Euro Area is Recovering Strongly, But Challenges Lie Ahead

IMF News, February 7, 2022

Source details

Economic policies in the euro area have forcefully supported household incomes and protected corporate balance sheets.
High levels of vaccination and increasing adaptation to the pandemic have helped foster a strong economic recovery.
The labor market recovered rapidly but unevenly across sectors.

Elevated uncertainty from the evolution and legacies of the pandemic, and ongoing geopolitical tensions.
Upside inflation risks have clearly increased, even though under the baseline medium-term inflation dynamics are expected to remain weak.
Stretched asset valuations, especially in real estate markets, pose financial stability risks in some euro area countries.

Coordinate the normalization of economic policy with agility, and increasingly target policies to contain scarring and mitigate a potential rise in inequality and poverty.
Highly indebted countries, in particular, will need to reduce their debts once the expansion is firmly underway; credible plans to achieve this should be announced now.
Reform European Union fiscal rules, including consideration of an EU-level climate fund.
The European Central Bank should stand ready to adjust course as needed in response to evolving inflation risks.
Some euro area countries could tighten their macroprudential stance given stretched asset valuations.
Facilitate labor reallocation and protect the vulnerable through:
- Reskilling and upskilling workers.
- Using hiring subsidies.
- Enhancing targeted safety nets.
Advance structural reforms and high-impact investment envisioned in the Next Generation European Union package to enhance resilience, support green and digital transitions, and boost potential growth.

IMF European Department, February 7, 2022