COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances
Date: 2013-04-10
Institutions: European Commission
Subjects: EU Member State, competitiveness, economic growth, economic recession, economic reform, macroeconomics, public debt

EUROPEAN 
COMMISSION 

Brussels, 10.4.2013  
COM(2013) 199 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP 

Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and 
correction of macroeconomic imbalances 

{SWD(2013) 113 final} 
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COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP 

Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and 
correction of macroeconomic imbalances 

1. 

INTRODUCTION 

The  on-going  economic  and  financial  crisis  has  prompted  a  profound  restructuring  of  our 
economies. This needs to be accompanied by a new kind of economic governance in the EU 
that recognises the interdependence between our economies and which builds the foundations 
for future growth and competitiveness that will be smart, sustainable and inclusive.  

Correcting  the  problems  of  the  past  and  putting  the  EU  on  a  more  sustainable  development 
path for the future is a shared responsibility of the Member States and the EU Institutions, as 
our economies are closely intertwined. 

In the decade leading up to the outbreak of the crisis, not enough attention was paid at the EU 
level to developments in the economies of individual Member States. This was due in part to 
an  insufficient  recognition  of  the  spillover  effects  of  economic  policies  pursued  in  one 
Member  State  on  the  economies  of  other  Member  States  –  spillover  effects  that  were 
particularly  acute  in  the  euro  area,  due  to  the  close  economic  interdependence  of  countries 
sharing a currency. But it was also in part due to the lack of tools at the disposal of the EU to 
help  detect,  prevent  and  where  necessary  correct  such  imbalances.  As  a  result,  imbalances 
were  allowed  to  develop  unchecked,  with  negative  consequences  both  for  the  economies  of 
several Member States and for the proper functioning of the Economic and Monetary Union.  

Drawing on the lessons of the past and determined to avoid repeating similar situations in the 
future,  the  EU  has  put  in  place  a  new  system  of  economic  governance.  As  part  of  this  new 
way  of  working,  on  a  proposal  of  the  Commission,  the  legislator  set  up  a  Macroeconomic 
Imbalances Procedure (MIP) to help detect, prevent and correct problems at an earlier stage 
(Regulation  (EU)  No  1176/2011,  hereafter  ‘the  Regulation’).  The  MIP  –  together  with  the 
reinforced Stability and Growth Pact, with its focus on sustainable public finances – is at the 
heart of the EU’s strengthened economic governance.  

While decisive policy action by Member States and at EU-level is helping to rebalance the EU 
economy  and  indicators  suggest  that  previous  competitiveness  losses  are  gradually  being 
reversed, the imbalances that built up over several years in some EU economies continue to 
pose daunting challenges.  In particular, the need to bring unsustainable levels of public and 
private  debt  under  control  and  to  get  a  better  balance  between  income  and  expenditure  is 
temporarily  dampening  economic  activity  and  employment.  In  some  cases  this  situation  is 
exacerbated  by  the  persistence  of  deep-rooted  structural  rigidities  in  some  countries' 
economies, which limit the adjustment capacity and has aggravated the unbearably high levels 
of  unemployment.  These  factors  are  recognised  in  the  Commission's  2013  Winter  Forecasts 
which indicate that the return to sustained growth will be gradual.  

While the situation varies from one Member State to another, continued reform is needed in 
all  of  them.  Structural  reforms  take  time  to  support  growth  and  job  creation,  which  in  turn 

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would  reduce  pressures  on  public  finances.  That  is  why  a  credible  medium-term  fiscal 
strategy and a comprehensive set of structural reforms complement each other. The new EU 
economic governance tools are designed to help governments to pick up underlying problems 
and to address them without delay, pursuing appropriate and country specific policies within a 
wider  European  framework.  The  EU  institutions  and  Member  States  are  working  closely 
together,  recognising  the  interdependence  of  the  Euro  area  and  of  the  wider  EU  which 
necessitates deeper, shared decision-making.  

This is the comprehensive approach that underpinned the Commission's 2013 Annual Growth 
Survey1  at  the  start  of  this  third  cycle  of  the  European  Semester  of  economic  policy 
coordination.  As  part  of  this  process  in  its  Alert  Mechanism  Report2,  the  Commission 
screened  all  Member  States3  for  possible  macroeconomic  imbalances  on  the  basis  of  a 
scoreboard of indicators as part of the Macroeconomic Imbalances Procedure. The scoreboard 
has been established by the Commission after consultation with the European Parliament and 
the  Council,  as  well  as  the  European  Systemic  Risk  Board.  These  indicators  support  the 
economic analysis of the situation of each Member State with regard to internal imbalances 
(such as private and public debt levels, house prices, unemployment) and external imbalances 
(such  as  the  current  account,  international  assets  and  liabilities  and  competitiveness 
indicators). As a result, fourteen Member States were selected for further in-depth reviews. 

The  origin,  nature  and  gravity  of  the  imbalances  identified  by  this  process  differ  across 
Member States and require a country-specific approach. The need for policy action to support 
significant  adjustment  is  particularly  pressing  in  those  Member  States  that  have  been 
experiencing  persistent  and  large  current-account  deficits  and  competitiveness  losses.  In  a 
comprehensive study published in December 2012, the Commission also looked at the reasons 
for large and persisting current account surpluses4. While current account surpluses should be 
a  sign  of  healthy  competitiveness,  they  can  also  reflect  market  failures  or  a  weakness  of 
domestic demand and investment opportunities. The macro-economic imbalances observed in 
the EU resulted in a misallocation of resources in surplus countries with negative implications 
for growth. 

the 

the  analysis  presented 

in-depth  reviews  (IDR)  accompanying 

Based  on 
this 
Communication,  the  Commission  has  identified  imbalances  in  all  countries  selected  in  the 
Alert  Mechanism  Report:  Belgium,  Bulgaria,  Denmark,  Spain,  France,  Italy,  Hungary, 
Malta, the Netherlands, Slovenia, Finland, Sweden and the United Kingdom)5. Section 2 
summarises the broad conclusions that can be drawn from this analysis. Section 3 presents the 
main findings country by country6. Section 4 draws some brief conclusions and outlines the 
next steps in this process of EU economic governance. 

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4 

5 

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COM(2012) 750, 28.11.2012. 
COM(2012) 751, 28.11.2012. 
With the exception of the programme countries. 
European  Commission,  Directorate-General  for  Economic  and  Financial  Affairs:  "Current  Account 
Surpluses in the EU", European Economy 9/2012. 
No IDR is published for Cyprus, given the political agreement reached between the Eurogroup and the 
Cypriot  authorities  on  the  key  elements  of  a  macroeconomic  adjustment  programme  and  official 
financing.  Programme  countries  are  not  covered  by  the  MIP,  as  they  are  under  enhanced  economic 
surveillance in the scope of the economic adjustment programme linked to the financial assistance they 
receive.  This  principle  has  now  been  confirmed  with  the  approval  of  the  so-called  "two-pack",  that 
consists  of  two  regulations  to  further  strengthen  the  economic  pillar  of  the  Economic  and  Monetary 
Union. The implementation of MIP has also been suspended for Greece, Ireland, Portugal and Romania. 
This Communication fulfils the requirement of Articles 6(1) and 7(1) of Regulation (EU) No 1176/2011 
(the  MIP  Regulation),  according  to  which  the  Commission  informs  the  European  Parliament,  the 

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2. 

MAIN CROSS-COUNTRY FINDINGS FROM THE IN-DEPTH REVIEWS  

Macroeconomic adjustment is taking place though with differences in nature and pace 
across the Member States. This adjustment is documented in the IDRs, which provide data 
and  discuss  key  factors  such  as  reductions  in  current  account  deficits,  convergence  in  unit 
labour  costs,  corrections  in  excessive  housing  prices  and  reductions  in  private  sector 
indebtedness.  Given  different  challenges  and  imbalances,  cross-country  growth  differences 
are expected to persist in the coming years7. 

Weak  economic  activity  and  the  fragile  economic  outlook  in  some  cases  may  have 
aggravated  both  the  risks  and  the  cross-country  spillovers  arising  out  of  the 
macroeconomic  imbalances  which  have  been  analysed.  Moreover,  in  most  cases  the 
adjustment  process  is  not  yet  complete.  In  particular,  the  accumulated  stocks  of  external 
liabilities  (as  measured  by  the  large  and  negative  net  international  investment  positions  and 
the net external debt), private indebtedness and the housing market situation in some Member 
States  continue  to  pose  challenges.  Overcoming  these  challenges  will  determine  whether 
indebted economies can grow and compete, ensure financial stability and succeed in reducing 
unemployment. In several Member States the macroeconomic imbalances identified will 
need  to  be  closely  monitored  and  to  be  tackled  through  a  decisive  commitment  to 
structural  reform.  Many  of  the  measures  which  need  to  be  taken  to  ensure  smooth 
absorption  of  the  external  and  internal  imbalances  also  promote  medium-term  economic 
growth. As such, the EU strategy to boost medium-term growth and investment includes the 
policy responses that should be taken in the context of the MIP. 

The IDRs illustrate in particular that: 

•  The adjustment of external positions is underway, although the high level of net external 

liabilities continues to make several Member States vulnerable.  

• 

In  spite  of  improvements  in  export  performance,  which  result  from  gains  in  cost-
competitiveness,  several  Member  States  need  to  step  up  efforts  to  boost  or  regain 
competitiveness, both inside the Internal market and globally.  

•  Non-cost competitiveness factors remain crucial, for example action is needed on export 
composition  and  technological  content,  geographical  diversification  of  exports,  firms' 
structure, the imported contents of exports, the role of intermediary inputs, and investment 
in R&D and innovation. 

•  Deleveraging  is  occurring  in  the  private  sector  of  several  economies,  but  private  debt 

levels remain high and the deleveraging pressures remain strong.  

•  Housing markets are in the adjustment phase in a number of countries which experienced 
pre-crisis  housing  booms.  Further  downward  adjustments  cannot  be  excluded,  against  a 
background of a still vulnerable banking sector, tightened credit conditions and economic 
uncertainty. 

Council, the Eurogroup and the ESRB whether imbalances exists on the basis of the IDRs. The IDRs 
are published in line with Article 5(3), in parallel with this Communication. In respect of Article 7(1), it 
also informs in which cases the Commission considers the imbalances to be excessive. 
See  the  Commission  services'  winter  forecasts,  which  were  released  on  22  February  2013,  European 
Economy, 1(2013). 

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3. 

FINDINGS BY MEMBER STATE  

This section outlines the analysis in the in-depth reviews per country and, as required by the 
Regulation,  indicates  where  the  Commission  considers  imbalances  to  exist  and  where  it 
considers such imbalances to be excessive.  

BELGIUM  is  experiencing  macroeconomic  imbalances,  which  deserve  monitoring  and 
policy  action.  In  particular,  macroeconomic  developments  in  the  areas  of  external 
competitiveness  of  goods,  and  indebtedness,  especially  concerning  the  implications  of  the 
high level of public debt for the real economy, continue to deserve attention. 

More  specifically,  Belgium  has  experienced  a  long-term  decline  in  its  export  market  shares 
due  to  persistent  losses  in  both  cost  and  non-cost  competitiveness.  While  Belgian  goods 
exports  are  gradually  being  reoriented  towards  more  dynamic  regions,  the  specialization  in 
cost-sensitive  intermediate  products  is  intensifying.  The  latter  highlights  the  role  played  by 
cost factors in Belgium's export performance with labour costs outpacing the trends observed 
in  trading  partner  countries.  Over  the  last  year,  the  Government  has  announced  and  started 
actions to curb the widening wage gap. However, this correction is expected to be protracted 
at best so that the problem will last over the medium term, while several trading partners are 
pursuing  competitiveness-enhancing  reforms.  In  terms  of  non-cost  competitiveness  the 
imperfect  transmission  of  research  activities  into  the  development  of  new  products  with  a 
higher technological content is one area that needs action. The overall loss of competitiveness 
aggravates problems arising from the large public debt as it weighs on growth prospects. The 
high public debt exposes Belgium to financial turbulence, with important contingent liabilities 
for  the  financial  sector  representing  an  additional  risk.  Over  a  longer-term  horizon  fiscal 
sustainability  will  also  have  to  be  reconciled  with  the  budgetary  impact  of  an  ageing 
population. 

BULGARIA  is  experiencing  macroeconomic  imbalances,  which  deserve  monitoring  and 
policy action. In particular, the impact of deleveraging in the corporate sector as well as the 
continuous  adjustment  of  external  positions,  competitiveness  and  labour  markets  deserve 
continued attention.  

More specifically, Bulgaria rapidly built up imbalances during the boom phase that coincided 
with  its  accession  to  the  European  Union.  In  a  context  of  catching  up,  high  foreign  capital 
inflows  contributed  to  the  overheating  of  the  domestic  economy  and  a  booming  housing 
sector. With the onset of the crisis, Bulgaria embarked on a fast process of deleveraging and 
has  taken  measures  to  maintain  financial  stability.  While  Bulgaria  experienced  a  quick  and 
important adjustment of its current account, moderate deficits are expected to resume as the 
economic  recovery  will  lead  to  higher  imports.  This  will  slow  down  adjustment  in  the  net 
external indebtedness. To sustain cost competitiveness and export growth, it will be important 
to  ensure  that  unit  labour  cost  are  supported  by  productivity  gains.  Non-financial  corporate 
sector  indebtedness,  including  an  increase  in  late  payments,  suggest  that  deleveraging 
pressures  are  impeding  more  dynamic  economic  growth.  The  low-skilled  segment  of  the 
labour  market  seems  to  have  been  especially  hard-hit  by  the  crisis  and  warrants  close 
attention.  Unemployment  has  increased  sharply,  and  steps  should  be  taken  to  prevent 
unemployment  from  becoming  more  structural  in  nature.  Skills  mismatches  can  be  seen  in 
emerging labour shortages in some sectors, pointing to a need for a comprehensive package of 
active labour market, education and regional policies. On the way forward, the challenges for 

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Bulgaria include the need to increase the adjustment capacity of the labour market, to enable 
smooth corporate sector deleveraging and to avoid re-emergence of unsustainable imbalances.  

DENMARK  is  experiencing  macroeconomic  imbalances,  which  deserve  monitoring  and 
policy  action.  In  particular,  the  continuing  adjustment  in  the  housing  market  and  the  high 
level  of  indebtedness  in  the  household  and  private  sector  as  well  as  drivers  of  external 
competitiveness, deserve continued attention.  

More  specifically,  there  has  been  a  weak  export  performance  linked  to  a  rise  in  unit  labour 
costs due to high wage growth and, in particular, weak productivity growth. Furthermore, the 
weak  export  performance  is  partially  due  to  an  unfavourable  export  market  mix.  In  recent 
years  there  have  been  some  improvements  in  this  regard,  but  at  the  current  juncture  it  is 
difficult  to  assess  their  sustainability  and  durability.  Taking  into  account  that  Denmark  has 
been experiencing high and rising current account surpluses, these trends do not point to short 
term  risks.  Low  interest  rates  and  an  acceleration  of  house  prices  in  the  years  prior  to  the 
financial  crisis  contributed  to  a  surge  of  household  debt  to  unsustainable  levels.  While  a 
reversal  of  this  trend  has  been  set  in  motion  and  risks  are  also  attenuated  by  high  net  asset 
positions of households, the correction process will have to stretch over a significant period of 
time. This poses potential risks to economic and financial stability. 

SPAIN is experiencing excessive macroeconomic imbalances. Although adjustment is taking 
place, the magnitude of the necessary correction requires continuous strong policy action. In 
particular, very high domestic and external debt levels continue to pose risks for growth and 
financial stability. The decisive policy action at the EU level and by Spain has resulted in a 
visible adjustment of flows, reduction in financing costs and a reduction of immediate risks. 
However, developments over the last year, including further contraction in economic activity, 
soaring unemployment, and the need for public support for the recapitalisation of a number of 
banks,  have  exposed  the  vulnerabilities  represented  by  those  imbalances  for  growth, 
employment, public finances and financial stability.  

More  specifically,  Spain  has  been  affected  by  large  and  closely  interconnected  external  and 
internal  imbalances.  Strong  capital  inflows  during  the  boom  years  contributed  to  the 
accumulation  of  large  net  external  liabilities  and  spurred  a  large  housing  and  construction 
bubble. After this bubble burst, the exposure of the banking sector to doubtful real estate and 
construction assets endangered financial stability. These risks to the banking sector are being 
effectively  addressed 
the 
recapitalisation  and  restructuring  of  the  most  affected  banks  and  the  strengthening  of  the 
regulatory and supervisory framework8.  

the  financial  sector  assistance  programme  and 

through 

The adjustment of external imbalances is on-going but not completed yet, as Spain needs to 
move towards a persistent current account surplus to reduce its stock of net external liabilities: 
currently  part  of  the  improvement  in  the  current  account  balance  and  cost  competitiveness 
may  be  driven  by  cyclical  factors.  The  adjustment  of  private  sector  balance-sheets  is 
advancing, but will continue to pose a challenge for economic growth and the fiscal outlook 
over  the  medium  term.  The  housing  market  has  not  stabilised yet. Rigidities in product  and 
labour  markets  contribute  to  high  and  rising  unemployment,  and  more  generally  hinder  the 
adjustment  of  the  economy.  All  in  all,  vulnerabilities  to  possible  real  and  financial  shocks 

8 

See  the  Commission,  services'  reports  on  the  financial  assistance  programme  to  recapitalise  financial 
institutions in Spain, European Economy-Occasional Papers, 118, 121, 126 and 130. 

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remain elevated, and with them the possibility of negative spill overs on the rest of the euro 
area. These challenges require continued action in the areas of product and service markets, 
labour market, financial sector, and public finances. 

In  addition,  significant  revenue  shortfalls  linked  to  the  rebalancing  of  the  economy,  higher 
social  expenditure  and  costs  of  bank  recapitalisation  have  led  to  a  substantial  pressure  of 
government  deficits  and  a  steeply  rising  government  debt.  A  sustainable  correction  of  the 
excessive  budget  deficit  in  the  medium-term  requires  simultaneous  progress  on  correcting 
macroeconomic  imbalances,  supported  by  further  structural  reforms  to  boost  growth  and 
employment creation and to reduce structural rigidities that hamper the adjustment.  

FRANCE  is  experiencing  macroeconomic  imbalances,  which  require  monitoring  and 
decisive policy action. In particular, the deterioration in the trade balance and competitiveness 
levels,  driven  both  by  cost  and  non-cost  factors,  against  a  background  of  a  deteriorating 
external position and high public debt deserves continued attention. The need for action so as 
to  reduce  the  risk  of  adverse  effects  on  the  functioning  of  the  French  economy  and  of  the 
Economic and Monetary Union, is particularly important notably given the size of the French 
economy. 

More  specifically,  the  growing  trade  deficit  reflects  the  long  term  decline  in  export  market 
shares which is linked to persistent losses in both cost and non-price competitiveness. Wages 
have  risen  fast  and  put  pressure  on  prices  and  firms'  profitability.  The  low  and  decreasing 
profitability  of  private  companies,  in  particular  in  the  manufacturing  sector,  have  not  only 
weighed  on  their  indebtedness,  but  more  importantly  may  have  hampered  their  ability  to 
innovate  and  to  strengthen  their  non-price  competitiveness.  Other  factors,  including  the 
decreasing  number  of  exporting  firms  have  aggravated  these  competitiveness  issues.  In 
particular, rigidities in the French labour market, which also contributed to the development in 
the  cost  of  labour,  may  have  limited  the  potential  for  adjustment  of  the  economy  and 
hampered  productivity  developments.  In  addition  to  the  competitiveness  issues,  the  rising 
public  debt  exposes  France  to  potential  financial  market  turbulence  and  brings  risks  of 
crowding out private investment.  

ITALY is experiencing macroeconomic imbalances, which require monitoring and decisive 
policy action. In particular, export performance and the underlying loss of competitiveness as 
well  as  high  public  indebtedness  in  an  environment  of  subdued  growth  deserve  continued 
attention  in  a  broad  reform  agenda  in  order  to  reduce  the  risk  of  adverse  effects  on  the 
functioning of the Italian economy and of the Economic and Monetary Union, notably given 
the size of the Italian economy. 

More  specifically,  in  a  context  of  elevated  risk  aversion  in  financial  markets,  Italy's  high 
public debt weighs on the country's growth prospects through several channels, in particular 
the high tax burden needed to service the debt, funding pressures for Italian banks and thus for 
the  private  sector,  increased  macroeconomic  uncertainty  and  a  severely  limited  margin  for 
countercyclical  fiscal  policies  and  growth-enhancing  public  expenditure.  In  order  to  put  the 
high public debt-to-GDP ratio on a steadily declining path, Italy has been pursuing a strategy 
of sizeable fiscal consolidation, but subdued growth prospects make it challenging – but even 
more essential – to achieve and sustain the necessary large primary surpluses. Italy's declining 
external  competitiveness  since  the  late  1990s  is  reflected  in  substantial  export  market  share 
losses.  Stagnant  productivity,  outpaced  by  labour  cost  growth,  has  implied  increasing  unit 

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labour  costs  compared  to  peers,  and  the  sizeable  appreciation  of  Italy's  nominal  effective 
exchange rate between 2003 and 2009 further undermined cost competitiveness. The high tax 
burden, especially on labour and capital, also negatively affects competitiveness. In addition, 
Italy's  export  performance  continues  to  suffer  from  an  unfavourable  product  specialisation, 
and the country's weak human capital endowment hampers a move towards a technologically 
more  advanced  specialisation  model.  Institutional  and  regulatory  barriers,  an  unfriendly 
business  environment  and  structural  firm-level  features  hinder  the  ability  of  many  Italian 
companies to grow, limiting productivity gains and international expansion. These factors also 
limit the inflow of foreign direct investment, thus missing out on a further important potential 
source  of  productivity  enhancements.  Finally,  the  double-dip  recession  has  seriously 
weakened the ability of the Italian banking sector to support the adjustment needed to address 
imbalances.  

HUNGARY  is  experiencing  macroeconomic  imbalances,  which  deserve  monitoring  and 
decisive  policy  action.  In  particular,  the  on-going  adjustment  of  the  highly  negative  net 
international investment position, largely driven by private sector deleveraging in a context of 
high public debt and a weak business environment continue to deserve very close attention so 
as to reduce the important risks of adverse effects on the functioning of the economy.  

More  specifically,  Hungary  is  adjusting  its  large  stocks  of  external  and  internal  (public  and 
private) debt, a process that should be continued in the midterm. For the third year in a row, 
the NIIP has been improving thanks to current account surpluses. This is  mainly a result of 
falling  domestic  demand,  driven  by  an  on-going  private  sector  deleveraging  (mostly  in  the 
household  sector).  At  the  same  time,  a  rapid  fall  in  corporate  credit  supply  (exacerbated  by 
policy  uncertainty  and  high  surtaxes  on  the  financial  sector)  has  contributed  to  historically 
low investments. This has increased Hungary's vulnerability, further reduced the outlook for 
potential growth and  sustained a high level of  unemployment,  which  makes  adjustment  and 
fiscal consolidation more difficult. Public debt, which is relatively high when compared with 
neighbouring  countries,  has  decreased.  This  is  linked  to  a  number  of  fiscal  consolidation 
measures  as  well  as  a  one-off  receipt  from  the  abolition  of  the  mandatory  private  pension 
scheme. Nevertheless, uncertainty in the policy environment, a low growth potential coupled 
with a high share of foreign currency denominated debt and elevated public and private sector 
indebtedness, may have an important impact on Hungary's financing conditions which might 
become more difficult in the future. 

MALTA  is  experiencing  macroeconomic  imbalances,  which  deserve  monitoring  and  policy 
action.  In  particular,  the  long-term  sustainability  of  the  public  finances  warrants  attention 
while  the  very  large  financial  sector,  and  in  particular,  the  strong  link  between  the 
domestically-oriented  banks  and  the  property  market  poses  challenges  for  financial  stability 
and deserves continued monitoring. 

More  specifically,  the  long-term  sustainability  of  public  finances  is  at  risk  due  to  the  high 
projected cost of ageing and other sizeable contingent liabilities. While the real estate market 
does  not  appear  to  be  exposed  to  an  immediate  risk  of  boom  and  bust,  ensuring  its  proper 
functioning  is  of  particular  importance  for  financial  stability.  To  this  purpose,  regular 
monitoring  of  developments  in  the  property  market  appears  warranted.  Risks  to  domestic 
financial stability stemming from the presence of a very large financial sector should not be 
overstated, given the very limited exposure of internationally-oriented banks to the domestic 
economy, but continued regular monitoring of the activities of the internationally-oriented and 

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the  non-core  domestic  banks  is  important.  Furthermore,  the  stability  of  the  core  domestic 
banks  would  benefit  from  further  measures  to  strengthen  loan  loss  provisions  to  limit  risks 
arising from their exposure to the property sector.  

THE  NETHERLANDS  are  experiencing  macroeconomic  imbalances,  which  deserve 
monitoring  and  policy  action.  In  particular,  macroeconomic  developments  regarding  private 
sector  debt  and  deleveraging  pressures,  also  coupled  with  remaining  inefficiencies  in  the 
housing  market  deserve  attention.  Although  the large  current  account  surplus  does  not  raise 
risks similar to large deficits, the Commission will also continue monitoring the developments 
of the current account in the Netherlands.  

More  specifically,  rigidities  and  distortive  incentives  have  built  up  over  decades  to  shape 
house financing and sectorial savings patterns. Balance sheets of financial institutions became 
heavily geared towards housing finance, as households leveraged up against housing wealth. 
In  parallel,  since  the  mid-1990s  non-financial  corporations  moved  into  a  structural  savings 
surplus. This has resulted in a substantial and persistent current account surplus going hand-
in-hand with a high level of both gross household debt and household assets. At the current 
juncture,  feedbacks  from  the  housing  market  to  the  real  economy,  notably  through  negative 
wealth and confidence effects, are weighing on economic activity. 

FINLAND is experiencing macroeconomic imbalances, which deserve monitoring and policy 
action. In particular, the substantial deterioration in the current account position and the weak 
export  performance,  driven  by  industrial  restructuring,  as  well  as  cost  and  non-cost 
competitiveness factors, deserve continued attention.  

More  specifically,  the  loss  in  competitiveness  weakens  the  country's  economic  position  and 
risks  compromising  future  prosperity  and  living  standards,  especially  as  population  ageing 
already poses a challenge in this regard. Finland has rapidly lost world market shares and the 
current account balance has been on a downward trend, and even turned into a deficit in 2011, 
which is forecast to widen. The decline of the current account balance seems mainly driven by 
deteriorating  non-price  competitiveness  and  delays  in  the  necessary  restructuring  in  some 
industries. In addition, cost-competitiveness suffers from significant increases in unit labour 
costs as a result of wage settlements that did not fully reflect the drop of productivity during 
the  crisis  and/or  sectorial  productivity  developments.  Finland  is  exporting  intermediate  and 
investment  goods  mainly  to  mature,  slow  growing  economies  and  industry  is  vulnerable  to 
energy price increases and the consequent deterioration in the terms of trade. In contrast, risks 
related to housing and household indebtedness appear relatively limited. The main concern in 
this respect relate to the financial position of Finnish households, with low savings rates and a 
net overall borrowing position. 

SLOVENIA  is  experiencing  excessive  macroeconomic  imbalances.  Urgent  policy  action  is 
needed to halt the rapid build-up of these imbalances and to manage their unwinding. Until 
now, the levels of private and public debt are below the alert thresholds of the scoreboard and 
also net external debt is relatively contained. However, in a context of accelerating negative 
economic trends, the risk to financial sector stability stemming from corporate indebtedness 
and  deleveraging  is  substantial,  including  through  interlinkages  with  the  level  of  sovereign 
debt.  These  risks  are  compounded  by  limited  adjustment  capacity  in  labour  and  capital 
markets  and  by  an  economic  structure  dominated  by  state-ownership.  Periods  of  policy 
uncertainty  and  legal  obstacles  to  reforms  have  prevented  Slovenia  from  addressing  its 

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imbalances adequately and enhancing its adjustment capacity, thus increasing its vulnerability 
at a time of heightened sovereign funding stress.  

More  specifically,  Slovenia  continues  to  struggle  with  the  legacy  of  its  previous  boom. 
Companies  are  still  unsustainably  over-indebted,  leading  to  further  rises  in  non-performing 
loans. While the size of the Slovenian banking sector is relatively small and less than half of 
the  euro  area  average,  the  main  banks  are  thinly  capitalised  in  view  of  the  continuing 
deterioration of their credit portfolios and their dependence on the state for capital is a major 
threat  to  the  economy.  At  the  same  time,  the  state  is  itself  subject  to  funding  pressures. 
Necessary  deleveraging  is  underway,  but  the  process  is  hampered  by  labour  and  capital 
market frictions and severely depressed output levels. Corporate reliance on bank finance and 
the  complex  nexus  of  state  ownership  limit  adjustment  and  distort  resource  allocation.  Past 
cost competitiveness losses have not been reversed and current minimum wage policies risk 
triggering  further  losses  in  the  future  when  the  labour  market  starts  to  recover.  Lack  of 
adjustment,  poor  cost-competitiveness  and  state-ownership  combine  to  deter  private  and 
foreign  direct  investment.  Export  market  shares  have  been  lost  and  export  performance  is 
substantially  weaker  than  in  peer  countries.  These  challenges  require  urgent  action  in  the 
areas of the financial sector, state-owned enterprises and microeconomic reforms in order to 
prevent a situation in which severe imbalances would steeply increase towards unsustainable 
levels. 

Recurrent  episodes  of  sovereign  funding  pressure  underscore  the  need  to  pursue  fiscal 
consolidation  in  tandem  with  structural  reforms.  Sustainable  improvements  in  financial 
stability and macroeconomic outcomes require a coherent strategy including public finances.  

SWEDEN is experiencing macroeconomic imbalances, which deserve monitoring and policy 
action.  In  particular,  macroeconomic  developments  regarding  private  sector  debt  and 
deleveraging, coupled with remaining inefficiencies in the housing market deserve continued 
attention.  Although  the  large  current  account  surplus  does  not  raise  risks  similar  to  large 
deficits  in  other  countries,  the  Commission  will  continue  to  monitor  developments  of  the 
current account in Sweden. 

Some  deleveraging  has  taken  place  in  the  non-financial  corporate  sector.  Recent  reforms  in 
company  taxation  are  likely  to  further  reduce  the  level  of  corporate  debt  by  limiting  tax 
minimisation  by  multinational  companies.  Household  debt  has  stabilised  but  the  main 
contributing  factors  –  the  debt-bias  in  housing  taxation  and  the  slow  mortgage  amortisation 
pace – remain in place. Low interest rates on mortgages also contribute to debt build-up. On 
the other hand, various indicators of household leverage as well as credit supply and demand 
conditions  do  not  indicate  imminent  deleveraging  pressures.  The  housing  market  has  been 
stable over the last year and concerns about a possible overvaluation have subsided. Yet, the 
housing  market  remains  a  potential  source  of  instability  for  the  future.  Despite  some  recent 
measures,  housing  supply  remains  constrained  by  cumbersome  planning  processes,  limited 
competition  within  the  construction  sector  and  regulation  of  rental  markets.  Together  with 
debt-bias housing taxation, these inefficiencies tend to create an upward-bias in house prices 
and in household indebtedness.  

THE  UNITED  KINGDOM  is  experiencing  macroeconomic  imbalances,  which  deserve 
monitoring  and  policy  action.  In  particular,  macroeconomic  developments  in  the  areas  of 
household  debt,  linked  to  the  high  levels  of  mortgage  debt  and  the  characteristics  of  the 

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housing market, as well as unfavourable developments in external competitiveness, especially 
as regards goods exports and weak productivity growth, continue to deserve attention.  

More  specifically,  the  UK  faces  tensions  between  the  needs  for  deleveraging,  maintaining 
financial stability and avoiding compromising investment and growth. The primary cause of 
the growth in household debt was high and volatile house prices, linked to an insufficient and 
rigid  supply  of  housing.  Household  deleveraging  continued  in  2012  and  house  prices 
corrected  further  but  this  may  not  be  sustained  once  the  economy  improves  and  housing 
transactions  return  to  more  normal  levels.  Policy  measures  have  been  introduced  aiming  at 
increasing  residential  construction,  although  it  is  not  yet  clear  whether  they  will  prove 
effective.  As  a  consequence  of  a  combination  of  high  house  prices  and  the  widespread  and 
growing  use  of  variable-rate  mortgages,  households  are  particularly  exposed  to  interest  rate 
changes.  The  stock  of  UK  corporate  debt  is  modestly  high  yet  some  firms  are  having 
difficulty accessing adequate funding for investment. The UK is also confronted with the twin 
challenge  of  sustaining  the  pre-crisis  dynamism  in  service  exports  and  boosting  the 
underlying  drivers  of  productivity  in  the  industrial  sectors  in  order  to  regain  the  external 
competitiveness that was partly eroded in the pre-crisis years. The net trade outturn for 2012 
was lower than expected. Overall public investment remains low and it is not clear when and 
to  what  extent  private  investment  will  pick-up.  On  current  policies,  the  flow  of  credit  may 
only be normalised once broader macroeconomic conditions improve. Skill gaps persist and 
closing  them  will  require  a  substantial  long-term  investment.  Given  the  size  of  the  British 
economy, the imbalances may generate spill-overs to the other European economies. 

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4. 

CONCLUSIONS  

The Commission's analysis leads it to conclude that in Slovenia, while in a still manageable 
position,  excessive  macroeconomic  imbalances  are  quickly  building  up.  Slovenia  should 
now  proceed  swiftly  and  decisively  by  completing  the  reforms  it  has  started  and  include 
comprehensive and detailed policy measures in its forthcoming National Reform Programme 
and Stability Programme, in order to halt and reverse this trend. 

The  Commission's  analysis  leads  it  to  conclude  that,  despite  significant  progress  in  2012, 
Spain  still  has  excessive  macroeconomic  imbalances.  Spain  should  maintain  the  reform 
momentum  by  including  comprehensive  and  detailed  policy  measures  in  its  forthcoming 
National Reform Programme and Stability Programme.  

The Commission is ready to cooperate closely and swiftly with these two Member States in 
preparing  this  response,  in  full  respect  of  national  processes  and  with  an  appropriate 
involvement of domestic stakeholders. These policy packages will be assessed in May by the 
Commission as part of the European Semester to determine whether they are adequate in view 
of  the  challenges.  Based  on  this  assessment,  the  Commission  will  consider  whether  further 
steps are needed under the Excessive Imbalance Procedure. 

The Commission also expects the eleven other Member States experiencing imbalances that 
are  not  found  to  be  excessive,  namely  Belgium,  Bulgaria,  Denmark,  France,  Italy, 
Hungary, Malta, the Netherlands, Finland, Sweden and the United Kingdom, to take the 
findings  of  the  in-depth  reviews  into  account  in  their  National  Reform  Programmes  and 
Stability  and  Convergence  Programmes.  On  this  basis  and  in  the  context  of  the  European 
Semester, on 29 May the Commission will make policy recommendations for the correction 
of these imbalances and the prevention of new ones. 

On 29 May, on the basis of actual data for 2012 validated by Eurostat and the Commission 
services' Spring 2013 Forecast, the Commission will also reassess the situation under the on-
going  excessive  deficit  procedures  and,  where  necessary,  adopt 
the  appropriate 
recommendations to the Council.  

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Annex: Macroeconomic Imbalance Procedure-2013 

AMR-2013.  On  28  November  2012,  the  European  Commission  presented  the  second  Alert 
Mechanism Report (AMR-2013)9, prepared in accordance with Regulation No 1176/2011. The AMR 
serves as the initial screening tool to identify Member States that warrant further analysis to determine 
whether  imbalances,  or  excessive  imbalances,  exist10.  The  AMR-2013  examined  the  situation  of  all 
Member  States,  with  the  exception  of  the  four  countries  which  are  implementing  a  wide  range  of 
reforms  under  economic  adjustment  programmes  (Greece,  Ireland,  Portugal  and  Romania)11.  It 
concluded that IDRs were warranted for Belgium, Bulgaria, Denmark, Spain, France, Italy, Cyprus, 
Hungary, Malta, the Netherlands, Slovenia, Finland, Sweden and the United Kingdom. These are the 
same  twelve  Member  States  for  which  in  the  previous  cycle  imbalances  were  identified  in  May 
201212, plus Malta and the Netherlands. Although the AMR-2013 concluded that there was no need of 
carrying  out  IDRs  for  the  other  Member  States,  the  Commission  will  put  forward  country-specific 
recommendations to all Member States under the European Semester for strengthened coordination of 
economic and budgetary policies13. 

In-depth  reviews  (IDRs).  The  IDRs  examine  macroeconomic  developments  with  the  aim  of 
identifying  imbalances,  their  origin,  nature  and  severity,  and  in particular  whether  those  imbalances 
are  excessive  in  the  sense  of  the  MIP  regulation.  The  IDRs  cover  a  broad  set  of  issues  which 
demonstrate  deeper  surveillance  of  macroeconomic  developments  at  EU  level  with  the  aim  of 
supporting a smooth correction of existing imbalances and preventing the build-up of new ones. They 
consider a wide set of available statistics and other information and take into account methodological 
work by the Commission services in collaboration with the Member States14. In the preparation of the 
IDRs  and  of  this  Communications,  specific  surveillance  missions,  including  discussions  with  the 
Member States and other stakeholders, took place, as envisaged in the legislation. 

Policy recommendations and follow-up. Based on the IDRs, and on its assessment of the National 
Reform  Programmes  and  Stability  or  Convergence  Programmes  to  be  submitted  by  30  April,  the 
Commission will on 29 May propose policy recommendations to be adopted by the Council. For the 
Member  States  experiencing  imbalances,  these  recommendations  (under  the  preventive  arm  of  the 
MIP)  are  part  of  the  integrated  macroeconomic  surveillance  in  the  European  Semester.  If  for  the 
Member States with excessive imbalances, the Commission then judges the policy response to be not 
adequate,  the  Commission  would  recommend  to  the  Council  to  recommend  that  the  Member  States 
concerned  take  corrective  action.  The  Member  States  concerned  should  then  submit  a  corrective 
action  plan  (CAP)  under  the  corrective  arm  of  the  MIP.  The  CAP  will  then  be  assessed  by  the 
Commission and the Council, and its implementation will be closely monitored by the Commission, 
with regular reports made public by the Member States concerned and the Commission. 

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COM(2012) 751 final.  
According to the MIP Regulation (Article 2(1, 2)), imbalances are trends giving rise to macroeconomic 
developments  which  are  adversely  affecting,  or  have  the  potential  adversely  to  affect,  the  proper 
functioning of the economy of a Member State or of the economic and monetary union, or of the Union 
as  a  whole;  excessive  imbalances  are  severe  imbalances,  including  those  that  jeopardise  or  risk 
jeopardising the proper functioning of the economic and monetary union. 
For  Greece,  Ireland,  Portugal  and  Romania,  see  the  latest  compliance  reports,  European  Economy-
Occasional Papers, 123, 127, 124 and 116, respectively.  
See  European  Economy-Occasional  Papers,  99  to  110,  and  Commission  Communication  'Action  for 
Stability, Growth and Jobs,' COM(2012) 299 final, 30.5.2012. 
For  the  rationale  of  the  MIP  and  a  detailed  description  of  the  procedure,  see  'The  Surveillance  of 
Macroeconomic Imbalances in the Euro Area,' Quarterly Report on the Euro Area, 1(2012):7-15. 
Methodological work has focused on external imbalances, including on current account surpluses (see 
e.g.  'Current  Account  Surpluses  in  the  EU,'  European  Economy,  9(2012)),  price  and  non-price 
competitiveness, external sustainability (see e.g. 'The Dynamics of International Investment Positions,' 
Quarterly Report on the Euro Area, 3(2012):7-19), trade ('A Closer Look at Some Drivers of the Trade 
Performance at Member State Level,' Quarterly Report on the Euro Area, 2(2012):29-39), wage norms 
(see e.g. 'Labour Market Developments in Europe-2012,' European Economy, 5(2012)), housing prices 
(see  e.g.  'Assessing  the  Dynamics  in  House  Prices  in  the  Euro  Area,'  Quarterly  Report  on  the  Euro 
Area, 4(2012):7-18), private sector indebtedness and deleveraging (see e.g. 'Indebtedness, Deleveraging 
Dynamics  and  Macroeconomic  Adjustment,'  European  Economy-Economic  Papers,  477  forthcoming 
2013)).  

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