IMF Executive Board Concludes 2020 Discussions on Common Euro Area Policies with Member Countries
IMF News, December 22, 2020
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- Published: December 22, 2020
COVID-19 impact and near-term developments
- Euro area real GDP declined sharply in the first half of 2020; unprecedented policy responses at national and EU levels helped cushion the impact and supported a strong rebound in the third quarter.
- Recent second wave and containment measures are expected to weigh on economic activity in the near term.
- Inflation has descended into negative territory in recent months, mainly reflecting temporary factors, and is expected to only gradually increase and remain below the ECB’s medium-term aim throughout most of the forecast horizon.
- Vaccine developments provide significant upside further out, but a prolonged health crisis and slower recovery could depress investment and increase private and public sector vulnerabilities.
- Potential scarring: significant labor market hysteresis, increased inequality and poverty, and lower growth potential if downside scenarios materialize.
- Ongoing negotiations regarding the U.K.’s future relationship with the EU and potential escalation of trade tensions add to uncertainty.
Executive Board assessment and recommendations
- Directors commended the authorities’ unprecedented policy response to cushion the pandemic’s severe socio-economic impact.
- Directors noted the pandemic’s second wave has slowed the economic recovery and concurred that the outlook remains extremely uncertain.
- Directors praised the Next Generation EU package and stressed effectiveness will hinge on quick implementation, quality of spending, and capacity to catalyze structural reforms.
- To meet EU emission reduction goals, Directors said more comprehensive carbon pricing and nonprice policies would be needed.
- Fiscal policy:
- Directors emphasized that the pandemic’s resurgence requires further national fiscal support and warned against premature withdrawal.
- Directors concurred that any further deterioration in the outlook would require additional fiscal support.
- Once the recovery gets underway, Directors recommended policies that facilitate resource reallocation, support sustainable growth, and achieve sound medium-term fiscal positions.
- Directors favored maintaining the fiscal rules’ escape clause active until the recovery is firmly entrenched and encouraged exploring options to enhance the current fiscal rules.
- Monetary policy and financial stability:
- Directors commended the ECB’s monetary policy response, including this month’s recalibration of measures, and noted further accommodation could be necessary if downside risks materialize.
- Given that prolonged accommodation could raise financial stability risks, Directors called for continued monitoring and appropriate use of macroprudential tools to address emerging vulnerabilities.
- Directors welcomed the ECB’s Strategy Review and broadly agreed with staff’s recommendation to adopt a well-communicated symmetric point inflation target.
- Financial sector:
- Directors welcomed recent financial sector measures and recommended that capital relief and conservation measures for banks be maintained until the recovery is well underway.
- If the recovery stalls, more targeted borrower support should be made available.
- Directors noted that credible medium-term strategies to reduce nonperforming loans and stronger insolvency regimes would support swift balance sheet repair.
- Directors favored expanding the macroprudential perimeter to include nonbank financial institutions and called for closing gaps in the EU’s crisis management framework and advancing financial sector architecture reforms.
- Labor and distributional policies:
- As recovery takes hold, policies should facilitate labor and capital reallocation toward viable firms and sectors.
- Noting pernicious distributional effects, Directors called for targeted policies to safeguard vulnerable regions and address rising inequality.
- External relations and climate:
- Directors praised the European authorities for continued support and promotion of a global rules-based trading system and for leadership in fighting climate change.
Key projections and indicators (Euro Area: Main Economic Indicators, 2017–25)
- Real GDP (2017, 2018, 2019, 2020, 2021, 2022, 2023, 2024, 2025):
- 2.6; 1.9; 1.3; -8.3; 5.2; 3.1; 2.2; 1.7; 1.4
- Private consumption (selected values shown):
- 1.8; 1.5; -9.2; 5.5; 3.2
- Gross fixed investment (selected values shown):
- 3.8; 5.8; -12.0; 7.6; 5.0; 3.4; 2.4
- Final domestic demand (selected values shown):
- 2.1; -7.4; 4.9; 2.9; 1.6
- Stockbuilding (contribution to growth):
- 0.2; 0.1; -0.5; -0.2; 0.0
- Exports (includes intra-euro area trade; selected values shown):
- 3.6; 2.5; -12.9; 8.3; 4.3; 3.3
- Imports (selected values shown):
- 3.7; 3.9; -11.6; 7.8; 5.7; 4.2
- Potential GDP:
- -3.2
- Output gap (selected values shown):
- -0.4; -5.1; -1.6; -0.6
- Employment (selected values shown):
- -1.7; 0.6
- Unemployment rate (percent; selected values shown):
- 9.1; 8.2; 8.9; 8.4; 7.9; 7.7
- GDP deflator and Consumer prices: (rows present in table; specific numeric series not fully shown in page extract)
- General government balance (percent of GDP; selected values shown):
- -0.9; -10.1; -5.0; -2.7; -2.1; -1.8
- General government structural balance (percent of GDP; selected values shown):
- -5.3; -3.1
- General government gross debt (percent of GDP):
- 87.7; 85.8; 84.0; 101.1; 100.0; 98.4; 97.0; 95.6; 94.3
- Current account balance (external sector): (row present; specific numeric series not fully shown in page extract)
- Interest rates (end of period):
- EURIBOR 3-month offered rate: -0.3
- 10-year government benchmark bond yield: (row present; specific numeric series not fully shown in page extract)
- Exchange rates (end of period):
- U.S. dollar per euro: 1.18; 1.14; 1.11
- Nominal effective rate (2005=100): 106.1; 107.8; 105.7; 113.9
- Real effective rate (2005=100, ULC based): 87.2; 86.8; 85.4; 89.3
Footnotes and data sources (as presented)
- Projections are based on aggregation of WEO Oct 2020 projections submitted by IMF country teams.
- Contribution to growth noted for stockbuilding and foreign balance entries.
- Exports and imports include intra-euro area trade.
- Some series are expressed in percent or percent of GDP as indicated in table notes.
- Sources: IMF, World Economic Outlook, Global Data Source; Reuters Group; and Eurostat.
- Latest monthly available data for 2020 used for certain series.
Press Release No. 20/384 — December 22, 2020. IMF Communications Department
