2018.
  - Nonperforming loans (NPLs) fell to just under 4 percent of gross loans in 2018Q3, though NPL ratios remain in double digits in four countries.
  - The asset share of banks with high NPLs or low price-to-book ratios declined to 15 percent of the total assets of SSM-supervised banks by 2018Q3.
- Profitability and costs:
  - Return-on-equity (ROE) of the 100 largest banks was 6 percent in 2018Q3, below the 8–10 percent cost of equity, and is expected to stay low in the medium term.
  - Euro area banks have operating costs higher than 65 percent of income on average; Nordic neighbors have costs close to only 50 percent of income.
  - Banking systems with lower deposits per branch tend to have higher cost-to-income ratios.
- Supervisory and structural recommendations:
  - Supervisors should proactively encourage bold reforms to cut costs, including simultaneously reducing branch networks and updating IT platforms.
  - Supervisory actions should assess viability of banks’ business models, push to improve internal capital generation, and incentivize consolidation including via mergers and acquisitions.
- Financial stability heterogeneity and vulnerabilities:
  - An aggregate index summarizing credit growth, equities, and house prices is at its historical mean; however, rapid house price increases with deteriorating affordability occur in some countries (e.g., the Netherlands and Luxembourg).
  - Leveraged loans do not appear excessive at the euro area level, but corporate indebtedness with low interest coverage ratios (ICR) or high net debt to equity warrants careful monitoring in some countries.
- Macroprudential and borrower-based tools:
  - Macroprudential policies should be used more actively for housing and corporate vulnerabilities; examples include tighter large exposure limits and increased countercyclical capital buffers.
  - Bank-based tools cannot address risks from nonbank loans; borrower-based tools for corporates (limits on loan-to-value for commercial real estate, debt/equity caps, minimum ICRs) should be explored and national macroprudential supervisors given authority to apply them to all financial institutions.
  - Authorities should monitor liquidity risks in investment funds exposed to lower-grade corporate debt and real estate.
  - Comprehensive and comparable credit information systems and urgent data-gap resolution for commercial real estate and nonbank financial institutions are needed.
- Brexit-related preparedness:
  - Most U.K.-based banks and investment firms have secured licenses to operate in the EU-27.
  - Conditional recognition for U.K.-based central counterparties to clear derivatives provided until March 2020 in case of a no-deal Brexit.
  - ESMA has temporarily reduced regulatory costs of moving uncleared derivatives contracts to EU-27 counterparts; some national laws legislate temporary continuity of these contracts.
  - Remaining low-probability risk: a British court might fail to recognize SRB resolution powers on existing MREL.
- Anti-money laundering (AML/CFT):
  - Multiple money laundering breaches in the EU underscore the need for stronger enforcement tools and better information-sharing.
  - EBA’s strengthened mandate to ensure quality and consistency of domestic AML/CFT supervisory practices is useful; over the medium term an EU-level supervisory function could be established.
- Authorities’ actions and views:
  - Authorities broadly agree with FSAP recommendations; progress includes macroprudential and AML policy measures, closer monitoring of liquidity risks, and improved early action frameworks.
  - ECB Banking Supervision has used early intervention powers (e.g., replacing bank management with an administrator in an Italian bank).
  - ECB Banking Supervision has set up an AML coordination function and signed an agreement to exchange information with 48 national AML/CFT authorities in the European Economic Area.
  - The ECB believes it should not be assigned full AML supervisory responsibilities due to interaction with criminal law at the national level.

### Advancing Economic and Monetary Union (EMU) and Capital Markets Union (CMU)
- Banking union and deposit insurance:
  - A truly borderless single banking market requires ambitious steps to reduce ring-fencing and strengthen SSM powers on capital and liquidity for cross-border groups.
  - Establishing a European Deposit Insurance Scheme (EDIS) will require political agreement on a timetable and properly defined risk reduction measures in the banking sector.
  - Progress on completing the banking union has stalled amid lack of consensus on risk reduction and common deposit insurance.
  - EU leaders agreed the ESM would serve as a backstop to the Single Resolution Fund (SRF), which could come into force before 2024 if there is sufficient progress on risk reduction by 2020.
  - The Eurogroup stated progress toward a 5 percent gross NPL target and the MREL targets for all SRB banks is required, but details remain unclear.
- Central fiscal capacity and euro area budget:
  - Staff advocates a central fiscal capacity for macroeconomic stabilization to strengthen countries’ ability to use fiscal policy against shocks; there is insufficient political support at this stage.
  - EU leaders agreed to work toward a small euro area budget for convergence and competitiveness, rather than stabilization.
- Capital Markets Union (CMU) progress and barriers:
  - Capital markets in Europe remain small and fragmented due to frictions; four key barriers identified: limited data accessibility on listed and unlisted companies, weak insolvency regimes, disparate and opaque withholding tax regimes, and divergent regulatory quality.
  - Recent measures include legislation on simple, transparent and standardized securitization to boost SME financing; measures to promote venture capital investment in innovative SMEs; political agreements on a portable personal pension product and common rules on covered bonds; facilitation of cross-border distribution of collective investment funds; and an EU Directive to improve restructuring regimes for viable companies in financial difficulties.
  - Further EU-level actions recommended to improve private risk sharing, reduce market fragmentation, and make the portable pension product more cost- and tax-effective (including equal tax treatment for cross-border PEPP providers).

*Source: Box 3. Structural Reforms and Economic Resilience, IMF staff analysis and related sections from the supplied content unit.*

### Box 4. Benefits of a Single Capital Market

### Box 4. Benefits of a Single Capital Market

### Main findings: economic benefits of deeper EU capital markets
- Greater private risk sharing would:
  - diversify savers’ exposures,
  - enhance firms’ financing choices,
  - soften links between domestic demand and domestic economic shocks (the “consumption smoothing” effect).
- Access to more developed financial markets within the EU can significantly lift economic growth by reducing firms’ reliance on tangible collateral, especially for high-value added startups.
- Staff econometric estimates:
  - A firm with a 10 percentage points lower share of tangible assets than average would have close to 2 percentage points higher real value-added growth in France than in Lithuania.
  - A firm with 10 percentage point lower leverage than average can grow close to 2.5 percentage points faster in France than in Lithuania.
- Only 25 percent of risks are shared across euro area countries, while more than 80 percent is shared across the 50 states of the U.S.

### Effects of improving insolvency, regulation, and taxation
- Better quality insolvency and regulatory regimes could improve overall risk sharing by 25–30 percentage points in the eurozone.
- Average cross-border portfolio assets would almost double with 1 standard deviation improvements in insolvency, regulatory quality, and taxes taken together.

### Barriers to capital market integration (survey and staff analysis)
- Significant obstacles to cross-border investment in most of the EU-27:
  - deficiencies in insolvency frameworks,
  - regulatory quality shortcomings,
  - low quality of auditors.
- Hurdles that hinder firms’ ability to raise funds from cross-border venues:
  - restrictions on access to trading platforms,
  - onerous listing requirements.
- Market liquidity for both debt and equity markets is significantly lower in the EU-27 countries and the euro area than in the U.K.
- Many participants reported that protectionist policies hinder cross-border M&As.
- IMF survey metrics (note designations preserved):
  - Note: 1/ Percent of respondents assessing as “low” or “very low.”
  - Note: 2/ Percent of respondents assessing as "somewhat a deterrent” or “a high deterrent."

### Policy recommendations to complete the Capital Markets Union (CMU)
- Increase information transparency, including greater data dissemination on unlisted corporations.
- Simplify procedures for reclaiming withholding taxes and simplify withholding tax rules.
- Improve insolvency regimes and move to more efficient insolvency procedures; the EU could define and monitor minimum standards even though insolvency regimes are enshrined in national law.
- Sharpen regulatory and supervisory powers of the European Supervisory Authorities, centralizing powers over systemic entities where appropriate.
- Seek maximum cooperation with third countries on capital market issues, reflecting the global nature of capital market finance.
- Consider centralizing AML supervision at the EU level to address data gaps and fragmentation along national lines.
- Phase in a common deposit insurance scheme alongside agreed risk-reduction measures to help complete a truly borderless banking union.
- Use EU-level instruments to incentivize national reform efforts and support external rebalancing.

### Authorities’ views and related institutional points
- Authorities welcomed progress toward agreement on an ESM backstop for the SRF, with political agreement that ESM resources for bank resolution will be provided swiftly in a crisis.
- The ESM is confident that adequate governance arrangements can be found to take decisions in the foreseen time span of 12 hours or, in exceptional cases, 24 hours; the Eurogroup agreed to an emergency procedure based on qualified majority voting.
- Liquidity post resolution is actively discussed:
  - Combined resources of the SRF and the backstop are around €120 billion for small and medium-sized banks.
  - Globally systemic institutions could have much higher financing needs; the ECB can provide liquidity only against adequate collateral, possibly including a guarantee from a highly rated European entity.
  - Proposals include an ESM guarantee or appropriately rated bonds issued by the SRF/SRB.
- Further progress on common deposit insurance (EDIS) is seen as essential but political disagreements remain; a high-level Eurogroup working group reported that disagreements persist on several key issues.
- Completing more ambitious CMU elements (for example, improving insolvency regimes or centralizing supervisory power) will be difficult and require political consensus among EU member states.

### Contextual statistics and indicators (selected)
- Risk sharing: 25 percent shared across euro area countries; more than 80 percent across the 50 U.S. states.
- Firm-level growth differentials:
  - ~2 percentage points higher real value-added growth for a firm with 10 percentage points lower tangible asset share (France vs. Lithuania).
  - ~2.5 percentage points faster growth for a firm with 10 percentage points lower leverage (France vs. Lithuania).
- Improvements in insolvency/regulatory quality/taxes: 1 standard deviation combined improvement would almost double average cross-border portfolio assets.
- SRF and backstop resources for liquidity: around €120 billion.
- Euro area NIIP and gross positions (2018):
  - NIIP: -3.8 (% GDP)
  - Gross Assets: 228.0 (% GDP)
  - Debt Assets: 89.7 (% GDP)
  - Gross Liabilities: 231.8 (% GDP)
  - Debt Liabilities: 94.6 (% GDP)
- Current account 2018: 3.0 percent of GDP (euro area)
- Staff assessment: CA norm estimated at 1.1 percent of GDP by the EBA model; staff assesses a CA gap of 1.8 percent of GDP (context preserved from staff analysis).

*Source: IMF staff analysis as presented in Box 4, “Benefits of a Single Capital Market.”*

### 1.3 percent for 2018, with a range of 0.5 to 2.1 percent of GDP.

### 1eurea2019001 - 1.3 percent for 2018, with a range of 0.5 to 2.1 percent of GDP.

### Current Account (CA) — Findings and Staff Assessment
- Headline: "1.3 percent for 2018, with a range of 0.5 to 2.1 percent of GDP."
- Reported/Tabulated values:
  - Actual CA: 2.9
  - Cycl. Adj.: 2.9
  - EBA CA Norm: 1.1
  - EBA CA: 1.8
  - Staff Adj.: -0.5
  - Staff CA Gap: 1.3
- Aggregation note: When applying GDP-weighted aggregation for the euro area, the CA norm is subtracted by 0.6 percent of GDP (the difference between the sum of the individual 11 countries' CA balances and the CA of the entire euro area).
- Assessment summary: The euro area recorded a CA surplus in 2018 and staff assess an aggregate CA gap of 1.3 (percent of GDP as in headline).

### Real Exchange Rate (REER) — Background and Assessment
- Background:
  - The CPI-based REER appreciated by about 3.0 percent from 2017 to 2018.
  - This reflected a nominal appreciation of about 5.2 percent partly offset by weaker inflation in the euro area relative to its trading partners.
  - Estimates through May 2019 show that the REER has depreciated by 3.1 percent relative to the 2018 average.
- Staff assessment:
  - Staff assesses the average euro real exchange rate gap in the range of -5 to -1 percent, with a mid-point of -3 percent.
  - Heterogeneity: REER gaps across member states range from an undervaluation of 8 to 18 percent in Germany to overvaluations of 0 to 10 percent in several small to mid-sized member states.
  - The EBA REER level model indicates an overvaluation of 1.1 percent, whereas the index model points to an overvaluation of 6.0 percent in 2018.
  - The staff-assessed REER gap of -3 percent is within the (-5 percent, +5 percent) interval described as broadly in line with fundamentals.
- Policy implication noted: Need for net external debtor countries to improve external competitiveness and for net external creditor countries to boost domestic demand.

### Capital and Financial Accounts — Flows and Drivers
- Background:
  - Mirroring the 2018 CA surplus, the euro area experienced net capital outflows, largely driven by portfolio debt and FDI outflows.
  - These outflows were somewhat tempered by inflows into portfolio equity.
- Assessment:
  - Capital outflows in portfolio debt and inflows into portfolio equity over the past couple years likely arose in large part from the ECB’s monetary accommodation through its asset purchase program, which has lowered yields on debt and spurred interest in equity.

### FX Intervention and Reserves
- Background: The euro has the status of a global reserve currency.
- Assessment:
  - Reserves held by euro area economies are typically low relative to standard metrics.
  - The currency is free floating.

### Risk Assessment Matrix — Key Risks, Likelihood, Impacts, and Policy Responses
- Rising protectionism and retreat from multilateralism
  - Likelihood: High
  - Expected impact: High
  - Expected consequences: retaliatory trade restrictions; undermining rules-based international trading system; lower growth; increased policy uncertainty; weaker investment and productivity.
  - Policy responses: support multilateral rules-based trading system and trade liberalization; secure benefits of economic integration and cooperation across the EU; measures to support growth and productivity, such as scaled up domestic public investment.
- A disorderly Brexit
  - Likelihood: High
  - Expected impact: High
  - Expected consequences: significant disruptions, border delays, sudden increase in tariff and nontariff costs, long-term efficiency losses (especially for countries with closer links to the U.K.).
  - Policy responses: contingency planning and collaboration between U.K. and EU authorities to reduce cliff-edge effects and disruptions.
- A shift in market sentiment against some high-debt euro area countries
  - Likelihood: High
  - Expected impact: High
  - Expected consequences: higher sovereign and bank spreads; loss of credibility of the euro area policy framework.
  - Policy responses: fiscal consolidation in high-debt countries; continue risk reduction to sever sovereign-bank nexus; reform the Stability and Growth Pact to simplify rules and strengthen enforcement.
- Weaker-than-expected global growth
  - Likelihood: Medium
  - Expected impact: High
  - Expected consequences: lower growth potential; higher output gaps; slower export growth; weaker investment; deterioration in public debt sustainability; private balance sheet strain; intra-euro area rebalancing challenges.
  - Policy responses: accelerate structural reforms to spur investment, productivity and competitiveness; adopt more accommodative fiscal stance in countries with available fiscal space and financing conditions; continue accommodative monetary policy.
- Further pressure on traditional bank business models
  - Likelihood: Medium
  - Expected impact: Medium
  - Expected consequences: financial distress in one or more major banks; reverberations through financial sector; wider sovereign yield spreads.
  - Policy responses: forceful supervisory actions; insolvency reform; develop distressed debt markets; cost cutting and banking system consolidation; follow ECB guidance on NPL management with strict supervisory monitoring; greater inter-agency coordination and improved readiness for early intervention.
- Intensification of security risks leading to sharp rise in migrant flows
  - Likelihood: Medium
  - Expected impact: Medium
  - Expected consequences: socio-economic disruptions; political divisions; pressure on national budgets; potential restrictions on movement in single market.
  - Policy responses: rapid integration of refugees into labor markets; accommodate temporary refugee-related costs within fiscal targets case-by-case; develop a new system to relocate refugees to reduce burden on frontline countries.

### Structural Reform Plans and Progress — Selected Country Priorities and Staff Recommendations (high-level)
- France
  - Priorities: improve labor market functioning, business environment, competition in services, reform government spending to place debt on a firm downward path and attain MTO.
  - Recent progress: labor code reforms (2017); 2018 tax reforms lowering tax wedge; apprenticeship and training reforms (2018); public railway reform (2018); law in 2019 to simplify firm creation and insolvency regime changes.
  - Staff recommendations: fully implement recent labor market reforms; pursue product and service market reforms; provide specific medium-term plans to reduce public spending and put debt on a firm downward path; implement public administration and pension reforms.
- Germany
  - Priorities: increase labor force participation (women, older workers, refugees), increase productivity, advance digitalization, support innovation and venture capital, reduce administrative burden, reduce uncertainties about energy transition.
  - Recent progress: child care financing program (June 2018); Act to Flexibilize the Transition from Working Life to Retirement (2017); Skills Development Opportunities law (January 2019); federal support up to €12 bn for fiber-based gigabit network; planned regulatory reforms and R&D tax credit bill; Electricity Grid Action Plan (August 2018).
  - Staff recommendations: lower tax wedge on low-income households and secondary earners; expand child care; enhance education and lifelong learning; deregulate professional services; strengthen incentives for private sector participation in fiber expansion; expand R&D tax credit envelope; introduce clearer strategy for greenhouse gas reduction and consider carbon tax.
- Greece
  - Priorities: preserve and expand labor market flexibility; foster competition in service and product markets; improve the business environment.
  - Recent progress: reversals of some 2011 reforms (August 2018); statutory minimum wage increased by 10.9 percent (February 2019); partial liberalization of professions; modernization of public works registries; simplification of investment licensing procedures.
  - Staff recommendations: pursue more flexible labor market policies favoring firm-level agreements; accelerate reforms to reduce nonwage costs; reassess regulated professions; strengthen Hellenic Competition Commission capacity; extend investment licensing reforms.
- Italy
  - Priorities: implement labor market reforms; increase competition; reform civil justice and insolvency; raise public sector efficiency.
  - Recent progress: "Dignity Decree" (mid-2018); retirement age adjustments in 2019 budget; new insolvency law adopted January 2019 (expected full effect August 2020); public administration reform bill; privatization/rationalization delayed to 2020.
  - Staff recommendations: decentralize wage bargaining; lower dismissal costs and uncertainty; strengthen ALMPs and coordination; ensure annual pro-competition law adoption; strengthen Competition Authority enforcement; significant implementation effort for new insolvency law and related measures; improve civil justice efficiency and court case management.
- Portugal
  - Priorities: preserve labor market flexibility; review composition of public expenditure.
  - Recent progress: tri-partite negotiations on labor regulations; capital spending increased from a low base; modest pay rises for teachers negotiated.
  - Staff recommendations: preserve labor reforms; promote managerial skills; link minimum wage increases to productivity; reduce duality by making permanent contracts more flexible; comprehensive review of public employment to control wage bill growth; increase capital spending further.
- Spain
  - Priorities: make labor market more inclusive (reduce duality, raise regional mobility, tackle skills mismatches); enhance competition and facilitate innovation and firm growth.
  - Recent progress: intensified inspections and sanctions to reduce abuse of temporary contracts; limited progress on active labor market policies; plans to improve coordination between regions and vocational training; slow implementation of Market Unity Law; financial counseling to SMEs started.
  - Staff recommendations: reduce labor segmentation; improve active labor market policies targeting and evaluation; improve education and training; incentivize labor mobility (moving subsidies, targeted housing assistance); swiftly implement Market Unity Law and liberalize professional services; tackle size-related rules and increase public-private R&D cooperation.

*Italic: Source — IMF staff analysis and country team inputs from the provided PDF content.*

### Annex I. Progress Against IMF Recommendations

### Annex I. Progress Against IMF Recommendations

### Structural Policies
- Policy advice: Countries should grasp the opportunity afforded by strong growth to redouble reform efforts.
- Findings since 2018 Article IV:
  - Compliance with the 2018 Country-Specific Recommendations (CSR) under the European Semester continues to disappoint.
  - Linking EU financial support to incentivize reforms: the newly proposed reform delivery tool and technical support instrument by the European Commission under the 2021–27 EU budget, while limited in size (0.2 percent of the EU-27 GDP), can incentivize national reform efforts.
  - The EU should stay committed to free trade and the rules-based global trading system: the EU-Japan free-trade agreement, which entered into force in February 2019, created the largest open trade zone in the world; trade negotiations with Australia and New Zealand have started. The European Commission is developing a proposal to modernize the WTO.

### Fiscal Policies
- Policy advice: Countries with fiscal space should use it to promote public investment and structural reforms, while high-debt countries should adjust now to rebuild buffers.
- Findings since 2018 Article IV:
  - Policy actions have been mixed: some countries with fiscal space eased their fiscal stance while others tightened. High-debt countries have not adjusted enough, either easing or having a broadly neutral fiscal stance.
  - Better compliance with and enforcement of the fiscal rules is needed to build political support required to establish a central fiscal capacity (CFC). The fiscal rules should be simplified and enforcement made more automatic.
  - A CFC should be designed to better smooth macroeconomic shocks and improve the fiscal-monetary policy mix, while supporting fiscal discipline in good times.
  - Compliance with the fiscal rules has been weak and enforcement has become increasingly discretionary.
  - There are currently no discussions on reforming the fiscal rules.
  - In December 2018, euro area leaders endorsed a euro area budget contained in the EU budget; however, agreement on the size and financing of such an instrument has not been reached yet.

### Monetary Policies
- Policy advice: Strong monetary accommodation should be maintained until inflation is convincingly converging to objective.
- Findings since 2018 Article IV:
  - The ECB stopped net asset purchases at the end of 2018, but monetary policy is expected to remain strongly accommodative at least through the first half of 2020.
  - The ECB has committed to fully reinvesting maturing securities under the asset purchases program until well beyond the first rate hike, implying a repurchase of about €20 billion per month in a context of falling debt-to-GDP ratios in most euro area countries.
  - Reflecting the worsening outlook for growth and inflation, the ECB Governing Council in June 2019 postponed the first rate hike to after mid-2020 at the earliest.
  - A new quarterly series of targeted longer-term refinancing operations (TLTRO III) was announced in March 2019, to be launched between September 2019 and March 2021.

### Financial Policies
- Policy advice: The link between low profitability and high NPLs underlines the role of NPL reduction, and thus the need for strong supervision.
- Findings since 2018 Article IV:
  - NPL levels continue to improve with the ratio falling to 4 percent of gross loans in 2018Q3.
  - Profitability fell to an ROE of 6 percent in 2018Q3, along with the growth slowdown, and bank stock prices fell by 35 percent in 2018.
  - Supervisory efforts: banks’ business models are reflected in Pillar 2 decisions on capital requirements. In March 2018, both the European Commission and the ECB proposed new risk reduction measures.
  - Commission package measures include changes to the Capital Requirements Regulation requiring new unsecured loans to be fully provisioned no later than two years, and new secured loans no later than eight years, after they become nonperforming, with concomitant Pillar 1 deductions from banks’ own funds; efficient out-of-court mechanisms for value recovery on secured loans; and development of distressed debt markets supported by specialized credit servicers.
  - The ECB’s guideline sets provisioning expectations for all loans, new or existing, that become nonperforming going forward: supervisory expectations are to cover the full value of unsecured loans no later than two years, and secured loans no later than seven years, after default, with more ambitious interim expectations than the binding requirements proposed by the Commission.
  - The FSAP calls for closer interagency coordination and data sharing, including to facilitate earlier intervention in problem banks. The SSM used its early intervention powers for an Italian bank, putting in place an administrator.
  - Careful steps should be taken to encourage a gradual reduction of home bias in financial intermediaries’ sovereign exposures; no EU-level action has been taken yet. Concentration risk with sovereign exposures is assessed as part of Pillar 2 discussions.

### Completing the Banking Union and Resolution Framework
- Policy advice: Completing the banking union by establishing a common deposit insurance scheme with a common fiscal backstop would foster the free flow of liquidity and provide reassurance to supervisors that the bank-sovereign link is severed. Further integration would be helped by corporate insolvency and foreclosure framework harmonization and a speedier implementation of the BRRD’s minimum requirement for own funds and eligible liabilities (MREL) and related resolution planning.
- Findings since 2018 Article IV:
  - Discussions on architecture have been slow. EU leaders agreed that the ESM would serve as a backstop to the SRF that would come into force before 2024 if there is sufficient progress on risk reduction by 2020.
  - Discussions on common deposit insurance have not progressed far.
  - SRB published two sets of MREL policy—on November 20, 2018 for banks without presence outside the banking union, and on January 16, 2019 for the more complex cross-border groups. The SRB intends to set binding targets for all banking groups within the SRB’s remit by 2020.
  - Supervisors and resolution authorities should push the largest banks to issue more capital and junior debt now given still-supportive financial conditions, while remaining alert to cross holdings of MREL among banks and potentially uneven profitability impacts.
  - EBA reports show that EU banks would need an additional EUR 39 billion of additional capital to meet Basel III needs in the next eight years.

### Capital Markets Union and Macroprudential Policy
- Policy advice: Faster progress on the capital markets union (CMU) action plan would foster greater international private risk sharing.
- Findings since 2018 Article IV:
  - Many items in the CMU Action Plan have been implemented or reached political agreement. Legislations for simple, transparent, and standardized securitization, a new Prospectus Regulation, and EU Venture Capital Funds have been implemented.
  - Political agreements have been reached on a pan-European personal pensions product, covered bonds, cross-border distribution of collective investment funds, review of investment firms, and preventive restructuring/second chance procedures, among others.
- Policy advice: In the area of macroprudential policies, increase national authorities’ flexibility, improve the transparency of ESRB warnings and ECB decisions on top-ups, legislate borrower-based tools, strengthen reciprocity arrangements, and close data gaps in commercial real estate and shadow banking.
- Findings since 2018 Article IV:
  - Not done.

### Annex II — Progress Against IMF FSAP Recommendations (selected)
- Supervision
  - Reduce the fragmentation of national legal frameworks for bank supervision (EU) — Timing: MT. Action: SSM has drawn up an action plan to inform the next CRD/CRR review.
  - Revise legal provisions to close regulatory gaps with international standards (EU) — Timing: MT. Action: Partially addressed in the most recent review of the CRD/CRR concluded in 2019; examples include interest rate risk in the banking book (BCP 23), capital adequacy (BCP 16), and liquidity risk (BCP 24), especially the 2018 amendments to the Liquidity Coverage Ratio.
  - Improve planning of supervisory resources (SSM) — Timing: ST. Action: Some actions taken, e.g., a Simplification Group comprising ECB and NCA staff; improvements of the SSM planning module will be made in 2019.
  - Raise standards for handling of loan classification and provisioning (SSM) — Timing: ST. Action: Improvements via (i) Addendum for new NPEs as of April 1, 2018; (ii) SREP recommendations for the stock of NPEs as of March 31, 2018; (iii) automatic Pillar 1 backstop for NPEs from newly originated loans as part of the EU Banking Reform package approved in 2019.
  - Improve coordination and information sharing regarding AML/CFT (ECB, national authorities) — Timing: ST. Action: ECB/SSM set up an AML Coordination Function (ALMCO); in January 2019, the ECB signed an agreement for information exchange with nearly 50 national AML/CFT authorities as mandated by the 5th review of the AML Directive; following the ESA review, the EBA is playing a coordinating role on AML/CFT supervision issues across sectors and the EU.
  - Transfer supervision of systemic investment firms and third country branches to the SSM (EU) — Timing: ST. Action: Political agreement on a new Investment Firm Regulation and Directive requiring the largest and more systemic investment firms (above €30 billion under solo, group or branch level) to be registered as credit institutions and fall under ECB/SSM supervision; the new parliament expected to pass it into law later in 2019.
  - Ensure the availability of a full set of borrower-based macroprudential instruments (EC, ESRB) — Timing: MT. Action: ESRB amended its recommendation on closing real estate data gaps; the EC will assess in the 2022 review of the CRD/CRR whether borrower-based instruments for both households and nonfinancial corporates could be added to the EU-level macroprudential toolkit.

- Preparations for the U.K. exit from the EU
  - Accelerate discussions on action to ensure continuity of service and data access (ECB, ESAs, SSM) — Timing: I. Actions: several measures in case of no-deal Brexit; conditional recognition to U.K.-based CCPs until March 30, 2020; ESMA reduced regulatory costs of moving uncleared derivative contracts to EU-27 counterparts; specified EU-27 dual-listed stocks that would need to trade in an EU-27 trading venue to meet the share-trading obligation under MiFID II; March activation of the currency swap arrangement by the ECB and the BoE for possible provision of euro to U.K. banks and GBP to euro area banks.

- NPL resolution
  - Set consistent NPL definitions and reporting standards (EC, EBA, SSM) — Timing: ST. Action: Based on EBA work, the revised CRR introducing the common NPE definition (along with the Pillar 1 prudential backstop) was adopted in April 2019.
  - Establish minimum standards for insolvency and creditor rights regimes (EU) — Timing: MT. Action: The June 2019 Directive on Preventive Restructuring established minimum standards in certain areas, including for preventive debt restructuring mechanisms and debt discharge for entrepreneurs.
  - Prescribe rules for valuation of immovable loan collateral, including repossessed collateral (EU) — Timing: MT. Action: -- (no action recorded).

- Crisis management and financial safety nets
  - Strengthen the early action framework and advance resolution preparation (SRB, SSM, EC, NRAs) — Timing: I. Action: In 2018, the ECB crisis management framework was improved by refining escalation procedures with qualitative and quantitative indicators of deterioration of bank conditions.
  - Proceed quickly with the buildup of MREL and internal MREL, prioritizing large banks (SRB) — Timing: I. Action: SRB published two sets of MREL policy—November 20, 2018, and January 16, 2019; intends to set binding targets by 2020. New EU rules on the revised EU MREL framework (integrating TLAC) will enter into force in July 2019, applicable from early 2021. All EU GSIIs already comply with TLAC as of January 2019.
  - Ensure availability of liquidity in resolution (SRB, EC, Eurosystem) — Timing: ST. Action: In December 2018, the Eurogroup mandated the Eurogroup Working Group and the Task Force on Coordinated Action to develop terms of reference for liquidity in resolution by June 2019; in June 2019, the Eurogroup agreed work should continue in the second half of 2019.
  - Designate and make operational the SRF backstop (such as the ESM) (EU, SRB, ESM) — Timing: ST. Action: At the December 2018 summit, EU leaders agreed that the ESM will serve as the SRF backstop, which could come into force before 2024 if there is sufficient progress on risk reduction by 2020. A broad agreement was reached on revising the ESM Treaty in June 2019, and work will continue in the second half of 2019 to finalize legal texts.
  - Establish an EDIS with a backstop (EU) — Timing: ST. Action: A high-level working group published its report in June 2019; disagreements remain on a number of issues such as the level and metrics of risk reduction and regulatory treatment of sovereign exposures; the report identifies topics for further analytical work.
  - Align the relevant state-aid loss-sharing requirements (in resolution) with the BRRD/SRMR, while introducing flexibility through a financial stability exemption subject to strict criteria (EU) — Timing: ST. Action: -- (no action recorded).
  - Further harmonize the hierarchy of creditor claims in bank insolvency (EU) — Timing: MT. Action: The new revisions to the BRRD (as part of the Banking Reform package) include a new paragraph to Article 48 specifying that all own funds items have a lower priority ranking in insolvency than non-own funds items.
  - Buttress SRB independence and powers (for example, by granting permanent observer status at the SSM Supervisory Board) (SSM, EC) — Timing: I. Action: In practice, an SRB Board member is already being invited to attend the SSM Supervisory Board meetings as an observer if a relevant topic is discussed.

- Liquidity management and ECB mandate items
  - Articulate an explicit financial stability mandate for the ECB/Eurosystem (ECB) — Timing: MT. Action: --.
  - Intensify “horizon scanning” involving supervisory and operational functions (ECB, SSM) — Timing: I. Action: --.
  - Further harmonize and ultimately centralize ELA arrangements (ECB) — Timing: ST. Action: --.
  - Manage the transition from crisis-related policy settings and develop the future operational framework to reflect regulatory and market developments (ECB) — Timing: MT. Action: --.

### Annex III. Statistical Issues (summary)
- European statistics are developed, produced, and disseminated by the European Statistical System (ESS) and the European System of Central Banks (ESCB); they operate under separate legal frameworks and cooperate closely when designing statistical programs.
- The European statistics produced by the two systems are of sufficient coverage, quality, and timeliness for effective macroeconomic surveillance.
- Transition to the new international statistical standards is complete; most countries received derogations from ESA 2010 data transmission requirements up to 2020. A review showed data availability has improved significantly and an updated list of remaining derogations was published. In many cases, member states have resolved the issues that gave rise to derogations, and a significant number have started providing part of the data covered by derogations before the first expected transmission date. In 2018, data on accrued to date pension entitlements in social insurance were released for the first time.
- Eurostat and the ECB continued working on the 20 recommendations of the second phase of the G20 Data Gaps Initiative (DGI-2) as members of the Inter-Agency Group on Economic and Financial Statistics; substantial progress has been achieved and it is intended that all DGI-2 recommendations are fully implemented by 2021.
- Eurostat and the ECB jointly support the Special Data Dissemination Standard Plus (SDDS Plus), the third and highest tier of the IMF’s Data Standards Initiatives.

*Source: Annex I–III, “Progress Against IMF Recommendations” (selected excerpts) from the provided IMF content unit.*

### 2012. By April 2019, 10 euro area countries (and 14 EU member states overall) have adhered to the

### 1eurea2019001 - 2012. By April 2019, 10 euro area countries (and 14 EU member states overall) have adhered to the SDDS Plus.

### Quality assurance and MIP statistics
- Eurostat and the ECB/DG-Statistics continued implementing their Memorandum of Understanding on the quality assurance of statistics underlying the Macroeconomic Imbalance Procedure (MIP), including:
  - Publication of the first harmonized domain specific quality reports for BOP and IIP statistics.
  - Quality-assurance visits to Luxembourg (July 2018), Poland (September 2018) and Germany (January 2019).
- Starting in 2018, two auxiliary indicators from the Consolidated Banking Data published by the ECB were included in the MIP Scoreboard: the leverage ratio (assets to equity) and the amount of gross nonperforming loans.

### Timeliness, coverage, and national accounts flash releases
- Streamlining flash releases of key national accounts (NA) indicators:
  - Preliminary (T+30) GDP flash estimates for the EU and the euro area introduced in April 2016.
  - Testing of European employment flash estimates led to publication of t+45 employment flash estimates starting November 2018.
  - Regular employment estimates advanced from about t+75 to t+65 days.
  - Testing of European t+30 employment flash estimates continues.
  - Strategy to move to a regular estimation schedule based on country estimates available after 30, 60, and 90 days is being partly implemented.

### Improvements to quarterly BOP and IIP statistics
- Amendment of the ECB Guideline on External Statistics will bring changes in 2021, including:
  - More detailed information by sector, including distinction between households and nonfinancial corporations and more granular presentation of the financial sector.
  - Comprehensive breakdown of the IIP by currency of denomination.
  - Bilateral data vis-à-vis all G20 countries for the main accounting entries.
  - Instrument breakdown of the BOP and IIP to facilitate the link with NA.
- ECB is working towards collecting fit for purpose data for Special Purpose Entities (SPEs) following the enhanced definition approved by the IMF Balance of Payments Committee.

### Financial derivatives, quarterly financial accounts strategy, and related task forces
- Guidance on recording of financial derivatives is being prepared by the ECB with support from international organizations, including the IMF. An ESCB Statistics Committee task force (established end-2018) aims to identify best practices for high coverage and consistent recording in macroeconomic statistics by 2020.
- A new medium-term strategy for quarterly financial accounts is being developed by the ECB with five objectives:
  - (i) addressing globalization challenges;
  - (ii) improving information on non-bank financial intermediation;
  - (iii) understanding interconnectedness at macro level;
  - (iv) enhancing household analysis;
  - (v) increasing serviceability of existing financial accounts data.

### ESA 2010 data quality reporting and productivity indicators
- The regular reporting exercise on the quality of ESA 2010 data transmitted by EU member states to Eurostat is well established. Eurostat assessment reports on 2016 and 2017 data transmissions were published in 2018, showing relatively high completeness and timeliness and improvements in most countries.
- Process started to complement Eurostat's existing metadata with national metadata and more detailed metadata. Eurostat published practical guidelines for revising the ESA 2010 based accounts.
- To exploit data under the ESA 2010 Transmission Programme, Eurostat and some EU member states will aim to extend production and publication of productivity indicators within the new phase of the Growth and Productivity Accounts project. A task force with NSIs with a two-year mandate (2019–21) will further develop high-quality indicators for labor, capital and multifactor productivity for all EU member states and improve underlying data and metadata.

### Task forces, handbooks, registers, and sectoral initiatives
- Eurostat Task Force on the recording of illegal economic activities in NA and BOP published a handbook in March 2018 addressing conceptual and practical issues for compiling statistics on illegal economic activities.
- Eurostat drafted a handbook "Maritime Cluster—Guidance for BOP Data Compilers" and a task force is working on a revised version.
- Eurostat started releasing core inflation and other special aggregates derived from more granular data based on subclass level of the European "classification of individual consumption according to purpose" starting January 2017.
- Task Force for Commercial Real Estate Indicators (TF CREI) created in 2018 to exchange experience on pilot projects, methodological framework, training resources, and closing data gaps. A Task Force CREI_STS will start in 2019 focusing on indicators for construction starts, completions, and vacancy rates.
- ESCB Statistics Committee’s Real Estate Task Force explored feasibility of a broad set of financial real estate indicators and AnaCredit as a possible data source. The General Board of the ESRB, with input from the STC, amended Recommendation 2016/14 on closing real estate data gaps in March 2019, aligning CRE definition more closely with AnaCredit.
- EuroGroups Register (EGR) improvements: more than 21,000 multinational enterprise groups active in the EU are part of 2017 EGR data, finalized in March 2019.
- ESCB’s Register of Institutions and Affiliates Data (RIAD): fourth generation of RIAD system delivered in March 2018 to support AnaCredit; around 8 million entities are currently recorded and updated at high frequency.

### Modernization of intra-EU trade, government finance statistics, and FIGARO
- Modernization of intra-EU trade in goods statistics: deployment project focusing on preparing European legal provisions and technical implementation, including exchange of micro-data on intra-EU exports.
- Progress in government finance statistics (GFS):
  - Annual and quarterly ESA 2010-based GFS time series continue to be available for all countries.
  - European GFS are consistent with data supplied under the Excessive Deficit Procedure and undergo strong verification procedures.
  - For most countries, annual data are mapped to the GFSM 2014 framework; quarterly data are mapped for all countries.
  - Progress in availability of detailed COFOG data, transactions with EU institutions, financial instruments, and government debt breakdowns.
  - Eurostat continues to publish data on contingent liabilities and non-performing loans of the government.
- FIGARO (Full International and Global Accounts for Research in Input-Output Analysis) project:
  - Establishing annual production of EU multi-country input-output tables and five-yearly production of EU multi-country supply, use, and input-output tables (EU-IC-SUIOT).
  - First deliverables of EU-IC-SUIOT for 2010 were released in April 2018.
  - Project will compile a time series of EU inter-country input-output tables from 2010 to 2017 by end 2020, both in current and previous years’ prices.

### Pension funds, Financial Corporations engaged in Lending (FCLs), and aggregated banking statistics
- ECB started implementing new regulation on statistical reporting requirements for pension funds (PF):
  - Regulation published in February 2018; reporting of the first PF data under the new regulation expected by end-2019; first publication expected by mid-2020.
- ECB published annual data on Financial Corporations engaged in Lending (FCLs) in September 2018 for data up to 2017. FCLs are intermediaries specialized in asset financing; balance sheet statistics are provided on a best-efforts basis and currently cover the euro area except Finland, Ireland, and Luxembourg.
- Aggregated banking statistics enhancements in 2018:
  - Publication expanded to include new indicators such as level 1, level 2 and level 3 assets, total exposures to general governments and internal ratings-based credit risk parameters.
  - Annual ECB publications of solvency and leverage indicators at bank level (Pillar 3 disclosures) were expanded in 2018 to include individual information on risk-weighted assets by risk type and by computation method for ECB-supervised global and other systemically important institutions.

*Source: 1eurea2019001 - 2012. By April 2019, 10 euro area countries (and 14 EU member states overall) have adhered to the SDDS Plus.*

### 6.      The ECB continued several projects to enhance the availability and quality of statistics

### 6.      The ECB continued several projects to enhance the availability and quality of statistics

### Statistics projects and data enhancements
- Money Market Statistical Reporting (MMSR)
  - Regular publication of aggregated indicators started in 2017 for the unsecured market.
  - Publication was extended in January 2019 with the secured segment.
- Euro short-term rate
  - The Governing Council of the ECB decided to develop a euro short-term rate based on MMSR data.
  - The rate will be produced by the ECB from October 2, 2019, which has been selected as the euro risk-free rate by a working group of private financial institutions.
- Securities holdings statistics
  - Data collection on securities held by individual banking groups has been extended to cover more banking groups and attributes.
  - Starting with the reference period 2018-Q3, the enhanced reporting now covers all banking groups that are directly supervised by the ECB.
  - New attributes are reported in-line with the concepts of AnaCredit so that data for loans and securities can be combined and analysed jointly in a harmonised manner.
  - The enhanced set of data is highly granular; data can be broken down to the level of the individual member of the banking group and to the security.
- Analytical credit datasets (AnaCredit Project)
  - The first reporting took place in mid-November 2018 based on data as of September 2018.
  - A number of countries took the transitional period and started reporting data in end-March 2019.

### Cooperation on income, consumption, wealth (ICW) and linking macro‑micro data
- The ECB, Eurostat and the OECD actively cooperate on statistics and research concerning the joint distribution of income, consumptions and wealth (ICW) and on linking macro and micro data on household wealth.
- Two meetings of the OECD/Eurostat Expert Group on Disparities in National Accounts took place in 2018.
- A new data compilation round has started and progress was achieved towards the publication of the methodological manual.
- The ECB Expert Group Linking Macro and Micro Data concentrates on household wealth, taking advantage of the Household Finance and Consumption Survey, which is aimed to be bridged to National Accounts.

### Public sector accounting modernization (EPSAS)
- Technical work by Eurostat is ongoing towards modernizing and harmonizing public sector accounting in the context of the European Public Sector Accounting Standards (EPSAS).
- In May 2018, Eurostat presented the draft EPSAS Conceptual Framework to the EPSAS Working Group.
- Technical work underway covers key public sector accounting issues from the EPSAS perspective, such as the accounting treatment of discount rates and grants.
- The collection of information for impact considerations continued in 2018 and is at an advanced stage.

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*Source: 1eurea2019001 - 6.      The ECB continued several projects to enhance the availability and quality of statistics*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1eurea2019001.pdf_