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IMF Country Report No. 14/198

EURO AREA POLICIES

2014 ARTICLE IV CONSULTATION—STAFF REPORT; PRESS RELEASE; AND STATEMENT BY THE EXECUTIVE DIRECTOR

July 2014

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 2014 Article IV consultation with the member countries, the following documents have been released and are included in this package:

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on July 9, 2014 following discussions that ended on June 2, 2014 with the officials of the Euro Area on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on June 25, 2014.

  • A Press Release on the Executive Board’s discussion.

  • A Statement by the Executive Director for the Netherlands.

The following document has been or will be separately released.

  • Selected Issues Paper

The publication policy for 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

PO Box 92780 • Washington, D.C. 20090

Telephone: (202) 623-7430 • Fax: (202) 623-7201

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International Monetary Fund

Washington, D.C.

©2014 International Monetary Fund

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EURO AREA POLICIES

STAFF REPORT FOR THE 2014 ARTICLE IV CONSULTATION WITH MEMBER COUNTRIES

June 25, 2014

Key Issues

Context. Real output has expanded for four consecutive quarters, and financial market sentiment has improved markedly. But the recovery is weak and uneven. Inflation has been too low for too long, financial markets are still fragmented, and structural gaps persist: these hinder rebalancing and substantial reductions in debt and unemployment.

Policies. The economic expansion is grounded in complementary policy actions at both the national and euro area levels, but more is needed to strengthen the recovery:

Supporting Demand. Recent ECB actions—including a rate cut, negative deposit rates and policy support for new bank lending to companies—should help address low inflation and financial fragmentation. But if inflation remains too low the ECB should consider a substantial balance sheet expansion, including through asset purchases. The broadly neutral overall fiscal stance is appropriate but any negative growth surprises should not trigger additional consolidation efforts as this would be self-defeating.

Mending balance sheets and completing the banking union. Successfully executing the ongoing asset quality review and stress tests should spur balance sheet repair and help reverse fragmentation. Agreement on a single resolution mechanism and bail-in rules comprise important milestones towards banking union, but a common fiscal backstop is still needed.

Advancing structural reforms. Alternative sources of funding through securitization, especially to credit-constrained SME’s, should be promoted. A comprehensive strategy, which boosts demand and removes country-specific structural impediments, is needed to tackle high youth unemployment. Competitiveness-enhancing reforms in debtor countries and higher public investment in creditor countries would promote needed rebalancing.

Approved By

Mahmood Pradhan and Hugh Bredenkamp

Discussions took place during May 19–June 2, 2014. Mission members included M. Pradhan (head), P. Koeva Brooks, S. Aiyar, S. P. Berkmen, J. Bluedorn, A. Jobst, and S. Saksonovs (all EUR), L. Eyraud (FAD), and C. Mumssen, B. Barkbu, and H. Schoelermann (all IMF Office in Europe). Executive Director M. Snel and his advisor L. Piana, as well as ECB Observer at the IMF G. Pineau and his advisor G. Pula participated in some meetings. Support from headquarters was provided by A. Al-Eyd, A. Banerji, K. Cincotta, P. Lukyantsau, X. Shao, S. Wang, and T. Wu (all EUR).1

Contents

  • CONTEXT: FROM CRISIS TO RECOVERY

  • OUTLOOK: A LONG ROAD TO FULL RECOVERY

  • THE POLICY AGENDA: STRENGTHENING THE RECOVERY

  • THE AUTHORITIES’ VIEWS

  • STAFF APPRAISAL

  • BOXES

  • 1. Investment in the Euro Area: Why has it been Weak?

  • 2. Stability and Growth Pact—Design and Implmentation Issues

  • 3. Capital Market Development: SME Financing in the Euro Area

  • 4. Youth Unemployment in the Euro Area: Okun’s Law and Beyond

  • 5. External Rebalancing in the Euro Area: Developments and Policies

  • FIGURES

  • 1. Euro Area: High Frequency Indicators

  • 2. Financial Market Developments

  • 3. Euro Area: Inflation Developments

  • 4. Debt Overhang in the Euro Area

  • 5. External Sector Developments

  • 6. Japan’s Deflation Episode and Current Euro Area Developments

  • 7. Fiscal Developments and Policies

  • 8. Euro Area: Banking Sector Developments

  • TABLES

  • 1. Euro Area: Main Economic Indicators

  • 2. Risk Assessment Matrix

  • 3. A Scorecard Approach to the Near-Term Fiscal Stance from April 2014 WEO

  • 4. Structural Reform Plans and Progress in Selected Countries

  • APPENDIX

  • Statistical Issues

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Press Release No. 14/341

FOR IMMEDIATE RELEASE

July 14, 2014

International Monetary Fund

Washington, D.C. 20431 USA

Telephone 202-623-7100

Fax 202-623-6772

www.imf.org

Euro Area Policies: Staff Report for the 2014 Article IV Consultation With Member Countries
Author: International Monetary Fund. European Dept.