IMF Executive Board Concludes 2021 Discussions on Common Euro Area Policies with Member Countries

IMF News, February 7, 2022

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Published: February 7, 2022

Economic outlook and near-term risks

Euro area output fell by about 6½ percent in 2020 and "has rebounded strongly since the second quarter of 2021," with real GDP having reached its pre-crisis level by the end of last year.
Inflation accelerated in 2021, "largely reflecting base effects from last year’s low energy prices and transitory factors."
Near-term headwinds: "supply chain disruptions, elevated energy prices, and the resurgence of Covid-19 cases—including those related to the Omicron variant."
These headwinds are expected to "dissipate over the course of 2022," with the recovery continuing due to "a strong labor market, the normalization of the households’ savings rate, and the impulse provided by the Next Generation EU Plan."
Upside inflation risks have increased, but "with temporary factors dissipating, inflation is projected to decline through 2022 and to remain below the ECB’s 2-percent target in the medium term."
Uncertainty remains high and is "largely tied to the evolution of the pandemic."
Additional downside risks: "the ongoing phasing-out of policy support, a potential correction in real estate markets, or spillovers from a sharp slowdown outside Europe."
Upside scenarios: "faster-than-expected adjustment to Covid-19," "a material unwinding of large household savings" that could "significantly increase consumption," and "an effective implementation of the envisaged reforms and investments" could raise medium-term growth.

Executive Board assessment — policy priorities and recommendations

Directors commended "the authorities’ forceful economic policies" and agreed "strong growth is set to continue," while noting high uncertainty and pandemic-dominated risks.
Fiscal policy:
- "Fiscal policy should remain supportive, and, as the recovery takes hold, become increasingly targeted to support the vulnerable and limit scarring."
- Welcomed approval of national Resilience and Recovery Plans and "urged their rapid and high-quality implementation."
- Noted debate on reforming the EU fiscal framework and "agreed that a time-bound transitional arrangement could be desirable until the new rules become effective."
- Acknowledged that "an expenditure growth rule with a debt anchor could be an attractive option for the new framework."
- Suggested that "an EU-level climate investment fund could complement the fiscal rules by creating scope for financing essential climate investments and realizing the potential for positive cross-border spillovers from carbon-mitigation efforts."
Monetary policy and inflation:
- Directors "generally concurred with the ECB’s recent decision to maintain an accommodative monetary policy stance until its medium-term inflation target is met," while retaining flexibility to adjust if elevated underlying inflation proves more durable.
- Directors "welcomed the conclusions of the ECB’s strategy review, including an ambitious climate-related action plan."
Financial sector and macroprudential policy:
- While the financial system "appears resilient," bank supervisors need to "ensure timely loss recognition and appropriate provisioning."
- Housing market conditions warrant "a more effective use of macroprudential policies in jurisdictions where real estate risks are higher."
- Continued progress on European financial architecture reforms and "a faithful implementation of internationally agreed bank capital standards" would help underpin global financial resilience and stability.
- Directors "saw merit in establishing a single AML/CFT rulebook and making progress towards the harmonization of AML/CFT supervision."
Structural policies and social protection:
- "Ambitious structural policies and sizable investments will be needed to increase euro area potential growth and support the digital and green transitions."
- The Next Generation EU is viewed as "a unique opportunity to make progress on these priorities."
- Labor market policies should "focus on facilitating reallocation, including through programs for reskilling and upskilling of workers, and temporary and targeted subsidies."
- Improving coverage of social safety nets "by relying on progressivity and means-testing would help mitigate the impact on the vulnerable of structural economic shifts."
Climate policy:
- Directors welcomed "the EU’s climate change mitigation agenda," and noted authorities’ assurances that any carbon border adjustment mechanism would be "compatible with WTO rules."
Global vaccination equity:
- Directors underscored that the emergence of the Omicron variant "illustrated the criticality of continued EU efforts to ensure equitable global access to Covid-19 vaccines."

Key statistics — Euro Area: Main Economic Indicators (selected series and projections)

Real GDP (annual growth):
- 2017: 2.6
- 2018: 1.8
- 2019: 1.6
- 2020: -6.4
- 2021: 5.2
- 2022: 3.9 (projection)
- 2023: 2.5 (projection)
- 2024: 1.7 (projection)
- 2025: 1.4 (projection)
- 2026: (table lists "Private consumption" next; Real GDP series ends at 2025)
Private consumption (annual growth):
- 2017: 1.5
- 2018: 1.3
- 2019: -7.9
- 2020: 3.5
- 2021: 3.1
Public consumption (annual growth):
- 2017: 1.1
- 2018: 3.7
- 2019: 0.1
- 2020: 0.9
- 2021: 1.0
Gross fixed investment (annual growth):
- 2017: 6.7
- 2018: -7.0
- 2019: 4.6
- 2020: 4.1
- 2021: 3.2
- 2022: 2.4
- 2023: 1.9
Final domestic demand (annual growth):
- 2017: 2.1
- 2018: -5.8
- 2019: 3.8
Stockbuilding (contribution to growth):
- 2017: 0.2
- 2018: -0.1
- 2019: -0.5
- 2020: 0.3
- 2021: 0.0
Domestic demand (annual growth):
- 2017: 2.3
- 2018: -6.2
- 2019: 4.0
Foreign balance (contribution to growth):
- 2017: 0.4
- 2018: -0.8
- 2019: -0.3
Exports (includes intra-euro area trade, annual growth):
- 2017: 5.6
- 2018: 3.6
- 2019: 2.7
- 2020: -9.1
- 2021: 9.9
- 2022: 6.2
- 2023: 3.4
Imports (annual growth):
- 2017: 4.7
- 2018: 7.7
- 2019: 5.9
- 2020: 5.0
- 2021: (no value shown in provided excerpt)
Potential GDP (annual growth):
- 2017: -2.0
- 2018: 3.3
- 2019: 2.0
Output gap:
- 2017: -0.6
- 2018: -4.3
- 2019: -2.6
- 2020: -0.7
Employment (annual growth):
- 2017: -1.5
- 2018: 0.8
- 2019: 1.2
- 2020: 0.6
Unemployment rate (percent):
- 2017: 9.1
- 2018: 8.2
- 2019: 7.6
- 2020: 7.9
- 2021: 7.8
- 2022: 7.5
- 2023: 7.3
- 2024: 7.2
- 2025: 7.1
- 2026: 7.0
GDP deflator:
- 2017: 3.0
Consumer prices:
- (single value shown) 3.0
Public finance (percent of GDP):
- Overall fiscal balance:
- 2017: -0.9
- 2018: -0.4
- 2019: -7.2
- 2020: -6.3
- 2021: -3.8
- 2022: -2.4
- 2023: -1.9
- 2024: -1.6
- Primary balance:
- 2017: -5.9
- 2018: -5.1
- 2019: -2.7
- 2020: -1.4
- Structural balance:
- 2017: -4.6
- 2018: -4.7
- 2019: -3.3
- 2020: -2.3
- 2021: -1.7
- Structural primary balance:
- 2017: -3.5
- 2018: -2.2
- 2019: -1.3
- 2020: -1.0
- Gross public debt:
- 2017: 87.5
- 2018: 85.5
- 2019: 83.6
- 2020: 97.3
- 2021: 97.4
- 2022: 95.1
- 2023: 93.5
- 2024: 92.4
- 2025: 91.1
- 2026: 89.9
External sector:
- Current account balance (percent of GDP):
- 2017: 2.9
- 2018: 2.8
Interest rates (end of period):
- EURIBOR 3-month offered rate: …
- 10-year government benchmark bond yield: (no value shown)
Exchange rates (end of period):
- U.S. dollar per euro:
- 2017: 1.18
- 2018: 1.14
- 2019: 1.11
- 2020: 1.22
- 2021: 1.13
- Nominal effective rate (2005=100):
- 2017: 106.1
- 2018: 107.8
- 2019: 105.7
- 2020: 114.6
- 2021: 111.0
- Real effective rate (2005=100, ULC based):
- 2017: 87.3
- 2018: 84.0
- 2019: 82.0

Source: IMF Executive Board press release, "IMF Executive Board Concludes 2021 Discussions on Common Euro Area Policies with Member Countries" (Press Release No. 22/28), February 7, 2022.