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 economic recovery continues at a moderate pace in the euro area. Sustaining and strengthening growth in the euro area requires continued policy efforts to support a balanced adjustment in the private and public sectors, improve the adjustment capacity and increase the economy's competitiveness and growth potential in the medium to long term. The pace of growth is hampered by legacies of the most recent economic and financial crises, including ongoing external rebalancing, high levels of public and private debt, high unemployment, as well as persistent structural rigidities in national labour and product markets. Investment remains weak on account of these factors but also of other bottlenecks, such as unfavourable business environments, public-administration inefficiencies as well as obstacles to access to finance.

(2)The implementation of ambitious structural reforms that raise productivity and boost growth potential needs to be bolstered in line with the policy priorities set out in the 2016 Annual Growth Survey for all EU Member States. If carried out jointly across Member States, structural reforms can offer benefits to the euro area as a whole through positive spillover effects, notably through trade and financial channels. Despite some progress with reforms to improve the resilience of labour markets, significant divergence persist across the euro area, especially as regards long-term and youth unemployment rates. Those Member States that pursued comprehensive labour market and social protection reforms prior to the crisis have been able to better support employment and preserve fairness during the economic downturn. Such reforms encompass flexible and reliable contractual arrangements, comprehensive lifelong learning strategies, effective active labour market policies, and modern social protection systems. Also, reducing the tax wedge on labour, in particular for low-income earners, and ensuring equitable tax systems can improve outcomes.

(3)An appropriate design and swift implementation of reforms can help in addressing existing imbalances in the euro area and to prevent the build-up of new ones. The thematic discussions by the Eurogroup, with increased focus on benchmarking, pursuing best practices and peer pressure, can contribute to promoting convergence towards best performance. The Eurogroup should therefore further strengthen the thematic discussions on reforms in areas that are essential for the functioning of EMU and regularly monitor the implementation of reforms by euro area Member States as well as the progress made with the correction of imbalances in the context of the Macroeconomic Imbalances Procedure.

(4)Fiscal policies are a matter of vital common interest in the Economic and Monetary Union. Responsible national fiscal policies that respect the common fiscal rules are essential to ensure debt sustainability and allow the fiscal stabilisers to operate and cushion country specific shocks. In addition, in light of the spillovers between euro area Member States, it is essential also to achieve an appropriate fiscal stance at the level of the euro area as a whole and to avoid pro-cyclical fiscal policies. This calls for a reinforcement of the coordination of fiscal policies within the euro area in full respect of the Stability and Growth Pact. In this context, the broadly neutral aggregate fiscal stance in the euro area expected in 2016 appears appropriate in light of the overall macroeconomic conditions and downside risks to growth. As regards 2017, based on the forecast of a gradually closing output gap, fiscal policies should balance the need of avoiding pro-cyclicality and reducing public debt to restore fiscal buffers. This should be reflected in the preparations of the up-dated Stability Programmes in Spring 2016, taking into account the latest economic and fiscal developments. The composition of fiscal strategies is not yet sufficiently growth-friendly. As highlighted in the recommendations to the euro area Member States in summer 2015, Member States should hold thematic discussions on improvements in the quality and sustainability of public finances.

(5)The Banking Union needs to be fully implemented. First, the Bank Recovery and Resolution Directive must be fully transposed by 30 November 2015 as required for all 28 Member States. Second, as regards bank resolution, appropriate bridge financing arrangements need to be put in place without delay so that the Single Resolution Fund (SRF) will be able to face any potential financing needs as of 1 January 2016. In addition, a fiscally neutral backstop to the SRF should be agreed as soon as possible during the transition period. Finally, as part of the further development of the Banking Union, the Commission has proposed on 24 November 2015 the creation of a European deposit insurance scheme for the euro area Member States.