IMF Executive Board Concludes 2020 Discussions on Common Euro Area Policies with Member Countries

December 22, 2020

Washington, DC: On December 18, 2020, the Executive Board of the International Monetary Fund (IMF) concluded the 2020 discussions on common euro area policies with member countries. [1]

The COVID-19 pandemic has taken a significant human and economic toll. Euro area real GDP declined sharply in the first half of the year, though the unprecedented policy responses at the national and EU levels helped cushion the impact of the crisis—including by effectively limiting increases in unemployment and insolvencies—and supported a strong rebound in the third quarter. Going forward, the recent second wave and necessary measures to contain it are expected to weigh on economic activity in the near term. Unless pandemic dynamics change significantly in the coming months, economic activity is set to recover more gradually than forecast in the October 2020 World Economic Outlook. Inflation, which has descended into negative territory in recent months, mainly reflecting temporary factors, is expected to only gradually increase and remain below the ECB’s medium-term aim throughout most of the forecast horizon.

The outlook is subject to extreme uncertainty. Risks remain to the downside through early 2021, but the recent promising news on vaccine development provide a significant upside further out. While rapid and widespread delivery of safe and effective vaccines would likely spur a faster recovery, a prolonged health crisis and slower recovery could depress investment and increase private and public sector vulnerabilities. In such a downside scenario, significant labor market hysteresis could also take place, increasing inequality and poverty. Taken together, these “scarring” effects could weigh on the growth potential of the euro area. The ongoing negotiations regarding the U.K.’s future relationship with the EU and a potential escalation of trade tensions add to the uncertainty.

Executive Board Assessment [2]

Directors commended the authorities’ unprecedented policy response to cushion the pandemic’s severe socio-economic impact. Directors noted that the pandemic’s second wave has slowed the economic recovery and concurred that the outlook remains extremely uncertain, subject to both significant downside and upside risks from pandemic dynamics, including those related to recent vaccine developments.

Directors praised the Next Generation EU package, which aims to accelerate Europe’s green and digital transformations. They stressed that its effectiveness will hinge on a quick implementation, the quality of spending, and its capacity to catalyze structural reforms. To meet EU emission reduction goals, more comprehensive carbon pricing and nonprice policies would be needed.

Directors emphasized that the pandemic’s resurgence requires further national fiscal support and warned against its premature withdrawal. They 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. They favored maintaining the fiscal rules’ escape clause active until the recovery is firmly entrenched. More generally, Directors encouraged the authorities to explore options to enhance the current fiscal rules.

Directors commended the ECB’s monetary policy response, including this month’s recalibration of measures. Yet, they noted that further accommodation could prove necessary, especially if downside risks materialized. As 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.

Directors welcomed recent financial sector measures. They recommended that capital relief and conservation measures for banks be maintained until the recovery is well underway. Should it stall, 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. They also favored expanding the macroprudential perimeter to include nonbank financial institutions. Directors called for closing gaps in the EU’s crisis management framework and advancing the financial sector architecture reforms.

Directors agreed that, as the recovery takes hold, policies should facilitate labor and capital reallocation toward viable firms and sectors. Noting the pandemic’s pernicious distributional effects, they also called for targeted policies to safeguard vulnerable regions and address rising inequality. Directors praised the European authorities for their continued support and promotion of a global rules-based trading system and for their leadership in fighting climate change.

Table 1. Euro Area: Main Economic Indicators, 2017–25

Projections 1/

2017

2018

2019

2020

2021

2022

2023

2024

2025

Demand and Supply

Real GDP

2.6

1.9

1.3

-8.3

5.2

3.1

2.2

1.7

1.4

Private consumption

1.8

1.5

1.3

-9.2

5.5

3.2

1.9

1.5

1.3

Public consumption

1.1

1.2

1.9

2.2

0.9

0.3

1.2

1.1

1.1

Gross fixed investment

3.8

3.2

5.8

-12.0

7.6

5.0

3.4

2.4

1.7

Final domestic demand

2.1

1.8

2.4

-7.4

4.9

2.9

2.1

1.6

1.3

Stockbuilding 2/

0.2

0.1

-0.5

-0.2

0.0

0.0

0.0

0.0

0.0

Domestic demand

2.3

1.9

1.9

-7.5

4.8

2.9

2.1

1.6

1.3

Foreign balance 2/

0.4

0.1

-0.5

-1.0

0.5

0.3

0.2

0.1

0.1

Exports 3/

5.5

3.6

2.5

-12.9

8.3

5.8

4.3

3.6

3.3

Imports 3/

5.2

3.7

3.9

-11.6

7.8

5.7

4.2

3.6

3.3

Resource Utilization

Potential GDP

1.5

1.3

1.3

-3.2

3.1

1.4

1.2

1.3

1.2

Output gap

-0.4

0.2

0.2

-5.1

-3.2

-1.6

-0.6

-0.2

0.0

Employment

1.6

1.6

1.2

-1.7

0.6

1.1

0.6

0.4

0.2

Unemployment rate 4/

9.1

8.2

7.6

8.9

9.1

8.4

7.9

7.7

7.6

Prices

GDP deflator

1.1

1.4

1.7

1.6

1.2

1.3

1.4

1.6

1.8

Consumer prices

1.5

1.8

1.2

0.4

0.9

1.2

1.4

1.6

1.7

Public Finance 5/

General government balance

-0.9

-0.5

-0.6

-10.1

-5.0

-2.7

-2.1

-1.8

-1.8

General government structural balance

-0.6

-0.5

-0.6

-5.3

-3.1

-1.8

-1.8

-1.7

-1.8

General government gross debt

87.7

85.8

84.0

101.1

100.0

98.4

97.0

95.6

94.3

External Sector 5/, 6/

Current account balance

3.1

2.9

2.3

1.9

2.4

2.5

2.5

2.6

2.5

Interest Rates (end of period) 4/, 7/

EURIBOR 3-month offered rate

-0.3

-0.3

-0.4

-0.5

…

…

…

…

…

10-year government benchmark bond yield

0.9

1.2

0.4

0.0

…

…

…

…

…

Exchange Rates (end of period) 7/

U.S. dollar per euro

1.18

1.14

1.11

1.18

…

…

…

…

…

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

…

…

…

…

…

Sources: IMF, World Economic Outlook, Global Data Source; Reuters Group; and Eurostat.

1/ Projections are based on aggregation of WEO Oct 2020 projections submitted by IMF country teams.

2/ Contribution to growth.

3/ Includes intra-euro area trade.

4/ In percent.

5/ In percent of GDP.

6/ Projections are based on member countries' current account aggregations excluding intra-euro flows and corrected for aggregation discrepancy over the projection period.

7/ Latest monthly available data for 2020.


[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. Staff hold separate annual discussions with the regional institutions responsible for common policies for the countries in four currency unions—the Euro-Area, the Eastern Caribbean Currency Union, the Central African Economic and Monetary Union, and the West African Economic and Monetary Union. For each of the currency unions, staff teams visit the regional institutions responsible for common policies in the currency union, collect economic and financial information, and discuss with officials the currency union’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis of discussion by the IMF Executive Board. Both staff’s discussions with the regional institutions and the Board discussion of the annual staff report subsequently are considered an integral part of the Article IV consultation with each member.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .

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