## IMF Executive Board Concludes 2018 Article IV Consultation on Euro Area Policies

_IMF News, July 19, 2018_

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## Bibliographic details
- Published: July 19, 2018

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### 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.*

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_Source: https://www.imf.org/en/news/articles/2018/07/18/pr182898-imf-executive-board-concludes-2018-article-iv-consultation-on-euro-area-policies_