## IMF Executive Board Concludes 2023 Article IV Consultation with Euro Area

_IMF News, July 19, 2023_

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## Bibliographic details
- 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).*

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_Source: https://www.imf.org/en/news/articles/2023/07/18/pr23268-euro-area-imf-executive-board-concludes-2023-article-iv-consultation_