COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE EUROGROUP Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances
Date: 2014-03-05
Institutions: European Commission
Subjects: Euro Group (euro area), budget deficit, competitiveness, economic growth, gross domestic product, macroeconomics, stability pact













EUR-Lex - 52014DC0150 - EN











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52014DC0150

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE EUROGROUP Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances /* COM/2014/0150 final */









This
Communication summarises the results of the in-depth reviews (IDRs) to assess
whether imbalances and excessive imbalances exist in a number of EU Member
States. (*)
It also elaborates on the euro area dimension of macroeconomic imbalances and
how several policy challenges have to be addressed in a euro area-wide context.
In addition, to contribute to integrated surveillance, the Communication also
discusses fiscal developments: for the countries concerned, the Commission
updates its assessment of November 2013 when it discussed the Draft Budgetary
Plans. (**)
The
IDRs discuss relevant features of the Member States' economies, in particular
the evolution of their external accounts, savings and investment balances,
effective exchange rates, export market shares, cost- and non-cost
competitiveness, productivity, private and public debt, housing prices, credit
flows, financial systems, unemployment and other variables. The assessment of
imbalance or excessive imbalances considers the situation of each economy at a
given moment, the dynamics in each of those issues, as well as, when
appropriate, the recent policy actions. 
The
IDRs illustrate that the challenges that the EU economies face have been
changing. When the Macroeconomic Imbalance Procedure (MIP) was created, and
during the previous rounds of its implementation, the main challenges were
related to the unsustainable current account deficits, losses in
competitiveness related to previously very dynamic labour costs, private debts
and high housing prices. The main challenges of a cross-country nature now also
concern the impact that deleveraging in many countries has on medium-term
growth; the sustainability of private and public debts and of the external
liabilities in a context of very low inflation; the need to ensure an adequate
flow of credit to viable  activities – particularly in the non-tradables sector
– in the vulnerable economies under a fragmented financial system; and the very
high level of unemployment in many economies.   
On
the basis of the IDRs, the Commission has identified imbalances in Belgium, Bulgaria, Germany, Ireland, Spain, France, Croatia, Italy, Hungary, Netherlands, Slovenia, Finland, Sweden, and the United Kingdom. Among those Member
States, Croatia, Italy and Slovenia are experiencing
excessive imbalances.
In the case of Spain, the Commission considers that a significant
adjustment has taken place over the last year and that, on current trends,
imbalances will continue to abate over time; while this is the basis to
conclude that imbalances are no longer excessive in the sense of the MIP, the
Commission stresses that substantial risks are still present. 
The
drivers of imbalances and the risks they raise are different from one economy
to another. Policies should be adapted to the challenges of each economy and
appropriate monitoring is necessary. In line with the Council Recommendation
addressed to the Euro Area, the Commission intends to put in motion a specific
monitoring of the policies recommended by the Council to the Member States with
excessive imbalances (Croatia, Italy and Slovenia), as
well as for countries where imbalances require decisive policy action (Ireland,
Spain and France). (***) In the case of Ireland and Spain this monitoring will rely on post-programme surveillance. 
For
 Denmark and Malta, the Commission considers that, compared to
the last year, the risks have abated or are better controlled; imbalances in
the sense of the MIP are no longer identified in these countries. Moreover,
while a number of features of the Luxembourg economy, including its
large financial sector, require attention, they do not constitute imbalances in
the sense of the MIP. (****)
The
strengthening of the recovery and strong policy implementation should
facilitate the unwinding of imbalances and excessive imbalances in other
economies in the coming years. Having said this, imbalances are long-lasting
phenomena and it may take time before the appropriate policies result in a
decisive reduction in the macroeconomic risks under the MIP surveillance. Thus,
identifying imbalances or excessive imbalances for an economy for several years
is not passing a judgement on the policies adopted, but signalling that risks
remain, and that strong vigilance in relation to imbalances and relevant policy
implementation is necessary. However, for some countries, it should be noted
that the persistence of imbalances is also related to the slow implementation
of the country-specific recommendations under the European Semester.
Regarding
fiscal developments,
the situation has continued to improve both in the EU and the euro area due
to continued consolidation efforts. However, the latest forecasts show that for
 France and Slovenia, there are risks that the
consolidation effort may not be strong enough to ensure that the correction of
excessive deficits remains on track. Thus, the Commission is addressing
Recommendations, under Article 11 of the Regulation No 473/2013 to these Member
States. 
The
Commission expects that the Member States take the findings of the IDRs and the
fiscal forecasts into account in their National Reform Programmes (NRPs) and
Stability and Convergence Programmes (SPs and CPs). Member States in excessive
imbalances should, in particular, set out a comprehensive and detailed policy
response in their forthcoming NRPs and SPs and CPs. The Commission is ready to
cooperate closely with these Member States in preparing this response, in full
respect of national processes. The two Member States to whom the Communication
is addressing a Recommendation to ensure that the correction of excessive
deficits remains on track are expected to report on actions responding to such
Recommendation in a dedicated section of the their SPs. The NRPs and SPs and
CPs for all Member States will be assessed in June 2014, as part of the
European Semester of Economic Policy Coordination, to determine whether they
are adequate in view of the challenges. For those Member States in excessive
imbalances (Italy, Croatia, Slovenia), if the Commission considers that the
proposed policy response is inadequate in view of the challenges, it would
recommend to the Council that the Member State concerned take corrective action
under the corrective arm of the MIP. If necessary, subsequent procedural steps
under the EDP will also be taken at the beginning of June.
_______________
(*)
This Communication fulfils the requirement of Articles 6(1) and 7(1) of
Regulation (EU) No 1176/2011, according to which the Commission informs the
European Parliament, the Council and the Euro Group about the outcome of the
IDRs. The IDRs for seventeen Member States are published at the same time as
this Communication (see European Economy-Occasional Papers). In the
sense of the MIP, imbalances are trends giving rise to developments which
adversely affect the functioning of the economy of a Member State, or the monetary union, or the Union as whole; excessive imbalances are severe
imbalances, including those that could jeopardise the proper functioning of the
economic and monetary union.
(**)
COM(2013) 900, 15.11.2013.
(***)
See CSR5 of Council Recommendation (2013/C 217/24) of 9 July 2013 (OJ C 217,
30.7.2013, p. 97).  
(****)
In the Alert Mechanism Report of November 2013, the Commission considered that
no specific action in the context of the MIP was necessary for the Czech Republic,  Estonia, Latvia, Lithuania, Austria, Poland and Slovakia. The macroeconomic
surveillance for all these Member States will continue in the context of the
European Semester. Moreover, the MIP does not apply to Member States which are
implementing macroeconomic adjustment programmes supported by financial
assistance: Greece, Cyprus, Portugal and Romania; the enhanced monitoring of
their imbalances and policies will continue in the context of their programmes.
Synoptic
Table
Integrated surveillance of macroeconomic and Fiscal imbalances
(Member States for which an IDR has been prepared) 
   || MIP || SGP 
 Finding || Follow-up 
 BE || Imbalance || Recommendations to be adopted under the European Semester, including on MIP-related issues || Excessive deficit, deadline for correction: 2013 
 BG || Imbalance || Recommendations to be adopted under the European Semester, including on MIP-related issues || Not yet at MTO 
 DE || Imbalance || Recommendations to be adopted under the European Semester, including on MIP-related issues || Overachieving MTO 
 DK || No imbalance || Recommendations to be adopted under the European Semester || Excessive deficit, deadline for correction: 2013 
 IE || Imbalance || Recommendations to be adopted under the European Semester, including on MIP-related issues. Specific monitoring: post-programme surveillance || Excessive deficit, deadline for correction: 2015 
 ES || Imbalance || Recommendations to be adopted under the European Semester, including on MIP-related issues.  Specific monitoring: post-programme surveillance || Excessive deficit, deadline for correction: 2016 
 FR || Imbalance || Recommendations to be adopted under the European Semester, including on MIP-related issues. Specific monitoring to be put in motion || Excessive deficit, deadline for correction: 2015 The Commission adopts today a recommendation (*) 
 HR || Excessive imbalance || Recommendations to be adopted under the European Semester, including on MIP-related issues. Decision to be taken in June on subsequent steps under the MIP. Specific monitoring to be put in motion || Excessive deficit, deadline for correction: 2016 
 IT || Excessive imbalance || Recommendations to be adopted under the European Semester, including on MIP-related issues. Decision to be taken in June on subsequent steps under the MIP. Specific monitoring to be put in motion || Not yet at MTO 
 LU || No imbalance || Recommendations to be adopted under the European Semester || Overachieving MTO 
 HU || Imbalance || Recommendations to be adopted under the European Semester, including on MIP-related issues || Not yet at MTO 
 MT || No imbalance || Recommendations to be adopted under the European Semester || Excessive deficit, deadline for correction: 2014 
 NL || Imbalance || Recommendations to be adopted under the European Semester, including on MIP-related issues || Excessive deficit, deadline for correction: 2014 
 SI || Excessive imbalance || Recommendations to be adopted under the European Semester, including on MIP-related issues. Decision to be taken in June on subsequent steps under the MIP. Specific monitoring to be put in motion || Excessive deficit, deadline for correction: 2015 The Commission adopts today a recommendation (*) 
 SE || Imbalance || Recommendations to be adopted under the European Semester, including on MIP-related issues || Overachieving MTO 
 FI || Imbalance || Recommendations to be adopted under the European Semester, including on MIP-related issues || Not yet at MTO 
 UK || Imbalance || Recommendations to be adopted under the European Semester, including on MIP-related issues || Excessive deficit, deadline for correction: 2014-5 
 (*) The Recommendations under the '2-pack' (Reg. No 473/2013) regarding measures to be taken in order to ensure a timely correction of its excessive government deficit only concern euro area Member States. MTO: Medium-term fiscal objective. Euro area Member States for which an IDR was prepared are shaded. 
1.           Introduction and Main Findings
Over the last
years, the EU economic governance has been significantly strengthened. It
now provides for a coherent annual cycle of economic policy co-ordination in Europe, with more integrated steps for the euro area. The European Semester has become key
for delivering reforms, ensuring that Member States co-ordinate their economic
policies and their efforts to promote growth and jobs.[1] 
Together with
the reinforced Stability and Growth Pact, with its focus on sustainable public
finances, the Macroeconomic Imbalances Procedure (MIP) is at the heart of the
EU’s strengthened economic governance. The
Macroeconomic Imbalances Procedure (MIP) is designed to help detect, prevent
and correct problems at an early stage. At the start of the
fourth European Semester in November 2013, in its Alert Mechanism Report (AMR),
the Commission screened all the EU Member States for possible macroeconomic
imbalances on the basis of a scoreboard of indicators and identified 16 cases
where an in-depth review was warranted. After the successful conclusion of its
macroeconomic adjustment programme, Ireland is also included on the invitation
of the ECOFIN Council of February 2014. On the basis of these in-depth analyses,
the Commission drew conclusions on the existence of imbalances and their
nature. 
Overall, the
analysis shows that macroeconomic imbalances, which have been built up over
many years, are gradually receding. Imbalances are
no longer identified as excessive in one country, while imbalances are no
longer identified in two others. However, in some cases, new concerns have
arisen, which require closer attention. The Commission
expects that those three Member States, for which it has concluded that
imbalances are excessive, will act swiftly and decisively and include
comprehensive and detailed policy measures in their forthcoming National Reform
Programme and Stability and Convergence Programmes. Member States, for which
the Commission has concluded that imbalances exist, are invited 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, in June the Commission will make policy
recommendations for the correction of these imbalances and the prevention of
new ones.
As part of its
continuous monitoring of obligations under the excessive deficit procedure, the
Commission today also makes use of a new instrument under the strengthened
Stability and Growth Pact and draws the attention of two euro area Member
States to the risk of non-compliance with the budgetary target recommended for
this year.
In
the context of the European Semester in June, the Commission will reassess the overall
situation as regards the obligations under the Stability and Growth Pact and,
where necessary, propose the appropriate steps to the Council. 
2.           Economic recovery but continued need for reform
The economic
recovery is gaining ground. On the basis of the latest forecast[2], the
European economy will grow 1.5 per cent in 2014 and 2.0 per cent in 2015. For
the first time in several years, the growth projections have been revised
upwards for several countries. A number of imbalances-related headline data,
including the external and fiscal accounts, competitiveness and trade
indicators, and overall indebtedness, are improving. In many countries, the
housing price cycles have bottomed out and turned moderately upward. The
unemployment rate has stabilised and has been slowly declining in several
economies, though unemployment and other indicators of social stress remain too
high in many countries. The correction of imbalances, which results from
politically complex policy measures as well as socially painful adjustment by
economic agents, has contributed to improving the fundamentals and has
supported a gradual recovery, which then helps in reducing macroeconomic risks.
However, the recovery is still fragile and uneven. It is only in 2014 and 2015
that the EU and euro area, respectively, will return to the real activity
levels recorded in 2007, and for some Member States this will take longer.
The IDRs
illustrate that the challenges faced by the economies under review have been
changing. When
the MIP Regulation was put forward by the Commission and later adopted, and
during the first two rounds of its implementation, the main challenges were
related to unsustainable current account deficits, losses in competitiveness
linked to previously very dynamic labour costs, private debts and high housing
prices. While
many 'flow' imbalances, like the current account deficits have been overcome,
this is not yet the case of 'stock' imbalances, like the external liabilities. The main
challenges of a cross-country nature now concern the lingering impact that
deleveraging pressures in many countries have on medium-term growth; the
sustainability of private debts and of the external liabilities in a context of
very low inflation and slow growth; the implications of the euro area shifting
to a relatively large current account surplus; and the need to provide credit
to viable investments in the vulnerable economies, under a fragmented financial
system. Moreover, the very high level of unemployment in many economies
represents a major policy and social challenge.   
The policy
responses to the changing set of challenges should also consider the euro area
dimension of imbalances. Macroeconomic imbalances are, first and
foremost, harmful for the economies of the Member States concerned, which have
therefore an interest in reducing the associated risks. These risks concern
external, and public and private debt, sustainability; the ability to compete
in the world markets and ultimately the capacity to generate strong medium-term
growth and create jobs. However, the interdependence among the economies
implies that imbalances spill over across countries, and the losses in
efficiency in one Member State also lead to foregone welfare in its partners.
There
are several channels through which the macroeconomic situation and policy
action in one Member State affect their partners: trade, financial and monetary
linkages, structural reforms and confidence and uncertainty[3].
In the framework
of the MIP, given the interdependence of the economies, several challenges need
to be seen against a euro area-wide context: 
·     
Policies for growth. After several years of recession or slow growth, the euro area has
now entered a fragile recovery phase. Given the interconnectedness of the Member States, and the constraints many of them face, a boost to economic activity and
medium-term outlook is expected to come from continuing structural reforms
aiming at boosting competitiveness and adjustment in the vulnerable economies
and, for the larger and less indebted Member States, policies to increase domestic
demand and potential growth. Policies that contribute to an increase in
investment are critical as they boost demand in the short term, and increase
potential growth in the future[4].
·     
Financial fragmentation consists in differences in the functioning and performance of
financial markets of different jurisdictions. It leads to divergent interest
rates and credit conditions for businesses and households depending on their
country of residence, which go beyond those justified by economic fundamentals.
Making sure the financial system provides financing for viable investment
projects is necessary for the reallocation of resources between sectors among
the most vulnerable Member States[5]
and to restore smooth 'downhill' financial flows to the euro area's periphery.
·     
Indebtedness and very low inflation. Price stability, defined by the ECB as an inflation rate of below
but close to 2 per cent over the medium term, is important for medium-term
growth. The Commission Winter Forecast points to a protracted period of low
inflation, which could have adverse implications for economic activity and debt
levels. Moreover, very low inflation implies an adequate degree of nominal
flexibility to bring about the real wage adjustment which may be necessary in
some cases to reduce unemployment.  
·     
Rebalancing in a difficult economic context. The euro area is going through a rebalancing process which is well
advanced, but not yet complete. For a number of Member States, this means
regaining competitiveness via an internal devaluation, i.e. wage
moderation, productivity gains and reduction of other production costs relative
to trading partners. This together with an ambitious broader reform agenda is a
necessary process to recover competitiveness both inside the monetary union and
worldwide but with considerable social costs. Compared to the economic
adjustment in some economies after the creation of the monetary union, the
challenge of recovering competitiveness has been magnified by the low economic
activity in the EU as a whole and globally. The necessary adjustments in labour
costs depend not only on the specific situation of each Member State, but also
on the behaviour of the competitors' labour costs inside and outside the euro
area, and the nominal exchange rate of the euro. The euro exchange rate is not
a policy target. Upward pressures on the exchange rate could be the result of
internal developments or external developments. There is a risk that competitiveness
gains earned through very difficult policy adjustment may be undone by an
appreciation of the euro nominal exchange rate. While overall demand in the
euro area is still weak, according to the Commission Winter Forecast the
recovery is expected to become increasingly driven by domestic demand and to
spread across Member States, which could help alleviate upward pressures.
Actions to
address macroeconomic imbalances and divergences in competitiveness are
required in all Member States, particularly in the euro area. As established in
the specific recommendations for the euro area Member States[6], they
should take action, individually and collectively in the framework of the Euro
Group, and take responsibility for the aggregate policy stance in the euro area
to ensure the good functioning of the euro area and to increase growth and
employment. The coordination should contribute to ensuring that
the pace of fiscal consolidation is differentiated according to the fiscal and
macroeconomic situation of the Member States. Fiscal and
productivity-enhancing measures should promote further rebalancing in the euro
area, and address distortions to the savings and investment behaviour in Member
States. In order to tackle the social consequences of the crisis and the rising
unemployment levels, further reforms are necessary (e.g. to facilitate
access to employment, prevent early withdrawals from the labour market, reduce
the cost of labour and combat labour market segmentation). 
Completing the
Banking Union remains the cornerstone to restore confidence in the financial
sector and reduce market fragmentation. This will in
turn foster the flow of credit to the real economy, particularly to SMEs,
traditionally more dependent on bank finance. The upcoming definitions
regarding liquidity rules for banks in the context of the delegated acts of the
capital requirements legislation should equally ease access to finance for the
real economy. Further balance sheet repair and consolidation of the banking
system needs therefore to be promoted; the forthcoming comprehensive assessment
of banks' balances sheets by the ECB will be key in this respect. 
The growth contribution
of large Member States is important. Among the
largest euro area Member States, the policy priorities should be on
strengthening domestic demand and medium-term growth in Germany, addressing
bottlenecks to medium-term growth while working on structural reforms and
fiscal consolidation in France and Italy, and continuing the
orderly deleveraging and structural transformation of the economy that will
contribute to sustainable growth, and addressing social issues in Spain.
3.           Main cross country findings
The IDRs provide
a fuller insight into a number of cross-country developments, already discussed
in the Alert Mechanism Report[7].
Several imbalances and risks remain a distinct feature in a number of Member
States. The IDRs illustrate, in particular, that:
·        
Large external liabilities remain a
vulnerability. Over the latest quarters, current
account deficits have been further reduced in countries which experienced high
deficits in the pre-crisis period. In some countries, such as Bulgaria, Spain, Croatia and Hungary the current accounts have swung
into surplus, and in the case of Ireland and Slovenia into
very large surplus. The improvement in the current balance in these Member
States is due to gains in competitiveness facilitated by adjustment in labour
costs, but also due to a compression of domestic demand in those countries.
However, in terms of stocks, the net external liabilities remain very high in
some of the countries under review. This is particularly the case for Ireland, Spain, Croatia and Hungary, where the negative net
international investment position (NIIP) is close to, or above, annual GDP, but
the NIIP is also very high in Bulgaria. Concerns over external
sustainability vary across countries and also depend on the type of their gross
and net liabilities. In particular, the high share of FDI attenuates the risks
in Bulgaria, Ireland and Hungary[8]. Much
of the improvement in current accounts has not been cyclical and, therefore, is
not expected to disappear with the recovery[9].
Yet to ensure external sustainability of the most indebted economies, the
current account adjustment will have to continue, with surpluses or low
deficits persisting over an extended period of time. The structural reduction
in demand in most vulnerable countries illustrates the need for productivity
gains, supported by growth-enhancing reforms; otherwise, economic activity
would remain anaemic for a long period, in particular in the most indebted
economies.  
·        
In recent years, there have been substantial
deteriorations in the external flows of a few countries. This is the case of France and the United Kingdom: the
latter currently posts the largest current account deficit in the EU. Although
these economies have relatively low levels of net external liabilities and
their external sustainability is not at risk, increasing divergences might
engender specific risks to their economies if their external deficits continue
to widen. 
·        
Persistent very large current account surpluses
often reflect subdued domestic demand dynamics. A
country with a current account surplus transfers consumption from today to
tomorrow by investing abroad. In turn, a country with a current account deficit
can increase its investment or consumption today but must transfer future
income abroad to redeem the external debt.[10]
Surpluses are very high in Germany, Luxembourg, Netherlands and Sweden, while the surplus in Denmark is also high. Their
surpluses are associated with strong export performance as compared with
imports, the moderate growth of the latter is in line with that of domestic
demand. The accumulation of moderate surpluses is a welcome development given
the need for saving part of current income to cope with the challenge raised by
the demographic outlook[11],
and provide savings to be invested abroad. To the extent that the high
surpluses result from large domestic investment gaps, they also hamper the
medium- to long-term economic outlook. The nature of the surpluses is not
identical in all these countries; while surpluses are associated with
deleveraging in Denmark, the Netherlands and Sweden where
households and non-financial corporates register high debt levels, this is much
less the case in Germany. The trade surplus of Germany vis-à-vis the rest of the world has increased, while it has decreased with
the rest of the euro area. The latter is a favourable development, but which
need to be put in perspective: the change vis-à-vis the euro area owes more to
a reduction in imports by the euro area periphery than an increase in German
imports. Moreover, part of the reduction in the intra-euro area surplus has to
do with other 'surplus countries.' An increase in domestic demand through an
acceleration of investment, would reduce the surplus, boost potential growth, and
could contribute to the recovery and to the ongoing adjustment in the euro area.

·        
Cost competitiveness remains a crucial issue.
This is particularly the case for the countries
that used to have the largest current account deficits, and need to secure
their external sustainability, such as Bulgaria, Spain and Hungary,
or that have experienced large losses in export market shares in recent years,
such as Croatia, Italy or Finland. Competitiveness and
export performance is particularly relevant for the economic outlook of several
economies as, given the deleveraging needs in the private sector and the fiscal
consolidation needs, net exports or export-oriented investments are likely to
be the important demand components supporting growth in the medium term. Unit
labour costs (ULC) continue to adjust in several Member States most affected by
competitiveness and unemployment. Among the Member States under review, the
largest adjustment in the latest years has taken place in Ireland and Spain. The ULC adjustment has been driven by intensive market and
competitiveness pressures leading to reductions in the nominal remuneration in
several sectors, labour shedding, as well as productivity improvements. The
adjustment has been comparatively much smaller in France, Italy and Slovenia. For several countries, ULC have fallen by more than export and GDP
deflators. This may be compatible with the rebalancing to the extent that
increased mark-ups contribute to incentivising the tradable sector to expand[12]. Despite
the ongoing adjustment in real wages, the labour market adjustment has so far
taken place predominantly in terms of labour shedding and much reduced job
finding rates. This resulted in sharp increases in unemployment and an overall
lengthening of unemployment spells[13]
with social consequences and implications for potential growth that need to be
taken into account in the policy responses. 
·        
The IDRs also emphasise the role of non-cost
competitiveness. For most Member States, non-cost
competitiveness appears to be as important in explaining trade performance as
cost competitiveness. Non-cost factors include the export composition and
technological content, geographical diversification of exports, firms'
structure, business environment and innovation. The IDRs discuss how Member
States such as Belgium, Denmark, Italy, France, Croatia, Hungary, Finland and the United Kingdom face the
challenge of improving their export performance and restoring non-cost
competitiveness. Exports of services often mitigate poorer performance in the
exports of goods for several of the countries reviewed in the IDRs, like Belgium, Denmark, Croatia, Luxembourg, Sweden, Slovenia and the United Kingdom. Stagnating productivity growth has been identified as
a protracted problem in Belgium and Italy, which aggravates the
risks related to external or internal imbalances. Improvements in both costs
and non-cost competitiveness are crucial given the declining trend in world
export market shares among the advanced economies. 
·        
Deleveraging is occurring in the private
sector, but private debt stocks remain high in several economies. The need for households and non-financial corporates, as well as
financial corporates, to downsize their balance sheets and cut down their
liabilities has had a negative impact on private consumption and investment.
The credit flow to the private sector has been affected by unfavourable demand
and supply conditions[14].
The latter includes the deleveraging in the financial sector itself, a
fragmented financial sector and lingering policy uncertainty which affected
investment decisions. The low level of corporate investment constitutes an
obstacle to the shift of resources to the most productive sectors and
export-oriented industries, and constrains medium-term growth[15]. At
the same time, the deleveraging of households and non-financial and financial
corporates has contributed to the improvement in the current account in several
Member States under review, such as Spain and Slovenia, and
contributed to the large surpluses in Denmark, Netherlands and Sweden. Moreover, the low inflation rates, which for several Member
States are a crucial component of their strategy to recover competitiveness,
may make the deleveraging efforts of the private sector more challenging in
some countries.
·        
The housing market adjustment appears to be
bottoming out in a number of countries. Most EU
housing markets have been in a phase of correction after a particularly long
bull cycle. In some countries, notably Denmark, Ireland, Spain, and the Netherlands, the cumulated reduction in the real price
of residential assets has been substantial. In Spain and Ireland, the adjustment in housing prices has gone in tandem with the downsizing of
construction sectors, aggravating unemployment. It contributed to the increase
in non-performing loans and the deterioration in banks' balance sheets,
requiring increased provisions and the transfer of problematic assets to
dedicated asset management firms. While further downward adjustments cannot be
excluded for some countries under review, the available data suggest that, for
most countries the cycle has bottomed out and there have been moderate
increases, as in Luxembourg, Malta, Sweden and the United Kingdom.
·        
Unemployment and other indicators of social
stress remain very high[16]. Unemployment soared in particular in
countries concerned by current account reversals, and divergences among Member
States are also very high. Youth and long-term unemployment are specific
concerns, while skill mismatches also need to be addressed. However, since
mid-2013, there have been some signs of stabilisation and timid reductions in
the unemployment rate in some Member States, like Bulgaria, Ireland, Hungary and United Kingdom. To the extent that the current account
reversals lead to a persistent fall in investment and productivity, the
reduction in unemployment may require that wage developments are in line with
productivity, supporting thus both competitiveness and aggregate demand.
The latest
forecasts show that the pace of fiscal adjustment is set to decelerate in the
EU and euro area.
This is thanks to the major consolidation efforts of the past two years.
However, in most Member States there is still a need to step-up fiscal
consolidation. 
·        
Fiscal consolidation is slowing down while
the public debt ratio is peaking in 2014. In 2013,
public finances have continued to improve both in the EU and the euro area
thanks to continued consolidation efforts. In 2014 the pace of adjustment is
expected to slow down. Nevertheless, ongoing consolidation efforts and the
economic recovery should allow for a further reduction of headline deficits. As
regards structural adjustments, the efforts of most Member States were
satisfactory in 2013. Both in the EU and in the euro area, the debt-to-GDP
ratio is forecast to increase further in 2013 and, at a somewhat lower pace, in
2014, when it is expected to peak. 
·        
There are doubts whether the consolidation is
strong enough in some Member State to ensure that the correction of the
excessive deficits remains on track. This is in
particular the case of France and Slovenia. For these countries,
the Commission is  adopting Recommendations inviting Governments to address the
situation in a timely manner. In the case of Italy, which does not have
an excessive deficit, the forecasts point to a need of further consolidation
efforts to ensure the required debt reduction. As far as non-euro area
countries are concerned, Croatia is at risk of missing targets for both
headline deficits and structural adjustment on current trends and in the
absence of additional measures. In Hungary, which does not have an
excessive deficit, the structural balance is loosening which puts at risk the
debt reduction.
4.           Findings by Member State
The imbalances
that fourteen Member States are experiencing are of different natures. On the basis of
the analysis documented in detail in the IDRs, the Commission considers that Belgium,
Bulgaria, Germany, Ireland, Spain, France, Croatia, Italy, Hungary, the
Netherlands, Slovenia, Finland, Sweden, and the United Kingdom
experience imbalances. Among those Member States, Croatia, Italy and
Slovenia are experiencing excessive imbalances. In the case of Spain,
the Commission considers that a significant adjustment has taken place over the
last year and that on current trends imbalances would continue to abate over
time. While this is the basis to conclude that imbalances in Spain are
no more excessive in the sense of the MIP, the Commission stresses that risks
are still present. The differences in the nature of imbalances and excessive
imbalances, including their fiscal space and stage in the surveillance process
mean that the policy responses, to be prepared by the Member States in
cooperation with the Commission should be customised to the specific needs of each
country. 
·     
Belgium continues to experience macroeconomic imbalances, which require
monitoring and policy action. In particular, developments with regard to
the external competitiveness of goods continue to deserve attention as a
persistent deterioration would threaten macroeconomic stability.
More specifically, a
continuing worsening of competitiveness, including its non-cost dimension, may
engender negative consequences for the economy. The ability of manufacturing to
compete internationally has been hampered, which is reflected in eroding producers'
margins and in job destruction. Squaring high labour costs with sustainable job
creation and high standards of living requires a push towards products higher
up in the global value chains. At the same time, a further decoupling between
fast wage and slow productivity growth needs to be prevented. In this respect, Belgium has taken steps that are expected to produce effects in upcoming years. Yet,
preserving the manufacturing basis requires more ambitious action, all the more
so with reforms unfolding in competitor countries. This is related to labour
taxes and making wage formation more responsive to economic and sectorial
realities, and addressing persistent problems with regard to labour market
functioning. Belgium's high public debt remains a concern for the
sustainability of public finances. On the positive side, however, Belgium has managed to stabilize its public debt ratio, is estimated to have met the
recommended deficit target in 2013, and is projected to keep the deficit below
3 per cent of GDP. Moreover, long average maturities, relatively reduced
interlinkages with the domestic financial sector and a relatively healthy
private sector temper risks for the wider economy.
·     
Bulgaria
continues to experience macroeconomic imbalances, which require monitoring
and policy action. In particular, the protracted adjustment of the labour
market warrants policy actions, while the correction of the external position
and corporate deleveraging are progressing well. 
More specifically, Bulgaria experienced a period of very rapid accumulation of imbalances during the boom
phase that coincided with accession to the EU. High foreign capital inflows
contributed to the overheating of the economy and sustained increases of fixed
asset prices. The current account reversed since 2009 but the stock of external
liabilities, though a large share is FDI, remains high. The adjustment appears
to be mostly non-cyclical, but a further reduction in external liabilities
depends on sustaining external competitiveness and a strong export performance.
The ongoing deleveraging of non-financial corporations could limit investments
and growth in some sectors in the short and medium term. Also the weak
non-inclusive labour market limits the adjustment capacity of the economy and
is one of the reasons that holds back potential growth. Unemployment has
increased sharply, as the contraction in employment during the crisis has been
more pronounced than suggested by the contraction of output. The low-skilled
and young workers have been most affected by labour shedding. Despite
relatively low wage costs, after strong increases in recent years, wage floors
may risk pricing the most vulnerable out of the labour market. At the same
time, active labour market policies and the educational system have not been
effective in facilitating the adjustment process so far and hamper a
broad-based accumulation of human capital. 
·     
Germany is experiencing macroeconomic imbalances, which require
monitoring and policy action. In particular, the current account has
persistently recorded a very high surplus, which reflects strong
competitiveness while a large amount of savings were invested abroad. It is
also a sign that domestic growth has remained subdued and economic resources
may not have been allocated efficiently. Although the current account surpluses
do not raise risks similar to large deficits, the size and persistence of the
current account surplus in Germany deserve close attention. The need for action
so as to reduce the risk of adverse effects on the functioning of the domestic
economy and of the euro area is particularly important given the size of the
German economy.
More specifically, relatively low private
and public sector investment together with subdued private consumption over a
longer period contributed to modest growth, falling trend growth, increased
dependence of the economy on external demand and the build-up of the external
surplus. The challenge is, therefore, to identify and implement measures that help
strengthen domestic demand and the economy's growth potential. Higher
investment in physical and human capital, and promoting efficiency gains in all
sectors of the economy, including by unleashing the growth potential of the
services sector, which would also contribute to further strengthening of labour
supply, are central policy challenges. 
·     
Ireland: The
recently completed macroeconomic adjustment programme was instrumental to
manage economic risks and reduce imbalances. However, the remaining macroeconomic
imbalances require specific monitoring and decisive policy action. In
particular, financial sector developments, private and public sector
indebtedness, and, linked to that, the high gross and net external liabilities
and the situation of the labour market mean that risks are still present. The
Commission will put in motion a specific monitoring of the policy
implementation, and will regularly report to the Council and the Euro Group.
This monitoring will rely on post-programme surveillance.
More specifically, starting in 2007, Ireland experienced a collapse of the property market, and measures to address losses in
banks and a fall in government revenues gave rise to severe budgetary problems.
On the back of a loss of market access, Ireland sought international financial
assistance at the end of 2010. Ireland maintained a strong track record of
implementation throughout the programme, which was completed in 2013. The
fiscal consolidation targets under the programme have been met, and Ireland has improved domestic fiscal rules and institutions. Moreover, the headline deficit is projected to meet the targets in 2013 and
2014. Bank deleveraging targets have been met and
capital adequacy ratios have improved. Financial supervision and regulation
have been strengthened. Households have increased their saving rates to reduce
their indebtedness. Labour market reforms contributed to a reduction in
unemployment. House prices have also stabilized and shown signs of recovery.
Nonetheless, more progress is needed as public debt remains very high, as does
external debt, the financial sector is vulnerable with a high amount of
non-performing loans and long-term and youth unemployment remains elevated.
·     
Spain is
experiencing macroeconomic imbalances which require specific monitoring and
decisive policy action. In several dimensions, the adjustment of the
imbalances identified last year as excessive has clearly advanced and the
return to positive growth has reduced risks. Yet, the magnitude and
inter-related nature of the imbalances, in particular high domestic and
external debt levels, mean that risks are still present. The Commission will
continue a specific monitoring of the policies recommended by the Council to Spain in the context of the European Semester, and will regularly report to the Council and
the Euro Group. This monitoring will rely on post-programme surveillance. 
More specifically, the adjustment has been supported by decisive policy actions at the
EU level and by Spain. In particular, the recapitalisation and restructuring of
weaker banks have dispelled systemic concerns about the financial sector and
allowed a smooth ending of the financial assistance programme at the beginning
of 2014. The current account has turned into surplus, as a result of a
combination of import compression and strong exports, supported by
competiveness gains. The housing market has approached stabilisation.
Employment destruction appears to be coming to an end. On the policy front, the
comprehensive agenda of structural reforms outlined in the 2013 NRP is mostly
completed from legislative point of view, and attention is shifting to a
challenging implementation phase. These positive developments have led to a
strong return of confidence, manifest in the fall in market risk premia, the return
of foreign capital inflows and the rise in business and consumer confidence. 
Yet, the adjustment is far from complete
and vulnerabilities persist. More specifically, the very high stock of private
and public debt, both domestic and external, continues to pose risks for growth
and financial stability. Despite its recent contraction, unemployment remains
at alarming levels. The re-orientation of the productive system towards
exporting sectors and the recovery in international competitiveness will have
to be maintained to reduce the very large stock of external liabilities and the
burden that it causes in terms of negative flow of incomes towards the rest of
the world. The adjustment of private sector balance-sheets is advancing, but
high unemployment and falling incomes have limited the pace of deleveraging of
households. Non-financial corporations have reduced debt at a somewhat more
sustained pace. Going forward, the challenge is ensuring that deleveraging will
go hand in hand with positive credit flows to financially healthy borrowers.
Removing hindrances in the functioning of the product and financial markets and
efficient insolvency procedures could reduce the drag on growth from
deleveraging. In the labour market, building on the positive effects of recent
reforms on internal flexibility and wage settings, additional reforms could be
envisaged. Finally, significant revenue shortfalls, higher social expenditure
and costs of bank recapitalisation have led to a substantial pressure on
government deficits and a steep rise in government debt to high levels. The
2013 fiscal deficit target might have been missed, although the improving
macroeconomic prospects should allow Spain to meet the 2014 headline target.
Ensuring a reduction in government debt in the medium-term will require
sustained fiscal efforts.
·     
France
continues to experience macroeconomic imbalances, which require specific
monitoring and decisive policy action. In particular, the deterioration in
the trade balance and in competitiveness as well as the implications of the
high level of public sector indebtedness deserve continuous policy attention.
The need for decisive action so as to reduce the risk of adverse effects on the
functioning of the French economy and of the euro area is particularly important
given the size of the French economy and potential spillovers onto the
functioning of the euro area. Given the need for policy action already called
in the 2013 IDR, the Commission will put in motion a specific monitoring of the
policies recommended by the Council to France in the context of the European
Semester, and will regularly report to the Council and the Euro Group. 
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. Despite
measures taken to foster competitiveness, so far there is limited evidence of
rebalancing. While wages have developed in line with productivity, the labour
cost remains high and weighs on firms' profit margins. The low and decreasing
profitability of private companies, in particular in the manufacturing sector,
may have hampered their ability to grow and improve their export performance.
The unfavourable business environment, and in particular the low level of
competition in services, further aggravate the competitiveness challenge. In
addition, rigidities in the wage setting system result in difficulties for
firms to adjust wages to productivity.  Despite measures taken to reduce the
government deficit since 2010, public debt has continued to increase, which calls
for continued fiscal consolidation and, given the high level of public
expenditure, for specific focus on spending cuts, notably through the search
for efficiency gains. France is projected to miss both headline deficit and
structural adjustment targets over the entire forecast period.
·     
Croatia is
experiencing excessive macroeconomic imbalances, which require specific
monitoring and strong policy action. In particular, policy action is required
in view of the vulnerabilities arising from sizeable external liabilities,
declining export performance, highly leveraged firms and fast-increasing
general government debt, all within a context of low growth and poor adjustment
capacity. The Commission will put in motion a specific monitoring of policy
implementation, and will regularly report to the Council.
More specifically, after an expansionary
phase, in which imbalances accumulated, Croatia is now experiencing a prolonged
bust, in which a range of external and internal risks have come to the fore.
External rebalancing is beset by important risks pending the reduction of Croatia's foreign liabilities to safer levels and is conditioned on improved
competitiveness and broadening exports beyond tourism to support growth. The
deleveraging of non-financial corporates is still at an early stage and
non-performing loan developments in this segment need monitoring. State-owned
enterprises, which in some sectors still play a dominant role and which are often
un-restructured, are overall highly indebted and weakly profitable. Croatia has the lowest activity and employment rates in the EU, which is partly related to
underlying institutions and policy settings. Better labour market functioning
will be crucial to support the growth and adjustment needed in view of external
and internal vulnerabilities. On nearly a range of standard indicators, Croatia's business environment ranks significantly below the average for central and
eastern European Member States. These factors combine to lower potential
growth, which hinders private sector balance sheet repair and increases the
required fiscal consolidation effort. There is a need for significant
additional fiscal consolidation efforts to curtail the deficit and prevent debt
from rising unsustainably. Croatia is in EDP and needs to take effective action
to address the excessive deficit by 30 April 2014. On current trends, in the
absence of additional measures, Croatia risks missing its targets by a large
margin in 2014.
·     
Italy is
experiencing excessive macroeconomic imbalances, which require specific
monitoring and strong policy action. In particular, the implications of the
very high level of public debt and weak external competitiveness, both
ultimately rooted in the protracted sluggish productivity growth, deserve
urgent policy attention. The need for decisive action so as to reduce the risk
of adverse effects on the functioning of the Italian economy and of the euro
area, is particularly important given the size of the Italian economy. The
Commission intends to put in motion a specific monitoring of the policies
recommended by the Council to Italy in the context of the European Semester,
and will regularly report to the Council and the Euro Group.
     More
specifically, high public debt puts a heavy burden on the economy, in
particular in the context of chronically weak growth and subdued inflation.
Reaching and sustaining very high primary surpluses – above historical averages
– and robust GDP growth for an extended period, both necessary to put the
debt-to-GDP ratio on a firmly declining path, will be a major challenge. In
2013, Italy has made progress toward its medium-term fiscal objective. However,
there is a risk that the adjustment of the structural balance in 2014 is
insufficient given the need to reduce the very large public debt ratio at an
adequate pace. The crisis has eroded the initial resilience of the Italian
banking sector and weakens its role to support the recovery of the economy The
losses of competitiveness are rooted in a continued misalignment between wages
and productivity, a high labour tax wedge, an unfavourable export product
structure and a high share of small firms which find it difficult to compete
internationally. Rigidities in wage setting hinder sufficient wage
differentiation in line with productivity developments and local labour market
conditions. Long-standing inefficiencies in the public administration and
judicial system, weak corporate governance, and high levels of corruption and
tax evasion reduce the allocative efficiency in the economy and hamper the
materialisation of the benefits of the adopted reforms. Large human capital
gaps – reflecting low returns to education for younger generations, the
country's specialisation in low-to-medium technology sectors and structural
weaknesses in the education system – adds to the productivity challenge. 
·     
Hungary
continues to experience macroeconomic imbalances, which require monitoring
and decisive policy action. In particular, the ongoing adjustment of the
highly negative net international position, the high level of public and
private debt in the context of a fragile financial sector and deteriorating
export performance continue to deserve very close attention so as to reduce the
important risks of adverse effects on the functioning of the economy. 
     More
specifically, despite a lacklustre export performance, the NIIP has been
improving, reflecting primarily private sector deleveraging. Although there
have recently been some encouraging signs in manufacturing, it will not be
enough to bring out by itself a marked turnaround in export performance. While
the debt level has declined, the imbalance and risks related to private debt
remain, as deleveraging has been hindered by a high share of distressed
borrowers, a depressed housing market, a fragile financial sector, a
substantial share of loans in foreign currency as well as prevailing business
uncertainty. Restoring normal lending to the economy in a sustainable manner
would require improving the operating environment for banks. A high government
debt is another important source of concern. Despite substantial improvements
in the structural fiscal balance, a weakened exchange rate, a poor growth
potential and elevated financing costs have kept the debt from declining. Hungary is not expected to meet its medium-term objective and its structural balance is
projected to deteriorate in 2014. 
·     
The Netherlands continues
to experience macroeconomic imbalances, which require monitoring and policy
action. In particular, macroeconomic developments regarding private sector
debt and ongoing deleveraging, coupled with remaining inefficiencies in the
housing market, deserve attention. Although the large current account surplus
does not raise risks similar to large deficits, and is partly linked to the
need for deleveraging, the Commission will follow the developments of the
current account in the Netherlands in the context of the European Semester. 
     More
specifically, rigidities and distorted 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 corporates 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 net
assets. In recent years, subdued domestic demand in the wake of the global
crisis has further pushed up the external surplus. Over the past years there
have been improvements in this regard with policies implemented to curb
mortgage-financing. Deleveraging will continue to weigh on economic activity
but a stabilising housing market and a significantly positive net asset
position of households limit the risks. As regards public finances, the Netherlands is forecast to miss its headline deficit target in 2014, the year in which the
excessive deficit should be corrected, although it is expected to have adopted
the structural measures of the recommended size in 2013-14.
·     
Slovenia continues to experience excessive macroeconomic imbalances which
require specific monitoring and continuing strong policy action. Imbalances
have been unwinding over the last year, thanks to macroeconomic adjustment and decisive
policy action by Slovenia. Yet the magnitude of the necessary correction means
that substantial risks are still present. The Commission will continue the specific
monitoring of the policies recommended by the Council to Slovenia in the context of the European Semester, and will regularly report to the Council
and the Euro Group.
More specifically, the risk stemming from an
economic structure characterized by weak corporate governance, high level of
state involvement in the economy, losses in cost competitiveness, the corporate
debt overhang, the increase in government debt warrant very close attention.
While considerable progress has been made in repairing the banks' balance
sheets, determined action with respect to the full implementation of a
comprehensive banking sector strategy, including restructuring, privatisation
and enhanced supervision is still required.
Slovenia continues
to struggle with the legacy of its previous boom, with corporates remaining
unsustainably over-indebted. The transfer of non-performing loans (NPLs) to the
Bank Asset Management Company (BAMC) has improved the banks' balance sheets but
NPLs remain elevated relative to pre-crisis levels and still need to be durably
restructured based on the recently amended insolvency framework. As domestic
demand, and especially investment, contracted significantly, the current
account has corrected sharply, turning into a large surplus, but cost competitiveness
losses have not been recouped and reforms so far have not fully addressed the
labour market flexibility and competitiveness challenge. Weak corporate
governance, particularly but not only in state-owned enterprises, reduces the
overall efficiency of the economy through possible inefficient allocation of
resources. Significant withdrawal of the state from the corporate and financial
sector, combined with a comprehensive strategy for the management of core
assets and divestment of non-core assets, could improve the adjustment capacity
of the economy. Finally, the substantial increase in government debt in recent
years, albeit from a relatively low level, creates new challenges. While the
headline fiscal deficit is expected to be above the targets due to the
significant expenditures related to bank recapitalisation in 2013 and 2014, the
deficit is also projected to exceed the target in 2015 under a no-policy-change
scenario. The structural adjustment likewise falls slightly short of what would
be needed. Taken together, these shortcomings and challenges weigh on the near
term macroeconomic performance. The recent fall in sovereign bond yields
relieves some pressure but the pace of implementation of the programme of
structural reform needs to accelerate.
·     
Finland
continues to experience macroeconomic imbalances, which require monitoring
and policy action. In particular, the weak export performance during the
last years, driven by industrial restructuring, cost and non-cost
competitiveness factors, deserve continued attention. 
More specifically, high import growth
prior to the crisis and subdued exports afterwards explained the erosion in
external balance. However, the current account has stabilised recently and
external sustainability is not a concern. The country continued to lose export
market shares at a fast pace, despite the recovery in world trade. Finland's integration into global value chains has played a role in the declining
performance of exports, while the industrial restructuring has not yet been
able to make up for the large downsizing of the electronics and forestry
industries. In turn, the adjustment capacity of the economy is constrained by
low productivity and weak competitive pressures in services as well as
increasing costs due to dynamic wage growth and a high energy-intensity.
Exporters have thus been able to sustain price competitiveness mainly by
compressing profit margins, which have limited their capacity to translate the
high innovation potential into new products. Non-cost factors appear to explain
most of the deterioration in competitiveness: a limited number of large
exporting firms selling a narrow product range, a lower propensity of small
companies to export as well as less efficient R&D spending. In turn, weak
investment, a declining working age population and a significant drop in
productivity weigh on potential growth. As regards public finances, the
structural deficit is expected to be slightly above its medium-term objective
in 2014 while, partly due to the unfavourable growth dynamics, the public debt
is projected to increase to above 60 per cent of GDP.
·     
Sweden continues to experience macroeconomic imbalances, which require
monitoring and policy action. In particular, developments regarding
household indebtedness, coupled with inefficiencies in the housing market,
continue to warrant attention. Although the large current account surplus does
not raise risks similar to large deficits, and is partly linked to the need for
deleveraging, the Commission will follow the developments of the current
account in Sweden in the context of the European Semester. 
More specifically, household debt has
increased again after a period of stabilisation, as the main contributing
factors – low interest rates on mortgages, debt-bias in taxation, slow mortgage
amortisation and limited housing supply – remain in place. Various indicators
of credit supply and demand conditions do not indicate imminent deleveraging
pressures. After stabilising in recent years, house prices increased again in
2013, driven by favourable demand conditions and supply inefficiencies.
Moreover, rental market inefficiencies, cumbersome planning procedures and
little competition in construction, have also contributed to the house price
dynamics. More stable house prices are needed to limit private indebtedness and
reduce macroeconomic risks, once debt service costs increase. The recent
macroprudential measures are instrumental, but likely not enough, to reduce
macroeconomic risks. In particular, strong tax incentives for debt financing
are perceived as key drivers of house prices. Higher residential investment
would also improve the savings‑investment balance. As regards the
non-financial corporate sector indebtedness the analysis finds that it does not
give rise to macroeconomic risks. Moreover, recent reforms in company taxation
are likely to further reduce the level of corporate debt by limiting tax
minimisation by multinationals.
·     
The United
  Kingdom continues to experience macroeconomic
imbalances, which require monitoring and policy action. In particular,
developments in the areas of household debt, linked to the high levels of
mortgage debt and structural characteristics of the housing market, as well as
unfavourable developments in export market shares, continue to warrant
attention. 
More specifically, while recent growth in
economic activity is welcome, it is driven mostly by household consumption and
is accompanied by a rising current account deficit. Business investment and net
exports are yet to pick up from their current low levels. Containing high
indebtedness, in particular of the household sector, while minimising the
impact on investment and growth, would help limit medium-term risks and
vulnerability to rises in the cost of borrowing. Credit growth for mortgage loans
has been modest but rising from high pre-existing levels of household
indebtedness. The risks in the housing sector relate to a continuing structural
under-supply of housing; the relatively slow response of supply to increases in
demand results in high house prices, particularly in London and the Southeast,
and in household mortgage indebtedness. While the declining export market share
is unlikely to pose short-term risks, together with the current account
deficit, it still points to structural challenges. These are related to skills
gaps and a low level of infrastructure endowment. As regards public finances,
the UK seems to continue missing its headline deficit targets and its
structural adjustment targets by wide margins.
For three
countries under review, no macroeconomic imbalances have been identified. The IDRs shows
that the macroeconomic risks in Denmark and Malta have abated and
are better controlled. Also, there is no evidence of imbalances in the sense of
the MIP in Luxembourg. However, careful surveillance and policy
coordination is necessary at all times for all Member States to identify
emerging risks and put forward the policies that contribute to growth and jobs.
This surveillance will continue in the context of the European Semester.
·     
The macroeconomic challenges in Denmark no longer constitute substantial
macroeconomic risks and are no longer identified as imbalances in the sense of
the MIP. The adjustment on the housing market and the implications of a
high private sector debt for the real economy and the stability of the
financial sector seem contained.  However, these developments, as well as
drivers of external competitiveness deserve continued monitoring.  
     More
specifically, macro-financial risks stemming from elevated private debt appear
limited, even in the face of tail risks such as combined adverse interest rate
shocks and unfavourable labour market developments. The high level of household
debt is matched by high household assets, mirroring large savings in pension
funds and real estate. Households have so far been financially capable of
handling the house price adjustment since 2007, as the number of arrears has
stayed at a very low level. Moreover, various stress test and studies have
concluded that the households would be resilient in the event of adverse
shocks. The financial sector appears stable with the remaining challenges
tackled through strengthened regulatory and supervisory measures. Regarding
competitiveness, Denmark has been losing export market shares; this is linked
to high wage growth and weak productivity growth. However, the mismatch between
productivity and wages seems to be a cyclical phenomenon.  In view of the high
current account surpluses, the trend decline in exports market shares does not
point to short-term risks. As regards public finances, Denmark is expected to have sustainably corrected its excessive deficit in 2013.
·     
The macroeconomic challenges of Luxembourg have not been identified as
imbalances in the sense of the MIP. They stem from a growth model based on
an efficient financial sector, which has weathered the crisis well. Still,
losses in the manufacturing competitiveness, the evolution of the housing
market and the high level of indebtedness of the private sector deserve
continued monitoring. 
More specifically, the analysis of the
current account surplus shows that it does not stem from an anaemic domestic
demand, but is rather the result of the particular growth model of the country
strongly based on financial services. Still, it masks a large and steadily
increasing deficit in merchandise trade, which broadly comes from disappointing
exports. Losses of export market shares are largely associated with unit labour
costs rising much faster than in trading partner countries, driven to a certain
extent by the wage setting mechanism. In such regard, finding a structural
solution to the temporary modulation of the automatic wage indexation
constitutes a challenge. Risks to the domestic financial stability stemming
from the presence of a large financial sector exist, but they are relatively
contained as the sector is diversified and specialised at the same time.
Furthermore, domestic banks post sound capital and liquidity ratios. The high
level of indebtedness of the private sector and in particular of the
non-financial corporations mainly reflects the presence of a large number of
multinational firms that use their branches or subsidiaries in Luxembourg for
intra-group financing operations. The dynamism of house prices represents an
increasing source of concern. Finally, the current favourable position of
public finances is highly dependent on the sustainability of the growth model
based on a buoyant financial sector and presents a high sustainability risk in
the long term. In this vein, the recently implemented pension reform is
insufficient to cope with the challenge. However the structural balance is
above the medium-term objective.
·     
The macroeconomic challenges in Malta no longer constitute substantial
macroeconomic risks and are no longer identified as imbalances in the sense of
the MIP. Although indebtedness remains high, risks to the sustainability of
private and public sector debt and the stability of the financial sector appear
contained, even if they deserve continued monitoring. 
More specifically, the analysis in the IDR
finds that financial stability indicators remain sound. Still, in light of the
structural nature of the risks in the sector, a continuation of the current
prudent supervisory and risk-taking practices is key. The housing market has stabilised
and thus risks arising from over-exposure to property are limited. Private debt
is on the decrease; the corporate deleveraging is taking place in an orderly
manner and credit market pressures are limited. As regards public finances, Malta is expected to meet its nominal deficit targets in 2013 and 2014. As regards external
sustainability, trade performance has been positive, thanks to product and
geographical market orientation and non-cost competitiveness factors; the
current account balance is in surplus. Still, external competitiveness could
benefit from active policy response to cost-adjustments in competitor
countries.
­­­­­­­­­­­­­­­­­­____________________________
[1]               Commission Communication "Taking stock of the Europe
2020 strategy for smart, sustainable and inclusive growth", COM(2014)130,
5.3.2014.
[2]               See the Commission services' winter forecasts, of 25
February 2014, European Economy, 2 (2014).
[3]               See 'Cross-Border Spillovers in Confidence,' Quarterly
Report on the Euro Area, 2013 (3), 26-30, and 'Assessing the Impact of
Uncertainty on Consumption and Investment'. Quarterly Report on the Euro
Area, 2013 (2), 7-16, and 'The Economic Effects of Policy Uncertainty, '
box I.1 in European Economy, 2014 (2); 28-30. 
[4]               See 'The Euro Area's Growth Prospects over the Coming
Decade' and 'The Growth Impact of Structural Reforms,' Quarterly Report on
the Euro Area, 2013 (4), 7-16 and 17-27, and 'Post-Crisis Total Factor
Productivity in the EU,' box I.2 in European Economy, 2014 (2);
31-4.
[5]               See 'Drivers of Diverging Financing Conditions Across
Member States,' Quarterly Report on the Euro Area, 2013 (1), 19-25, and
'Financial Fragmentation and SMEs' Financing Conditions, box I.2, European
Economy, 2013 (7): 20-3.
[6]               Council Recommendation (2013/C 217/24) of 9 July 2013
(OJ C 217, 30.7.2013, p. 97).
[7]               COM(2013) 790 final, 13.11.2013.
[8]               See 'The Role of FDI in Preventing Imbalances in the Euro
Area,' Quarterly Report on the Euro Area, 2013 (2), 17-25.
[9]               See 'The Cyclical Component of Current Account Balances,'
box I.3 in European Economy, 2014 (2); 35-8.
[10]             See 'Current Account Surpluses in the EU,' European
Economy, 2012 (9).
[11]             See 'Ageing Report,' European Economy,
2012 (2) and 'Fiscal Sustainability,' European Economy, 2012 (8).
[12]             'Labour Costs Pass-Through, Profits and Rebalancing in Vulnerable
Member States,' Quarterly Report on the Euro Area, 2013 (3), 19-25.
[13]             See 'Labour Market Developments in Europe,' European
Economy, 2013 (6).
[14]             See 'Drivers of Diverging Financing Conditions across
Member States,' Quarterly Report on the Euro Area, 2013 (1), 19-25, and
'Assessing the Private Sector Deleveraging Dynamics,' Quarterly Report on
the Euro Area, 2013 (1), 26-32.
[15]             See 'Product Market Review: Financing the Real
Economy,' European Economy, 2013 (8), 'Financial Dependence and Growth,'
Quarterly Report on the Euro Area, 2013 (3), 7-18, and 'Firms’ Investment
Decisions in Vulnerable Member States,' Quarterly Report on the Euro Area,
2013 (4), 29-35.
[16]             See also the Commission Communication 'Strengthening
the Social Dimension of the Economic and Monetary Union,' COM(2013) 690,
2.10.2013 and 'Draft Joint Employment Report 2014,' COM(2013) 801 final, 13.11.2013.