COMMISSION STAFF WORKING DOCUMENT Assessment of the 2012 national reform programmes and stability programmes for the EURO AREA Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on the implementation of the broad guidelines for the economic policies of the Member States whose currency is the euro
Date: 2012-05-30
Institutions: European Commission
Subjects: Euro Group (euro area), banking system, budgetary equilibrium, economic integration, economic reform, economic stabilisation, political cooperation, structural policy, tax reform

EUROPEAN COMMISSION 

Brussels, 30.5.2012  
SWD(2012) 301 final 

COMMISSION STAFF WORKING DOCUMENT 

Assessment of the 2012 national reform programmes and stability programmes for the 

EURO AREA 

Accompanying the document 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the implementation of the broad guidelines for the economic policies of the Member 
States whose currency is the euro 

{COM(2012) 301 final} 

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CONTENT 

1.  Executive Summary  

.......................................................................................... 3 

2.  Economic Situation and Outlook  ................................................................................... 4 

3.  Main Economic Challenges and Policy Responses ....................................................... 5 

3.1.1. 
3.1.2. 

3.1.  Restoring and maintaining stability...........................................................................  5 
Financial stability  .............................................................................................. 5 
Fiscal policy  ...................................................................................................... 8 
3.2.  Adjusting imbalances and enhancing growth .......................................................... 12 
Adjusting internal imbalances in the euro area  ............................................... 12 
Structural reforms to boost growth and adjustment capacity .......................... 19 
Euro Plus Pact – assessment of the implementation of the commitments  ....................... 21 

3.2.1. 
3.2.2. 

4.  Strengthening policy coordination in the euro area ................................................... 23 

4.1. 
4.2. 

The crisis highlighted weaknesses in euro area governance  ................................... 23 
The reform of economic governance in the euro area ............................................. 24 

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1. 

EXECUTIVE SUMMARY 

Over the last year the crisis in the euro area went through its most acute phase to date. 
At its centre was a dangerous feedback loop between sovereigns, the banking system and the 
deteriorating  economic  outlook.  As  banks  in  Europe  hold  large  amounts  of  domestic 
sovereign debt, concerns about the sustainability of sovereign debt spilled over to the banking 
sector.  In  turn,  banks’  limited  capacity  to  absorb  losses  added  to  the  sovereign  risk  as 
governments  were  perceived  as  ultimate  backstops  for  ailing  financial  institutions.  Finally, 
feeble  growth  prospects  –  weakened  further  by  private  and  public  deleveraging  –  increased 
the concerns about debt sustainability and banks' profitability, led to higher debt refinancing 
costs and endangered debt sustainability in a self-fulfilling way.  

This intense phase of the crisis showed the strength of cross-border spillovers in the euro 
area. The sovereign debt problems in the euro area started in 2010 as an isolated case. The 
crisis  has  since  then  spread  to  other  vulnerable  Member  States  revealing  or  compounding 
various home-grown problems, including built-up macro-economic imbalances or weaknesses 
in the banking sector. Finally even Member States that had been regarded as financially sound 
became affected and the crisis became system-wide in the second half of 2011. This reveals 
the  strength  of  spillovers  in  the  euro  area  –  due  to  close  economic  and  financial  links  and 
common  policy  frameworks  –  and  is  a  call  against  complacency  for  those  seemingly 
unaffected.  

Determined  policy  actions  to  break  the  negative  feedback  loops  and  strengthen  policy 
frameworks helped to contain the crisis. The Roadmap to stability and growth adopted by 
the Commission in October 20121 set out a comprehensive plan to respond to the crisis, which 
guided  policy  makers  in  their  reform  efforts.  In  particular,  the  second  Greek  adjustment 
programme  has  been  agreed  on  the  basis  of  an  orderly  restructuring  of  government  debt. 
Other  vulnerable  Member  States,  in  particular  those  under  the  EU/IMF  adjustment 
programmes,  have  started  bold  policy  reforms.  Consolidation  in  the  whole  euro  area  has 
progressed broadly as planned even if additional measures are necessary in some cases. These 
national  efforts  have  been  paralleled  by  actions  at  the  European  level:  EU-level  initiatives 
with greatest growth potential have been accelerated; the size and scope of financial stability 
mechanisms  has  been  strengthened;  banks  have  strengthened  their  capital  base  in  a 
coordinated exercise led by the European Banking Authority; the European Central Bank has 
taken  measures  to  alleviate  funding  stress  in  the  banking  sector.  Finally,  far  reaching 
governance  reforms  were  agreed  on,  aiming  at  closer  monitoring  and  surveillance  of  fiscal 
and economic policies.   

A continuous and consistent policy effort to address the looming challenges is necessary. 
The above policy measures led to some tentative improvement in the first months of 2012, but 
volatility  increased  again  recently  due  to  adverse  macroeconomic  developments,  persistent 
concerns about the banking system and intensified policy uncertainty in some Member States. 
This shows that markets remain exceptionally tense and vigilant and confidence is still weak. 
This is also a reminder that any improvement of the situation hinges crucially on maintaining 
an  appropriate  policy  response  at  the  national  and  the  euro-area  level.  Therefore  it  is  of 
paramount  importance  to  continue  with  reform  efforts  to  address  the  medium-  and  longer-
term challenges of the euro area, in particular to: 

− 

revive growth already in the short term and increase growth potential, notably 
by  strengthening  market  integration  and  liberalisation  with  the  aim  in 

1 COM(2011) 669 final 

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particular to unlock private savings for productive investment and to improve 
competitiveness. 

− 

reduce  the  high  debt  burden  in  the  public  and  private  sector  in  a  well-
coordinated manner across countries and across sectors in a way that does not 
excessively constrain economic growth; in particular: 

(cid:131) 

(cid:131) 

reduce  the  high  public  debt  in  the  context  of  credible  medium-term 
fiscal  consolidation  strategies,  which  strike  the  right  balance  between 
the need for consolidation, reform and growth; 

reduce  of  large  imbalances  among  euro  area  countries  via  broad 
structural  reforms  increasing  adjustment  capacity  and  appropriately 
differentiated fiscal policies; 

−  continue financial repair in particular to ensure a sound banking sector, able to 

provide healthy financing to the economy. 

Strong  spillovers  and  interconnectedness  in  the  euro  area  demand  robust  economic 
governance and close economic surveillance. The bold reforms in economic governance of 
the euro area enacted so far and in the pipeline go a long way in meeting the requirements of 
strong governance and surveillance in a monetary union and laying strong foundations for a 
stable and sound euro area. Nevertheless, further steps are necessary in the medium term to 
complete the architecture of the EMU. 

2. 

ECONOMIC SITUATION AND OUTLOOK 

The  economic  situation  in  the  euro  area  deteriorated  significantly  over  the  last  year. 
After contracting at the end of 2011 euro area GDP stabilised at the beginning of 2012. The 
loss of confidence due to the intensifying sovereign debt crisis, the oil price increases and the 
decelerating of world output growth have been weighing on growth.  

While the risk of acute problems in the banking system has been eased by prompt policy 
action at the end of 2011, economic prospects remain sluggish. The European Commission 
spring  forecast  sees  GDP  as  almost  flat  (-0.3%)  in  2012,  while  a  moderate  expansion  is 
forecast for 2013 (1.0%). This subdued recovery is predicated on a return of confidence and 
thus  on  the  assumption  that  the  crisis  is  contained  and  the  financial-market  situation 
normalises. Indeed, escalation of the crisis remains the largest downside risk, which could re-
ignite  the  vicious  feedback  loop  between  the  financial  sector  and  the  real  economy  and 
significantly reduce growth prospects.  

Growth differences among the euro area Member States  are expected to persist. There 
have been visible growth differences among the euro area countries since the outbreak of the 
global economic and financial crisis. These are expected to continue in the forecast horizon as 
Member  States    suffering  from  the  legacy  of  internal  and  external  imbalances  are  likely  to 
register a much later and more protracted transition to a recovery than countries with lower 
structural impediments (see also Section 3.2).  

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3. 

MAIN ECONOMIC CHALLENGES AND POLICY RESPONSES 

The euro area faces a number of intertwined challenges. They are discussed below under two 
main headings reflecting relevant policy areas and policy instruments. Section 3.1. discusses 
challenges  related  to  financial  and  fiscal  policies  in  the  euro  area,  section  3.2.  discusses 
challenges  stemming  from  low  growth  and  large  macroeconomic  imbalances.  Each  section 
contains an assessment of policy actions in the euro area, with a focus on the response to the 
recommendations that were addressed to the euro area Member States in 2011.  

3.1. 

Restoring and maintaining stability 

3.1.1.  Financial stability 

Graph  1.  Programme  countries'  sovereign 
spreads 
10 year maturity, difference to Germany 

The financial sector worldwide and in 
Europe was hard hit during the crisis. 
The  general  reassessment  of  risk  during 
the  global  economic  and  financial  crisis 
triggered  large  falls  in  asset  prices  and 
eroded  the  capital  base  of  Europe's 
banks, some of which had to be rescued 
by national public authorities. Against a 
recession 
background  of  economic 
exerting  increasing  pressure  on  public 
finances,  these  rescue  operations,  were 
in  some  cases  big  enough  to  undermine 
the  sustainability  of 
the  sovereigns 
concerned.  This  –  together  with  the 
revision  of  public  finance  figures  in 
the 
Greece  –  severely  undermined 
confidence  in  sovereign  bonds  in  many 
euro  area  Member  States.  The  prices  of 
sovereign bonds of countries which were 
regarded  as  vulnerable  declined  and 
further  reduced  the  capital  of  banks, 
which had invested heavily in these bonds before the crisis (Graph 1). This interdependence 
between weak banks and weak sovereigns in the context of slowing growth has created a very 
dangerous  feedback  loop.  The  aggravating  crisis  significantly  undermined  investors' 
confidence in the quality of banks’ balance sheets and hindered their access to funding. The 
crisis became system-wide in the second half of 2011 when financial stress spread onto other 
euro area  sovereign markets,   reflecting  the strong spillovers  existing  in  the single currency 
area (Graphs 2 and 3). 

Source: Reuters Ecowin 

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Graph  2.  Selected  Member  States' 
sovereign spreads 

Graph 3.  Financial  price  indicators  for 
euro area corporations 

10-year maturity, difference to Germany 

Source: Reuters Ecowin 

Note:  Expressed  in  standard  deviations  derived  from 
daily averages 2005-2011. 

Source: Reuters Ecowin 

Policy  measures  introduced  in  the  second  half  of  2011  and  at  the  beginning  of  2012 
helped to rebuild market confidence in the early months of 2012, but the improvement 
proved  temporary.  In  particular,  the  3-year  Very  Long  Term  Refinancing  Operations 
(VLTRO)  carried  out  by  the  ECB  filled  acute  refinancing  gaps  for  euro  area  banks  by 
guaranteeing  banks  access  to  medium-term  funding  at  low  cost.  Also,  to  reassure  markets 
about the banks’ ability to withstand shocks and maintain adequate capital, the October 2011 
European  Council  agreed  on  an  EU-wide  recapitalisation  plan  coordinated  by  the  European 
Banking  Authority  (EBA).  The  overall  positive  implementation  of  EU/IMF  financial 
assistance  programmes  for  Portugal  and  Ireland  also  contributed  to  improved  market 
sentiment as did the ambitious reform programmes in other vulnerable countries. Other policy 
actions,  such  as  the  agreement  on  the  second  Greek  adjustment  programme,  further 
strengthening  of  the  firewalls  and  the  reinforcement  of  fiscal  governance  also  improved  the 
sentiment towards euro area economies. Unfortunately, the improvement in sentiment proved 
only  temporary  and  investors'  confidence  deteriorated  again,  which  shows  how  fragile 
financial markets remain and that a failure to continue implementing appropriate policies can 
quickly turn market sentiment.  

While  further  deleveraging  in  the  banking  sector  is  necessary  to  restore  investor 
confidence, the challenge is to ensure that it does not unduly constrain the flow of credit 
to  the  economy.  Recent  funding  strains  and  continuous  pressure  to  increase  capital  have 
raised concerns that banks could excessively reduce credit supply (Graph 6). As bank credit is 
a major source of funding for the real economy in the euro area, in particular for the small and 
medium-sized  enterprises,  a  credit  crunch  would  have  severe  repercussions  for  growth  and 
employment  and  could  eventually  impair  growth  potential  if  sustained  over  a  prolonged 
period.  To  counter  this  risk,  national  supervisors  have  been  requested  to  ensure  that  banks’ 
plans  to  strengthen  capital  ratio  lead  to  an  appropriate  increase  of  capital  rather  than  to 
excessive deleveraging and lending disruptions. At this stage, there is no clear-cut evidence 
that  the  deleveraging  process  has  become  excessive  or  disorderly  with  disruptive 

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consequences on the real economy. Nevertheless, the heterogeneity across Member States is 
large and the aggregate picture may hide different situations at country level. 

Graph 4: Bank lending to the private non-
financial sector in the euro area 

The  run-down  of  problematic  assets, 
accumulated  before  the  crisis,  is  essential 
to  restore  the  flow  of  credit  to  the 
economy.  The  continuing  low  interest-rate 
environment  coupled  with  banks'  reluctance 
to  recognise  losses  or  foreclose  properties 
could  increase  the  propensity  of  banks  to 
forebear  on  loans  or  other  problematic 
loss  recognition,  could 
assets.  Delaying 
constrain 
to  more  creditworthy 
lending 
borrowers,  reduce  potentially  productive 
investment  and  exert  negative  effect  on 
growth..  Therefore  correct  and  transparent 
risk  recognition  and  timely  restructuring  is  
necessary  to  ensure  the  health  of  both  the 
banking system and the economy. 

for 

ECB 

sales  and 

Source: ECB 

extraordinary 

Note:  monthly 
flows  adjusted 
securitisation; seasonally adjusted. 

The 
measures  have  given 
breathing 
alleviated  acute  funding  strains 

liquidity 
the  banks  a 
space.  The  VLTROs  have 
the 
banking sector and which will allow banks to provide lending to the economy, once economic 
conditions  improve.    However,  the  high  returns  offered  by  some  sovereign  bonds  have 
encouraged  some  banks  to  further  invest  in  domestic  government  debt,  thus  increasing 
interconnectedness  between  banks  and  sovereigns.  Thus,  it  is  of  paramount  importance  that 
the window of opportunity offered by the VLTROs is used by banks to proceed with financial 
repair and restructuring of balance sheets, while maintaining credit flow to the economy, so 
that a more resilient banking sector is in place when the VLTROs come to maturity. 

in 

Financial  sector  restructuring  has  continued  over  the  last  12  months  in  the  euro  area. 
Following last year’s recommendation to the euro area countries to improve the functioning 
and stability of the financial system,  many Member States pursued the restructuring of their 
financial  sector  (CY,  DE,  ES,  EL,  IE,  PT)  and  strengthened  their  supervisory  framework 
(BE). Nevertheless, the measures sometimes lack ambition or a comprehensive approach (DE, 
SI). 

The crisis has slowed the financial integration process and ambitious steps to accelerate 
and  deepen  financial  integration  may  be  needed.  Already  before  the  crisis,  it  was 
acknowledged  that  the  EU  model  of  cross-border  banking  was  not  stable  under  the  existing 
institutional  setting,  in  particular  with  respect  to  supervision  and  management  of  banking 
crises.  This  has  proved  particularly  damaging  in  the  context  of  the  monetary  union,  due  to 
closer financial and real  linkages  and  the inter-linkages  with the sovereign. Although banks 
have broadly maintained their cross-border presence so far, there are signs of declining cross-
border  activities  and  banks  retrenching  behind  national  borders.  As  part  of  their  balance 
sheets restructuring banks have started to divest non-core assets, which often include foreign 
assets,  although  the  pattern  of  the  divestments  is  not  clear-cut.  To  counter  this  trend  of 
financial dis-integration more coordination at European level is required in supervision  and 
crisis  management  frameworks.  More  specifically,  a  closer  integration  among  the  euro  area 
countries  in  supervisory  structures  and  practices,  in  cross-border  crisis  management  and 
burden sharing, towards a "banking union" would be an important complement to the current 

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structure of EMU. In the same vein, to sever the link between banks and the sovereigns, direct 
recapitalisation by the ESM might be envisaged.  

3.1.2.  Fiscal policy 

Since the outbreak of the crisis public debt has increased substantially in the euro area. 
While the levels and trajectories of debt differed substantially across euro area Member States 
before  the  crisis,  the  increase  since  its  outbreak  was  universal.  This  has  been  to  the  largest 
extent  due  to  the  significant  role  public  finances  played  to  support  the  economy  and  the 
financial sector during the global economic and financial crisis. However, insufficient efforts 
to reduce debt during good economic times before the crisis have also made some countries 
more vulnerable to economic shocks. Since the onset of the crisis in 2007, government debt 
levels  across  the  euro-area  have  increased  by  more  than  20  percentage  points  and  reached 
88%  of  GDP  in  2011,  with  large  differences  across  Member  States.  It  is  fair  to  point  out, 
however, that although the euro-area is at the epicentre of the sovereign debt crisis, the overall 
increases and levels of government debt-to-GDP ratios are actually higher in both the US and 
Japan (Graph 5). 

A combination of factors makes the reduction of high public debt an acute challenge per 
se and in particular in the context of the euro area monetary union. First, risk aversion on 
sovereign debt markets have increased markedly, probably over-correcting the subdued levels 
prevailing before, as investors have reassessed the prospects of sovereign debt sustainability 
in  face  of  increased  debt  levels  and  a  depressed  growth  outlook.  This  has  led  to  a  surge  in 
financing  costs  for  some  governments,  which  in  turn  endanger  debt  sustainability  in  these 
Member  States  already  in  the  medium  term.  Second,  the  crisis  has  revealed  very  large 
spillovers between euro-area sovereigns that increase the risks of developing systemic crises, 
i.e. a situation  when  developments in the euro area as a whole play larger role in  investors' 
perception of a Member country than the developments in the country concerned. And third, 
budgetary costs stemming from ageing populations have implications for fiscal sustainability 
in  the  longer  term.  The  sizeable  magnitude  of  the  fiscal  adjustment  required  to  bring  down 
currently  high  debt-to-GDP  ratios  in  most  Member  States  calls  for  a  durable  and  sustained 
fiscal consolidation strategy. 

Fiscal  consolidation  has  been  ongoing  in  the  euro  area  and  the  Member  States  have 
undertaken  significant  consolidation  efforts.  The  headline  government  deficit  in  the  euro 
area  has  fallen  by  2.1  pp.  to  4.1%  of  GDP  in  2011.  Government  debt,  however,  continued 
rising and reached 87.2% of GDP. As the reduction in the headline deficit-to-GDP ratio took 
place in the context of slowing output growth, it amounts to significant consolidation effort. 
Indeed, the cyclically adjusted budget balance improved by 1 pp. and reached 3.4% of GDP in 
2011.  This  shows  that  the  euro  area  Member  States  have  broadly  achieved  the  structural 
consolidation efforts planned in the 2011 updates of their Stability Programmes. 

Stability Programmes show that the consolidation is expected to continue. According to 
the  plans  set  out  in  the  Stability  Programmes,  fiscal  deficit  in  the  euro  area  will  decline  to 
around 3% of GDP in 2012 and further to less than 1% of GDP in 2015. The gross public debt 
is planned to still increase, however, and exceed 90% in 2012, before falling around 85% in 
2015, but large differences in debt levels are expected to persist over the programme horizon. 

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Graph 5. Development in government debt 
and deficit in the euro area, US and Japan 

2007-2013 (% of GDP) 

in 

entail 

consolidations 

While  euro  area  Member  States  have  to 
restore  sustainability 
their  public 
finances,  there  are  short-term  growth 
effects  of  fiscal  consolidation.  In  general, 
fiscal 
short-term 
contractionary  effects  on  economic  activity. 
These effects are likely to be larger now – in 
a post-financial crisis recession – than during 
a usual cyclical slowdown. This is because a 
larger share of household and firms are now 
credit  constrained  and  are  more  sensitive  to 
changes in current income and profits rather 
than  to  interest  rates.  Moreover,  the  already 
accommodative  stance  of  monetary  policy 
and  the  impairment  of  the  transmission 
mechanism  due  to  problems  in  the  banking 
sector  limit  the  scope  for  any  offsetting 
stimulus from this source.  

The  main  challenge  for  fiscal  policy  is  to 
pursue  fiscal  consolidation  in  a  growth 
friendly  manner.  Credible  medium-term 
growth-friendly  consolidation  programmes 
are  of  utmost  importance  to  simultaneously 
reduce  the  high  debt  levels  and  to  mitigate 
potential  negative  growth 
effects  of 
consolidation. Credibility of consolidation is 
one  of  key  factors  here:  short-term  adverse 
growth  effects  are  typically  found  to  be 
smaller  for  consolidation  efforts  which  are 
perceived  to  be  permanent.  There  are  four 
dimensions  of  growth-friendly  nature  of 
consolidation:  (i) differentiation  of  the  pace  across  countries,  (ii) strong  attention  to  the 
composition  of  consolidation,  including  a  clear  focus  on  curbing  age-related  spending,  and 
(iii) accompanying reform of budgetary institutions. 

Source: Commission Services  

(i)  The size of fiscal challenge differs among the euro area Member States and calls 

for differentiated speed of consolidation.  

The  Stability  and  Growth  Pact  provides  a  flexible  and  rule-based  framework  to  guide 
the differentiated pace of consolidation. The application of the EU fiscal rules is based on 
economic analysis and legal provisions, together with an overall assessment of the structural 
sustainability of public finances. The framework allows for objectively-based differentiation 
between  Member  States  according  to  their  fiscal  space  and  macroeconomic  conditions 
(Graph 6).  The  assessment  of  the  budgetary  measures  taken  by  the  Member  States,  in 
particular in structural terms, is central to the implementation of the rules.  

The strategy of fiscal exit from the extraordinary measures adopted to cushion the effect 
of  the  crisis  reflects  the  flexibility  embedded  in  EU  fiscal  rules.  Specifically,  Member 
States  which  face  high  and  potentially  rising  risk  premia  do  not  have  much  room  for 
manoeuvre  to  deviate  from  their  nominal  fiscal  targets,  even  if  macroeconomic  conditions 

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turn out worse than expected. However, other Member States are in a position to fully let their 
automatic stabilisers play along the structural adjustment path. 

Graph 6. Government deficit and debt in 2011, euro area Member States (% of GDP) 

Source: Commission Services  

(ii)  The composition of fiscal consolidation is critical to minimise the negative effects 

on growth.  

Expenditure  retrenchment  can  have  important  signalling  effect.  Due  to  the  inherent 
difficulties  in  implementing  expenditure-based  consolidation  strategies,  their  adoption  is 
instrumental in signalling the commitment to cut fiscal deficits. Thus, spending retrenchment 
is a precondition to underpin credibility and prevent risk premia from rising further. However, 
a  growth-friendly  consolidation  also  requires  prioritising  growth-supporting  public 
expenditure  so  as  not  to  undermine  the  already  weak  growth  potential  of  the  euro  area 
economy.  Public  investment  has  particular  importance  in  this  respect  as  investment 
expenditure  increase  growth  via  domestic  demand  already  in  the  short  term,  while  have  a 
positive effect on the supply side in the long term. Especially in some Member States, which 
face  extraordinarily  low  interest  rates  there  is  a  case  for  adopting  policies  to  promote 
productive investment, as it is very likely that its private and social returns would exceed the 
funding costs. However, it is also important to pay particular attention to the efficiency and 
effectiveness of the expenditure programmes. 

However, as the size of the required fiscal adjustment is significant, part of it might have 
to  come  from  the  revenue  side  in  many  Member  States.  This  is  particularly  relevant  in 
Member States where large consolidation needs are combined with some room for potential 
tax revenue increases or where there is a need to restore tax bases eroded by the crisis. There 
are several ways to increase tax revenue which do not involve outright tax hikes. Improving 
tax compliance and administration should be the first lever to use. Where this is not sufficient 
or  where  tax  compliance  is  already  high,  broadening  of  the  tax  base  should  be  considered. 
Moreover,  improving  compliance  and  broadening  the  tax  bases  are  valuable  aims  of  tax 
policy per se as they increase the efficiency of taxation and reduce economic distortions. As a 
last option, increasing tax rates or introducing new taxes might be unavoidable in some cases. 
In  such  cases  it  is  necessary  to  pay  utmost  attention  to  minimising  the  possible  negative 
effects  on  growth  by  focusing  on  the  least  detrimental  taxes  such  as  consumption  taxes  or 
recurrent property taxes. 

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Appropriate tax policies can also contribute to growth and competitiveness and reduce 
imbalances in the economy. Tax policy should generally focus on growth-friendly changes 
in the structure and design of existing tax systems. In particular, an increase in the tax burden 
on labour and capital has more detrimental effects on growth and competitiveness than is the 
case  with  other  types  of  taxes,  such  as  on  consumption,  property  and  environmental  taxes. 
This  is  particularly  relevant  for  some  euro  area  Member  States,  which  need  to  significantly 
improve their competitiveness. The potential distributional impact of tax changes also needs 
to be carefully assessed. Any reduction in the tax burden on labour should be centred on the 
most  vulnerable  labour  market  groups,  given  that  these  often  face  particularly  high 
disincentives to work and suffer from relatively high labour costs. With particular relevance 
for the euro area, tax reforms should also address the incentives to build up debt, embedded in 
corporate income tax systems and the housing taxation.   

The  composition  of  consolidation  has  not  always  been  growth-friendly.  Although 
consolidation efforts have been generally expenditure-based, only a few Member States have 
safeguarded growth-enhancing items, such as R&D (IT) or education (DE). Others (PT,  IT) 
prioritised capital expenditure, notably by enhancing the use of EU structural funds. In several 
Member States, the efficiency of public spending has been improved (EE, FI). Measures on 
the  revenue  side  have  also  been  frequent.  A  number  of  Member  States  have  opted  for  tax 
increases. These sometimes improved the structure of taxation shifting the tax burden away 
from labour (IT). More often the changes did not go in the right direction, as the tax burden 
on labour (AT, ES, FR) or on capital (ES) has increased, even if other, less growth-harmful 
options  have  not  been  fully  exploited.  There  were  also  measures  reducing  distortions  in 
property  taxation  (PT)  or  increases  in  consumption  taxation  (FR),  but  no  shift  towards 
environmental taxes have been recorded.  

Tackling  the  budgetary  implications  of  ageing  population  is  key  for  public  finance 
sustainability. Due to the negative impact of the crisis on growth, the age-related expenditure 
is now expected to be a larger burden for public finances. On the basis of current policies, the 
ratio  of  age-related  public  expenditure  to  GDP  is  projected  to  increase  by  4¾  percentage 
points by 2060. There are however large differences across countries with Belgium, Cyprus, 
Luxembourg,  Malta,  the  Netherlands,  Slovenia  and  Slovakia  facing  particular  challenges. 
Pensions represent a very large and rising share of public expenditure in the euro area: more 
than  12%  of  GDP  today  and  projected  to  rise  to  14%  in  2060.  In  Member  States  that  face 
highest pension costs, but also in others, reforms in pensions, health and long-term care would 
improve the long-term sustainability of public finances, underpin the credibility of the current 
consolidation efforts and help to strengthen investor confidence.  

Progress  has  been  made  with  respect  to  pension  reforms,  but  health  care  reforms  are 
lagging  behind.  The  looming  challenge  of  ageing  population  has  over  the  last  decade 
prompted  the  majority  of  Member  States  to  adapt  pension  systems  with  the  aim  of  putting 
them  on  a  more  sustainable  footing.  This trend has  continued over the last year. The recent 
pension reforms in some euro area Member States notably Greece, Italy and Spain are having 
visible  positive  budgetary  impacts.  However,  further  reforms  are  in  many  cases  necessary. 
Less  progress  has  been  made  in  the  area  of  health  care  systems,  where  the  challenge  is  to 
balance  the  need  for  universal  health  care  and  long-term  care  with  an  increasing  demand 
related to ageing population, technological development and growing patient expectations in 
all  age  categories.  Sound  reforms  are  thus  needed  to  achieve  both  a  more  efficient  use  of 
limited public resources and the provision of high quality health care. 

(iii)  

Reforms  of  national  budgetary  frameworks  can  make  an  important 

contribution to consolidation and alleviate growth-consolidation trade-offs.  

EN 

11 

   EN 

Improving  national  budget  processes  by  drawing  on  identified  best  practices  would 
improve fiscal policy-making on a lasting basis. Moreover, credible budgetary frameworks, 
oriented  towards  ensuring  fiscal  sustainability,  can  create  more  room  for  short-term 
stabilisation role of public finances. If markets' expectations are firmly anchored in a credible 
medium-term  path,  i.e.  if  investors  trust  policy  makers  will  reduce  deficits  in  the  medium-
term,  they  will  be  less  sensitive  to  the  short-term  fluctuation  of  fiscal  aggregates,  leaving 
more  room  for  stabilisation  policies.  To  anchor  the  expectations,  the  role  of  national  fiscal 
frameworks and EU surveillance is crucial.  

Visible progress has been achieved in improving fiscal frameworks. Most countries have 
embarked  on  ambitious  reforms  of  major  structural  elements  of  their  fiscal  frameworks, 
putting  in  place  new  or  tighter  fiscal  rules  (in  some  cases  at  constitutional  level), 
strengthening  multi-annual  planning  and  setting  up  fiscal  councils.  These  efforts  should  be 
pursued to provide tangible deliverables strengthening the budgetary process. In particular the 
transposition of the Directive on requirements for budgetary frameworks by the end of 2012 – 
as committed by euro area Heads of State and Governments – and the swift implementation of 
the fiscal compact would send an unambiguous message that the euro area is putting in place 
the appropriate mechanisms to achieve a credible and lasting fiscal consolidation process. 

Budgetary  discipline  and  solidarity  in  the  euro  area  could  also  be  fostered  by  the 
common issuance of sovereign debt instruments. Creating a new market segment based on 
common  issuance  would  address  the  current  shortage  of  investor  demand  for  the  sovereign 
bonds of many euro-area Member States. In dependence of their design, such an instrument 
would  provide  participating  Member  States  with  more  secure  access  to  refinancing  at  a 
generally lower rate through a lower liquidity premium and less market volatility. A number 
of  suggestions  in  this  direction  have  been  brought  forward,  including  the  issuance  of 
mutualised bonds combined with a debt redemption fund as suggested by the German Council 
of Economic Advisers, different options  of  Stability Bonds  as  outlined in the  Commission's 
Green Paper or the common issuance of short-term debt securities (E-Bills). Even if common 
issuance  were  not  to  play  a  role  in  managing  the  sovereign  debt  crisis,  such  an  instrument 
would contribute to efficient financial integration by facilitating the transmission of monetary 
policy and making available high-quality collateral that can be more easily used on a cross-
border  basis.  However,  the  net  effects  of  common  issuance  will  be  positive  only  if  the 
potential disincentives for fiscal discipline can be controlled. The successful application of the 
new economic governance framework already in force and in the process of being put in place 
may  be  a  significant  step  towards  fulfilling  the  preconditions  for  common  issuance.  The 
Commission  will  come  forward  with  proposals  following  the  analysis  of  the  results  of  the 
consultation undertaken on its Green Paper. 

3.2. 

Adjusting imbalances and enhancing growth 

3.2.1.  Adjusting internal imbalances in the euro area 

One  of  the  salient  features  of  the  first  decade  of  the  euro  area’s  existence  was  the 
gradual accumulation of macroeconomic imbalances. Their most visible manifestation was 
the  increasing  divergence  in  external  positions.  Some  Member  States  saw  their  current 
account deficit rise to very high levels while others accumulated substantial current account 
surpluses2 (Graph 7).  

2  For  more  information  see  e.g.  Quarterly  Report  on  the  Euro  Area,  No.  1/2009,  European  Commission; 
European  Economy  No.  1/  2010,  Surveillance  of  intra-euro  area  competitiveness  and  imbalances,  European 
Commission.   

EN 

12 

   EN 

                                                 
The mounting current account deficits and surpluses were a counterpart to large capital 
flows across the euro area countries. Capital inflows benefited mostly those Member States 
where the real returns on investment appeared the highest. While these capital flows partially 
reflected sound catching-up processes, particularly in the initial period, they also reflected a 
generalised  mis-pricing  of  credit  risk  and  were  ultimately  to  result  in  a  misallocation  of 
resources within the recipient economies and became a significant ingredient of unsustainable 
macroeconomic  trends.  Part  of  the  capital  flows  was  channelled  into  unproductive  uses  and 
fuelled domestic demand booms, which were associated with excessive credit expansions and 
raising  debt  in  the  private  and/or  public  sectors  and  housing  bubbles  in  some  euro  area 
countries (Graph 8). 

Graph  7.  Decomposition  of  current 
account developments in the euro area  

Graph 8. External and internal imbalances 
before the crisis 

)
7
0
'
-
0
0

'

e
g
a
r
e
v
a
(

t
i
d
e
r
c
e
t
a
v
i
r

P

PT

EL

ES

30

25
IE

20

15

FR

10
IT

5

BE

NL

FI

AT

DE

-15

-10

5
Current account (average '00-'07)

-5

0

LU

10

Source: Commission Services 

Source: Commission Services 

Note: Average private credit (transactions) as % GDP 
and average current account over 2000-2007. 

The  past  divergence  in  external  positions  within  the  euro  area  was  mainly  due  to 
diverging developments in the private sector (Graphs 9 and 10). A look at the sectoral net 
lending/borrowing in surplus and deficit countries in the euro area shows that the key driver 
of the growing divergences in external positions prior to the onset of the crisis was the non-
financial private sector. Although government sector balances were somewhat more negative 
in  deficit  countries  than  in  surplus  countries,  their  contribution  to  overall  imbalances  was 
generally more limited compared to the private sector.3 However, the developments in the rest 
of  the  private  sector  were  documenting  growing  divergences:  while  in  surplus  countries  the 
financial  balance  of  the  private  sector  on  average  improved,  in  deficit  countries  it 
progressively  deteriorated  up  to  2007.  The  household  sectors  in  both  surplus  and  deficit 
countries were on average net lenders over the whole period, while the net lending position 
was  much  weaker  in  the  latter  and,  moreover,  deteriorating  in  the  run  up  to  the  crisis.  The 
non-financial corporations were net borrowers in deficit countries while they turned into net 
lenders in surplus countries. The advent of the crisis has set in motion important consolidation 
of  private  balance  sheets  –  both  of  households  and  non-financial  corporations.  This 
consolidation  does  not  necessarily  affect  only  deficit  countries  but  also  those  with  current 
account surpluses. 

3  Also,  the  net  lending/borrowing  positions  of  the  financial  sector  were  relatively  small  and  broadly  similar, 
reflecting the intermediation role of financial institutions. 

EN 

13 

   EN 

 
 
 
 
                                                 
Graph  9:  Net  lending/borrowing  as  %  of 
GDP by sector –  

Graph  10:  Net  lending/borrowing  as  %  of 
GDP by sector –  

euro area "surplus" countries 

euro area "deficit" countries 

Source: Eurostat 

Source: Eurostat 

Note:  Surplus  countries  are  BE,  DE,  LU,  NL,  AT,  FI 
(based on average external position in the period 2000-
2010). 

Note:  Deficit  countries  are  EE,  IE,  EL,  ES,  FR,  IT, 
CY,  MT,  PT,  SI,  SK  (based  on  average  external 
position in the period 2000-2010). 

The onset of the crisis triggered a reversal in the previous trends and current account 
imbalances  in  the  euro  area  have  been  significantly  reduced  since.  Currently,  the 
dispersion of current account imbalances has dropped significantly compared to the peak. The 
gaps  between  actual  current  account  balances  and  their  'norms'  determined  by  fundamental 
factors have shrunk substantially (Graph 11). In the years preceding the crisis, a majority of 
countries recorded current account balances which were below what could be expected on the 
basis of the underlying fundamentals. As the largest adjustment so far took place on the side 
of  current  account  deficit  countries,  the  average  current  account  gap  approached  zero  and 
turned  positive  thereafter.  While  to  a  large  extent  the  reduction  in  deficits  was  linked  to 
depressed  domestic  demand  and  imports,  deficit  countries  have  also  started  improving  their 
export performance. According to the Commission spring forecast their export markets shares 
are forecast to improve more than those of the surplus countries.  

Although to a lesser extent, some rebalancing is taking place on the surplus side as well. 
Since  2007  all  surplus  countries  have  noticeably  reduced  their  surpluses.  Particularly,  in 
Germany  the  composition  of  growth  has  changed  visibly  over  the  recent  past.  Domestic 
demand became the main driving force behind output growth and in 2011 has been growing 
by  almost  2  pp.  faster  than  in  the  euro  area  as  a  whole.  Also  unit  labour  costs  accelerated 
faster in 2011 than on average in the euro area and recent wage negotiations also point further 
in  this  direction.  According  to  Commission  spring  forecast  these  trends  are  expected  to 
continue in the forecast horizon.   

EN 

14 

   EN 

 
Graph  11.  Developments 
account 'gaps' in the euro area  

in  current 

Graph  12.  Actual  current  account  (CA) 
balance and IIP-stabilising CA (2012-2020)

8

6

4

2

0

-2

-4

-6

-8

-10

BE DE EE IE EL ES FR IT CY LU MT NL AT PT SI SK FI

CA (% of GDP) 2012

IIP-stabilizing CA (growth 2012-2020)

Source: European Commission 

Source: European Commission 

Note:  Current  account  'gaps'  show  the  difference 
between  actual  current  accounts  and  'norms'  based  on 
the approach by Salto and Turrini (2010). 

Note:  The  current  account  stabilising  international 
investment position (IIP-stabilising CA) shows the CA 
balance  necessary  to  keep  the  net  IIP-to-GDP  ratio 
constant given the growth projections for 2012-2020. 

On  the  way  forward,  a  key  issue  is  whether  the  recorded  narrowing  of  imbalances  is 
structural or will be reversed once cyclical conditions improve. There are indications that 
at least part of the observed rebalancing is of a more structural nature and therefore likely to 
be  relatively  persistent.  To  the  extent  the  recent  corrections  reflect  reassessment  of  income 
expectations  and  risk  premia  rather  than  purely  cyclical  drops  in  output,  they  could  prove 
sustainable.  Given  the  high  level  of  external  liabilities  in  most  deficit  countries,  market 
pressure for rebalancing should remain high in the years to come and a reversal of the balance 
sheet  adjustment  appears  unlikely.  Also,  fiscal  consolidation  needs  are  generally  larger  in 
deficit than in surplus countries, so the public sector is likely to contribute to rebalancing in 
the longer term. Finally, the adjustment in many deficit countries is accompanied by changes 
in relative prices which is a precondition for the required reallocation of resources within the 
economies. 

Even if the adjustment on the deficit side has been large, there are indications that it has 
not  been  complete  in  those  countries  which  had  the  highest  current  account  deficit. 
While there has often been a radical adjustment in flows, some of these countries still feature 
very high levels of external liabilities as showed by the net international investment positions 
(NIIP) as a share of GDP. Given the high level of net liabilities and weak growth dynamics, 
there is a need for further improvements in current accounts, particularly in trade balances, to 
bring  the  NIIP-to-GDP  ratios  on  a  declining  trend  (Graph  10).  Given  the  growth  prospects 
over  the  coming  decade,  external  indebtedness  in  Greece,  France,  Italy,  Cyprus,  Malta  and 
Portugal would continue increasing if current account deficits stayed at the current level. This 
does not necessarily jeopardise external sustainability in countries with relatively favourable 
external positions such as France but would be an additional drag for countries with already 
high levels of external debt. 

EN 

15 

   EN 

 
 
Graph 13. Euro area Member States' sectoral Net Financial Assets, (% of GDP), 2010 

r
o
t
c
e
s

t
n
e
m
n
r
e
v
o
g

e
h
t

f
o

s
t
e
s
s
a

l

i

a
c
n
a
n
i
f

80

60

40

20

0

-20

-40

-60

-80

t
e
N

-100

-150

EE

SI

SK

IE

PT

ES

EL

Public
savers

Twin
savers

FI

LU

Twin
debtors

Public
debtors

AT

FR

MT

DE

BE

IT

CY

NL

-100

-50

0

50

100

Net financial assets of the rest of the world sector

Source: Commission Services 

Note:  Net  financial  asset  (NFA)  positions  are  defined  as  financial  assets  less  financial  liabilities.  The  NFA 
positions  represent  the  national  accounting  counterpart  of  the  net  international  investment  position  (NIIP)  and 
allow exploring savings-investment balances in a sectoral perspective. The graph depicts the situation in the euro 
area countries by looking at three dimensions: (1) the ratio between the NFA position of households to that of 
firms  ("coverage  ratio"),  which  gives  an  indication  to  what  extent  domestic  private  savings  are  sufficient  to 
finance  the  needs  of  firms.  The  light  colour  indicates  full  coverage  and  the  dark  colour  reflects  less  than  full 
coverage. A priori it is expected that firms are on average net investors (negative NFA) and that households are 
net savers (positive NFA) while financial corporations are, on average, intermediaries (balanced NFA position); 
(2) the government NFA gives an indication of the role of the public sector in complementing/supplementing a 
potential savings gap in the private sector (a negative sign indicates net general government liabilities); (3) the 
NFA of the economy as a whole to the rest of the world links the internal position with the economies external 
needs/capacities (a negative sign means net external liabilities). Surplus countries are in circles. 

The  required  improvement  in  current  accounts  to  stabilise  or  reduce  external 
indebtedness often implies even more ambitious improvements in trade balances. This is 
due to the negative net investment income payments which these countries need to pay, i.e. 
interest payments on foreign loans, dividends on foreign investment or other factor payments. 
As the income balances are primarily linked to the stock of external liabilities, they are rather 
persistent. So far, much of the adjustment in deficit countries took place via changes in trade 
balances  which  in  turn  were  mostly  driven  by  drops  in  imports  induced  by  contractions  in 
domestic demand. To regain sustainability of external positions, countries like Greece, Spain, 
Cyprus or Portugal need to turn their trade deficits (including net transfers) into surpluses in 
order  to  compensate  for  the  relatively  high  negative  income  balances.  This  will  inter  alia 
require  important  improvements  in  their  competitiveness  to  recoup  the  losses  registered 
before  the  crisis.  Ensuring  that  wage  developments  contribute  to  regaining  labour  cost 
competitiveness and implementing measures that tackle nominal rigidities in product markets 
is crucial in  this respect. To avoid increasing unemployment,  the  measures  supporting price 
and  cost  adjustments  need  to  be  complemented  by  reforms  facilitating  reallocation  of 
resources  across  firms  and  sectors.  Primarily,  labour  and  capital  will  have  to  be  channelled 
from  non-tradable  activities,  which  expanded  before  the  crisis,  to  the  export  sector.  Labour 
market  reforms  in  line  with  the  principle  of  flexicurity  are  particularly  relevant  for  that 
purpose.  The  large  stock  of  debt  in  the  deficit  countries  also  underlines  the  importance  of 
external  financing  conditions  for  these  Member  States,  as  the  large  stocks  of  external 
liabilities  make  them  more  sensitive  to  changes  in  financing  costs.  Structural  reforms 
addressing  the  problems  underlying  the  imbalances,  together  with  progress  in  restoring  the 

EN 

16 

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sustainability  of  public  finances,  will  help  rebuild  the  confidence  in  financial  markets  and 
keep the costs of financing of existing liabilities at viable levels. 

Unlike  current  account  deficits,  large  and  sustained  current  account  surpluses  do  not 
raise  concerns  about  the  sustainability  of  external  debt  or  financing  capacity  for  the 
countries  concerned.  Persistent  surpluses  can  be  justified  if  they  are  the  result  of  the 
exogenous factors, such as the availability of natural resources, competitiveness of enterprises 
or  come  from  the  structural  features  of  the  economy  that  determine  saving  and  investment, 
e.g. countries with an ageing population may find it opportune to save today (i.e. run current 
account surpluses) to avoid a drop in consumption in the future. Nevertheless, it is possible 
that  large  and  persistent  current  account  surpluses  can  be  caused  by  less  benign  factors, 
related to the functioning of markets, e.g. the way the financial sector allocates resources, or 
policies that constrain domestic demand and investment opportunities. When the latter is the 
case,  reforms  that  help  strengthen  domestic  demand  and  growth  potential  would  be  welfare 
enhancing for the Member State concerned. The reductions in excess domestic savings over 
investment could, moreover, benefit other euro area countries, where no exchange rate exist to 
respond  to  persistent  current  account  imbalances,  though  the  strength  of  such  growth 
spillovers is surrounded by significant uncertainty. 

Moreover, a closer look at the surplus economies reveals significant heterogeneity of the 
sector  composition  of  their  external  positions  and  hence  the  potential  for  external 
rebalancing.  A  first  investigation  of  the  euro  area "surplus"  economies  shows  that  they  are 
rather  diverse  as  regards  the  relative  situations  of  the  different  sectors  in  the  economy 
(Graph 13):  

•  As  regards  the  general  government  sector,  Finland  and  Luxembourg  had  in  2010 
overall positive financial position, i.e. their public sectors held larger amount of assets 
than  liabilities.  This  is  because  of  both  relatively  low  stock  of  liabilities  and  a  large 
stock of funded assets, stemming mainly from the investment of employment pension 
schemes. In the case of Austria, Germany and the Netherlands these countries had net 
public liabilities positions (net "public debtors" in Graph 13), derived essentially from 
the large stock of gross liabilities (Graph 14). 

•  Austria stands out of the group of surplus countries as it shows overall net liabilities 
with  respect  to  the  rest  of  the  world  (although  they  appear  very  limited)  despite  the 
past accumulation of current account surpluses. 

•  Looking at the situation in the private sector, a similar grouping of countries emerges. 
The private sectors in Austria, Germany and the Netherlands are the main providers of 
financing in these economies.  In Austria and Germany, households are saving enough 
to  compensate  for  firms'  borrowing,  which  partially  (in  the  case  of  Austria)  or  fully 
compensates for their net public liabilities. In the Netherlands, the household savings 
rate is virtually zero and firms provide financing for the rest of the economy (positive 
net lending). This coverage ratio (see the note in Graph 13) is partial for Finland and 
Luxembourg. 

The sectoral differences among the surplus countries will shape the rebalancing pattern 
in the coming years. These differences in the financial positions of the different sectors and 
the  potential  interlinkages  between  the  sectors  can  have  an    impact  of  deleveraging  on 
external positions. In particular, the interplay between the savings-investment balances of the 
public  and  the  private  sector  via  existing  deleveraging  pressures  will  influence  the  external 
position in the coming years: 

EN 

17 

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• 

In surplus Member States with net government liabilities, fiscal consolidation can  be 
expected  to  contribute  to  negative  feedback  effects  on  growth  and  upward  pressures 
on the external position. Graph 14 shows gross debt (non-consolidated) of the general 
government, which, in 2011, stood above 75% of GDP for Germany, Austria and the 
Netherlands  (upper  panel)  and  was  mainly  accumulated  over  the  previous  4  years 
(lower panel). 

Graph 14. Gross debt in the euro area countries: sector decomposition 

105

45

82

IT

43
26
47

SK

P
D
G

f

o
%

450

400

350

300

250

200

150

100

50

0

LU
FI
EE

CY
BE
NL
MT
DE

IE
PT
ES
FR
AT
SI
IT
SK

-100

-50

0

Twin debtors

96

93

73

82

86

55

92

56

106

105

135

155

46

31

99

79

119

222

AT

SI
Non financial corporates

FR

ES

PT

IE

Household

Public debtors

Twin savers

74

63

145

75

125

91

NL

MT
Government

87

60

69

DE

62

127

108

53

176

150

20

52

202

53

62

113

6

48

93

BE

CY

EE

FI

LU

Private sector

LU
FI
EE

CY
BE
NL
MT
DE

IE
PT
ES
FR
AT
SI
IT
SK

10

15

Deleveraging

300

350

400

-15

-10

-5

0
2010-2011 (pp change)

5

50

100

150
2007-2010 (pp change)

200

250

Source: Commission Services 

Note: The government debt data in the graph consist of securities other than shares (F3) and loans (F4) and are 
reported on a non-consolidated basis for consistency with the data for private sectors and so differ with the data 
reported  in  the  context  of  the  EU  fiscal  surveillance.  Upper  panel:  levels  in  2011  (%  of  GDP);  bottom  panel: 
change over 2007-2010 and 2010-2011, percentage points of GDP. 2011 data is calculated on the basis of the 
first three quarters and is not available for Ireland and Luxembourg. 

•  The likely impact of public consolidation on the economy and on the external balance 
will  depend  on  its  interplay  with  private  deleveraging  pressures.  On  the  one  hand, 
countries  with  a  modest  level  of  private  indebtedness  (Graph  14,  upper  panel)  have 
room for increases in domestic consumption and investment, compensating the public 
consolidation  effect,  as  is  the  case  for  Germany,  which  went  through  a  prolonged 
deleveraging phase in the decade before the crisis. This is particularly important when 
current  account  surpluses  are  driven  by  anaemic  private  demand  and  when  sluggish 
domestic  consumption  and  investment  reflect  weaknesses  in  the  functioning  of 
specific  sectors  in  the  economy  such  as  services  markets.  In  these  circumstances, 
current  accounts  surpluses  can  be  the  counterpart  of  lower-than-necessary  living 
standards of the domestic population. Structural reforms that address these weaknesses 
will  be  instrumental  in  releasing  the  constrained  domestic  demand  and  make  the 
economies more competitive. On the other hand, countries with a debt overhang in the 
private sector, like the Netherlands, are likely to witness complementary deleveraging 

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18 

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forces  to  those  of  the  public  sector,  reinforcing  their  effects  on  growth  and  their 
upward bias on the external position. 

•  Finally,  "public  savers"  with  net  government  assets  might  feel  lesser  deleveraging 
pressures,  as  the  general  government  provides  a  buffer  for  potential  balance  sheet 
repair in the private sector. 

Graph  15.  Net  lending/borrowing  and  the 
international investment position (IIP) 

There  are  additional  issues  related  to 
surplus  countries  that  require  further 
investigation.  For  instance,  it  is  interesting 
to  note  that  in  some  surplus  countries  the 
international  investment  position  has  not 
improved 
in  spite  of  substantial  and 
sustained  current  account  surpluses.  This 
may  partially  be  due  to  valuation  effects 
linked  to  exchange  rate  movements,  and 
differences in the composition and valuation 
of foreign assets and liabilities, but can also 
indicate  that  the  capital  exports  have  been 
channeled  to  unprofitable  investments  and 
raise  questions  about  the  efficiency  of  the 
financial  sector  in  channelling  resources  to 
most productive uses4. For instance, the cummulated current account surpluses since 2000 in 
Germany,  the  Netherlands  or  Austria  are  significantly  above  the  change  in  the  net 
international investment  position  over  the same period, although it is necessary to point out 
that the period was characterised by a global mispricing of risk. (Graph 15). 

Source: Commission services 

As  the  above  analysis  shows,  the  nature,  strength  and  direction  of  interlinkages  between 
deficits and surpluses in the euro area require thorough investigation to shed light on the way 
surplus  countries  could  contribute  to  the  overall  rebalancing.  The  Commission  intends  to 
publish a dedicated study on this issue in the autumn of 2012. 

3.2.2. 

Structural reforms to boost growth and adjustment capacity 

Entrenched  growth  divergences,  in  particular  if  linked  to  a  high  debt  burden,  creates 
problems in the context of a monetary union. The Commission's spring economic forecast 
shows continuous growth divergence, with Member States with ongoing adjustment lagging 
behind.  However,  the  adjustment  is  likely  to  continue  beyond  the  horizon  of  the  current 
forecast,  creating  risk  of  entrenched  growth  divergence.  This  is  problematic  in  a  monetary 
union  and  in  particular  so  if  the  slow-growth  countries  are  highly  indebted  as  slow-growth 
countries experience higher real interest rates, which aggravates the debt problem further.  

The  growth  weakness  caused  by  deleveraging  only  adds  to  long-standing  problems  of 
low  potential  growth  in  the  euro  area.  The  euro  area's  growth  potential  was  already 
relatively  weak  before  the  crisis,  with  the  crisis  putting  an  additional,  significant,  strain  on 
trends.  Over  the  medium  term,  potential  growth  rates  of  0.8%  are  expected,  compared  with 
rates  of  around  2¼ %  at  the  beginning  of  2000s.  This  downward  revision  represents  a 
significant deterioration in euro area’s economic performance over a relatively short period of 
time. The main contributor to this downward revision has been a strong downward pressure 

4 Although there is no indication that the financial systems of countries with persistent current account surpluses 
are structurally worse in allocating capital than the financial systems of countries with persistent current account 
deficits.  

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on  total  factor  productivity  growth,  which  can  be  to  a  large  extent  explained  by  declining 
growth rates of human and knowledge capital. 

Therefore,  the  euro  area  as  a  whole  faces  a  double  challenge  of  rebalancing  and 
strengthening growth in the medium and long term. Growth need to be revived already in 
the  medium  term  as  without  growth  deleveraging  and  rebalancing  would  be  much  more 
difficult  to  achieve.  At  the  same  time,  it  is  necessary  to  carefully  manage  the  process  of 
deleveraging  in  various  sectors  in  order  to  control  its  negative  impact  on  growth  and  avoid 
negative  feedbacks.  While  the  challenges  and  hence  the  urgency  of  action  is  greater  in  the 
deficit countries, it is necessary to bear in mind the risks for the whole euro area, which stem 
from continuing growth divergence and persisting imbalances.  

Structural  reforms  that  increase  contestability  and  flexibility  of  markets  can  enhance 
growth  and  facilitate  adjustment.  In  some  countries  private  savings  have  built  up  and 
investment has been held back by high regulatory barriers in some sectors. There is therefore 
potential to unlock saving overhang and induce investment and hence growth by liberalisation 
policies  that  aim  at  facilitating  entry  and  exit  to  and  from  closed  sectors.  More  contestable 
markets  improve  adjustment  capacity  i.e.  facilitate  reallocation  of  production  factors  across 
sectors – in particular from non-tradable to tradable sectors – and improve price and non-price 
competitiveness.  To  that  end,  while  respecting  the  need  for  fiscal  consolidation,  productive 
public expenditure need to be prioritised. The reforms of the wage setting mechanism could 
improve the adjustment of wages to better reflect productivity developments and enhance the 
scope  for  real  wage  adjustment.  Changes  in  the  employment  protection  legislation  could 
contribute  to  a  faster  reallocation  of  resources  across  sectors,  thereby  sustaining  the 
adjustment in countries with large current account deficits. Lower tax burden on labour and 

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Euro Plus Pact – assessment of the implementation of the commitments 

In early 2011, euro area Member States, as well as Bulgaria, Denmark, Latvia, Lithuania, Poland 
and  Romania  agreed  on  the  Euro  Plus  Pact.  In  the  context  of  the  Pact,  Member  States  have 
committed  to  reforms  in  the  four  areas:  fostering  competitiveness,  fostering  employment, 
enhancing  the  sustainability  of  public  finances  and  reinforcing  financial  stability.  They  have 
recognised  that  pragmatic  coordination  of  tax  policies  is  a  necessary  element  of  stronger 
economic  policy  coordination,  and  have  committed  to  engage  in  structured  discussions  on  tax 
policy issues. The reform commitments of the participating Member States are reflected in their 
Stability or Convergence Programmes and National Reform Programmes. 

In  2011,  Member  States  took  up  many  commitments  in  the  policy  areas  identified  in  the  Pact. 
However, the implementation of the commitments varied considerably across the Member States 
and  policy  areas.  Only  a  few  Member  States  met  all  their  commitments.  In  many  cases  the 
government  had  made  the  relevant  legislative  proposals,  while  the  adoption  of  legislation  was 
delayed, e.g. due to discussion in the national Parliament of with social partners.  

Most  progress  was  made  on  reforms  to  foster  competitiveness  and  in  particular  to  improve 
business  environment.  Member  States  simplified  the  administrative  requirements  for  businesses 
and introduced new services. Most Member States met their commitments to promote education 
and  innovation,  e.g.  to  ensure  additional  funding  for  universities  and  research  institutes.  Less 
progress  was  made  to  enhance  competition  in  services  and  to  revise  wage  setting  mechanisms, 
either in the private or public sector.  

Member States also introduced reforms to increase labour participation and to lower labour taxes. 
Fewer measures were taken to improve life-long learning and reduce undeclared work.  

Member States delivered on their commitments to strengthen the sustainability of public finances 
and put forward legislative proposals on pension systems and national fiscal rules. In many cases, 
however,  the  adoption  of  new  legislation  has  been  delayed  and  thee  implementation  postponed. 
Member  States  that  had  targeted  certain  deficit  or  debt  levels  generally  managed  to  meet  their 
commitments.  

Financial  sector  reforms  were  somewhat  mixed,  with  only  a  few  Member  States  increasing  the 
efficiency  of  the  regulation  and  supervision  of  the  financial  sector.  Member  States  also 
safeguarded financial stability by taking measures to diversify the structure of the economy. 

March  2012  European  Council  invited  Member  States  to  include  in  their  National  Reform 
Programmes and Stability or Convergence Programmes further commitments, focused on a small 
number of essential, timely and measurable reforms to achieve the objectives of the Pact. Several 
Member States answered to this invitation and presented new commitments.  

The  new  commitments  are  relevant  for  achieving  the  objectives  of  the  Pact.  Most  of  them  are 
timely  and  measurable,  with  clear  objectives  to  be  implemented  within  the  next  12  months.  In 
many  cases,  Member  States  have  also  indicated  expected  costs  and  benefits  of  their  measures. 
However, the measures often refer to already ongoing projects.  

As  indicated  in  the  Pact,  the  Commission  will  continue  monitoring  the  implementation  of  the 
commitments  in  the  framework  of  the  European  semester.  The  Commission  will  report  on  the 
progress in its Staff Working Documents on country assessment next spring.   

effective  active  labour  market  policies  and  employment  policies  can  boost  job  creation,  in 
particular in light of the risks of building up of long-term unemployment. 

In the current context of low growth, fiscal challenges and social tensions there is a need 
to  sustain  the  reform  momentum.  While  pursuing  growth-friendly  consolidation  and 
prioritising items such as investments in skills, reforms that (i) show positive growth impact 
already in the short- to medium term and which (ii) do not involve large fiscal costs should be 

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given priority. Most regulatory reforms fulfil these criteria: opening up over-regulated sectors 
does  not  involve  fiscal  costs.  The  same  holds  for  reforms  to  improve  business  environment 
and for most reforms in the labour market, such as reforms to wage bargaining or employment 
protection systems as well as providing better incentives to work. The effects on productivity 
resulting  from  such  reforms  can  be  enhanced  by  accompanying  active  labour  market  and 
skills  policies.  In  a  similar  vein,  pension  reforms  have  a  double  positive  effect  on  public 
finances  and  on  growth  as  they  reduce  implicit  public  liabilities  and  enhance  sustainability 
while increasing labour supply, even though the effects are visible only beyond the short term. 
Additionally,  in  the  context  of  the  specific  challenges  they  face,  euro  area  Member  States 
should be vanguards in implementation of some EU-wide tools, such as the Single Market and 
the  Services  Directive.  While  bearing  limited  fiscal  costs,  political  costs  of  these  reforms 
should  not  be  underestimated.  This  is  an  argument  for  an  appropriate  distribution  of  the 
reform  burden  across  the  population,  including  addressing  the  poverty  implications,  rather 
than  abandoning  the  reforms,  bearing  in  mind  that  the  crisis  has  disproportionately  affected 
those who had already been in a vulnerable situation.  

Graph  16.  Change  in  responsiveness  to 
OECD's 
Growth 
recommendations 

Going 

for 

OECD's euro area countries  

of 

coordination 

Common  monetary  policy  and  strong 
cross-border  spillovers  give  a  case  for 
stronger 
structural 
reforms 
in  the  euro  area.  Structural 
reforms  are  crucial  in  a  monetary  union, 
where  due  to  the  lack  of  monetary  policy 
tool at the national level and the fixed intra-
area  exchange  rates  most  of  the  adjustment 
has to take place via markets.  Moreover, in 
face  of  strong  spillover  effects  in  the  euro 
area,  strong  coordination  –  e.g.  in  the  form 
of  ex  ante  discussion  of  major  policy  plans, 
which could have large spill-over effects – is 
necessary  to  properly  account  for  increased 
reform externalities. 

Source: OECD 

Over  the  last  12  months,  progress  with 
structural  reforms  in  the  euro  area  has 
been  correlated  with  the  intensity  of  market  pressure  (Graph  16).  Programme  countries 
and some vulnerable countries introduced ambitious reforms, in particular in labour markets, 
financial  markets,  professional  service  sectors,  network  industries  and  their  overall 
frameworks for competition. However, in other countries the pace of reform was sluggish. In 
a  number  of  countries  (BE,  CY,  ES,  IT,  EL,  IE,  LU),  recently  enacted  or  adopted  labour 
market reforms, including in wage setting  mechanisms, represent important steps toward an 
enhanced  and  more  balanced  labour  market  adjustment  to  shocks.  The  major  on-going  or 
planned  reform  processes  will  have  to  be  translated  into  legislation,  implemented 
successfully, and followed up with additional measures if necessary. However, as a result of 
tax  changes,  the  tax  burden  on  labour  has  recently  increased  in  several  euro  area  Member 
States (AT, ES, FR). A few euro area Member States have increased R&D (IT) or education 
expenditure  (DE),  while  it  has  not  been  a  common  trend.  Only  few  Member  States  enacted 
reforms  to  increase  competition  in  the  retail  sector  (IT,  IE)  or  to  remove  unjustified 
restrictions on professional services (IT, IE, PT, EL), while in other Member States, for which 
recommendations in these areas were issued last year, reforms stalled or lacked ambition. 

Implementation of the single market and the services directive has been relatively good, 
if  uneven.  Importantly,  progress  has  been  made  in  the  implementation  of  the  Services 

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Directive. In general, euro area Member States with high levels of barriers to a single market 
for services before the Directive was adopted have cut their barriers significantly. Some (ES, 
SK)  seem  to  have  made  particularly  good  progress,  but  others  (AT,  MT)  have  clearly  been 
less diligent. 

4. 

STRENGTHENING POLICY COORDINATION IN THE EURO AREA 

4.1. 

The crisis highlighted weaknesses in euro area governance 

Economic flexibility has long been recognised as a crucial adjustment channel in EMU. 
The  original  architecture  of  EMU  combined  a  single,  supranational  monetary  policy  with 
national  economic  policies  coordinated  at  the  EU  level.  Historically,  there  was  no  close 
precedent  for  this  construction  by  which  to  judge  its  design  merits.  Academic  literature  on 
optimum  currency  areas  suggested  that  the  extent  to  which  the  region  was  prone  to 
asymmetric  macroeconomic  shocks  and  the  extent  to  which  it  could  absorb  these  through 
economic  flexibility  would  be  two  critical  factors  in  determining  its  durability.  Economic 
flexibility  of  individual  Member  States  has  generally  remained  low  since  the  launch  of  the 
euro,  while  the  crisis  has  shown  that  a  monetary  union  can  at  times  place  even  stronger 
demands on adjustment capacity than originally thought.  

Markets  failed  to  induce  sufficient  discipline  during  the  first  ten  years  of  EMU.  At  a 
global level, nominal interest rates fell and country-specific risk premia virtually evaporated, 
encouraging  greater  risk  taking.  In  the  euro  area,  this  trend  was  amplified  first  by  the 
elimination  of  currency  risk  among  the  Member  States.  Secondly,  the  ECB  fixes  policy 
interest  rates  which  in  nominal  terms  are  the  same  for  the  whole  euro  area,  while  inflation 
differences  between  Members  remained  considerable.  This  entailed  large  differences  in  real 
interest  rates,  which  in  turn  fuelled  capital  inflows  driving  asset  price  bubbles  and 
exaggerating the strength of macroeconomic performance.  

Weaknesses in macroeconomic surveillance and enforcement at both the Member State 
and  the  EU  level  meant  that  the  misallocation  of  resources  and  consequent  macro-
financial  imbalances  were  not  detected  early  enough  and  adequately  addressed  by 
policymakers. Apparent strong macroeconomic performance across the euro area prior to the 
crisis  hid  the  underlying  structural  problems  in  public  finances  and  macro-economic 
fundamentals.5 The SGP was met with lax implementation at the Council level. Furthermore, 
the analysis, design and conduct of economic policy remained compartmentalised and did not 
adequately take into account the interaction between fiscal issues and wider macro-economic 
imbalances  (asset  price  bubbles,  competitiveness  and  external  borrowing  developments). 
Surveillance  did  not  sufficiently  cover  non  -fiscal  issues,  which  allowed  macroeconomic 
imbalances to develop unchecked.  

The  dynamics  of  switching  from  a  'good'  equilibrium  to  a  'bad'  one  during  the  crisis 
gained  further  strength  due  to  the  cross-country  spillovers.  Investors  appeared  to  infer 
from  sovereign  funding  difficulties  in  one  economy  that  countries  economically  and 
financially  connected  to  it  would  eventually  receive  an  equivalent  tightening  of  sovereign 
bond market access. In the early stages of the crisis, these cross-border contagion effects were 
magnified  by  the  lack  of  appropriate  financial  backstops.  Not  all  of  the  observed  negative 
spillovers were purely speculative or confidence-based, however. Strong trade linkages in the 
euro  area  spread  the  negative  growth  impact  of  falling  aggregate  demand  in  one  country  to 

5  Even  reforms  of  the  Stability  and  Growth  Pact  in  2005,  which  were  designed  to  take  better  into  account 
cyclical  conditions,  suffered  from  conceptual  difficulties  in  adequately  distinguishing  trend  growth  from  the 
cycle. 

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trading  partners  via  lower  imports.  Moreover,  deeper  financial  integration  in  the  euro  area 
since  the  start  of  EMU  meant  a  greater  exposure  of  Member  States  to  each  other,  implying 
that  a  deterioration  in  one  Member  State  also  pushed  up  risks  for  partner  economies  in  the 
euro area.  

4.2. 

The reform of economic governance in the euro area 

Since  the  crisis  erupted,  the  EU  and  the  euro  area  have  engaged  in  a  comprehensive 
strengthening of its economic governance. The reforms introduced and those in the pipeline 
address the identified weaknesses in economic policy surveillance through the integration of 
surveillance  across policy  areas; a better timing of policy guidance to achieve an impact on 
national  policy  formulation;  stronger  incentives,  and  a  widening  of  surveillance  to  cover 
macro-economic imbalances. Enforcement mechanisms have been introduced specifically for 
the euro area.  

The European Semester integrates the surveillance of the economic policies covered by 
the  Europe  2020  strategy,  as  well  as  the  preventive  parts  of  the  Stability  and  Growth 
Pact  and  the  Macroeconomic  Imbalances  Procedure,  and  provides  policy  guidance  to 
Member States before they finalise  their budgets and economic reform plans.  The new 
approach  of  integrated  surveillance  embodied  in  the  European  Semester  ensures  a  more 
holistic  assessment  across  macro-economic,  structural  and  employment  policies.  It  has  led 
inter alia to a more systematic assessment of the risks to the fiscal policy path arising from the 
build-up of macro-economic imbalances, such as housing bubbles or excessive credit growth. 
It  also  provides  a  framework  for  reinforced  coordination  and  multilateral  surveillance  of 
employment and social policies. 

The  surveillance  and  coordination  of  fiscal  policies  have  been  radically  strengthened. 
The "six-pack" of legislation on economic governance has reinforced both the preventive and 
the  corrective  arm  of  the  SGP.  It  defines  quantitatively  the  meaning  of  a  "significant 
deviation"  from  the  MTO  or  the  adjustment  path  towards  it  and  operationalises  the  debt 
criterion  of  the  Excessive  Deficit  Procedure  through  a  numerical  benchmark.  A  central 
innovation  is  the  use  of  reverse-qualified-majority  voting  in  Council  decisions  on  most 
sanctions. Finally, the six pack also sets minimum requirements for all main aspects of fiscal 
frameworks at national level. 

Further strengthening of fiscal surveillance is in the pipeline. The proposed Regulation on 
common  provisions  for  monitoring  and  assessing  draft  budgetary  plans  and  ensuring  the 
correction  of  excessive  deficit  of  the  Member  States  in  the  euro  area  complements  the  six-
pack.  It  aims  at  better  synchronising  key  steps  in  preparation  of  national  budgets  and  at 
ensuring  minim  quality  standards  in  national  budgetary  processes.  The  proposal  also 
strengthens  further  ex-ante  fiscal  surveillance  and  ensures  an  appropriate  integration  of  EU 
policy  recommendations  in  the  national  budgetary  preparations.  The  Treaty  on  Stability, 
Coordination and Governance in the Economic and Monetary Union (TSCG), signed by the 
euro area Member States together with eight other Member States, contains commitments to 
further strengthen fiscal and economic surveillance. In particular, in TSCG contracting parties 
committed  to  lay  down  in  national  legislation  rules  of  balanced  budgets  in  structural  terms, 
complemented by an automatic correction mechanism in case of a significant deviation. 

The  Macroeconomic  Imbalances  Procedure  has  introduced  systematic  economic 
surveillance in all areas that could potentially lead to harmful imbalances. It will reduce 
the risk of a build-up of macro-economic imbalances by systematic monitoring and preventive 
the  enforcement  of  policy 
recommendations.  Where 
recommendations is strengthened by the possibility of sanctions in case of non-compliance. In 

risks  are  observed, 

larger 

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24 

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its first Alert Mechanism Report6, the Commission identified seven euro area Member States 
(along  with  five  non-euro  area  Member  States)  which  may  be  affected  by  harmful 
macroeconomic imbalances, such as deteriorating positions of competitiveness, a high level of 
indebtedness or corrections of asset price bubbles. These Member States have been subject to 
in-depth reviews (IDR)7, which investigated the nature of the imbalances in greater detail. 

The 
in-depth  reviews  confirmed  that  seven  euro  area  Member  States  face 
macroeconomic  imbalances  which  call  for  policy  action.  The  analysis  identified 
macroeconomic imbalances in seven euro area countries, which are, however, not excessive in 
nature. The IDRs confirmed that adjustment is proceeding, which is evident from reductions 
in current account deficits, retrenchment in credit flows, or corrections in housing prices. The 
accumulated stocks of imbalances, nevertheless, pose a formidable challenge for many euro 
area Member States. The levels of external, private and public indebtedness imply a pressing 
need  for  deleveraging  which  is  likely  to  have  an  adverse  impact  on  growth  in  the  years  to 
come. The results underline the broad variety of situations in which these euro area Member 
States find themselves and the need for a country-specific approach. 

The  new  EU  financial  supervisory  framework  has  already  been  instrumental  in 
addressing  the  fragmented  landscape  of  national  supervision.  A  new  supervisory 
architecture  in  the  EU  became  operational  in  January  2011.  Its  central  innovation  is  the 
establishment  of  the  European  Systemic  Risk  Board  to  provide  a  comprehensive  European 
view  on  macro-prudential  risk  analysis.  It  enhances  the  effectiveness  of  early  warning 
mechanisms  by  improving  the  interaction  between  micro-and  macro-prudential  analysis  and 
by  allowing  for  risk  assessments  to  be  translated  into  action  by  the  relevant  authorities.  By 
creating three European Supervisory Authorities8, the reform has also brought about better co-
ordination  between  national  supervisors,  including  binding  decisions  requiring  them  to  take 
action  where  necessary  and  a  clearer  focus  on  working  towards  a  common  rulebook  by 
developing  technical  standards  in  the  areas  defined  in  legislation.  The  new  setup  also  helps 
ensure more complete exchange of information and views at an earlier stage.  

The  establishment  of  robust  euro-area  financial  stability  mechanisms  has  also  implied 
an  important  step  forward  in  euro-area  governance.  The  creation  of  the  European 
Financial  Stability  Facility  (EFSF)  and  the  European  Financial  Stabilisation  Mechanism 
(EFSM)  in  May  2010  closed  this  important  gap  in  the  institutional  setup  of  the  euro  area. 
However,  both  these  elements  of  the  European  safety  net  are  temporary  in  nature  and  a 
permanent European Stability Mechanism (ESM) will be established on 1 July 2012. At the 
end of March 2012, the combined ceiling of ESM and EFSF lending capacity was raised to 
EUR 700 bn, which together with the funds provided by EFSM and the Greek Loan Facility, 
implies an overall lending capacity of EUR 800 bn. 

Effective  decision  making  arrangements  are  crucial  for  an  efficient  implementation  of 
the strengthened surveillance framework for the euro area. The Eurogroup and the Euro 
Summit  have  special  responsibility  in  this  regard.  The  euro  area  summit  in  October  2011 
already took some first decisions to enhance the decision-making structure in the Eurogroup: 
some of these have already been implemented, including the organisation of regular euro area 
summits  under  a  permanent  President,  and  the  creation  of  Permanent  chairmanship  for  the 
Eurogroup Working Group.  

6 COM(2012) 68 final of 14.2.2012 
7 SEC(2012) 150-161 
8  The  European  Banking  Authority,  the  European  Insurance  and  Occupational  Pensions  Authority  and  the 
European Securities Markets Authority  

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25 

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In the future, additional reforms to economic governance may be considered to complete 
the institutional structure of EMU. The changes made so far have in some cases touched on 
issues  traditionally  tied  to  national  sovereignty.  In  some  instances,  they  appear  to  have 
exhausted  the  scope  of  action  possible  under  the  Treaty  on  the  Functioning  of  the  EU. 
Nevertheless, the question remains as to whether stronger coordination of economic policies 
will  be  sufficient  or  whether  there  needs  to  be  progress  towards  closer  integration  of 
economic  policy  making.  The  crisis  experience  has  underlined  the  importance  of  this  issue. 
Over  the  medium  term,  the  momentum  for  further  integration  in  the  monetary  union  may 
increase,  particularly  if  the  success  of  the  governance  changes  made  recently  enhances 
confidence and mutual trust among euro area partners. 

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Growth and jobs

Competitiveness

Public Finances

Financial Stability

GDP per 
capita in 
PPS

GDP 
growth 
projec-
tion

Employ-
ment rate

Long-term 
unemplo-
yment* 

Youth 
unemp-
loyment 
(<25)* 

Labour-
force 
partici-
pation 
rate* 

Nominal Unit Labour Costs* 

Nominal 
Compensation per 
employee* 

Whole 
economy

Services

Manufac-
turing

Public 
sector

Private 
Sector

Current 
Account 
Balance* 

Market 
share of 
exports 
(goods + 
services)*  

 General 
Government 
Debt* 

General 
Government 
budget 
position* 

Overall 
tax 
burden

Sustainabil
ity 
Indicator 
(S2)* 

Average 
exit age 
from the 
labour 
force* 

Life 
expectancy* 

Private debt*

Non 
performing 
loans

LT interest 
rate 
spreads vis-
à-vis 
Germany

Return 
on equity

Annual rate 
of change

Age group 
15-64

% of active 
population

% of active 
population

%

Annual rate 
of change

Annual rate 
of change

Annual rate 
of change

Annual rate 
of change

Annual rate 
of change

% of GDP 

 % change 

% of GDP

%  of GDP

Total taxes 
as % of 
GDP

High level 
means weak 
sustain-
ability

2009 or 
latest 
available

At 60 years

% of GDP

%

Level 
ompared to 
EU27=100

2010
119
118
64
128
90
100
108
101
99
271
83
133
126
80
85
74
115

BE
DE
EE
IE
EL
ES
FR
IT
CY
LU
MT
NL
AT
PT
SI
SK
FI

2012
0.0
0.7
1.6
0.5
-4.7
-1.8
0.5
-1.4
-0.8
1.1
1.2
-0.9
0.8
-3.3
-1.4
1.8
0.8

2011
61.9
72.5
65.1
59.2
55.6
57.7
63.8
56.9
68.1
64.6
57.6
74.9
72.1
64.2
64.4
59.5
69.0

2011
3.5
2.8
7.1
8.6
8.8
9.0
4.0
4.4
1.6
1.4
3.0
1.5
1.1
6.2
3.6
9.2
1.7

2011
18.7
8.6
22.3
29.4
44.4
46.4
22.9
29.1
22.4
15.6
13.7
7.6
8.3
30.1
15.7
33.2
20.1

2011
66.7
77.2
74.7
69.4
67.7
73.7
70.4
62.2
74.0
67.9
61.6
78.4
75.3
74.1
70.3
68.9
74.9

2011
2.7
1.4
0.8
-4.1
-3.0
-1.9
1.8
1.0
2.0
3.2
0.8
0.7
1.3
-0.8
0.4
-0.6
1.0

2011
3.0
2.0
5.0
:
-0.9
-0.1
:
1.3
0.8
4.7
:
1.5
3.4
:
0.4
4.5
1.1

2011
-1.4
-2.1
-8.9
:
-5.1
-3.6
:
2.8
0.7
-3.4
:
-2.5
-4.5
:
-0.8
-7.6
0.7

EA 

EU

108
100

:
:
* Variables mentioned in the text on the Euro Plus Pact in the European Council conclusions of March 2011
Sources: Commission services, Eurostat, ECB

20.8
21.4

64.2
64.3

71.5
71.2

-0.3
0.0

4.6
4.1

0.8
0.9

:
:

Percentage 
points

%

March 2012 June 2011

1.7
:
:
5.1
17.2
3.3
1.1
3.2
5.2
0.2
2.5
0.4
1.0
11.2
3.3
3.1
0.5

2.2
2.0

6.9
9.1
25.8
-2.5
-43.5
8.1
9.0
4.3
-3.8
9.3
5.8
7.3
7.8
4.6
1.7
15.1
8.2

:
:

2011
3.5
3.2
3.9
:
-4.6
-0.7
:
0.2
1.2
1.8
0.2
0.8
3.7
:
0.0
-0.9
0.5

:
:

2011
3.2
2.8
0.0
:
-4.3
1.5
:
2.2
1.4
1.8
0.2
1.9
3.0
:
2.0
2.9
4.0

:
:

2011
2.1
5.3
5.1
-3.9
-9.9
-3.4
-2.7
-3.1
-10.7
7.1
-1.4
7.2
1.8
-5.0
-1.4
2.1
-0.3

0.2
0.1

2011
5.0
5.2
7.4
4.6
4.9
4.2
4.9
5.4
7.4
4.2
4.4
5.2
5.9
3.9
5.5
6.2
7.7

5.1
5.2

2011
98.0
81.2
6.0
108.2
165.3
68.5
85.8
120.1
71.6
18.2
72.0
65.2
72.2
107.8
47.6
43.3
48.6

88.0
83.0

2011
-3.7
-1.0
1.0
-13.1
-9.1
-8.5
-5.2
-3.9
-6.3
-0.6
-2.7
-4.7
-2.6
-4.2
-6.4
-4.8
-0.5

-4.1
-4.5

2011
45.7
40.0
33.2
30.0
33.7
32.6
45.5
42.3
36.2
37.9
35.3
38.8
43.6
36.1
38.1
29.0
42.8

40.5
39.9

2011
7.5
1.8
2.1
6.7
2.1
4.3
2.2
-2.8
5.5
9.8
6.1
7.9
3.7
-1.2
7.5
8.6
4.9

2.4
2.9

61.6
62.2
62.6
64.1
61.5
62.3
60.0
60.1
62.8
59.4
60.3
63.5
60.9
62.6
59.8
58.8
61.7

61.2
61.4

2010
23.6
23.5
20.9
23.9
23.6
25.0
25.4
24.6
23.8
23.8
24.1
23.6
23.8
23.1
23.1
19.9
23.7

24.0
23.2

2011
242
129
142
287
125
216
160
126
:
:
214
:
161
249
131
76
174

:
:

June 2011
4.1
2.5
8.9
11.6
8.8
4.6
4.4
8.8
7.6
0.4
1.6
2.2
4.0
3.1
12.1
3.9
0.9

:
:

27