Recommendation for a COUNCIL RECOMMENDATION on the economic policy of the euro area
Date: 2016-11-16
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: EU employment policy, Economic and Monetary Union, European social policy, banking, economic growth, economic policy, euro area, fiscal policy, investment promotion, unemployment

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   EUROPEAN COMMISSION  Brussels, 16.11.2016  COM(2016) 726 final   Recommendation for a COUNCIL RECOMMENDATION on the economic policy of the euro area  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the economic policy of the euro area 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 136 in conjunction with Article 121(2) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 5(2) thereof, 

Having  regard  to  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16  November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 

Having regard to the recommendation of the European Commission, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas:  

(1) 

Economic  recovery  in  the  euro  area  continues,  but  remains  fragile.  There  has  been 
significant progress in recent years: since 2015, euro area GDP has recovered its pre-
crisis  level  in  real  terms  and  unemployment  has  declined  to  its  lowest  level  since 
2010-11.  However,  aggregate  demand  is  sluggish,  inflation  is  well  below  target,  in 
spite  of  very  accommodative  monetary  policy  by  the  European  Central  Bank,  and 
growth  is  hindered  by  the  legacies  of  the  crisis,  such  as  persisting  macroeconomic 
imbalances  and  a  high  level  of  indebtedness  in  all  sectors  of  the  economy,  which 
require deleveraging and reduce resources available for consumption and investment. 
Additionally, while the growth potential of the euro area economy has been on a long-
term downward trend, that trend has been further accentuated by the crisis. In spite of 
signs  of  improvement,  the  persistent  investment  gap  and  the  high  level  of 
unemployment  create  the  risks  of  further  dampening  growth  prospects.  The 
asymmetric  nature  of  the  rebalancing  in  the  euro  area  economy  has  continued,  with 
only net debtor countries correcting their imbalances, and is resulting in an increasing 
current  account  surplus.  As  part  of  the  global  agreement  within  the  G20,  euro  area 
Member  States  are  called  to  use  all  policy  tools  –  monetary,  fiscal  and  structural  – 

1 
2 

OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 

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(2) 

(3) 

(4) 

individually  and  collectively  –  achieve  strong,  sustainable,  balanced  and  inclusive 
growth. 

Ambitious structural reforms should facilitate the smooth and efficient reallocation of 
human  and  capital  resources,  help  to  address  the  challenges  of  the  ongoing 
technological  and  structural  changes.  Reforms  that  create  an  enabling  business 
climate, complete the Single Market and remove barriers to investment are necessary. 
Those  efforts  are  crucial  for  increasing  productivity  and  employment,  strengthening 
convergence and enhancing the growth potential and adjustment capacity of the euro 
area  economy.  Structural  reform  implementation,  by  creating  efficient  markets  with 
responsive  price  mechanisms,  would  support  monetary  policy  through  facilitating  its 
transmission  to  the  real  economy.  Reforms  that  remove  investment  bottlenecks  and 
support investment can bring a double benefit by supporting economic activity in the 
short  term  and  creating  capacity  for  long-term  growth.  Reforms  that  improve 
productivity are particularly important for the Member States with large deleveraging 
needs linked to high external debt, as faster growth helps to reduce the debt as a share 
of  GDP.  Boosting  price-  and  non-price  competitiveness  would  further  contribute  to 
external  rebalancing  in  those  countries.  Member  States  with  large  current  acccount 
surpluses can contribute to euro area rebalancing by introducing measures, including 
structural  reforms,  that  facilitate  channelling  the  excessive  savings  to  domestic 
demand,  in  particular  by  strengthening  investment.  The  current  environment  of  low 
interest  rates  also  offers  additional  opportunities  in  this  regard,  notably  in  countries 
with significant fiscal space. 

Better  coordination  of  the  implementation  of  structural  reforms,  including  those 
prescribed in the country-specific recommendations and those needed to complete the 
Economic and Monetary Union (EMU), can create positive spillovers in the Member 
States and strengthen their positive short-term effects. Eurogroup thematic discussions 
have  proved  valuable  for  building  common  understanding  of  reform  priorities  in  the 
euro  area,  sharing  best  practices,  promoting  reform  implementation  and  structural 
convergence.  The  Eurogroup  should  continue  these  discussions,  strengthening  them 
where possible, making effective use of agreed common principles and benchmarking. 
The  National  Productivity  Boards,  to  be  established  in  response  to  the  Council 
recommendation adopted on 20 September 2016,3 can also contribute to the debate at 
the national level and to the design of structural reforms necessary for Member States 
in the context of the euro area economy. 

A strong coordination of national fiscal policies, based on common rules, is essential 
to arrive at an appropriate aggregate fiscal stance and for the proper functioning of the 
monetary  union.  The  common  fiscal  rules  are  geared  towards  pursuing  debt 
sustainability  at  the  national  level,  while  providing  room  for  macroeconomic 
stabilisation. The national and aggregate fiscal stances of the euro area have hence to 
balance  the  double  objective  of  ensuring  long-term  sustainability  of  national  public 
finances and short-term macroeconomic stabilisation at both country and the euro area 
level. At the current juncture of high uncertainty about the strength of the recovery and 
the  level  of  spare  capacity  in  the  economy,  when  monetary  policy  has  delivered 
substantial  accommodation,  fiscal  policy  at  the  euro  area  level  is  necessary  to 
complement monetary policy in supporting demand, notably investment, and moving 
out  of  low  inflation.  The  effectiveness  of  fiscal  policy,  including  of  spillover  effects 

3 

OJ C 349, 24.9.2016, p. 1. 

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across countries, is enhanced by the context of low interest rates. There is thus a case 
to  recommend  a  more  positive  fiscal  stance  for  the  euro  area  as  a  whole.  For  2017,  
the Commission considers that a fiscal expansion of up to 0.5% of GDP is desirable at 
the level of the euro area as a whole in the present circumstances4. This is a prudent 
and  pragmatic  target,  within  a  range  of  possible  targets  which  has  0.3%  as  a  lower 
bound  and  0.8%  as  an  upper  bound,  in  order  to  balance  both  macroeconomic 
stabilisation  and  fiscal  sustainability  concerns.  At  the  same  time,  government  debt 
remains  high  and  there  is  still  a  need  to  make  public  finances  sustainable  in  the 
medium term in a number of Member States. For this reason, it is necessary to ensure 
appropriate  differentiation  of  fiscal  efforts  across  the  Member  States,  taking  into 
account  fiscal  space  and  the  spillovers  across  euro  area  countries.  Member  States 
which are over-achieving their fiscal objectives should use their fiscal space to support 
domestic demand and quality investments, including cross-border ones, in the context 
of the Investment Plan for Europe. For instance, guarantees to the European Fund for 
Strategic  Investments  are  a  particularly  effective  way  for  Member  States  with  fiscal 
space  to  maximise  the  impact  on  the  real  economy  and  recovery  in  the  euro  area. 
Member  States  that  need  further  fiscal  adjustments  under  the  preventive  arm  of  the 
Pact  should  make  sure  to  be  broadly  compliant  with  the  Stability  and  Growth  Pact's 
requirements  for  the  coming  year.  Under  the  corrective  arm  of  the  Pact,  Member 
States  need  to  ensure  a  timely  correction  of  their  excessive  deficits,  including  by 
providing  fiscal  buffers  against  unforeseen  circumstances.  Structural  reforms,  in 
particular  those  that  increase  productivity,  would  support  growth  and  improve 
sustainability  of  public  finances.  In  addition,  a  decisive  improvement  of  the 
composition  and  management  of  national  budgets,  on  both  the  revenue  and 
expenditure  sides,  by  shifting  resources  towards  tangible  and  intangible  investment 
would increase the impact of budgets on demand in the short term and productivity in 
the  longer term.  Effective  national fiscal  frameworks  are necessary  to strengthen the 
credibility of Member States' policies and help strike the right balance between short-
term macroeconomic stabilisation, debt sustainability and long-term growth.  

Labour markets continue to recover gradually in the euro area, with a steady reduction 
of  unemployment.  However,  the  rates  of  long-term  unemployment  and  youth 
unemployment  remain  high,  while  poverty  has  stabilised  at  a  high  level  in  several 
Member  States.  Despite  some  progress  with  reforms  to  improve  the  resilience  and 
adjustment  capacity  of  labour  markets,  significant  differences  persist  across  the  euro 
area,  which  continue  to  challenge  the  smooth  functioning  of  the  euro  area.  Well-
designed,  fair  and  inclusive  labour  market,  social  protection  and  tax  and  benefit 
systems  are  necessary  for  a  frictionless  and  constant  reallocation  of  labour  towards 
more productive activities, to support the (re)integration of those who are affected by 
transitions  between  jobs  or  are  excluded  from  the  labour  market,  to  reduce 
segmentation,  and  promote  social  fairness,  including  by  increasing  the  chances  of 
quality employment. They will also result in more effective automatic stabilisation and 
stronger  growth  and  employment  which  are  important  for  addressing  the  social 
challenges in the euro area. Necessary reforms encompass: (i) changes in employment 
protection  legislation  aiming  at  reliable  contractual  arrangements,  that  provide 
flexibility  and  security  for  both  employees  and  employers,  promote  labour  market 
transitions, avoid a two-tier labour market and allow for labour cost adjustment when 
needed,  an  area  where  reform  efforts  have  in  recent  years  been  particularly  intense;  

(5) 

4 

See COM(2016) 727 final,16.11.2016. 

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(7) 

(ii) enhancement of skills by improving the performance and efficiency of education 
systems  and  comprehensive  lifelong  learning  strategies,  focusing  on  labour  market 
needs; (iii) effective active labour market policies, to help the unemployed, including 
the  long-term  unemployed,  re-enter  the  labour  market  and  increase  labour  market 
participation  and  (iv)  modern  and  adequate  social  protection  systems  that  support 
those  in  need,  including  the  unemployed  and  those  outside  the  labour  market,  and 
provide  incentives  for  labour  market  integration.  Moreover,  shifting  taxation  away 
from labour, in particular for low-income earners, and ensuring equitable tax systems 
can  improve  labour  market  outcomes.  Euro  area  Member  States  that  have 
implemented such reforms are more resilient and demonstrate better employment and 
social performance.  

The  establishment  of  the  Banking  Union  has  progressed,  but  it  remains  unfinished. 
The  lack  of  a  common  deposit  insurance  scheme  and  of  a  common  backstop  for  the 
Single  Resolution  Fund  hamper  the  ability  of  the  Banking  Union  to  sever  the  link 
between banks and sovereigns. While the overall  resilience of the euro area  banking 
sector has increased since the crisis, pressure on banks has mounted due to a number 
of  factors,  such  as  high  levels  of  non-performing  loans,  inefficient  business  models 
and  overcapacity  in  some  Member  States,  all  resulting  in  low  profitability  and 
challenges to viability. That  pressure impairs banks' ability  to provide lending  to  the 
economy. Risks also extend to the real economy, where the level of public and non-
financial private debt in some Member States remains elevated. There is a need for a 
continued  orderly  deleveraging  in  the  private  sector  through  working  out,  servicing 
and  if  necessary  restructuring  of  viable  debt,  and  by  liquidating  the  stocks  of  non-
viable  debt,  so  that  capital  can  be  reallocated  more  quickly  and  efficiently.  In  this 
context,  dealing  with  still  elevated  levels  of  non-performing  loans  and  following 
common  principles  in  the  design  of  insolvency  frameworks  for  businesses  and 
insolvency  proceedings  and  out-of-court 
households, 
settlement frameworks, constitute key components of a successful and growth-friendly 
deleveraging process.  

including  by 

improving 

Over  the  last  year,  some  progress  has  been  made  on  the  initiatives  presented  in  the 
Five Presidents' Report on completing Europe's EMU, such as the increased role of the 
euro  area  dimension  in  the  European  Semester,  the recommendation  on  the  National 
Productivity  Boards  and  the  establishment  of  the  European  Fiscal  Board  within  the 
Commission.  Work  is  also  ongoing  on  improving  transparency  and  reducing 
complexity  of  fiscal  rules.  However,  agreement  on  other  initiatives  with  crucial 
importance  for  EMU,  such  as  the  European  Deposit  Insurance  Scheme  proposed  by 
the  Commission  in  November  2015,  is  still  missing.  Moreover,  there  are  broader 
challenges to address in the light of the Five Presidents' Report. The Commission has 
announced  its  intention  to  present  in  March  2017  a  White  Paper  on  the  future  of 
Europe, which will also include the future of EMU. Agreeing on an operational way 
forward requires a shared sense of ownership and a common sense of purpose among 
all  euro  area  Member  States  and  EU  institutions,  and  also  among  non-euro  area 
Member  States,  as  a  strong  EMU  will  help  to  address  the  challenges  facing  the  EU 
more  forcefully  and  will  have  a  positive  impact  on  non-euro  area  Member  States  as 
well, 

HEREBY  RECOMMENDS  that  euro  area  Member  States  take  action,  individually  and 
collectively, within the Eurogroup in the period 2017-2018 to:  

1. 

Pursue  policies  that  support  growth  in  the  short  and  the  long  term,  and  improve 
adjustment  capacity,  rebalancing  and  convergence.  Prioritise  reforms  that  increase 

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productivity, improve the institutional and business environment, remove bottlenecks 
to investment, and support job creation. Member States with current account deficits 
or  high  external  debt  should  raise  productivity  while  containing  unit  labour  costs. 
Member  States  with  large  current  account  surpluses  should  accelerate  the 
implementation  of  measures  that  help  to  strengthen  their  domestic  demand,  in 
particular investment. 

Deliver  an  overall  positive  fiscal  stance  contributing  to  a  balanced  policy  mix,  
to support reforms and to strengthen the recovery through a fiscal expansion of up to 
0.5%  of  GDP  in  2017.  Combine  national  efforts  to  secure  long-term  fiscal 
sustainability  in  respect  of  the  Stability  and  Growth  Pact  with  short-term 
macroeconomic  stabilisation  for  the  euro  area,  using  all  the  room  for  manoeuvre 
available  under  the  Stability  and  Growth  Pact.  Differentiate  the  fiscal  effort  by 
individual Member States by better taking into account their respective position with 
regard to the requirements under the Stability and Growth Pact, the situation of the 
euro area aggregate and spillovers across euro area countries: (i) for Member States 
which  are  over-achieving  their  fiscal  objectives,  use  their  fiscal  space  to  support 
domestic demand and quality investments, including cross-border ones, as part of the 
Investment  Plan  for  Europe;  (ii)  for  Member  States  that  need  further  fiscal 
adjustments under the preventive arm of the Pact, make sure to be broadly compliant 
with the requirements of the Stability and Growth Pact; (iii) for Member States under 
the corrective arm, ensure a timely correction of their excessive deficits, including by 
providing fiscal buffers against unforeseen circumstances. Improve the composition 
of public finances by creating more room for tangible and intangible investment and 
ensure the effective functioning of national fiscal frameworks. 

Implement  reforms  that  promote  job  creation,  social  fairness  and  convergence, 
underpinned by an effective social dialogue. They should combine: (i) reliable labour 
contracts  which  provide  flexibility  and  security  for  employees  and  employers;  
(ii) quality and efficient education and training systems and comprehensive lifelong 
learning  strategies  targeted  at  labour  market  needs;  (iii)  effective  active  labour 
market  policies  to  support  labour  market  participation;  (iv)  modern  and  adequate 
social protection systems that support those in need and provide incentives for labour 
market integration. Shift taxes away from labour, particularly for low-income earners 
and in Member States where cost competitiveness lags behind the euro area average, 
and make it budgetarily neutral in countries without the fiscal room for manoeuvre. 

Agree  on  a  European  deposit  insurance  scheme  on  the  basis  of  the  Commission's 
proposal of November 2015 and start work on the common backstop for the Single 
Resolution  Fund  to  make  it  operational  before  the  end  of  the  Fund's  transitional 
period. Devise and implement an effective euro-area wide strategy to address risks to 
the  viability  of  the  banking  sector,  including  as  regards  the  high  level  of  non-
performing  loans,  inefficient  business  models  and  overcapacity.  In  Member  States 
with large stocks of private debt, promote an orderly deleveraging. 

Accelerate  initiatives  to  complete  the  EMU,  in  full  respect  of  the  EU's  internal 
market  and  in  an  open  and  transparent  manner.  Implement  the  remaining  actions 
under stage 1 of the Five Presidents' Report on completing Europe's EMU. 

2. 

3. 

4. 

5.  

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Done at Brussels, 

For the Council 
The President 

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