(5)Consistency and balance in the overall macroeconomic policy mix of the euro area, including monetary, fiscal and structural policies, is crucial to ensure a more robust and sustainable economic recovery. In recent years, this policy mix has been skewed towards monetary policy, which resorted to new unconventional tools to achieve the ECB's medium-term inflation objective, thereby supporting growth and job creation. The ECB announced to start a recalibration of its asset purchases as of January 2018. This calls for a supportive role from other policies, in Member States where space for policy action is available.

(4)Wage growth contributes to the economic recovery in the euro area by supporting aggregate demand, reduces inequalities and ensures high standards of living in the area. Efficient wage setting mechanisms should ensure that wages are differentiated depending on country-specific conditions and taking due account of changes in productivity. Implementing structural reforms that increase productivity in all countries, improving the quality and composition of public expenditure to support investments, promoting wage growth and stronger demand dynamics in net creditor countries and implementing measures that contain growth in unit labour costs in net debtor countries would help accelerate the rebalancing process in the euro area.

(3)Significant imbalances persist in the euro area. While much progress has been achieved among net debtor countries in correcting their external balances, large current account surpluses remain in some creditor countries, reflecting an overall shortfall in aggregate demand. These generate a surplus for the euro area of 3.3% of GDP in 2016, projected to decline to 2.9% of GDP in 2019. The net international investment positions of the most indebted Member States have been improving at a slow pace and sustained rebalancing efforts are still needed. Countries that had large current account deficits for a long time still have large negative net international investment positions that are generally coupled with large stocks of private or government debt and constitute a vulnerability. At the same time, efforts are also needed in large current account surplus countries to support domestic demand and thereby the rebalancing of the euro area.

(2)Overall, on the basis of the reading of the economic indicators for the euro area, there appears to be a case for further supporting demand, investment and wage growth without incurring the risk of triggering inflationary pressures, while fostering internal and external rebalancing and economic and social convergence. At the same time, signs of newly emerging imbalances, e.g. in the housing market in some Member States, need to be closely monitored.

(1)The economic expansion in the euro area continues and has become increasingly broad-based across countries. The recovery is increasingly driven by domestic demand, with private consumption as the key driver of growth and investment picking up. Employment continued to increase throughout 2016 and the first half of 2017. The unemployment rate has seen a significant reduction, though it is still higher than in 2008. The recovery in the euro area is nonetheless characterised by some atypical features: subdued core inflation and wage growth that do not reflect the labour market improvements as signalled by standard labour market indicators, a large current account surplus and a persisting, though declining, investment gap. In particular, subdued wage growth appears to be due to remaining labour market slack in some economies, low inflation expectations feeding in wage negotiations and low productivity growth. Real household income has increased but remains below 2008 levels in many countries. Divergences across euro area countries in terms of GDP per capita and unemployment rates persist. The rates of long-term unemployment and youth unemployment are still high while poverty, social exclusion and inequality remain a serious concern in several Member States.

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 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,

(6)A strong coordination of national fiscal policies, based on common rules, is essential to arrive at an appropriate aggregate fiscal stance for the euro area and for the proper functioning of the monetary union. The common fiscal rules are geared towards pursuing debt sustainability at the national level, while providing room for macroeconomic stabilisation. The fiscal stances for the Member States and at aggregate level for the euro area have hence to balance the objectives of ensuring the long-term sustainability of national public finances and the short-term macroeconomic stabilisation at country and euro area level. In the light of the current economic recovery in the euro area characterised by some atypical features, the debt legacy from the crisis and the expected recalibration of asset purchases by the ECB, a broadly neutral fiscal stance at aggregate level for the euro area appears appropriate. An appropriate differentiation of fiscal efforts across euro area Member States, taking into account fiscal space and the spillovers across countries, is required.

(7)A decisive improvement in the composition and management of national budgets, on both the revenue and expenditure sides, for instance by shifting resources towards tangible and intangible investment, would increase the impact of public budgets on demand in the short term and raise productivity in the longer term. Improvements in the functioning of national fiscal frameworks and well-managed spending reviews support the pursuit of credible and growth-friendly fiscal policies.

(8)A well-designed structure of taxation is key to promote growth and employment, as well as to contribute to reduce inequalities. Simplifying tax systems and addressing tax fraud, evasion and avoidance are essential to make tax systems more efficient and fairer. This can free resources for public investment, education and healthcare and contributes to supporting investment, employment and improving social fairness. In particular, measures against Aggressive Tax Planning (ATP) are essential to secure government revenues, impede distortions of competition between firms, preserve social cohesion and fight increasing inequalities. The Common Consolidated Corporate Tax Base (CCCTB) would be another powerful tool against tax avoidance, while improving the Single Market for businesses.

(9)Structural and institutional features of labour and product markets and well-functioning public administrations are important determinants of economic resilience as well as cyclical, real and social convergence across euro area Member States. Resilient economic structures prevent shocks from having significant and long-lasting effects on income and employment within Member States and across the euro area. In this way, they reduce economic fluctuations and provide a favourable environment for sustainable and inclusive growth. Better coordination of the implementation of structural reforms, in particular those prescribed in the country-specific recommendations, can create positive spillovers in the Member States and strengthen their positive effects.

(10)Well-functioning labour markets and social protection systems are important foundations for inclusive economic growth, for reduced inequality and for the resilience of national economies and the euro area as a whole. With the aim to achieve upward convergence in this domain, the European Pillar of Social Rights sets out 20 key principles, falling into three broad chapters: (i) equal opportunities and access to the labour market; (ii) fair working conditions; and (iii) social protection and inclusion.

(11)Despite progress with reforms to improve the adjustment capacity of labour markets, significant differences persist across the euro area, which continue to challenge its smooth functioning. Well-designed labour market policies that are fully integrated with social protection systems can support labour market transitions and reintegration, reduce labour market segmentation, provide effective automatic stabilisation and promote social fairness. Well-designed working-time arrangements can help mitigate shocks. Effective and timely activation of jobless people who can participate in the labour market can be achieved by providing individualised support for job search, training and re-qualification, while protecting those unable to participate. Emerging new forms of employment and new types of contracts bring along challenges related to job security and social protection. Against this background, employment protection legislation needs to provide for fair and decent working conditions for all workers.

(12)Effective social protection systems are crucial to promote inclusive labour markets, ensure adequate income support and appropriate social support through access to quality services. Pension reforms and work-life balance policies are also key to foster labour market participation. Unnecessary restrictions to job, sectoral and geographical mobility of workers in employment and social protection systems should be lifted.

(13)Access to high quality education and training is vital to ensure equal opportunities and address skills mismatches. Adequate investments in human capital through education and training systems that improve lifelong learning and ensure that skills levels match present and future labour market needs play a key role in improving the economy's adjustment capacity and real convergence in the longer run. Investment in skills can also drive innovation and increase productivity and competitiveness, in addition to ensuring social inclusion and mobility.

(14)Product market reforms that increase competition and reforms that improve the business environment and the quality of institutions (including an effective justice system that facilitates contract enforcements) foster economic resilience in Member States and the euro area as a whole. Further integration in the Single Market has proven to be a major engine of growth and convergence between Member States. The Single Market still holds considerable unexploited potential and significant progress is needed to complete it. The Single Market for services (including financial, digital commerce, energy and transport) is the pending challenge. Attention should nonetheless also be focused on the goods markets to avoid potential market segmentation. The Digital Single Market should contribute to completing the legal environment to speed up the digitalisation of economic activities as a necessary step to improving the performance of product markets and global competitiveness.

(15)While the overall robustness of the euro area banking sector has increased since the crisis and bank lending started to rise again, vulnerabilities remain and need to be addressed. Banks, and especially small and medium-sized institutions, are confronted with low profitability,. The costs of adapting banks' business models, the low interest rate environment and increasing competition from other forms of finance continue to exert pressure on banks' profitability. Business models therefore need to further adapt to become sustainable in the long term. NPL ratios have stabilised in nearly all more affected euro area Member States or are on a declining trend, but progress remains slow. High NPL ratios hinder banks' ability to lend, the transmission of monetary policy as well as economic adjustment capacity. They are also a source of vulnerability for the banking system as a whole. On the basis of the Action Plan to tackle NPLs that was agreed by the Council in July 2017, and as announced in its Communication on Banking Union of 11 October 2017, the Commission is currently working to deliver a comprehensive package of measures to reduce NPLs by 2018.

(16)Strengthening the institutional architecture of EMU requires, as a matter of priority, completing the Banking Union and further progressing on the Capital Markets Union. The establishment of the Banking Union has made significant advances, but it remains unfinished. The Commission's recent Communication on completing the Banking Union attempts to set out a path on how an agreement on completing the Banking Union can be achieved, based on existing commitments by the Council. The lack of a common deposit insurance scheme and of a common backstop for the Single Resolution Fund hamper the ability of the Banking Union to sever the link from banks to sovereigns. Efforts to further reduce risk and improve risk management in banks must continue. In this context, swift work towards agreement on the regulatory package proposed by the Commission in November 2016 is crucial, as well as further advances in reducing non-performing loans and helping banks diversify their investments in sovereign bonds.

(17)The Commission’s White Paper on the future of Europe marked the beginning of a process of reflection for the EU27 to decide on the future of the Union, outlining possible scenarios. The Commission further contributed with a series of reflection papers, among which the Reflection Paper on the Deepening of EMU offered an overall vision for the completion of EMU with a clear sequencing of what needs to be done to complete its architecture. The 2017 State of the Union address identified key elements to push the EMU agenda further and the Commission made relevant proposals in autumn 2017.

HEREBY RECOMMENDS that euro area Member States take action, individually and collectively, within the Eurogroup in the period 2018-2019 to:

1.Pursue policies that support sustainable and inclusive growth and improve resilience, rebalancing and convergence. Make significant progress towards completing the Single Market, particularly in services, including financial, digital commerce, energy and transport. Given the positive cyclical conditions, all Member States should prioritise reforms that increase productivity and growth potential, improve the institutional and business environment, remove bottlenecks to investment, support the creation of quality jobs and reduce inequality. Member States with current account deficits or high external debt should additionally aim at containing growth in unit labour costs. Member States with large current account surpluses should additionally promote wage growth and implement as a priority measures that foster investment, support domestic demand and facilitate rebalancing in the euro area.

2.Aim at a broadly neutral fiscal stance at the aggregate level for the Euro Area and a balanced policy mix. Fiscal policies should strike the appropriate balance between ensuring the sustainability of public finances, in particular reducing debt ratios where they are high, and supporting the economic recovery. While ensuring the effective functioning of national fiscal frameworks, Member States should pursue fiscal policies in respect of the SGP and which support investment and improve the quality and composition of public finances, also by making use of spending reviews and adopting growth-friendly and fair tax structures. Member States should take and implement measures to reduce debt bias in taxation and fight aggressive tax planning to ensure a level playing field, provide fair treatment of taxpayers and safeguard public finances and stability within the euro area. This includes continuing work towards the Common Consolidated Corporate Tax Base (CCCTB).

3.Implement reforms that promote quality job creation, equal opportunities and access to labour market, fair working conditions, and support social protection and inclusion. Reforms should aim at: (i) reliable and flexible labour contracts combined with adequate support during transitions and avoiding labour market segmentation; (ii) quality, efficient and life-long education and training systems, which aim at matching skills with labour market needs; (iii) effective active labour market policies that foster labour market participation; (iv) sustainable and adequate social protection systems that respond to new types of employment and employment relationships; (v) smooth labour mobility across jobs, sectors and locations; (vi) effective social dialogue and wage bargaining at the appropriate level; (vii) shifting taxes away from labour, particularly for low-income and second earners.

4.In line with the Council (ECOFIN) roadmap of June 2016, continue work to complete the Banking Union with regard to risk reduction and risk sharing, including a European Deposit Insurance Scheme, making the common backstop for the Single Resolution Fund operational and strengthening the European supervisory framework to prevent the accumulation of risks. Take measures to tangibly accelerate reduction of the levels of non-performing loans on the basis of the agreed Council (ECOFIN) Action Plan and promote orderly deleveraging in Member States with large stocks of private debt. Enhance the integration and development of EU capital markets to support growth in the real economy while safeguarding financial market stability.

5.Make swift progress on completing the economic and monetary union, notably on the basis of the Commission initiatives launched in autumn 2017, in full respect of the Union’s internal market and in an open and transparent manner towards non-euro area Member States.

Done at Brussels,