Front Matter

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© 2009 International Monetary Fund

July 2009

IMF Country Report No. 09/223

Euro Area Policies: 2009 Article IV Consultation—Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Member Countries

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2009 Article IV consultation with member countries forming the euro area, the following documents have been released and are included in this package:

  • The staff report for the 2009 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on May 28, 2009, with the officials at EU institutions in the context of the Article IV consultations with member countries forming the euro area. Based on information available at the time of these discussions, the staff report was completed on July 1, 2009. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its July 17, 2009, discussion of the staff report that concluded the Article IV consultation.

  • A statement by the Executive Director for Germany, on behalf of the euro-area Member States and the European Community.

The document listed below has been or will be separately released.

  • Selected Issues Paper

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

700 19th Street, N.W. • Washington, D.C. 20431

Telephone: (202) 623–7430 • Telefax: (202) 623–7201

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International Monetary Fund

Washington, D.C.

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Staff Report for the 2009 Article IV Consultation with Member Countries

Prepared by the European Department

Approved by Marek Belka and Tamim Bayoumi

July 1, 2009

  • A staff team held discussions at the European Central Bank (ECB), the European Commission (EC), Eurostat, and the Committee of European Banking Supervisors (CEBS) during May 15–28, 2009. The team comprised Messrs. Belka (Head), Čihák, Everaert, Fonteyne, Harjes, Stavrev, and Ms. Sgherri (all EUR), Mr. Nier (MCM), and Mr. van der Mensbrugghe (EUO).

  • Meetings were held at the ECB with President Trichet, Mr. Bini Smaghi, Mr. González-Páramo, Mr. Stark, Ms. Tumpel-Gugerell, and senior staff. At the EC, the mission met with Commissioner Almunia, Mr. Buti (Director General for Economic and Financial Affairs), Mr. O’Sullivan (Director General for Trade), and other senior officials. The mission also met with representatives of labor unions, financial market participants, and think-tanks. Messrs. Belka and Everaert discussed the mission’s preliminary findings at the May 28 Euro Working Group meeting, and presented its concluding statement to the Eurogroup Ministers on June 8. Mr. Stein (Executive Director) and Mr. Pineau (ECB Observer at the Executive Board) attended most of the meetings.

  • The authorities released the mission’s concluding statement in Luxembourg on June 8, 2009.


  • Executive Summary

  • I. Staff Appraisal

  • II. Outlook, Risks, and regional Spillovers

  • III. Policy Discussions: Ensuring a Sustainable Recovery

    • A. Financial Sector

    • B. Monetary Policy in Uncharted Territory

    • C. Fiscal Policy: Mitigating the Downturn while Ensuring Sustainability

    • D. Trade, Regional, Other Structural Issues, and Statistics

  • Figures

  • 1. Euro Area: Leading Indicators

  • 2. Euro Area Financial Indicators: Corporate Bond Rates and Equities

  • 3. Euro Area Financial Indicators: Credit Markets

  • 4. Financial Indicators in New Member States

  • 5. Libor/Euribor Rates, Policy Rates and Spread

  • 6. Euro Area: External Developments

  • 7. Margins of Euro Area Exporters to Main Export Destinations

  • 8. Euro Area: Inflation and Labor Costs, 1999–2009

  • 9. Euro Area: Recent Developments of the ECB’s Liquidity Operations

  • 10. Euro Area: Monetary Policy and Market Expectations

  • 11. Euro Area: Money and Credit, 1980–2009

  • 12. Euro area: Changes in Credit Standards to Enterprises and Households, 2005-08

  • 13. Euro Area: Fiscal Developments

  • 14. European Union: Labor Markets and Structural Reform

  • Tables

  • 1. Euro Area: Main Economic Indicators, 2005–10

  • 2. Euro Area: Balance of Payments

  • Boxes

  • 1. Assessment of the Euro

  • 2. Large Bank Loss Estimates Call for Thorough Assessment of Individual Banks’ Capital Needs

  • 3. Has the Financial Crisis Impaired Monetary Transmission in the Euro Area?

  • Appendix I. Statistical Issues

Executive Summary

The euro area remains in recession, amid tentative signs of improvement and an uncertain outlook. Three key elements are weighing on the recovery: (i) remaining stresses in the financial system, including adverse feedback loops with the real sector as a result of the recession; (ii) soft demand associated with fragile confidence; (iii) and structural rigidities, especially in the labor market, which also constrain the area’s potential growth. The discussions focused on actions needed to support the recovery, return to self-sustaining growth, and address cross-border spillovers in the EU.

Financial sector policies: There was agreement that the financial sector remains key to the shape and the robustness of the recovery. While a broad policy arsenal to shore up the sector has been put in place, take up of various measures, in particular of recapitalization, has been lagging. The staff recommended a more proactive approach consisting of a comprehensive review of the financial positions of banks to assess capital needs and viability, accompanied by follow-up action comprising disclosure, recapitalization, and, where needed, restructuring or resolution of financial institutions. The EC advocated a very similar approach, while the ECB emphasized the need for a speedy implementation of the measures already in place. There was broad agreement that the proposed new financial stability arrangements for the EU ought to be implemented on an ambitious time table.

Monetary policy: The ECB and the staff concurred that monetary policy has to maintain a supportive stance, keeping in mind both downside risks and exit strategies. The staff argued for keeping interest rates low by continuing to provide unlimited term funding at fixed rates as long as disinflationary pressures persist. All unconventional measures would need to remain under consideration to deal with the risk of protracted deflation. The ECB emphasized that the design of its unconventional tools reflected the concern to ensure a relatively straightforward exit and noted that, if needed, it could issue its own paper or offer additional short-term deposit facilities to mop up liquidity.

Fiscal policy: With a slow recovery ahead, authorities and staff agreed that a supportive fiscal stance should continue into 2010, while emphasizing the need for countries to cast any short-term fiscal actions in medium-term consolidation programs supported by the Stability and Growth Pact (SGP). The staff cautioned against a premature withdrawal of stimulus, while arguing for a pre-announcement of fiscal consolidation plans, to be implemented as soon as recovery takes hold. It was agreed that national fiscal institutions should foster ownership of consolidation goals, and that surveillance has to be stepped up at EU and national levels over progress toward medium-term objectives—which should better reflect the level of debt and costs of aging.

Structural and trade policies: With the crisis likely curbing potential growth, there was agreement that reinvigorated structural reforms are highly desirable, especially to support economic restructuring and keep the labor force attached to the labor market. All agreed on the importance of countering protectionist pressures from the crisis and concluding an ambitious Doha Round agreement to bring about new trade opportunities.

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Public Information Notice (PIN) No. 09/95


July 30, 2009

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

Euro Area Policies: 2009 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Member Countries
Author: International Monetary Fund