IMF Executive Board Concludes 2018 Article IV Consultation on Euro Area Policies
IMF News, July 19, 2018
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- Published: July 19, 2018
Overview
- On July 16, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation on euro area policies with member countries.
- The 2018 consultation included a discussion of the findings of the Financial Sector Assessment Program (FSAP) exercise for the euro area.
- The euro area expansion remains vigorous but is slowing to a more moderate pace, with domestic demand and solid job creation as the main engines.
Outlook and Projections
- Growth is projected to remain above potential in 2018 and 2019:
- 2018: 2.2 percent
- 2019: 1.9 percent
- Growth is projected to ease to an annual rate near 1½ percent in the medium term.
- Inflation:
- Headline inflation has exhibited volatility lately, while core inflation has remained subdued.
- Inflation is expected to take a few years to durably converge to the ECB’s objective of below, but close to 2 percent.
- Medium-term drags on growth include demographic changes, weak productivity growth, and crisis legacies.
Risks to the Outlook
- Global and domestic risks are skewed to the downside:
- Rising trade tensions, including recent U.S. imposition of tariffs on steel and aluminum imports.
- Policy inaction and political shocks at the national level, particularly regarding rebuilding fiscal buffers in high-debt countries and implementing structural reforms while growth remains strong.
- Lack of progress in Brexit negotiations raising the risk of a disruptive exit.
- Policy reversals that could abruptly raise borrowing costs and derail the expansion.
FSAP Findings and Banking Sector Assessment
- FSAP finds significant progress on the banking union:
- Banks’ buffers are larger and of higher quality than before.
- Nonperforming loans have declined.
- Low profitability remains a serious challenge for many banks.
- Institutional improvements:
- Banking supervision improved with the creation of the Single Supervisory Mechanism.
- Handling of bank resolution improved under the Single Resolution Mechanism, though fragmentation of rules along national lines remains an issue.
- FSAP provides detailed recommendations for further improvement, including strengthening resilience, profitability, cleanup of legacy assets, and addressing transitional and structural issues.
Executive Board Assessment and Policy Recommendations
- Monetary policy:
- Directors agreed monetary policy should remain supportive until inflation convincingly converges to the ECB’s objective.
- Directors welcomed the ECB’s intention to keep interest rates low well beyond the end of net asset purchases in 2018.
- Emphasized the importance of clear communication to anchor interest rate expectations.
- External rebalancing and trade:
- Directors agreed decisive policy efforts should support external rebalancing and promote trade openness and the rules-based global trading system.
- Staff assessed the euro area current account surplus as moderately stronger than warranted by fundamentals; remedies lie primarily at the national level.
- Fiscal policy:
- Concern that national budgetary plans did not adequately address country-specific challenges.
- High-debt countries should increase fiscal adjustment efforts while conditions remain supportive.
- Countries with ample fiscal space encouraged to pursue additional investment to lift potential growth and contribute to external rebalancing.
- Stressed better compliance with and enforcement of fiscal rules and a plan to simplify the fiscal framework.
- Called for internationally coordinated efforts to address new taxation challenges from globalization of corporate activities and digitalization.
- Structural reforms:
- Recognized deep structural issues impeding medium-term growth and income convergence.
- Urged countries to step up structural reform efforts to boost productivity and employment.
- Supported initiatives to link EU financial support to reform implementation.
- Financial sector and banking union architecture:
- Urged further efforts to strengthen system resilience, especially profitability, and vigilance against financial stability risks.
- Encouraged ongoing supervisory and other actions to clean up legacy assets.
- Agreed on importance of building up “bail-in-able” debt in banks and gradually reducing financial intermediaries’ exposures to home sovereign debt to attenuate sovereign-bank feedback loops.
- Supported further progress on building the capital markets union and enhancing supervision of nonbanks, especially in the context of Brexit.
- Considered architectural reforms necessary: reduce legal fragmentation across national lines, create a credit line from the European Stability Mechanism to backstop the Single Resolution Fund, and establish a common deposit insurance scheme.
- Most Directors saw merit in developing over time a central fiscal capacity to support macro stabilization, embedding strong safeguards against permanent transfers and moral hazard.
Key Statistics (Euro Area: Main Economic Indicators, 2015–23)
- Real GDP:
- 2015: 2.1
- 2016: 1.8
- 2017: 2.4
- 2018: 2.2
- 2019: 1.9
- 2020: 1.7
- 2021: 1.5
- 2022: 1.4
- Private consumption:
- 2015: 2.0
- 2016: 1.6
- 2017: 1.3
- Public consumption:
- 2015: 1.2
- 2016: 1.0
- Gross fixed investment:
- 2015: 3.3
- 2016: 4.6
- 2017: 3.2
- 2018: 3.9
- 2019: 3.6
- 2020: 2.9
- 2021: 2.5
- 2022: 2.3
- Stockbuilding (contribution to growth):
- 2015: 0.0
- 2016: -0.2
- 2017: 0.1
- Foreign balance (contribution to growth):
- 2015: -0.4
- 2016: 0.6
- 2017: 0.2
- Exports (includes intra-euro area trade):
- 2015: 6.4
- 2016: 5.3
- 2017: 4.7
- 2018: 4.4
- 2019: 3.8
- 2020: 3.4
- Imports:
- 2015: 6.7
- 2016: 4.3
- 2017: 4.2
- Potential GDP / Output gap:
- Output gap:
- 2015: -1.6
- 2016: -1.2
- 2017: 0.4
- 2018: 0.8
- 2019: 0.7
- Employment:
- 2017: 0.3
- Unemployment rate (in percent):
- 2015: 10.9
- 2016: 10.0
- 2017: 9.1
- 2018: 8.4
- 2019: 8.0
- 2020: 7.8
- 2021: 7.6
- 2022: 7.5
- 2023: 7.4
- GDP deflator:
- 2015: 1.1
- General government balance (in percent of GDP):
- 2015: -2.0
- 2016: -1.5
- 2017: -0.9
- 2018: -0.6
- 2019: -0.5
- 2020: -0.7
- 2021: -0.8
- General government structural balance:
- 2015: -1.0
- 2016: -1.1
- General government gross debt (in percent of GDP):
- 2015: 89.9
- 2016: 89.0
- 2017: 86.7
- 2018: 84.3
- 2019: 81.8
- 2020: 79.8
- 2021: 77.9
- 2022: 76.1
- 2023: 74.5
- Current account balance:
- 2015: 3.5
- 2016: 3.1
- 2017: 3.0
- EURIBOR 3-month offered rate (end of period):
- 2015: -0.1
- 2016: -0.3
- 10-year government benchmark bond yield (end of period):
- 2015: 0.9
- U.S. dollar per euro (end of period):
- 2015: 1.09
- 2016: 1.05
- 2017: 1.18
- Nominal effective rate (2005=100):
- 2015: 101.2
- 2016: 102.6
- 2017: 110.0
- 2018: 110.2
- Real effective rate (2005=100, ULC based):
- 2015: 90.7
- 2016: 90.6
- 2017: 96.3
- 2018: 96.7
IMF Communications Department, Press Release No. 18/298, July 19, 2018.