IMF Executive Board Concludes 2019 Article IV Consultation on Euro Area Policies

July 10, 2019

On July 8, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] on euro area policies with member countries.

Euro area growth slowed in 2018 but is expected to firm up over the course of 2019. Domestic demand is expected to remain resilient on the back of tight labor markets and external demand is projected to improve in the second half of the year. Growth is forecast to pick up from 1.3 percent in 2019 to 1.6 percent in 2020, before moderating to slightly below 1½ over the medium term. Headline inflation continues to exhibit some volatility, mainly due to energy price fluctuations, but core inflation remains subdued. Inflation is projected to take several years to durably converge to the European Central Bank’s objective of below, but close to 2 percent.

There are significant downside 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, this could cause short-term disruptions for the euro area, as well as longer-term output losses. Countries with high public debt have not consolidated sufficiently leaving them vulnerable to shocks. Even in the absence of a major shock, there is a risk the euro area could experience a prolonged period of anemic growth and inflation.

Executive Board Assessment [2]

Directors welcomed the projected growth recovery, while noting that inflation remained subdued despite stronger wage growth. However, they expressed concerns about risks from rising trade tensions, a possible no-deal Brexit, and vulnerabilities in high-debt countries, and called for appropriately tailored monetary and fiscal policies supported by acceleration of structural and architectural reforms.

Directors agreed that monetary policy should remain accommodative until inflation is sustainably converging to the ECB’s objective. They welcomed the recent extension of forward guidance to help achieve a sustained pickup in inflation. Targeted macroprudential policies could be used to address any financial stability risks.

Directors called for fiscal policy to be tailored to country circumstances. While high-debt countries should rebuild lost fiscal space, countries with ample fiscal space should use it to invest in potential growth enhancing areas, such as infrastructure, innovation, and education. Directors encouraged better compliance with the fiscal rules and looked forward to the planned review of the current rules. Directors advised that, in the event of a severe downturn, fiscal policy should more actively support growth, with the fiscal response appropriately differentiated across countries, depending on the severity of the shock, fiscal space, and financing conditions.

Directors called for the acceleration of national structural reforms to address deep-seated productivity and competitiveness gaps and improve economic resilience. They urged deepening the EU Single Market for services and implementing proposals for EU financial support for reforms.

Directors supported the policy efforts to reduce external imbalances. They called on net external creditor countries to implement policies to incentivize domestic investment, which would contribute to reducing external surpluses. They welcomed the EU’s efforts to modernize the rules-based global trading system.

Directors welcomed the further increase in the banking sector’s capital buffers and the reduction of nonperforming loans, but were concerned about the sector’s structurally low profitability. They welcomed progress in implementing the FSAP recommendations, but noted that the overhaul of bank supervision and the review of the bank resolution framework have been delayed. Directors saw merit in consolidating the anti-money laundering oversight at the EU level over the medium term.

Directors urged EU policymakers to find a consensus on completing the architecture of the monetary union. They welcomed the 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. Directors supported efforts in improving capital markets by enhanced transparency, better regulatory oversight, and more efficient insolvency regimes. Directors welcomed the proposed euro area budget for convergence and competitiveness but saw merit in a central instrument for macroeconomic stabilization.



Euro Area: Main Economic Indicators, 2016–24

Projections 1/

2016

2017

2018

2019

2020

2021

2022

2023

2024

Demand and Supply

Real GDP

1.9

2.4

1.9

1.3

1.6

1.5

1.4

1.4

1.3

Private consumption

1.9

1.7

1.3

1.4

1.5

1.5

1.4

1.4

1.3

Public consumption

1.8

1.2

1.0

1.0

1.1

0.9

0.8

0.9

1.0

Gross fixed investment

3.9

2.7

3.4

2.8

2.7

2.5

2.3

2.1

1.9

Final domestic demand

2.3

1.8

1.7

1.6

1.7

1.6

1.5

1.4

1.4

Stockbuilding 2/

0.1

0.0

0.1

-0.2

0.0

0.0

0.0

0.0

0.0

Domestic demand

2.4

1.8

1.8

1.4

1.7

1.5

1.5

1.4

1.4

Foreign balance 2/

-0.3

0.7

0.2

-0.1

0.0

0.0

0.0

0.0

0.0

Exports 3/

3.0

5.1

3.2

2.6

3.4

3.4

3.4

3.3

3.2

Imports 3/

4.2

3.9

3.2

3.0

3.8

3.7

3.6

3.5

3.5

Resource Utilization

Potential GDP

1.2

1.4

1.3

1.3

1.4

1.4

1.4

1.4

1.4

Output gap

-1.2

-0.3

0.3

0.2

0.4

0.4

0.4

0.4

0.3

Employment

1.4

1.6

1.5

0.9

0.6

0.4

0.3

0.2

0.2

Unemployment rate 4/

10.0

9.1

8.2

7.7

7.5

7.3

7.2

7.1

7.1

Prices

GDP deflator

0.9

1.1

1.4

1.5

1.6

1.7

1.8

1.9

2.0

Consumer prices

0.2

1.5

1.8

1.3

1.6

1.6

1.8

1.9

1.9

Public Finance 5/

General government balance

-1.6

-1.0

-0.5

-0.9

-0.8

-1.0

-1.0

-1.0

-1.0

General government structural balance

-0.8

-0.7

-0.6

-0.8

-1.0

-1.1

-1.2

-1.1

-1.1

General government gross debt

89.2

87.1

85.1

83.7

81.9

80.3

78.7

77.1

75.6

External Sector 5/, 6/

Current account balance

3.1

3.2

2.9

2.8

2.6

2.5

2.4

2.3

2.2

Interest Rates (end of period) 4/, 7/

EURIBOR 3-month offered rate

-0.3

-0.3

-0.3

-0.3

…

…

…

…

…

10-year government benchmark bond yield

1.3

0.9

1.2

0.9

…

…

…

…

…

Exchange Rates (end of period) 7/

U.S. dollar per euro

1.05

1.18

1.14

1.12

…

…

…

…

…

Nominal effective rate (2005=100)

98.9

106.1

107.7

107.0

…

…

…

…

…

Real effective rate (2005=100, ULC based)

81.2

86.7

86.2

85.6

…

…

…

…

…

Sources: IMF, World Economic Outlook, Global Data Source; Reuters Group; and Eurostat.

1/ Projections are based on aggregation of WEO July 2019 projections submitted by IMF country teams.

2/ Contribution to growth.

3/ Includes intra-euro area trade.

4/ In percent.

5/ In percent of GDP.

6/ Projections are based on member countries' current account aggregations excluding intra-euro flows and corrected for aggregation discrepancy over the projection period.

7/ Latest monthly available data for 2019.


[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. Staff hold separate annual discussions with the regional institutions responsible for common policies for the countries in four currency unions—the Euro Area, the Eastern Caribbean Currency Union, the Central African Economic and Monetary Union, and the West African Economic and Monetary Union. For each of the currency unions, staff teams visit the regional institutions responsible for common policies in the currency union, collect economic and financial information, and discuss with officials the currency union’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis of discussion by the IMF Executive Board. Both staff’s discussions with the regional institutions and the Board discussion of the annual staff report subsequently are considered an integral part of the Article IV consultation with each member.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

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