IMF Executive Board Concludes 2023 Article IV Consultation with Euro Area
IMF News, July 19, 2023
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- Published: July 19, 2023
Overview
- On July 12, the Executive Board of the International Monetary Fund (IMF) concluded the 2023 discussions on common euro area policies with member countries.
- The euro area economy displayed resilience after Russia’s invasion of Ukraine and the largest terms of trade shock in several decades, owing to a swift policy response and a strong rebound in contact-intensive services.
- Economic activity weakened significantly in the second half of 2022 and slipped into a mild technical recession in early 2023 as financial conditions tightened, real wages declined, and consumer confidence fell.
- The next consultation on euro area policies in the context of the Article IV obligations of member countries is expected to be held on the standard 12-month cycle.
Outlook and Inflation Dynamics
- Growth is expected to pick up gradually throughout 2023 and 2024, supported by:
- a recovery in real incomes in the context of continued tight labor market conditions,
- a further easing of supply constraints,
- firmer external demand,
- even as financial conditions continue to tighten.
- Headline inflation has fallen sharply recently after reaching record high levels, but core inflation is proving more persistent.
- As tight financial conditions restrain demand and supply shocks dissipate further, inflation is set to decline further but is expected to remain elevated for an extended period.
Risks and Uncertainty
- Uncertainty surrounding the outlook is high. Key downside risks identified:
- Turbulence in financial markets, including from distress elsewhere, could lead to a contraction in credit and a broader increase in risk aversion.
- Weaker external demand would negatively affect the bloc’s growth prospects.
- More persistent inflation, including due to strong wage growth, would require a tight policy stance for longer, weighing on domestic demand.
- Renewed supply shocks from an escalation of the war in Ukraine or further geoeconomic fragmentation would push up inflation and hurt growth.
- An upside scenario: the economy could again prove more resilient than expected, especially amid a still large stock of excess savings.
Executive Board Assessment
- Directors agreed with the thrust of the staff appraisal and commended authorities for decisive policy actions that supported resilience.
- Near-term priority: bring inflation back to target while preserving financial stability.
- Monetary policy:
- Directors noted the need to maintain a tight monetary policy stance to ensure inflation returns to target in a timely manner.
- Most Directors stressed that further monetary policy tightening is needed.
- Directors called for a continued flexible and data-dependent approach.
- Directors agreed that the Eurosystem’s bond holdings should continue to be reduced in a gradual and predictable manner, with the policy rate serving as the primary tool of monetary policy.
- Financial sector:
- Directors welcomed that euro area banks are overall well capitalized and liquid.
- They stressed the importance of strong supervision and regulation of banks and nonbank financial intermediaries to mitigate risks related to asset valuations, liquidity, funding, and exposures to real estate markets.
- Directors called for making further progress toward completing the EU’s financial architecture to enhance economic and financial resilience.
- Fiscal policy:
- Directors agreed that a tighter fiscal stance, as planned in 2024, would help contain inflationary pressures.
- They stressed that a reduction in deficits is essential to safeguard fiscal sustainability in many high-debt countries, including by phasing out energy relief measures and saving any revenue windfalls.
- Directors emphasized the importance of protecting investment as public finances are consolidated.
- They supported the ongoing reform of the European economic governance framework and encouraged reaching an agreement swiftly to anchor medium-term fiscal policy making.
- A number of Directors considered that an EU-wide fiscal capacity for macroeconomic stabilization and provision of public goods would help strengthen this framework.
- Structural policies:
- Directors noted that ambitious structural policies and investments are instrumental to increase potential growth and support the digital and green transitions.
- Progress toward the National Recovery and Resilience Plan targets, promoting innovation, facilitating sectoral reallocation of labor, and reskilling and upskilling the workforce were underscored as crucial.
- Directors also stressed the EU’s critical role in promoting rules-based, open trade and welcomed its commitment to the World Trade Organization.
Projections and Key Statistics (Table 1. Euro Area: Main Economic Indicators, 2019–2028)
- Real GDP (y/y percent change):
- 2019: 1.6
- 2020: -6.1
- 2021: 5.3
- 2022: 3.5
- 2023: 0.9
- 2024: 1.5
- 2025: 1.8
- 2026: 1.7
- 2027: 1.4
- 2028: 1.3
- Private consumption:
- 2019: -7.7
- 2020: 3.7
- 2021: 4.5
- 2022: 0.5
- 2023: 2.1
- 2024: 2.0
- Public consumption:
- 2019: 1.0
- 2020: 4.3
- 2021: 0.0
- 2022: 0.8
- 2023: 0.7
- 2024: 1.1
- Gross fixed investment:
- 2019: 6.9
- 2020: -6.2
- 2021: 3.9
- 2022: 2.3
- 2023: 2.4
- 2024: 1.9
- Final domestic demand:
- 2019: 2.7
- 2020: -5.5
- 2021: 3.6
- 2022: 0.6
- Stockbuilding (contribution to growth):
- 2019: -0.2
- 2020: -0.3
- 2021: 0.3
- 2022: -0.1
- Domestic demand:
- 2019: -5.7
- 2020: 4.1
- 2021: 3.8
- Foreign balance (contribution to growth):
- 2019: -0.7
- 2020: -0.5
- 2021: 0.4
- 2022: 0.1
- Exports (includes intra-euro area trade):
- 2019: 2.9
- 2020: -9.0
- 2021: 10.7
- 2022: 7.2
- 2023: 3.4
- 2024: 3.2
- 2025: 3.1
- Imports (includes intra-euro area trade):
- 2019: 4.8
- 2020: -8.5
- 2021: 8.4
- 2022: 8.3
- 2023: 4.2
- 2024: 3.3
- Potential GDP:
- 2019: -1.4
- 2020: 2.5
- 2021: 1.2
- Output gap:
- 2019: -4.7
- 2020: -2.1
- 2021: -0.4
- Employment growth (in percent):
- 2019: 0.2
- Unemployment rate (in percent):
- 2019: 7.6
- 2020: 8.0
- 2021: 7.7
- 2022: 6.7
- 2023: 6.8
- 2024: 6.6
- 2025: 6.5
- Prices:
- GDP deflator 2019: 4.6
- Consumer prices 2019: 2.6
- Consumer prices 2020: 5.2
- Consumer prices 2021: 2.8
- Public Finance (percent of GDP):
- Overall fiscal balance:
- 2019: -0.6
- 2020: -7.1
- 2021: -5.3
- 2022: -3.6
- 2023: -3.5
- 2024: -2.7
- 2025: -2.3
- 2026: -2.0
- Primary balance 2019: -4.0
- Primary balance 2020: -1.0
- Structural balance (in percent of potential GDP):
- 2019: -2.4
- 2020: -2.8
- 2021: -2.2
- Structural primary balance (in percent of potential GDP):
- 2019: -0.9
- 2020: -1.2
- Gross public debt:
- 2019: 83.7
- 2020: 96.8
- 2021: 95.1
- 2022: 91.2
- 2023: 89.4
- 2024: 88.2
- 2025: 87.1
- 2026: 86.3
- 2027: 85.6
- 2028: 85.1
- External Sector:
- Current account balance (in percent of GDP) 2019: 2.2
- Interest Rates (end of period):
- 10-year government benchmark bond yield 2019: 3.0
- Euro short-term rate (€STR): …
- Exchange Rates (end of period):
- U.S. dollar per euro:
- 2019: 1.11
- 2020: 1.22
- 2021: 1.13
- 2022: 1.06
- 2023: 1.09
- Nominal effective rate (2005=100):
- 2019: 106.0
- 2020: 114.5
- 2021: 110.8
- 2022: 111.1
- 2023: 112.7
- Real effective rate (2005=100, ULC based):
- 2019: 87.4
- 2020: 82.1
- 2021: 81.1
- 2022: 82.0
IMF Communications Department, Press Release No. 23/268 (July 19, 2023).
