Recommendation for a

COUNCIL RECOMMENDATION

on the economic policy of the euro area

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 136 in conjunction with Article 121(2) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies, and in particular Article 5(2) thereof,

Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances, and in particular Article 6(1) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)The euro area is entering its sixth year of uninterrupted economic growth and the negative output gap is closing, but risks to the outlook are increasing and growth is expected to moderate. Potential growth remains significantly below pre-crisis levels and country divergences persist resulting from notable differences in economic resilience across Member States. Real wage growth is still moderate and has been trailing behind productivity developments. Nominal wage growth and core inflation are picking up with continued employment growth, but pockets of labour underutilisation or high unemployment remain in some Member States. The euro area has recorded a large current account surplus over the past five years linked to the dynamics of the euro-area exports and improved competitive position while country divergences continue to be significant on the external side. Member States that recorded large external deficits for a long time still have large negative net international investment positions that represent vulnerabilities, as they are generally mirrored by large stocks of private or government debt. An appropriate deleveraging pace, a supportive growth and inflation environment, continued reforms to increase productivity are crucial for successful rebalancing in the euro area. Favourable demand dynamics are also important, and large surplus countries would also contribute to rebalancing by strengthening the conditions that support wage growth, as well as public and private investment.

(2)Increasing long-run growth potential and overcoming national and regional disparities requires further increases in labour participation rates, growth-enhancing structural reforms and investment in tangibles and non-tangibles to increase productivity and innovation, in particular in those Member States where it is clearly lower than the euro area average. This is important for strengthening economic, social and territorial cohesion in the euro area.

(3)Consistency and balance in the macroeconomic policy mix of the euro area, including monetary, fiscal and structural policies, is crucial to ensure robust and sustainable economic growth. In recent years, the European Central Bank resorted to unconventional monetary policy tools to bring inflation back towards its medium-term inflation objective, while supporting growth and job creation. Against the backdrop of a gradual normalisation of monetary policy, appropriately differentiated fiscal policies and focus on structural reforms are needed to continue supporting growth in the short and long term.

(4)The strengthening of fiscal sustainability of the euro area and its Member States requires differentiated national policies in full respect of the Stability and Growth Pact and should take into account fiscal space. Coordination of national fiscal policies in accordance with the common fiscal rules is essential for the proper functioning of the Economic and Monetary Union (EMU). The common fiscal rules are geared towards pursuing debt sustainability at the national level, while providing room for macroeconomic stabilisation. The euro area fiscal stance remained on average broadly neutral over 2015-2018 and based on the Commission forecast it is projected to become slightly expansionary in 2019 in spite of output being above potential. Rebuilding fiscal buffers is especially important in Member States with still high levels of public debt. Doing so would also reduce their vulnerability to shocks and allow for the full functioning of automatic stabilisers in the next downturn. Increasing public investment, in particular in Member States with fiscal space, would support growth and rebalancing.

(5)Fiscal structural reforms remain crucial for improving fiscal sustainability and strengthening the economic growth potential. Better functioning national fiscal frameworks, well-managed spending reviews and effective and transparent public procurement can strengthen the efficiency and effectiveness of public expenditure and the credibility of fiscal policies. Improving the composition of national budgets, on both revenue and expenditure sides, including shifting resources towards investment, would increase the growth impact of public budgets and raise productivity in the longer term. Simplifying and modernising tax systems and addressing tax fraud, evasion and avoidance, namely through measures against Aggressive Tax Planning are essential to making tax systems more efficient and fairer. Ensuring that tax systems favour the deepening of the single market, and encourage competition between firms is key in improving the business environment in and the resilience of the euro area and Member States’ economies. The Common Consolidated Corporate Tax Base would be instrumental in this endeavour.