International Monetary Fund. External Relations Dept.
Marking a milestone in Bulgaria’s long recovery from crisis a decade ago, the IMF Executive Board on March 16 completed the fourth and final review under a precautionary Stand-By Arrangement approved in 2004. One of the newest inductees to the European Union (EU), Bulgaria is on a firm footing to tackle the challenges of membership. It can also expect to reap the benefits, but this will require sustained prudent macroeconomic policies to ensure financial stability and structural reforms to maintain growth.
This Selected Issues paper on Euro Area Policies underlies global rebalancing of accounts. From a growth-accounting perspective, slower growth in the capital-labor ratio seems to be the main driver behind the deceleration in labor productivity. The increase in bilateral trade was accompanied by a large bilateral EU trade deficit. China’s market share seems to have increased mainly at the expense of other East Asian countries. EU trade with China increased at more than twice the rate of total EU external trade, and China became the EU’s second largest trading partner.
International Monetary Fund. External Relations Dept.
The cyclical recovery of the French economy was interrupted in the first half of 2005 as previously strong domestic demand faltered and the external sector continued to exert a drag on growth, the IMF said in its annual economic review. Because growth in 2004 was faster and more consumption-driven than in other large euro area countries, the fall in private consumption in the second quarter of 2005 was unexpected and possibly related to stagnating unemployment, rising oil prices, and political turmoil surrounding the rejection of the European Union constitution. Growth is likely to pick up, however, driven by an improvement in the external environment and a return of domestic demand to a normal pace following the mid-year clarification of the direction of economic policies. Indeed, the third-quarter data, not available at the time of the IMF Executive Board’s November discussion, came in strong, prompting the staff to revise its growth projection upward.
France’s economic short-term outlook is positive, and long-term prospects have improved. Fiscal adjustment remains high on the government’s agenda. Tax reforms have improved the economy’s growth potential. Reforms in financial, labor, and product markets are necessary to boost job creation, prepare the economy for aging, and allow it to benefit from global activity. The financial sector’s profitability and capitalization put it in a good position to manage increasing risks. Structural reforms in labor and product markets remain essential to boost long-term growth and secure fiscal sustainability.
This 2017 Article IV Consultation highlights that the cyclical recovery in the euro area is firming and becoming broad based. Lower energy prices, supportive policies, stronger labor markets and a recovery in credit growth have boosted domestic demand, especially private consumption. The near-term outlook is favorable, with growth of 1.9 percent expected in 2017 and 1.7 percent in 2018. Although headline inflation picked up in the first half of 2017 owing to higher energy prices, core inflation has remained persistently low. The improving near-term outlook is clouded by significant downside risks, especially in the medium and long term, amid thin policy buffers.
This 2016 Article IV Consultation highlights that the recovery in euro area has strengthened recently. Lower oil prices, a broadly neutral fiscal stance, and accommodative monetary policy are supporting domestic demand. However, inflation and inflation expectations remain very low, below the European Central Bank’s medium-term price stability objective. Euro area GDP growth is expected to decelerate from 1.6 percent in 2016 to 1.4 percent in 2017, mainly owing to the negative impact of the U.K. referendum outcome. Growth five years ahead is expected to be about 1.5 percent, with headline inflation reaching only 1.7 percent.
This 2008 Article IV Consultation on euro area policies highlights that 10 years after its launch, monetary union is a distinct success and the euro area a zone of stability in the international economy. However, economic union remains work in progress. Improved wage setting and labor market reforms have contributed to the creation of some 16 million jobs over the past decade. Similarly, the single market program and product market reforms have raised productivity in affected sectors. The outlook for financial stability is highly uncertain, although the area’s financial system remains sound.
Context. The recovery is strengthening, underpinned by lower oil prices and the ECB’sexpanded asset purchase program. But the medium-term outlook remains weak, weighed down by the legacies of insufficient demand, lagging productivity, and weak bank and corporate balance sheets.
Policies. A concerted, collective effort is needed to sustain the recovery, avoid overburdening monetary policy, and lift potential growth over the medium term, which would have positive spillovers for the rest of the world:
Demand support. Quantitative easing (QE) has boosted confidence and improved financial conditions. The ECB’s clear communication to stay the course on QE until inflation is on a sustained adjustment path will help anchor expectations. Countries should adhere to the SGP, but those with fiscal space should use it to support investment and structural reforms.
Balance sheet repair. High non-performing loans (NPLs) in some banks are eroding profitability and discouraging new lending. Complementary policies are needed to incentivize NPL resolution through strengthened prudential supervision, insolvency reforms, and development of distressed debt markets. Asset management companies (AMCs) could help banks to offload NPLs and assist with corporaterestructuring.Productivity-enhancing structural reforms. Labor and product market reformsshould be combined with faster implementation of the Services Directive, further improvements of insolvency regimes, and a greater push toward a single market in capital, transport, energy, and the digital economy. A capital markets union would help diversify funding sources and reduce reliance on bank lending.
Better economic governance. A more effective and simpler governance framework, including a move towards "outcome-based" benchmarking, could help advance structural reforms, while the fiscal framework could be simplified and strengthened.
The economic conditions in the euro area have brightened. Executive Directors commended the policy stance of the European Central Bank. They noted that the exchange rate developments of the euro failed to strengthen the euro area economy, and stressed the need for fiscal discipline, structural reforms, and wage moderation at the national level to maintain price stability in the medium term. They emphasized the need for deeper integration of European Union financial markets, development of risk capital, and improvement of the quality and sustainability of public finances.
The paper analyzes some key policy trade-offs involved in the implementation of the Stability and Growth Pact. Greater "procedural" flexibility in the Pact's implementation may improve welfare. Procedural flexibility designates the enforcer's room to apply judgment on underlying policies and to set a consolidation path that does not discourage high-quality measures. Budgetary opaqueness may hinder the qualitative assessment of fiscal policy; therefore, better monitoring and greater transparency would increase the benefits from procedural flexibility. Overall, a simple deficit rule with conditional procedural flexibility can contain excessive deficits, lower unproductive spending, and increase high-quality outlays.