## _cr07260

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---

### EXECUTIVE SUMMARY — Outlook and cyclical prospects
- Real GDP growth is running "around 2½ percent"; projections are for growth "around 2½ percent through 2008."
- Recent historical pace: "just over 3 percent over the four quarters to 2006:Q4 and 2007:Q1."
- Potential growth rate estimates: "currently just above 2 percent," implying a gradual increase in resource utilization.
- Cyclical drivers and indicators:
  - Strong export growth, improving profitability and balance sheets, and accommodative financial conditions have fostered a broad based upswing of investment and employment.
  - Investment and exports have led the recovery.
  - All capacity utilization indicators are moving up and some are already close to previous cyclical peaks.
  - Unemployment rates have fallen below the 2000 trough while equilibrium rates likely fell further; labor force participation and population are on the rise.
  - Drivers of labor-market changes include: (i) shift toward part-time and temporary jobs enabled by deregulation; (ii) rising labor force participation of women and older workers; (iii) high immigration; and (iv) less generous welfare.
- External setting:
  - Import demand growth in partner countries projected to slow "from about 7½ percent annually over the past couple of years to around 6½ percent through 2008."
  - "The area’s external current account is broadly balanced."
  - Financial market volatility and risk premia remain historically low.
- Risks:
  - Short-term risks seen as small and to the upside; medium-run risks widening and moving to the downside.
  - External downside risks: renewed upward pressure on oil prices; a hard landing of the US economy; a malign unwinding of global imbalances; flight from risk.
  - Domestic short-run upside risks: consumer spending could accelerate faster than anticipated; equity markets are more fairly valued and corporate balance sheets stronger than at the peak of the previous boom; emerging equipment capacity constraints could boost investment.
  - Domestic medium-run weaknesses: stretched housing sectors and insufficient competitiveness in some parts of the area.

### Inflation and monetary policy: removing policy accommodation
- Underlying inflationary pressures have been inching up; various indicators (financial market-based measures, analysts' expectations, core and trimmed measures) have been rising gradually since troughs of 2005.
- Euro-area headline HICP has been running just under the "2 percent" threshold.
- The January 2007 VAT increase in Germany "may have added around ¼ percentage point at the area-wide level."
- Wage developments:
  - Wage demands expected to firm somewhat more than productivity over the projection horizon.
  - Backward-looking indicators show subdued wages through 2006; recent wage settlements (notably in Germany's metal sector) continue to surprise on the downside.
  - Continued high oil prices and improving labor market conditions provide ground for higher pay, notably in Germany.
- Forecasts and risks:
  - Staff and ECB forecasts see HICP inflation "hovering around 2 percent through 2008."
  - Staff models point to roughly balanced risks for inflation; ECB puts greater emphasis on upside risks, including wages and ample liquidity.
- Monetary aggregates and transmission:
  - Credit to nonfinancial corporations is increasing rapidly; credit to households, notably for mortgages, is slowing down noticeably.
  - M3 continues to expand at a brisk pace (lately more on account of less liquid components); Fund staff is skeptical about M3 as an indicator of short-to-medium-run inflation.
- Policy actions and outlook:
  - "Following the mission the ECB raised rates to 4 percent on June 6, 2007," and markets foresee rates "just under 4½ percent by the end of this year."
  - With growth projected close to or above potential and possible further upward pressure on factor utilization and prices, "some further monetary policy action is likely to be necessary."
  - Scope and timing of further action depend on: (i) the extent reforms and demographics have improved labor supply; (ii) whether the incipient acceleration of productivity is structural or cyclical; and (iii) the evolving distribution of demand-side risks, including those related to the exchange rate.

### Fiscal policy and public finances
- Fiscal outturns and policies "have been strong," with the area’s fiscal deficit "has declined."
- Concern: past accomplishments together with benign prospects may prompt "some letting down of the guard," particularly in countries still distant from their medium-term objectives.
- Tabled fiscal indicators (Euro area, In percent of GDP):
  - Overall fiscal balance: -2.5 (2005), -2.3 (2006), -1.7 (2007 est.), -1.0 (2008 proj.), -1.0 (2009 proj.), -0.8 (SP 2005)
  - Revenue: 45.2 (2005), 45.1 (2006), 45.8 (2007 est.), 45.6 (2008 proj.), 45.4 (2009 proj.), 45.3 (SP 2005)
  - Expenditure: 47.7 (2005), 47.4 (2006), 47.4 (2007 est.), 46.6 (2008 proj.), 46.3 (2009 proj.), 46.1 (SP 2005)
  - Structural fiscal balance, Euro area 1/: -1.9 (2005), -1.7 (2006), -1.0 (2007 est.), -0.8 (2008 proj.), -0.8 (2009 proj.), -0.8 (SP 2005)
  - Structural fiscal balance, EDP countries 2/: -3.1 (2005), -3.1 (2006), -1.8 (2007 est.), -1.3 (2008 proj.), -1.5 (2009 proj.), -1.3 (SP 2005)
  - Structural fiscal balance, Non-EDP countries: -0.7 (2005), -0.3 (2006), -0.1 (2007 est.), -0.2 (2008 proj.), -0.2 (2009 proj.), -0.2 (SP 2005)
  - Germany overall: -2.4 (2005), -2.8 (2006), -1.3 (2007 est.), -0.7 (2008 proj.), -0.9 (2009 proj.), -0.6 (SP 2005)
  - France overall: -2.7 (2005), -1.6 (2006), -1.9 (2007 est.), -1.6 (2008 proj.), -1.6 (2009 proj.), -1.6 (SP 2005)
  - Italy 1/: -3.4 (2005), -3.1 (2006), -2.3 (2007 est.), -1.8 (2008 proj.), -2.0 (2009 proj.), -2.2 (SP 2005)
  - Footnotes: 1 Excludes net deficit increasing one-off measures in Italy in 2006 (1.5% of GDP). 2 Germany, Greece, Italy and Portugal, as of May 31, 2007.
- Interpretation and SGP implications:
  - Staff cautioned that standard cyclical adjustment might overstate the true structural adjustment in 2006; recommended conservatively treating about half of the observed reduction as structural pending deeper analysis.
  - Eurogroup commitment: achieve country-specific MTO by 2010 at the latest; under reformed SGP this implies adjusting by more than ½ percent of GDP annually for countries not at MTO.
  - Staff pressed for full adherence to the SGP norm of at least ½ percent of GDP adjustment per annum by countries short of their MTOs.
- Long-term pressures:
  - Aging-related expenditure (EU, In percent of GDP):
    - Pensions Level: 10.6 (2004), 11.5 (EU25); increase over 2004: 1.3 (2030), 1.6 (2050), 2.2 (EU25 level 2050), 2.6 (Euro area level 2050)
    - Health care Level: 6.4 (2004), 6.3 (EU25); increase over 2004: 1.0 (2030), 1.0 (2050), 1.6 (EU25 level 2050), 1.5 (Euro area level 2050)
    - Long-term care Level: 0.9 (2004), 0.7 (EU25); increase over 2004: 0.9 (2030), 0.2 (2050), 0.6 (EU25 level 2050), 0.5 (Euro area level 2050)
    - Gross expenditure Level: 17.9 (2004), 18.5 (EU25); plausible alternative increase ............5.8 6.0
    - Education Level: 4.6 (2004), 4.4 (EU25), changes -0.7, -0.7, -0.6, -0.6
    - Unemployment benefits Level: 0.9 (2004), 1.0 (EU25), changes -0.3, -0.3, -0.3, -0.3
    - Net expenditure Level: 23.4 (2004), 23.9 (EU25); increase over 2004: 2.2 (2030), 1.8 (2050), 3.5 (EU25 level 2050), 3.7 (Euro area level 2050)
  - Staff conservative estimate: increases of "3¾ percent of GDP by 2050" remain in the pipeline.
  - Staff warned some countries—Italy, and to a lesser extent France and Greece—would remain close to the 3 percent ceiling given the stage of the cycle.

### Structural policies: labor utilization, productivity, and integration
- Structural policies seen as the area's main contribution to an orderly resolution of global imbalances; staff welcomed renewed impetus behind the Lisbon Agenda.
- Labor market:
  - Developments continue to surprise on the upside, but much remains to be done to increase participation rates.
  - Low productivity and labor utilization are weighing on living standards.
- Product markets and contestability:
  - Product market policies moving into higher gear, but "contestability in sheltered sectors remains problematic" and is central to reversing weak productivity performance.
  - Lisbon Agenda growth impact estimates: about "½–¾ percentage points of GDP over the medium run."
  - Mission pressed for early and good faith implementation of the Services Directive by December 2009; recommended publication of country-specific transposition timetables and a formal mid-term review by the European Commission.
  - Need to extend liberalization to sectors not covered by the Directive, notably professional services.
- Financial sector:
  - Increased contestability and integration in the financial sector is key to improving performance.
  - Significant initiatives to strengthen markets and the stability framework are underway, but "how to proceed is controversial."

### Financial system assessment, vulnerabilities, and policy recommendations
- Current assessment:
  - Equity markets have returned "close to previous highs or above"; volatility and risk premia remain "unusually low."
  - Bank profitability "has strengthened through 2006," though "it remains structurally low in parts of the area."
  - Insurance sector has "benefited from recovering asset prices."
  - Balance sheets are "generally strong" with "relatively benign developments of market-based indicators, such as distance to default for large European banks."
- Emerging vulnerabilities:
  - Financial indicators "may have peaked."
  - Signs the credit cycle is gradually turning: "Nonfinancial corporate rating downgrades have been more frequent than upgrades."
  - "Leverage in parts of the corporate and household sectors may have become excessive."
  - ECB analysis: "vulnerability of the financial system to an abrupt and unexpected loss of market liquidity appears to be increasing."
  - Other concerns: external downside risks; rising complexity of financial instruments; activities of highly leveraged nonbank financial institutions.
  - EC and ECB staff: European "subprime-like" mortgage market is "far less developed" than in the United States and "few of the large euro-area banks have significant direct exposures to subprime activity in the United States."
- Empirical evidence on spillover risks (Box 2):
  - Method: Extreme Value Theory on distance-to-default (DD) for 27 largest EU banking groups (May 2000–April 2007); binomial logit model for large negative DD co-movements.
  - Key empirical findings (May 2000–Apr 2007 vs May 2000–Nov 2003):
    - Number of significant links: 1/ 195 71 45 0 (table reproduced as in source)
    - Percent of all possible links 2/: 39.6 8.7 28.6 7.6 (table reproduced as in source)
    - Footnotes preserved describing significance and denominators.
  - Interpretation: Spillovers within domestic systems remain more likely, but "the potential for extreme events to spill over from one bank to another appears to have increased, both among domestic banks and across the border." "The number of significant cross-border links is already larger than the number of significant links among domestic banks."
- Stability framework, cross-border integration, and supervisory issues:
  - 1993 Second Banking Directive created "home-country control and mutual recognition" and a "single passport."
  - FSAP and Lamfalussy delivered "major progress" but "less so in key areas, notably crossborder crisis prevention, management, and resolution."
  - Crossborder consolidation accelerating; "some 46 LCFI hold about 68 percent of EU banking assets." (footnote in source)
  - Core problem: national authorities' fiduciary responsibilities to national treasuries limit incentives to work toward a common EU-wide stability framework; supervisors likely to prioritize national treasuries in LCFI crises.
- Policy debate and IMF staff recommendations:
  - Divergent views: some favor a "burden sharing agreement"; others see ex-ante cost-sharing as premature.
  - Proposed measures to instill joint accountability:
    - (i) "introducing EU-related references in the mission statements of national supervisors and qualified majority voting (in lieu of unanimity) in Lamfalussy Level 3 committees;"
    - (ii) "elaborating LCFI-specific MoUs covering crisis prevention, management, and resolution, including agreement on EU principles and procedures that these MoUs should incorporate."
  - IMF staff recommended imparting a greater sense of joint responsibility and accountability, balancing national and system-wide priorities.
  - Short-to-medium term priorities to accelerate: establish "a database for sharing supervisory information on LCFI, including with the ECB"; reduce "differences in supervisory powers"; enhance "pre-crisis sanctions and tools"; harmonize and improve "the operations of deposit insurance"; understand and improve "the operation of bank insolvency laws in an area-wide context."

### Trade policy and FTAs
- Staff view: FTAs "are no substitutes for multilateral trade liberalization in the Doha Round" and should not distract political energy from Doha.
- EU bilateral agenda under "Global Europe" includes FTAs with ASEAN countries, India, Korea, Andean countries, Central America, Mercosur, and ACP countries (EPA context); Commission views bilateral agenda as complement, not substitute, to multilateral negotiations.
- Staff assessment:
  - Bilateral agreements may secure liberalization in "new" areas outside Doha's scope but are inferior to multilateral liberalization for both members and non-members.
  - Pursuit of FTAs may divert political energy away from an ambitious Doha outcome.
- Trade defense policy:
  - Staff concern: EU review of trade defense policy should not increase opportunities for protectionist outcomes.
  - Staff recommendation: EU should take more account of consumer benefits from trade and exercise restraint in the use of trade defense measures.
- Box 3 — Income Inequality and Globalization (findings summarized):
  - Gini coefficients on household disposable incomes indicate inequality increased in most industrialized countries but less pronounced in euro-area countries.
  - Distribution of wages of prime age males shows advanced countries fared very differently; trade liberalization and technological change may not be major drivers of inequality.
  - Country-specific patterns: little change in pre-redistribution income inequality among prime age males in France, Italy, Netherlands; limited hollowing in Germany at the low end; polarization in US and UK occurred mainly in the 1980s.
  - Sources: Luxembourg Income Study and OECD, STAN.

### Statistical and data developments
- Quarterly national accounts: initial set of quarterly euro area and EU-27 accounts per institutional sector published in June 2007 covering 1999:Q1–2006:Q4; releases to follow quarterly with delay to be reduced to 95 days.
- NACE Rev. 2 classification to be introduced gradually from 2008, applying to 2008 data and beyond; "not expected to have major effects on aggregate economic statistics such as GDP."
- European Statistics Code of Practice adopted in 2005; self- and peer-assessments ongoing.
- HICP-CT series to become available from 2008; euro area import price index and experimental euro area housing price index developments ongoing.
- Labor Force Survey to be expanded with more wage distribution detail; job vacancies legal act being prepared.
- Financial Soundness Indicators (FSIs): all EU countries participated in IMF Coordinated Compilation Exercise for end-2005; aggregated euro area FSIs provisionally discontinued until IFRS-compliant supervisory data available; reimplementation planned for end-2007.
- Remaining gaps: internationally comparable higher-frequency FSIs, more housing market indicators, improved statistics on non-bank financial intermediaries.

### Supplement update (since staff report release 7/10/07)
- Growth in 2007:Q1 revised to "2.8 percent on a quarterly annualized basis (3.1 percent over 2006:Q1)."
- Exports and trade (January–May 2007):
  - euro-area goods exports "9 percent above last-year’s levels."
  - euro-area goods imports "5 percent above last-year’s levels."
  - Trade balance swung from "euro 20 billion (0.2 percent of GDP) deficit to a surplus of euro 4 billion."
- Euro real effective exchange rate appreciated "by about 2 percent in real effective terms" since March 2007 assessment.
- Headline and core inflation "stayed at 1.9 percent in June."
- Unemployment fell to "7.0 percent in May."
- ECB left interest rates unchanged at its July 5 meeting; market participants expect hikes in September and December "to 4½ percent by end year."

### Key statistics and exact figures cited (selected)
- Real GDP growth: "around 2½ percent."
- Projected growth through 2008: "around 2½ percent."
- Recent pace (four quarters to 2006:Q4 and 2007:Q1): "just over 3 percent."
- Import demand growth in partner countries: "from about 7½ percent annually ... to around 6½ percent through 2008."
- Headline HICP threshold referenced: "2 percent."
- Germany January 2007 VAT effect: "around ¼ percentage point at the area-wide level."
- Potential growth rate estimates: "just above 2 percent."
- ECB policy rate action: "raised rates to 4 percent on June 6, 2007."
- Market expectations: "just under 4½ percent by the end of this year."
- Euro area Main Economic Indicators (selected series):
  - Real GDP (annual percent change): 2002: 0.9; 2003: 0.8; 2004: 2.0; 2005: 1.5; 2006: 2.7; 2007: 2.6; 2008: 2.5.
  - Potential GDP (annual percent change): 2002: 2.1; 2003: 1.9; 2004: 1.9; 2005: 1.9; 2006: 2.0; 2007: 2.1; 2008: 2.1.
  - Output gap (percent of potential GDP): 2002: 0.1; 2003: -1.1; 2004: -1.0; 2005: -1.4; 2006: -0.7; 2007: -0.2; 2008: 0.2.
  - Unemployment rate (percent): 2002: 8.2; 2003: 8.7; 2004: 8.8; 2005: 8.6; 2006: 7.8; 2007: 7.0; 2008: 6.9.
  - General government balance (percent of GDP): 2002: -2.6; 2003: -3.1; 2004: -2.8; 2005: -2.5; 2006: -1.7; 2007: -1.0; 2008: -1.0.
  - General government gross debt (percent of GDP): 2002: 68.2; 2003: 69.3; 2004: 69.8; 2005: 70.5; 2006: 69.0; 2007: 67.2; 2008: 65.7.
  - Current account balance (in billions of euros): 2000: -99.2; 2001: -22.0; 2002: 56.9; 2003: 32.6; 2004: 55.5; 2005: -8.3; 2006: -16.9; 2006Q4: 11.1.
  - GDP (in billions of euros, memorandum): 2000: 6,712.3; 2001: 7,003.8; 2002: 7,246.8; 2003: 7,456.7; 2004: 7,752.8; 2005: 8,014.5; 2006: 8,378.1; 2006Q4: 2,015.8.

### Executive Board and Directors — policy guidance (condensed)
- Growth and employment: monitor wages and firms’ pricing behavior; employment gains to remain healthy.
- Monetary policy: "some further monetary policy tightening might be required" depending on wages, pricing, productivity, and external risks.
- Fiscal policy: countries not at MTO should "continue to lower their cyclically-adjusted fiscal deficits by at least ½ percent of GDP per year" and resist spending revenue windfalls.
- Structural reform: accelerate productivity and employment reforms; implement Services Directive; raise contestability in services and retail markets; deepen financial market integration.
- Financial stability: strengthen crossborder supervisory cooperation, crisis prevention/management/resolution tools, and joint accountability for LCFI.
- Trade policy: resist protectionism; pursue ambitious conclusion to the Doha Round; use FTAs as complements only.

*Source: _cr07260 (IMF staff text and tables provided).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Outlook and cyclical prospects
- The outlook is "the best in years." The economy is poised for a sustained upswing driven by cyclical factors and forward-looking policies.
- Real GDP growth is running around 2½ percent; projections are for growth around 2½ percent through 2008.
- Recent historical pace was "just over 3 percent over the four quarters to 2006:Q4 and 2007:Q1."
- Potential growth rate estimates are "currently just above 2 percent," implying a gradual increase in resource utilization.
- Key cyclical indicators and developments:
  - Strong export growth, improving profitability and balance sheets, and accommodative financial conditions have fostered a broad based upswing of investment and employment.
  - Investment and exports have led the recovery.
  - All capacity utilization indicators are moving up and some are already close to previous cyclical peaks.
  - Labor does not appear to be a major constraining factor thus far; unemployment rates have fallen below the 2000 trough while equilibrium rates likely fell further; labor force participation and population are on the rise.
  - Drivers of labor-market changes include: (i) shift toward part-time and temporary jobs enabled by deregulation; (ii) rising labor force participation of women and older workers; (iii) high immigration; and (iv) less generous welfare.
- External setting:
  - Import demand growth in partner countries is projected to slow moderately, "from about 7½ percent annually over the past couple of years to around 6½ percent through 2008."
  - "The area’s external current account is broadly balanced."
  - Financial market volatility and risk premia remain historically low.
- Risks:
  - Short-term risks seen as small and to the upside; medium-run risks widening and moving to the downside.
  - External downside risks: renewed upward pressure on oil prices; a hard landing of the US economy; a malign unwinding of global imbalances; flight from risk.
  - Domestic short-run upside risks: consumer spending could accelerate faster than anticipated; equity markets are more fairly valued and corporate balance sheets stronger than at the peak of the previous boom; emerging equipment capacity constraints could boost investment.
  - Domestic medium-run weaknesses: stretched housing sectors and insufficient competitiveness in some parts of the area.

### Inflation and monetary policy: removing policy accommodation
- Underlying inflationary pressures have been inching up; various indicators (financial market-based measures, analysts' expectations, core and trimmed measures) have been rising gradually since troughs of 2005.
- Euro-area headline HICP has been running just under the "2 percent" threshold.
- The January 2007 VAT increase in Germany "may have added around ¼ percentage point at the area-wide level," with effects masked by stabilizing oil prices.
- Wage developments:
  - Wage demands expected to firm somewhat more than productivity over the projection horizon.
  - Backward-looking indicators show subdued wages through 2006; recent wage settlements (notably in Germany's metal sector) continue to surprise on the downside.
  - Continued high oil prices and improving labor market conditions provide ground for higher pay, notably in Germany.
- Forecasts and risks:
  - Staff and ECB forecasts see HICP inflation "hovering around 2 percent through 2008."
  - Staff models point to roughly balanced risks for inflation, though capturing upside risks from indirect taxes, administrative changes, and oil prices is difficult. ECB puts greater emphasis on upside risks, including wages and ample liquidity.
- Monetary aggregates and transmission:
  - Credit to nonfinancial corporations is increasing rapidly; credit to households, notably for mortgages, is slowing down noticeably.
  - M3 continues to expand at a brisk pace (lately more on account of less liquid components); ECB staff caution that recent dynamism may overstate underlying monetary expansion. Fund staff is skeptical about M3 as an indicator of short-to-medium-run inflation.
- Policy actions and outlook:
  - "Following the mission the ECB raised rates to 4 percent on June 6, 2007," and markets foresee rates "just under 4½ percent by the end of this year."
  - With growth projected close to or above potential and the possibility of further upward pressure on factor utilization and prices, "some further monetary policy action is likely to be necessary."
  - Scope and timing of further action depend on: (i) the extent to which reforms and demographics have improved labor supply; (ii) whether the incipient acceleration of productivity is structural or cyclical; and (iii) the evolving distribution of demand-side risks, including those related to the exchange rate.

### Fiscal policy and public finances
- Fiscal outturns and policies "have been strong," and intentions are for this to continue.
- Concern: past accomplishments together with benign prospects may prompt "some letting down of the guard," particularly in countries still distant from their medium-term objectives.
- The area’s fiscal deficit "has declined" (figures and tables in the report document the detailed fiscal developments).

### Structural policies: labor utilization, productivity, and integration
- Structural policies are the area's main contribution to an orderly resolution of global imbalances; staff welcomed renewed impetus behind the Lisbon Agenda.
- Labor market:
  - Developments continue to surprise on the upside, but much remains to be done to increase participation rates.
  - Despite improvements, low productivity and labor utilization are weighing on living standards.
- Product markets and contestability:
  - Product market policies have been moving into higher gear, but "contestability in sheltered sectors remains problematic" and is central to reversing weak productivity performance.
  - Fifty years after the Treaty of Rome, contestability in sheltered sectors remains a key challenge.
- Financial sector:
  - Increased contestability and integration in the financial sector is key to improving performance.
  - Significant initiatives to strengthen markets and the stability framework are underway, but "how to proceed is controversial."

### Key statistics and exact figures cited
- Real GDP growth: "around 2½ percent."
- Projected growth through 2008: "around 2½ percent."
- Recent pace (four quarters to 2006:Q4 and 2007:Q1): "just over 3 percent."
- Import demand growth in partner countries: "from about 7½ percent annually ... to around 6½ percent through 2008."
- Headline HICP threshold referenced: "2 percent."
- Germany January 2007 VAT effect: "around ¼ percentage point at the area-wide level."
- Potential growth rate estimates: "just above 2 percent."
- ECB policy rate action: "raised rates to 4 percent on June 6, 2007."
- Market expectations: "just under 4½ percent by the end of this year."

*Source: _cr07260 - EXECUTIVE SUMMARY.*

### 10.      Fiscal policy surprised on

### 10.      Fiscal policy surprised on

### Fiscal outcomes and 2006 developments
- Standard measures suggest the area’s cyclically-adjusted fiscal deficit fell by almost 1 percentage point of GDP in 2006––exceeding staff’s ½ percent of GDP benchmark for countries at a significant distance from their medium-term objectives (MTO).
- Reductions led by large decreases in Germany, France, and (upon considering the expiration of one-off measures), Italy.
- Other EDP countries have met their commitments; higher-than-budgeted revenues have been allocated to debt reduction, even if not to the full extent by all countries.
- House prices: moderating but still climbed at an annual pace just under 7 percent until lately.
- Tabled fiscal indicators (Fiscal Developments, 2005-09, In percent of GDP):
  - Overall fiscal balance, Euro area: -2.5 (2005), -2.3 (2006), -1.7 (2007 est.), -1.0 (2008 proj.), -1.0 (2009 proj.), -0.8 (SP 2005)
  - Revenue, Euro area: 45.2 (2005), 45.1 (2006), 45.8 (2007 est.), 45.6 (2008 proj.), 45.4 (2009 proj.), 45.3 (SP 2005)
  - Expenditure, Euro area: 47.7 (2005), 47.4 (2006), 47.4 (2007 est.), 46.6 (2008 proj.), 46.3 (2009 proj.), 46.1 (SP 2005)
  - Structural fiscal balance, Euro area 1/: -1.9 (2005), -1.7 (2006), -1.0 (2007 est.), -0.8 (2008 proj.), -0.8 (2009 proj.), -0.8 (SP 2005)
  - Structural fiscal balance, EDP countries 2/: -3.1 (2005), -3.1 (2006), -1.8 (2007 est.), -1.3 (2008 proj.), -1.5 (2009 proj.), -1.3 (SP 2005)
  - Structural fiscal balance, Non-EDP countries: -0.7 (2005), -0.3 (2006), -0.1 (2007 est.), -0.2 (2008 proj.), -0.2 (2009 proj.), -0.2 (SP 2005)
  - Germany overall: -2.4 (2005), -2.8 (2006), -1.3 (2007 est.), -0.7 (2008 proj.), -0.9 (2009 proj.), -0.6 (SP 2005)
  - France overall: -2.7 (2005), -1.6 (2006), -1.9 (2007 est.), -1.6 (2008 proj.), -1.6 (2009 proj.), -1.6 (SP 2005)
  - Italy 1/: -3.4 (2005), -3.1 (2006), -2.3 (2007 est.), -1.8 (2008 proj.), -2.0 (2009 proj.), -2.2 (SP 2005)
  - Sources noted: WEO, ECFIN and Fund staff projections.
  - Footnotes preserved: 1 Excludes net deficit increasing one-off measures in Italy in 2006 (1.5% of GDP). 2 Germany, Greece, Italy and Portugal, as of May 31, 2007.

### Interpretation of cyclically-adjusted improvements and SGP implications
- Staff concern: standard cyclical adjustment might overstate the true structural adjustment in 2006 because it did not allow for potential procyclicality of revenue elasticities.
- Shared cautious assumption: pending deeper analysis, consider only about half of the observed reduction in the deficit ratio as structural — broadly consistent with decline in the cyclically-adjusted expenditure ratio (adjusted for one-off operations).
- Eurogroup Ministers committed to achieve their country-specific MTO at the latest by 2010 and agreed that “good times” prevail despite a still negative output gap according to agreed measurement techniques.
- Under the reformed SGP rule book, this implies a commitment to adjust by more than ½ percent of GDP annually for those countries that have not yet reached their MTO.
- Staff pressed for full adherence to the SGP’s norm of at least ½ percent of GDP adjustment per annum by countries short of their MTOs.
- Staff view on near-term plans: little adjustment expected through 2008 on present budgetary plans, particularly in some key countries.

### Risks, long-term pressures, and fiscal credibility
- Despite progress under the SGP’s dissuasive arm, cyclically-adjusted fiscal positions today are not appreciably different from those attained in 2000.
- Recollections of very large negative ex post corrections to structural positions estimated for 2000 prompted caution about relying unduly on current estimates.
- Aging-related expenditure pressures (EU: Aging-related Expenditure, 2004-2050, In percent of GDP):
  - Pensions Level: 10.6 (2004), 11.5 (EU25), increase over 2004: 1.3 (2030), 1.6 (2050), 2.2 (EU25 level 2050), 2.6 (Euro area level 2050)
  - Health care Level: 6.4 (2004), 6.3 (EU25), increase over 2004: 1.0 (2030), 1.0 (2050), 1.6 (EU25 level 2050), 1.5 (Euro area level 2050)
  - Long-term care Level: 0.9 (2004), 0.7 (EU25), increase over 2004: 0.9 (2030), 0.2 (2050), 0.6 (EU25 level 2050), 0.5 (Euro area level 2050)
  - Gross expenditure Level and increases: Gross expenditure 17.9 (2004), 18.5 (EU25); plausible alternative increase ............5.8 6.0
  - Education: 4.6 (2004), 4.4 (EU25), changes -0.7 (-), -0.7, -0.6, -0.6
  - Unemployment benefits: 0.9 (2004), 1.0 (EU25), changes -0.3, -0.3, -0.3, -0.3
  - Net expenditure Level: 23.4 (2004), 23.9 (EU25), increase over 2004: 2.2 (2030), 1.8 (2050), 3.5 (EU25 level 2050), 3.7 (Euro area level 2050)
  - Footnote on plausible alternative: 1/ Assumes healthcare costs rise in line with wages rather than per-capita GDP; and that the probability of receiving formal long-term care rises gradually.
- Conservatively estimated increases of 3¾ percent of GDP by 2050 remain in the pipeline (staff estimate).
- Staff argued that, even if growth was likely to be stronger, a repeat of the damaging SGP debates of 2002–04 was a distinct possibility because some countries—Italy, and to a lesser extent France and Greece—would remain uncomfortably close to the 3 percent ceiling given the stage of the cycle.

### Structural policies and integration (labor, goods, services)
- Currency union integration: common shocks now explain around 60 percent of growth and inflation during EMU, up from around 20 percent for growth and 30 percent for inflation before EMU; common shocks now trigger different responses across countries accounting for some 20 percent of growth and inflation dispersions, down from 60 percent for growth and 30 percent for inflation before EMU.
- Remaining country-specific shocks have a fairly large persistent component; EMU-related declines of interest rates and increases in real estate valuations contributed.
- Further financial integration could increase risk sharing and income smoothing; staff research suggests the financial system’s contribution to income smoothing could increase by up to 20 percentage points if integration reached that of the United States.
- Productivity patterns:
  - Productivity in manufacturing has performed better than in services.
  - Euro-area productivity compares well on tradables and poorly on nontradables, notably wholesale and retail trade and financial services.
  - Successful reformers focused on increasing labor supply through benefit reform and lowering tax wedges and government consumption; greater labor supply translated into employment growth more effectively with liberal labor and product markets.
- Lisbon Strategy and Services Directive:
  - Lisbon Agenda growth impact estimates: about ½–¾ percentage points of GDP over the medium run.
  - National Reform Programs (NRP) need better harnessing of synergies between reforms and greater transparency/monitorability.
  - Mission pressed for early and good faith implementation of the Services Directive by December 2009, recommending publication of country-specific transposition status timetables and a formal mid-term review by the European Commission.
  - Need to extend liberalization to sectors not covered by the Directive, notably professional services.

### Financial sector integration and stability
- Financial integration seen as key to boosting growth prospects and cross-border risk sharing; direct contribution of financial intermediation to the Euro–US productivity gap (1996–2003 average) notable.
- Findings on productivity gaps (1996-2003 average, in percentage points) indicate largest gaps in trade and financial intermediation, while Europe does well in insurance business.
- Achievements: wholesale markets relatively well-integrated (interbank, corporate bond markets); equity and securitization markets less integrated; retail market integration lagging, particularly in banking—which is the least "Europeanized" sector.
- Policy framework: EU FSAP and Lamfalussy process; major directives include 2006 Capital Requirements Directive (CRD) for banks, forthcoming Solvency II Directive for insurance companies, and Markets in Financial Instruments Directive (MiFID).
- Key implementation challenge: ensure uniform implementation of directives by national prudential authorities (Level 3 and 4 of Lamfalussy framework); progress mixed on supervision and crisis prevention, management, and resolution.
- Ongoing initiatives:
  - MiFID transposition will reshape investment services and extend the “single passport” system for investment firms.
  - Integration of securities clearing and settlement: Code of Conduct signed November 2006 committing to price transparency, interoperability, and unbundling of services by January 2008; ECB evaluating Target 2-Securities for settlement in central bank money.
  - Initiatives on bank mergers and acquisitions; integration of payments systems (SEPA); retail products (mortgages, bank accounts); and investment funds.
- Securitization: encouraged to develop capital markets, spread risks, and reduce economic divergences; mission welcomed progress and encouraged converging national securitization markets.

_Italic line: Source: _cr07260 - 10.      Fiscal policy surprised on (IMF staff text and tables provided)._

### 23.      The financial system is

### 23.      The financial system is

### Financial system: current assessment
- Equity markets have returned "close to previous highs or above"; volatility and risk premia remain "unusually low," notwithstanding recent turbulence.
- Bank profitability has "strengthened through 2006 (Table 2, Figure 16)," although "it remains structurally low in parts of the area."
- The insurance sector has "benefited from recovering asset prices."
- Balance sheets are "generally strong (Figure 17)," reflected in "relatively benign developments of market-based indicators, such as distance to default for large European banks."
- Officials concerned about "rapid growth of credit (especially in foreign currency) in various NMS" did not see "significant vulnerabilities for euro-area financial institutions as a whole." [footnote 8 present in source]

### Emerging vulnerabilities and risks
- Financial indicators "may have peaked."
- Signs the credit cycle is gradually turning:
  - "Nonfinancial corporate rating downgrades have been more frequent than upgrades."
  - "Leverage in parts of the corporate and household sectors may have become excessive."
- ECB analysis suggests "the vulnerability of the financial system to an abrupt and unexpected loss of market liquidity appears to be increasing."
- Other concerns: "external downside risks; the rising complexity of financial instruments; and, to a lesser extent, the activities of highly leveraged nonbank financial institutions."
- EC and ECB staff discounted worries about “subprime-like” mortgage products, stating the market is "far less developed in Europe than in the United States" and that "few of the large euro-area banks have significant direct exposures to subprime activity in the United States."
- EC and ECB officials favor stress testing to gauge potential cross-border vulnerabilities in Europe but note "differences in supervisory data and confidentiality issues need to be addressed first." Meanwhile, they implement less sophisticated stress tests using publicly available data on financial products and large crossborder financial institutions (LCFI), which "had confirmed the robustness of the financial system."

### Stability framework, cross-border integration, and supervisory issues
- Historical background:
  - 1993 Second Banking Directive introduced "home-country control and mutual recognition," creating a "single passport" enabling banks licensed in any EU country to open branches in others on the basis of the home license.
  - Branching "entails a loss of control of host countries over domestic financial stability," contributing to limited convergence of a single "rules book" of prudential policies and practices.
  - The 1999 Financial Services Action Plan (FSAP) and the Lamfalussy framework aimed to introduce state-of-the-art prudential rules and convergence of supervisory practices.
- Progress and shortfalls:
  - FSAP and Lamfalussy achieved "major progress" but "less so in key areas, notably crossborder crisis prevention, management, and resolution."
  - Crossborder consolidation is accelerating, with a number of LCFI beginning "to dominate the European banking landscape." [footnote 9: "ESCB work shows that some 46 LCFI hold about 68 percent of EU banking assets."]
  - Importance of crossborder bank linkages and potential for contagion "are increasing."
- Core problem:
  - National authorities' fiduciary responsibilities are toward national treasuries, limiting incentives to work toward a common EU-wide stability framework.
  - In an LCFI crisis, supervisors likely to prioritize "the national treasury, using informational advantages," risking a scramble for assets and significant crossborder spillovers that would hinder efficient crisis management and resolution.
  - This dynamic contributes to "customization and 'goldplating' of EU directives," opposition to systematic multilateral supervisory data sharing, and reluctance to agree to EU principles for crossborder crisis prevention, management, and resolution. [footnote 10: "Specifically, no entity in Europe (including the ECB) has a deep knowledge over what is going on in all of the key LCFI at any point in time."]

### Empirical evidence on spillover risks (Box 2)
- Methodology:
  - Extreme Value Theory framework analyzing co-movements between extreme negative (left-tail) realizations of banks’ soundness measures.
  - Soundness measure: distance-to-default (DD) — "the difference between the expected value of assets at maturity and the default threshold," with higher DD associated with lower default probability.
  - DD computed for 27 of the largest EU banking groups for May 2000–April 2007 using daily stock price and annual balance sheet data.
  - Binomial logit model estimated probability of a bank experiencing a large negative DD change in response to large negative shocks to DD changes of other banks.
  - Large negative shocks defined as those in the "10th percentile of the left tail of the common distribution of the changes in the DD across all banks."
  - Four control variables included: "changes in the slope of the term structure, and the volatility of the domestic, regional and world stock market indices."
- Key empirical findings (table reproduced as in source):
  - May 2000 - Apr 2007May 2000 - Nov 2003 
  - Domestic   Cross-borderDomestic   Cross-border
  - Number of significant links 1/19571450
  - Percent of all possible links 2/39.68.728.67.6
  - 1/ "The number of bank pairs for which co-exceedances were found significant at the 5 percent level in the given period."
  - 2/ "The number of significant links (in the previous line), in percent of all possible contagion channels (i.e., as percent of all possible domestic and cross-border pairings of banks, respectively)."
- Interpretation:
  - Spillovers within domestic systems generally remain more likely, but "the potential for extreme events to spill over from one bank to another appears to have increased, both among domestic banks and across the border."
  - "The number of significant cross-border links is already larger than the number of significant links among domestic banks," supporting the need for greater cross-border supervisory cooperation in the EU.

### Policy debate and proposals for strengthening the framework
- Divergent views on priorities:
  - Some policymakers advocate a "burden sharing agreement" as the cornerstone of reform to foster joint responsibility and internalization of crossborder spillovers, facilitating broader reforms (e.g., more information sharing).
  - Others view ex-ante cost-sharing mechanisms as premature and potentially creating moral hazard, preferring to settle other issues first.
- Proposed measures to instill joint accountability and responsibility:
  - (i) "introducing EU-related references in the mission statements of national supervisors and qualified majority voting (in lieu of unanimity) in Lamfalussy Level 3 committees;"
  - (ii) "elaborating LCFI-specific MoUs covering crisis prevention, management, and resolution, including agreement on EU principles and procedures that these MoUs should incorporate."
- IMF staff recommendations:
  - Impart a greater sense of joint responsibility and accountability to the system to improve prevention and handling of LCFI solvency crises.
  - Frame the issue as balancing national and system-wide priorities rather than centralized versus decentralized supervision.
  - Possible approach: couple "a European orientation into the mandates of prudential authorities and qualified majority voting at Level 3 committees" with a parallel mandate to elaborate principles and procedures for efficient and effective LCFI oversight and crisis prevention, management, and resolution, aiming to "minimiz[e] collective costs of potential LCFI failures facing EU states."
  - Short-to-medium term priorities that such a mandate could accelerate:
    - establishing "a database for sharing supervisory information on LCFI, including with the ECB;"
    - reducing "differences in supervisory powers;"
    - enhancing "pre-crisis sanctions and tools;"
    - harmonizing and improving "the operations of deposit insurance;"
    - understanding and improving "the operation of bank insolvency laws in an area-wide context." [footnote 11 present in source]

### Spillovers: euro adoption, global imbalances, and trade
- Euro adoption for the NMS:
  - Staff noted Maastricht inflation and exchange rate criteria, if taken to their limit, "amount to a real income convergence criterion." [footnote 12 present in source]
  - Per capita incomes in most NMS are "appreciably lower than in the euro area"; real income convergence expected to extend "over a horizon stretching significantly beyond current market expectations on official plans for euro adoption."
  - Economic agents in NMS have expectations of euro adoption "within the next 5–7 years."
  - Interlocutors: Treaty embodies an expectation to join but "the timing was open and the euro-adoption process was well understood." Expectations of early entry replaced by more cautious statements without causing market tensions.
  - EC officials: the "real income convergence" argument is overstated; "sustainability" for the price stability criterion means inflation must be within Maastricht bounds "without reliance on one-off factors," using backward-looking and forward-looking assessments with Commission forecasts to assess medium-term prospects.
  - All interlocutors agreed NMS seeking euro adoption "should strengthen their policies further"; EC and ECB officials highlighted the disciplining effect of the Maastricht criteria and that the process is open to countries meeting the criteria, as with "the recent admission of Cyprus and Malta."
- Europe and global imbalances:
  - Staff welcomed "broad-based structural reform efforts underway" that help strengthen prospects for an orderly resolution of global current account imbalances and sustain world growth amid a U.S. current account adjustment.
  - Authorities' multilateral consultation commitments are "all in the structural and financial sector area (Table 3)" and implementation is continuing.
  - Staff calculations suggest "the euro’s real effective exchange rate remains broadly in line with medium-term fundamentals." EC and ECB officials presented similar calculations but suggested the exchange rate might be "somewhat more appreciated than suggested by the staff, although still broadly in line with medium-term fundamentals."
  - Over the past 6 months the euro "appreciated slightly in real effective terms," reflecting partly stronger portfolio inflows.
  - According to staff, "the euro continues to be close to equilibrium, as are the area’s balance of payments and net international investment positions (Figure 18, Tables 4–5)."
  - Staff "downplayed concerns about the latest exchange rate movements for the recovery."
- Europe’s role in promoting world trade:
  - Given trade’s contribution to Europe’s productivity, "an ambitious conclusion to the Doha Round is very much in the EU’s interest."
  - Political pressures exist for the Commission to take a tough stance in Doha because of social considerations, but "the evidence for trade liberalization driving income inequality in Europe is weak (Box 3)."
  - Staff view: "trade policy is a poor instrument to manage income inequality."
  - Commission noted the Doha Round remains "the foremost EU trade policy priority" and had shown "sufficient flexibility on agriculture in private discussions in July 2006."
  - Commission view: other key participants need to make additional concessions, including "the United States on agricultural subsidies and Brazil, India, and other emerging economies on industrial goods and services."
  - Staff emphasized that "a willingness to agree to additional liberalization by the EU, in particular on agriculture tariffs, is needed for an ambitious outcome to the Round," which would also "provide a greater incentive for the EU’s key trade partners to agree to greater liberalization in areas of particular interest to the EU, including industrial tariffs and trade in services."

*Source: _cr07260 - 23.      The financial system is*

### 34.      Staff stressed that free trade agreements (FTAs) were no substitutes for

### _cr07260 - 34.      Staff stressed that free trade agreements (FTAs) were no substitutes for

### Free trade agreements (FTAs) and multilateral liberalization
- Staff view: FTAs are no substitutes for multilateral trade liberalization in the Doha Round and should not be allowed to distract political energy and attention from the Doha Round negotiations.
- EU actions described: the EU has embarked on a new series of FTA discussions with Asian countries, including the ASEAN countries, India, and Korea, as part of its Global Europe initiative; these discussions come on top of ongoing FTA discussions with the Andean countries, Central America, Mercosur, and the 79 African, Caribbean, and Pacific (ACP) countries (the latter in the context of Economic Partnership Agreement (EPA) discussions).
- Commission position: the EU’s bilateral agenda is a complement to, and not a substitute for, multilateral negotiations; the Asian FTAs will only begin serious negotiations in 2008, after the target for conclusion of the Doha Round.
- Staff assessment:
  - Bilateral agreements may provide benefits to their participants and may secure liberalization in “new” areas that fall outside the scope of Doha Round negotiations.
  - Bilateral agreements are inferior to multilateral liberalization for both members and non-members.
  - Pursuit of FTAs may divert political energy and negotiating capacity away from securing an ambitious Doha Round outcome, both in the EU and the FTA partner countries.

### Trade defense policy
- Staff concern: the ongoing review of the EU’s trade defense (e.g., antidumping) policy should not increase opportunities for protectionist outcomes.
- Commission statement: it is too early to predict the conclusions of the review; the initiative makes clear that the EU rejects the temptations of protectionism; EC officials noted that the use of these instruments is consistent with the EU’s WTO obligations.
- Staff recommendation: the EU should take more account of the benefits consumers have from trade, and exercise restraint in the use of such trade defense measures.

### Box 3 — Income Inequality and Globalization (findings summarized)
- Theme: growing concern in Europe over the impact of globalization on high and evenly shared living standards, but this is difficult to substantiate in the data.
- Observations:
  - Concerns have surfaced in response to slowing wage growth and falling labor income share in aggregate national income data.
  - Gini coefficients on household disposable incomes may tell a different story: while Gini data also suggest that inequality has increased in most industrialized countries, this development was much less pronounced in euro-area countries, unlike what labor income shares data suggest.
  - Data on the distribution of wages of prime age males indicate advanced countries have fared very differently, implying broad phenomena such as trade liberalization and technological change may not be major drivers of inequality.
  - Country-specific patterns:
    - Inequality of pre-redistribution incomes among prime age males has not changed much in France, Italy, and the Netherlands.
    - In Germany, some limited hollowing out of the distribution is visible, but only at the low end.
    - Polarization has taken place in the US and UK but not during the past “globalization decade”; instead, it took place during the 1980s, when domestic policies on minimum wages and trade union representation changed appreciably.
- Sources cited in box: Luxembourg Income Study and OECD, STAN.
- Note: See “Globalization and Income Inequality: A European Perspective,” forthcoming IMF Working Paper. 1/

### Staff appraisal — macroeconomic outlook and policy guidance
- Overall assessment:
  - The euro-area economy is doing well on the heels of a supportive external environment and generally sound policies.
  - “Fifty years after the signing of the Treaty of Rome, the envisioned Single Market still holds the key to growing prosperity.”
  - Achievements justify optimism; progress made preparing for population aging is noted as the key challenge facing welfare systems.
- Policy imperative: policymakers need to overcome tendencies toward good-times complacency; intentions must be translated into continued action. The euro area’s economic governance framework (e.g., the Stability Pact and the Lisbon Agenda) can and should be used to resist good–times complacency.

- Growth and risks:
  - The euro-area economy has moved from recovery to upswing.
  - Drivers: benign external environment, favorable financing conditions, generally sound policies, strong domestic investment expenditure, strengthening consumption demand.
  - External position: remains roughly balanced and the real effective exchange rate of the euro continues to trade within range of medium-term equilibrium.
  - Growth outlook: Growth is expected to be above potential in 2007 and 2008 and to be accompanied by healthy employment gains thanks to reforms to labor markets and welfare systems, and immigration.
  - Risk profile: Risks to this outlook are relatively small and to the upside in the short run but widen and move to the downside over the medium run, mainly on account of external risks relating to oil prices, global current account imbalances, potential investor flight from risk, and US growth.

### Monetary policy
- With rising resource utilization, inflationary pressures can be expected to build gradually, and some further monetary policy tightening may be required.
- Current conditions:
  - The policy rate has come within range of neutral.
  - Inflation is widely forecast around 2 percent.
  - Wage demands remain quite moderate, but may firm as unemployment recedes.
- Determinants of further tightening: wages, the extent to which reforms and demographics have improved labor supply, pricing behavior of firms, productivity growth, and evolution of risks to activity including global imbalances and the exchange rate.

### Fiscal policy
- Key challenge: ensure that countries that have not yet reached their MTO adjust by at least ½ percent of GDP per year.
- Recent performance: Fiscal policy performances in 2006 were generally strong; announced intentions to reach MTOs by 2010 at the latest are noted as appropriate.
- Rationale: Meeting MTOs is necessary to limit risks of procyclical policies in future downturns and to prepare for population aging-related public expenditure.
- Pressure risks: pressures to slow adjustment and to spend revenue windfalls will increase as the upswing unfolds; these pressures must be resisted and the standards of the preventive arm of the Stability and Growth Pact be met.
- Policy design guidance: consolidation measures ought to be cast in a medium-term budgetary framework aimed at improving incentives to work and invest.
- Positive structural trend: trend toward strengthening fiscal policy rules and governance mechanisms is welcome; should help bring forward credibility gains from adopting complementary fiscal and structural policies.

### Structural reform agenda
- Fundamental challenge: effect a joint acceleration of productivity and employment.
- Employment: reforms and adjustment in labor markets have led to a significant strengthening of employment performance, consistent with the area commitments under the Multilateral Consultations.
- Productivity: weak performance, in particular in the nontradable services sectors, suggests contestability of national services markets needs to be raised.
- Policy instrument: The Services Directive is a significant step; its implementation should be monitored in a framework featuring interim progress reports.
- Labor markets: reforms need to remain oriented toward strengthening participation and incentives to work.
- Lisbon Strategy: the revamped Lisbon Strategy is picking up steam but needs to foster ownership, harness national and area-wide synergies among reforms, and become more transparent.
  - National Reform Programs (NRP) are useful for coordination of reform programs and coordination with Community-led initiatives.
  - Return to issuing country-specific policy recommendations is welcome; recommendations should increasingly consider NRP transparency and governance issues.

### Financial integration and stability framework
- Opportunity: integration of markets for financial services is a promising avenue to boost Europe’s productivity and growth, but needs a stronger area-wide perspective to the financial stability framework.
- Required actions for market development:
  - Retail financial services need to become more contestable.
  - Europe’s capital markets need further development.
  - Consistent cross-country implementation of the EU FSAP (notably MiFID) and integration of financial infrastructure (payments systems and securities clearing and settlement systems) are required.
- Current constraint: tension between impulse toward integration and preference for decentralized supervision is holding progress back.
  - Under the EU’s home-host supervision model: supervisors accountable only to national authorities; informational asymmetries between home and host supervisors are large; actions by one supervisor have potentially large effects on another’s jurisdiction.
  - Implications for large cross-border financial institutions (LCFI): the current setting largely precludes progress toward efficient and effective crisis management and resolution, fostering moral hazard and unnecessary risks for national taxpayers; it also hampers progress on prevention issues, e.g., supervisory convergence and information sharing.
- Recommended direction:
  - Move to a more integration-compatible decentralized financial stability framework emphasizing joint responsibility and accountability.
  - The proposal to introduce a European orientation to the mandates of national prudential authorities is welcome; the mandate should include responsibility to minimize the collective costs facing EU states from potential LCFI failures.
  - With such mandates, revamped cross-border arrangements for supervisory cooperation and memoranda of understanding should better keep pace with market developments and address informational and accountability issues, including the need for more (and more standardized) ex ante cooperation and information sharing.
  - Complementary system-wide arrangements should include extensive information sharing with the ECB.
  - A joint accountability framework could enable progress on deposit insurance, converging supervisory powers, convergent pre-crisis sanctions and tools, and improving the operation of insolvency laws as applied to banks in an area-wide context.

### Trade policy reiteration
- Finding: trade has consistently been a boon to Europe’s productivity performance.
- Recommendation: an ambitious conclusion to the Doha Round is very much in the EU’s interest.
- Specific policy points:
  - A willingness to agree to additional liberalization, in particular in agriculture, is needed on the part of the EU for successful agreement.
  - The window of opportunity to reach such an agreement may well be closing.
  - While well-designed FTAs can be complementary, the trade policy focus should remain on multilateralism.
  - The EU should take more account of the benefits consumers have from trade and exercise restraint in the use of contingent protection such as antidumping and special textile safeguards, even if these are compatible with WTO obligations.

### Statistics
- Assessment: The quality, availability, and timeliness of statistics are adequate for effective area-wide surveillance although further improvements are necessary, including with respect to euro area-wide financial soundness indicators.

*IMF staff appraisal excerpt from the provided content unit.*

### 47.      It is proposed that the next consultation on the euro-area policies in the context of

### _cr07260 - 47.      It is proposed that the next consultation on the euro-area policies in the context of

### Macro activity and demand (Table 1: Euro Area: Main Economic Indicators)
- Real GDP (annual percent change): 2002: 0.9; 2003: 0.8; 2004: 2.0; 2005: 1.5; 2006: 2.7; 2007: 2.6; 2008: 2.5.
- Domestic Demand (contributions to growth, percent points): Final domestic demand: 2002: 0.6; 2003: 1.3; 2004: 1.6; 2005: 1.6; 2006: 2.6; 2007: 2.7; 2008: 2.7.
- Foreign balance (contribution to growth): 2002: 0.5; 2003: -0.7; 2004: 0.1; 2005: -0.3; 2006: 0.2; 2007: 0.0; 2008: -0.2.
- Exports (includes intra-euro area trade): 2002: 1.7; 2003: 1.1; 2004: 6.9; 2005: 4.2; 2006: 8.3; 2007: 6.0; 2008: 5.6.
- Imports (includes intra-euro area trade): 2002: 0.3; 2003: 3.1; 2004: 6.8; 2005: 5.0; 2006: 7.9; 2007: 6.2; 2008: 6.2.
- Potential GDP (annual percent change): 2002: 2.1; 2003: 1.9; 2004: 1.9; 2005: 1.9; 2006: 2.0; 2007: 2.1; 2008: 2.1.
- Output gap (percent of potential GDP): 2002: 0.1; 2003: -1.1; 2004: -1.0; 2005: -1.4; 2006: -0.7; 2007: -0.2; 2008: 0.2.
- Unemployment rate (percent): 2002: 8.2; 2003: 8.7; 2004: 8.8; 2005: 8.6; 2006: 7.8; 2007: 7.0; 2008: 6.9.
- GDP deflator (year-on-year percent): 2002: 2.6; 2003: 2.1; 2004: 1.9; 2005: 1.9; 2006: 1.8; 2007: 2.0; 2008: 1.9.
- Consumer prices (year-on-year percent): 2002: 2.3; 2003: 2.1; 2004: 2.1; 2005: 2.2; 2006: 2.2; 2007: 2.0; 2008: 2.0.

### Public finances and external sector (Table 1; Table 4; Table 5)
- General government balance (percent of GDP): 2002: -2.6; 2003: -3.1; 2004: -2.8; 2005: -2.5; 2006: -1.7; 2007: -1.0; 2008: -1.0.
- General government structural balance (percent of GDP): 2002: -2.5; 2003: -2.5; 2004: -2.3; 2005: -1.8; 2006: -1.2; 2007: -0.7; 2008: -0.8.
- General government gross debt (percent of GDP): 2002: 68.2; 2003: 69.3; 2004: 69.8; 2005: 70.5; 2006: 69.0; 2007: 67.2; 2008: 65.7.
- Current account balance (in billions of euros, Table 4): 2000: -99.2; 2001: -22.0; 2002: 56.9; 2003: 32.6; 2004: 55.5; 2005: -8.3; 2006: -16.9; 2006Q4: 11.1.
- Current account (percent of GDP): 2000: -1.5; 2001: -0.3; 2002: 0.8; 2003: 0.4; 2004: 0.7; 2005: -0.1; 2006: -0.2; 2006Q4: 0.6.
- Net investment position (percent of GDP, Table 5): 2000: -7.6; 2001: -5.7; 2002: -9.9; 2003: -10.5; 2004: -10.7; 2005: -10.2; 2006: -11.6.
- GDP (in billions of euros, memorandum): 2000: 6,712.3; 2001: 7,003.8; 2002: 7,246.8; 2003: 7,456.7; 2004: 7,752.8; 2005: 8,014.5; 2006: 8,378.1; 2006Q4: 2,015.8.

### Financial sector conditions (Table 2: Financial Conditions of Large and Complex Banking Groups)
- Return on equity (%):
  - 2004: min. 4.30; 1st quartile 10.27; median 17; average 17.17; weighted average 17.32; 3rd quartile 20.85; max. 33.2.
  - 2005: min. 9; 1st quartile 16.22; median 17.6; average 19.56; weighted average 19.87; 3rd quartile 23.25; max. 37.
  - H1 2006: min. 9.11; 1st quartile 18.07; median 22.2; average 20.78; weighted average 20.77; 3rd quartile 23.75; max. 35.8.
- Return on risk-weighted assets (%):
  - 2004: min. 0.2; 1st quartile 1.1; median 1.14; average 1.14; weighted average 1.17; 3rd quartile 1.5; max. 2.26.
  - 2005: min. 0.8; 1st quartile 1.1; median 1.1; average 1.5; weighted average 1.14; 3rd quartile 1.46; max. 1.75; max. 2.26.
  - H1 2006: min. 0.72; 1st quartile 1.15; median 1.44; average 1.51; weighted average 1.43; 3rd quartile 1.85; max. 2.78.
- Net interest income (% total income): 2004 median 24.07; 1st quartile 38.89; weighted average 47.85; max. 69.54. H1 2006 median 25.5; 1st quartile 39.58; average 49.12; weighted average 47.41; 3rd quartile 46.99; max. 72.57.
- Trading income (% total income): H1 2006 median 7.39; 1st quartile 13.47; average 14.26; weighted average 15.84; 3rd quartile 18.39; max. 32.87.
- Fees and commissions (% total income): 2004 median 15.92; H1 2006 median 12.85; weighted average 26.51; max. 39.84.
- Cost-income ratio (%): 2004 median 48.60; H1 2006 median 38.50; weighted average 59.10; max. 77.70.
- Tier 1 ratio (%): 2004 median 6.3; H1 2006 median 5.94; weighted average 8.18; max. 11.40.
- Overall solvency ratios (%): 2004 median 8.46; H1 2006 median 9.50; weighted average 11.31; max. 15.70.

### Cyclical and sectoral developments (Figures 1–3, 6)
- Activity and cycle:
  - The recovery accelerated: quarterly annualized GDP growth series show the euro area catching up with a maturing global expansion.
  - Investment contributed strongly to the recovery: gross fixed capital formation and buoyant profitability supported investment growth (Figure 2).
  - Employment and productivity: employment rose and labor productivity per hour accelerated relative to previous cycles (Figure 3).
- Household sector and housing (Figure 4):
  - Labor-force participation increased to 64.5 percent in 2006 (noted in Table 3 policy section).
  - Housing prices continued to rise while housing affordability began to decline; household debt and mortgage borrowing increased, though household indebtedness remained lower than in other main currency areas.
- Capacity and labor constraints (Figures 5–6):
  - Capacity constraints in most euro-area members are less binding than at the peak of the last cycle, but equipment shortages are tighter where constraints bind.
  - Unemployment continued to decline; employment increased including in full-time positions, with a shift toward part-time and temporary work.
  - Some indicators suggest slack has diminished, though firms cite labor shortages less often than at past peaks.

### Prices, costs, and competitiveness (Figures 8–10)
- Inflation and labor costs:
  - Headline HICP and core inflation converged over 1999–2007; underlying inflation measures edged up slowly since the 2005 trough.
  - Unit labor costs and compensation per employee rose modestly; wage growth remained subdued.
- Dispersions and competitiveness:
  - Inflation and output dispersions are not high by historical standards, but persistent dispersions in cost growth and unit labor costs (ULC) contributed to competitiveness differences across member states.
  - Real interest rate declines and interest rate convergence over 1997–2006 were associated with cumulative GDP growth differences across countries.

### Policy progress and plans relevant to the IMFC strategy (Table 3)
- Structural reform progress in three main areas over the past year:
  - Strengthening competition in product markets: Liberalization of network industries; more effective competition policy; enhanced efficiency of public interventions; adoption of the revised Services Directive.
  - Implementing new measures in the labor market: Measures increased labor force participation to 64.5 percent in 2006 (6.6 percentage points since 1995); many countries reformed public pension systems since 2001 and tightened early-retirement schemes.
  - Integrating financial markets across the EU: Multiple initiatives under the Financial Services Action Plan (FSAP) and Lamfalussy framework.
- Authorities’ policy plans looking forward:
  - Product markets: Further reduce market regulation; transposition of the Services Directive in all Member States by December 2009 at the latest; develop an internal market for network industries like gas and electricity; remove barriers in regulated trades and professions.
  - Labor markets: Lisbon-led National Action Plans prioritize increasing fiscal incentives to work; further adjusting benefit systems; fostering flexibility and security (including modernizing employment protection legislation); better aligning wage and productivity developments; promoting labor mobility across borders and between occupations.
  - Financial markets: Implement Markets in Financial Instruments Directive (MiFID)—expected to come into effect on November 1, 2007; integrate clearing and settlement services (TARGET2-Securities, Code of Conduct) and payments systems (SEPA); implement Solvency II Directive for insurance companies; create a more integrated retail and wholesale financial market.

*Sources: IMF, World Economic Outlook; Eurostat; ECB Monthly Bulletin; ECB; Datastream; individual institutions' financial reports and ECB calculations.*

### Introduction of 35-hour

### Introduction of 35-hour working week in France

### Key findings on labor market and wages
- "The wage-unemployment trade off has improved... ...lately on account of rising hours worked."
- Emphasis in the source on hours worked as a recent contributor to labor-market developments.

### Euro area macroeconomic and financial environment (excerpts)
- Policy rates: "After 2 1/2 years at 2 percent, policy rates have been raised eight times since December 2005..."
- Market expectations: "and markets expect 50bp increase by the end of 2007."
- Inflation expectations: "Inflation expectations remain well anchored... ...in line with break-even inflation trends."
- ECB risk assessment: "the ECB perceives a liquidity 'overhang' as a key upside inflation risk as the recovery strengthens."
- Money and credit: "Credit growth remains high across the board."
- Monetary conditions: "Monetary conditions have become tighter..."
- Fiscal developments:
  - "The area's fiscal deficit has improved..."
  - "and fiscal policy has so far been countercyclical during the current upswing."
  - "The close-to-balance criterion remains elusive, in particular, for the countries currently under the EDP..."
  - "but the overall public debt-to-GDP ratio is expected to decline further."
- Economic regulations: "...and labor market regulations remain high."
- Banking sector:
  - "Banks remain well-capitalized..."
  - "...helped by still healthy interest margins..."
  - "Rising revenues and cost cuts have combined to improve profits."
  - "...and profitability has recovered..."
  - "...and low loan loss provisions."
- Leverage and balance-sheet trends:
  - "Household leverage ratios have remained broadly unchanged since 2003 ..."
  - "... while a process of de-leveraging continued in the non-financial enterprise sector..."
- External sector:
  - "The euro has again appreciated..."
  - "...and the current account continues to hover around balance."
  - "But the real value of the euro is still broadly aligned with medium-term fundamentals..."

### Statistical improvements, data coverage, and methodological changes
- Quarterly national accounts:
  - "Eurostat and the ECB published an initial set of quarterly euro area and EU-27 accounts per institutional sector in June 2007, covering 1999:Q1 until 2006:Q4."
  - "New releases will henceforth follow on a quarterly basis, with a delay that is to be gradually reduced to 95 days."
- Classification and series issues:
  - "A revised Nomenclature générale des Activités Economiques dans les Communautés Européennes (NACE) classification, NACE Rev. 2, will be introduced gradually from 2008 onwards, applying to 2008 data and beyond."
  - "NACE Rev. 2 is not expected to have major effects on aggregate economic statistics such as GDP."
- Quality frameworks and code of practice:
  - "A European Statistics Code of Practice was adopted in 2005 for Eurostat and the national statistical agencies..."
  - "Self-assessments using the Code of Practice have taken place, and peer assessments are now ongoing."
- Price and housing statistics:
  - "A harmonized index of consumer prices at constant tax rates (HICP-CT) series should become available from 2008 onward for most EU member states."
  - "Publication of an euro area import price index is expected later this year, covering extra-area imports in goods."
  - "Preliminary work is ongoing to better monitor administered prices, and work on housing prices is continuing, with the aim or producing an experimental euro area index by the end of 2007."
- Labor and short-term statistics:
  - "The Labor Force Survey is being expanded with more detailed information about the distribution of wages and a legal act providing for the compilation of data on job vacancies is being prepared."
  - "At present, data from member states are incomplete and not fully harmonized."
- Financial soundness indicators (FSIs) and reporting:
  - "All EU countries participated in the IMF’s Coordinated Compilation Exercise for Financial Soundness Indicators (FSIs). Data and metadata on a benchmark set of indicators of financial system soundness for end-2005 for all EU countries, but no aggregated data for the euro area and EU, have been posted on the IMF website."
  - "The aggregated FSIs for the euro area that were until 2005 published annually in the ECB’s Banking Sector Stability Report, which were prepared using a different methodology, have been provisionally discontinued due to the staggered implementation of International Financial Reporting Standards (IFRS)."
  - "Euro area and EU aggregates will be reimplemented for end-2007 data when IFRS-compliant data will be required in all countries for supervisory reporting."
- Data transmission and institutional notes:
  - "All euro area countries and the ECB provide monetary statistics to the IMF through a 'gateway' arrangement in which the data are channeled through the ECB."
  - "The recent entry of Slovenia in the euro area went smoothly from a statistical point of view."
- Remaining gaps and priorities:
  - "Internationally comparable and higher-frequency financial soundness indicators, more housing market indicators, and improved statistics on non-bank financial intermediaries would be desirable."
  - "Analysis of asymmetries between balance of payments data reported by different member states continues to improve... Further progress will require increased harmonization of data collection and compilation practices, and changes to national confidentiality arrangements."

### Administrative and document details (as stated)
- Staff report identifiers and approvals:
  - "Prepared by the European Department"
  - "Approved by Michael Deppler and Adnan Mazarei"
  - "July 20, 2007"

*Source: Staff Report for the 2007 Article IV Consultation — Supplementary Information (European Department), July 20, 2007.*

### 1.      This supplement provides an update of economic and policy developments since

### This supplement provides an update of economic and policy developments since the release of the staff report (7/10/07)

### Overview
- The thrust of the staff appraisal remains unchanged.
- This supplement provides an update of economic and policy developments since the release of the staff report (7/10/07).

### Growth and economic activity
- Growth in 2007:Q1 was revised up modestly, to 2.8 percent on a quarterly annualized basis (3.1 percent over 2006:Q1).
- Recent data indicate that economic activity remains buoyant.
- Industrial production data for May and purchasing managers’ indices for manufacturing and services in June point to robust growth ahead.

### External sector and exchange rates
- Exports continue to show strong momentum.
- During January-May 2007:
  - euro-area (nominal) goods exports stood 9 percent above last-year’s levels.
  - euro-area (nominal) goods imports stood 5 percent above last-year’s levels.
  - The trade balance swung from a deficit of euro 20 billion (0.2 percent of GDP) to a surplus of euro 4 billion.
- The staff’s March 2007 assessment suggested that the euro’s real effective exchange rate was still broadly in line with fundamentals; since then the currency has appreciated by about 2 percent in real effective terms.

### Inflation, labor market, and costs
- Headline and core inflation stayed at 1.9 percent in June.
- Capacity utilization continues to increase.
- Unemployment fell to 7.0 percent in May, the lowest level since the beginning of harmonized records.
- Labor cost indicators suggest still contained wage increases.
- Inflation expectations have essentially moved sideways.

### Monetary policy expectations
- The ECB left interest rates unchanged at its July 5 meeting.
- Market participants expect further interest rate hikes in September and December, to 4½ percent by end year.

*Source: Supplement to the staff report (release 7/10/07).*

### 6.      Pressures to slow fiscal adjustment are mounting. Since the staff report was

### _cr07260 - 6.      Pressures to slow fiscal adjustment are mounting. Since the staff report was

### Background and near‑term assessment
- Euro area economy described as "doing well" with "real GDP growth...around 2½ percent."
- Capacity utilization indicators moving up; labor not yet a major constraint.
- Since September 2006, HICP inflation running "in line with the European Central Bank’s 'close to but under' 2 percent target."
- ECB has raised the main policy rate eight times since December 2005 "to 4 percent."
- External position characterized as "broadly balanced"; "the euro’s real effective exchange rate has appreciated by about 1 percent since the end of 2006."

### Staff projections and risks
- Staff projects "above potential real GDP growth of around 2½ percent through 2008."
- Risks:
  - Short run: "generally small and to the upside."
  - Medium run: "widening and moving to the downside" due to oil prices, global current account imbalances, potential investor flight from risk, and US growth.

### Executive Board assessment — key policy messages
- Growth and employment
  - Real GDP expected to remain above potential near term; employment gains to stay healthy.
  - Need to monitor wages and firms’ pricing behavior to assess further monetary tightening.
- Monetary policy
  - Directors expect "some further monetary policy tightening might be required" depending on wages, pricing, and external risks.
- Fiscal policy
  - Welcome generally strong 2006 fiscal performance; cyclically-adjusted deficit fell by "somewhat under 1 percentage point of GDP in 2006."
  - Recommendation: countries not yet at medium-term fiscal objectives should "continue to lower their cyclically-adjusted fiscal deficits by at least ½ percent of GDP per year, consistent with the rules of the Stability and Growth Pact."
  - Emphasis on not loosening fiscal targets in response to abundant revenues; support for strengthening national fiscal rules and governance mechanisms.
- Structural reform and productivity
  - Fundamental challenge: achieve "a joint structural acceleration of productivity and labor force participation rates."
  - Support for hastening implementation of the Services Directive to raise contestability of national services markets.
  - Promote integration of financial services, raise contestability of national retail markets, and deepen capital markets (prompt implementation of the Markets in Financial Instruments Directive; integrate payments and securities clearing and settlement systems; facilitate cross‑border bank mergers and acquisitions).
- Financial stability framework
  - Need to strengthen crossborder financial stability framework to improve prevention, reduce moral hazard, and limit taxpayer exposure.
  - Emphasis on cooperation in supervision and greater joint responsibility and accountability for systemic cross-border institutions.
- Trade policy
  - Encourage resisting protectionist pressures and support an ambitious conclusion to the Doha Round, especially additional liberalization in agriculture.

### Authorities' (Euro area) perspective — summary highlights
- Short‑term outlook
  - Authorities broadly concur with staff growth outlook for 2007 and 2008; expect output growth "above 2½ percent" for the year.
  - Short-term risks described as "broadly balanced"; medium-term risks slightly tilted to the downside (U.S. slowdown, protectionism, financial market risks, oil price shocks, disorderly unwinding of global imbalances).
- Price stability and monetary analysis
  - Annual HICP inflation "was 1.9 percent in the first half of 2007."
  - Governing Council of the ECB views risks to price stability "on the upside" at the policy relevant medium-term horizon.
  - Monetary expansion remains strong (continued rapid growth of M3 and high credit growth); liquidity remains ample.
- Fiscal developments
  - General government deficit fell for the third consecutive year in 2006; debt ratio recorded first decline since 2002.
  - Authorities note uncertainty whether 2006 revenue buoyancy is permanent or temporary.
  - Support for full implementation of preventive arm of the reformed Stability and Growth Pact and for stepping up consolidation toward MTOs.
  - Authorities find the staff's suggestions for strengthening national fiscal rules and governance interesting; Commission proposals under examination.
- Structural reforms and Lisbon strategy
  - Authorities agree progress made and that "the revised Lisbon strategy...is creating a greater sense of 'national ownership' of objectives."
  - If National Reform Programs are implemented as intended, "R&D spending will rise to 2.8% of GDP by 2010, up from 1.9% of GDP in 2005."
  - Authorities stress that the Services Directive applies to most professional services despite some exclusions.
- Financial sector and integration
  - Financial integration in wholesale markets well underway; FSAP measures "almost fully transposed by Member States."
  - Ongoing work to improve supervisory frameworks, crisis prevention, management and resolution tools, and incentive structures.
- Enlargement and euro adoption
  - Authorities emphasize open, rules-based enlargement and the need for sustainable nominal convergence; cite decision on Cyprus and Malta adoption on "January 1, 2008."
- International relations and trade
  - Euro area committed to contributing to resolution of global imbalances through Lisbon Strategy implementation and multilateral consultations.
  - EU advancing bilateral free trade agreements (ASEAN, South Korea, India) as complementary to Doha; authorities reaffirm priority for successful Doha conclusion.

### Key quantitative indicators (selected series preserved exactly as in source)
- Real GDP (annual percent change): 0.9, 0.8, 2.0, 1.5, 2.8, 2.6, 2.5 (2002–2008 series as presented).
- Potential GDP (annual percent change): 2.0, 1.9, 1.9, 1.9, 2.0, 2.1, 2.1.
- Output gap (percent): 0.1, -1.0, -0.9, -1.3, -0.6, -0.1, 0.2.
- Unemployment rate (percent): 8.2, 8.7, 8.8, 8.6, 7.8, 7.0, 6.9.
- Consumer prices (annual percent change): 2.3, 2.1, 2.1, 2.2, 2.2, 2.0, 2.0.
- GDP deflator (annual percent change): 2.6, 2.1, 1.9, 1.9, 1.8, 2.1, 1.9.
- General government balance (percent of GDP): -2.6, -3.1, -2.8, -2.5, -1.6, -1.0, -1.1.
- General government structural balance (percent of GDP): -2.6, -2.6, -2.4, -1.9, -1.3, -0.9, -1.0.
- General government gross debt (percent of GDP): 68.2, 69.3, 69.8, 70.5, 68.8, 66.7, 65.4.
- Short-term deposit rate: 3.3, 2.3, 2.1, 2.3, 3.1, ..., ...
- Long-term government bond yields: 4.9, 3.9, 3.8, 3.3, 3.9, ..., ...
- U.S. dollar per euro: 0.94, 1.13, 1.24, 1.25, 1.26, ..., ...
- Real effective rate (2000=100): 107.1, 122.3, 127.8, 128.0, 128.0, ..., ...
- Current account balance (percent of GDP): 0.8, 0.4, 0.8, 0.0, -0.2, -0.3, -0.4.
- Exports (annual percent change): 1.7, 1.1, 6.8, 4.2, 8.2, 5.9, 5.7.
- Imports (annual percent change): 0.3, 3.1, 6.7, 5.0, 7.9, 5.8, 6.0.

### Policy recommendations and action points (as articulated by Directors and authorities)
- Maintain fiscal discipline: lower cyclically-adjusted deficits by at least ½ percent of GDP per year until MTOs reached; avoid loosening targets with revenue windfalls.
- Strengthen national fiscal rules, governance mechanisms, and implementation of preventive arm of the Stability and Growth Pact.
- Continue monetary vigilance; further tightening conditional on wages, pricing, and external developments.
- Accelerate structural reforms to raise productivity and labor force participation: implement Services Directive, raise contestability in services and retail markets, deepen financial market integration.
- Strengthen crossborder financial stability framework: enhance cooperation, supervision, crisis prevention/management/resolution tools, and accountability for systemic institutions.
- Resist protectionism; pursue ambitious completion of the Doha Round and use bilateral FTAs as complements to multilateral liberalization.

*Public Information Notice (PIN) No. 07/89 — IMF Executive Board Discusses Euro Area Policies, July 31, 2007.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07260.pdf_