Recommendation for a COUNCIL RECOMMENDATION on the economic policy of the euro area
Date: 2017-11-22
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: EU employment policy, Euro Group (euro area), economic growth, economic reform, fiscal policy, investment promotion, stability pact, structural adjustment, unemployment

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   EUROPEAN COMMISSION  Brussels, 22.11.2017  COM(2017) 770 final  Recommendation for a COUNCIL RECOMMENDATION on the economic policy of the euro area {SWD(2017) 660 final}  
 
 
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) 

The  economic  expansion  in  the  euro  area  continues  and  has  become  increasingly 
broad-based  across  countries.  The  recovery  is  increasingly  driven  by  domestic 
demand, with private consumption as the key driver of growth and investment picking 
up. Employment continued to increase throughout 2016 and the first half of 2017. The 
unemployment  rate  has  seen  a  significant  reduction,  though  it  is  still  higher  than  in 
2008.  The  recovery  in  the  euro  area  is  nonetheless  characterised  by  some  atypical 
features: subdued core inflation and wage growth that do not reflect the labour market 
improvements  as  signalled  by  standard  labour  market  indicators,  a  large  current 
account  surplus  and  a  persisting,  though  declining,  investment  gap.  In  particular, 
subdued  wage  growth  appears  to  be  due  to  remaining  labour  market  slack  in  some 
economies,  low  inflation  expectations  feeding  in  wage  negotiations  and  low 
productivity  growth.  Real  household  income  has  increased  but  remains  below  2008 
levels in many countries. Divergences across euro area countries in terms of GDP per 
capita  and  unemployment  rates  persist.  The  rates  of  long-term  unemployment  and 
youth  unemployment  are  still  high  while  poverty,  social  exclusion  and  inequality 
remain a serious concern in several Member States. 

1 
2 

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

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(2) 

(3) 

Overall, on the basis of the reading of the economic indicators for the euro area, there 
appears  to  be  a  case  for  further  supporting  demand,  investment  and  wage  growth 
without incurring the risk of triggering inflationary pressures, while fostering internal 
and  external  rebalancing  and  economic  and  social  convergence.  At  the  same  time, 
signs  of  newly  emerging  imbalances,  e.g.  in  the  housing  market  in  some  Member 
States, need to be closely monitored.3 

Significant  imbalances  persist  in  the  euro  area.  While  much  progress  has  been 
achieved  among  net  debtor  countries  in  correcting  their  external  balances,  large 
current  account  surpluses  remain  in  some  creditor  countries,  reflecting  an  overall 
shortfall in aggregate demand. These generate a surplus for the euro area of 3.3% of 
GDP  in  2016,  projected  to  decline  to  2.9%  of  GDP  in  2019.  The  net  international 
investment  positions  of  the  most  indebted  Member  States  have  been  improving  at  a 
slow pace and sustained rebalancing efforts are still needed. Countries that had large 
current  account  deficits  for  a  long  time  still  have  large  negative  net  international 
investment  positions  that  are  generally  coupled  with  large  stocks  of  private  or 
government  debt  and  constitute  a  vulnerability.  At  the  same  time,  efforts  are  also 
needed  in  large  current  account  surplus  countries  to  support  domestic  demand  and 
thereby the rebalancing of the euro area. 

(4)  Wage  growth  contributes  to  the  economic  recovery  in  the  euro  area  by  supporting 
aggregate  demand,  reduces  inequalities  and  ensures  high  standards  of  living  in  the 
area.  Efficient  wage  setting  mechanisms  should  ensure  that  wages  are  differentiated 
depending  on  country-specific  conditions  and  taking  due  account  of  changes  in 
productivity.  Implementing  structural  reforms  that  increase  productivity  in  all 
countries,  improving  the  quality  and  composition  of  public  expenditure  to  support 
investments,  promoting  wage  growth  and  stronger  demand  dynamics  in  net  creditor 
countries  and  implementing  measures  that  contain  growth  in  unit  labour  costs  in  net 
debtor countries would help accelerate the rebalancing process in the euro area. 

(5) 

(6) 

Consistency  and  balance  in  the  overall  macroeconomic  policy  mix  of  the  euro  area, 
including  monetary,  fiscal  and  structural  policies,  is  crucial  to  ensure  a  more  robust 
and sustainable economic recovery. In recent years, this policy mix has been skewed 
towards  monetary  policy,  which  resorted  to  new  unconventional  tools  to  achieve the 
ECB's  medium-term  inflation  objective,  thereby  supporting  growth  and  job  creation. 
The ECB announced to start a recalibration of its asset purchases as of January 2018. 
This calls for a supportive role from other policies, in Member States where space for 
policy action is available.  

A strong coordination of national fiscal policies, based on common rules, is essential 
to arrive at an appropriate aggregate fiscal stance for the euro area 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  fiscal  stances  for  the  Member  States  and  at 
aggregate level for the euro area have hence to balance the objectives of ensuring the 
long-term sustainability of national public finances and the short-term macroeconomic 
stabilisation  at  country  and  euro  area  level.  In  the  light  of  the  current  economic 
recovery in the euro area characterised by some atypical features, the debt legacy from 
the  crisis  and  the  expected  recalibration  of  asset  purchases  by  the  ECB,  a  broadly 
neutral  fiscal  stance  at  aggregate  level  for  the  euro  area  appears  appropriate.  An 

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See Alert Mechanism Report 2018.  

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(7) 

(8) 

(9) 

appropriate differentiation of fiscal efforts across euro area Member States, taking into 
account fiscal space and the spillovers across countries, is required. 

A decisive improvement in the composition and management of national budgets, on 
both  the  revenue  and  expenditure  sides,  for  instance  by  shifting  resources  towards 
tangible  and  intangible  investment,  would  increase  the  impact  of  public  budgets  on 
demand in the short term and raise productivity in the longer term. Improvements in 
the  functioning  of  national  fiscal  frameworks  and  well-managed  spending  reviews 
support the pursuit of credible and growth-friendly fiscal policies. 

A  well-designed  structure  of  taxation  is  key  to  promote  growth  and  employment,  as 
well as to contribute to reduce inequalities. Simplifying tax systems and addressing tax 
fraud,  evasion  and  avoidance  are  essential  to  make  tax  systems  more  efficient  and 
fairer.  This  can  free  resources  for  public  investment,  education  and  healthcare  and 
contributes  to  supporting  investment,  employment  and  improving  social  fairness.  In 
particular,  measures  against  Aggressive  Tax  Planning  (ATP)  are  essential  to  secure 
government  revenues,  impede  distortions  of  competition  between  firms,  preserve 
social  cohesion  and  fight  increasing  inequalities.  The  Common  Consolidated 
Corporate Tax Base (CCCTB) would be another powerful tool against tax avoidance, 
while improving the Single Market for businesses. 

Structural  and  institutional  features  of  labour  and  product  markets  and  well-
functioning public administrations are important determinants of economic resilience 
as  well  as  cyclical,  real  and  social  convergence  across  euro  area  Member  States. 
Resilient economic structures prevent shocks from having significant and long-lasting 
effects on income and employment within Member States and across the euro area. In 
this way, they reduce economic fluctuations and provide a favourable environment for 
sustainable  and  inclusive  growth.  Better  coordination  of  the  implementation  of 
the  country-specific 
structural 
recommendations, can create positive spillovers in the Member States and strengthen 
their positive effects. 

those  prescribed 

in  particular 

reforms, 

in 

(10)  Well-functioning  labour  markets  and  social  protection  systems  are  important 
foundations  for  inclusive  economic  growth,  for  reduced  inequality  and  for  the 
resilience of national economies and the euro area as a whole. With the aim to achieve 
upward convergence in this domain, the European Pillar of Social Rights sets out 20 
key principles, falling into three broad chapters: (i) equal opportunities and access to 
the  labour  market;  (ii)  fair  working  conditions;  and  (iii)  social  protection  and 
inclusion. 

(11)  Despite progress with reforms to improve the adjustment capacity of labour markets, 
significant  differences  persist  across  the  euro  area,  which  continue  to  challenge  its 
smooth  functioning.  Well-designed  labour  market  policies  that  are  fully  integrated 
with social protection systems can support labour market transitions and reintegration, 
reduce  labour  market  segmentation,  provide  effective  automatic  stabilisation  and 
promote social fairness. Well-designed working-time arrangements can  help mitigate 
shocks.  Effective  and  timely  activation  of  jobless  people  who  can  participate  in  the 
labour  market  can  be  achieved  by  providing  individualised  support  for  job  search, 
training  and  re-qualification,  while  protecting  those  unable  to  participate.  Emerging 
new forms of employment and new types of contracts bring along challenges related to 
job  security  and  social  protection.  Against  this  background,  employment  protection 
legislation needs to provide for fair and decent working conditions for all workers.  

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(12)  Effective  social  protection  systems  are  crucial  to  promote  inclusive  labour  markets, 
ensure  adequate  income  support  and  appropriate  social  support  through  access  to 
quality services. Pension reforms and work-life balance policies are also key to foster 
labour market participation. Unnecessary restrictions to job, sectoral and geographical 
mobility of workers in employment and social protection systems should be lifted. 

(13)  Access to high quality education and training is vital to ensure equal opportunities and 
address skills mismatches. Adequate investments in human capital through education 
and training systems that improve lifelong learning and ensure that skills levels match 
present  and  future  labour  market  needs  play  a  key  role  in  improving  the  economy's 
adjustment  capacity  and  real  convergence  in  the  longer  run.  Investment  in  skills  can 
also  drive  innovation  and  increase  productivity  and  competitiveness,  in  addition  to 
ensuring social inclusion and mobility. 

(14)  Product  market  reforms  that  increase  competition  and  reforms  that  improve  the 
business  environment  and  the  quality  of  institutions  (including  an  effective  justice 
system  that  facilitates  contract  enforcements)  foster  economic  resilience  in  Member 
States  and  the  euro  area  as  a  whole.  Further  integration  in  the  Single  Market  has 
proven to be a major engine of growth and convergence between Member States. The 
Single Market still holds considerable unexploited potential and significant progress is 
needed  to  complete  it.  The  Single  Market  for  services  (including  financial,  digital 
commerce,  energy  and  transport)  is  the  pending  challenge.  Attention  should 
nonetheless  also  be  focused  on  the  goods  markets  to  avoid  potential  market 
segmentation.  The  Digital  Single  Market  should  contribute  to  completing  the  legal 
environment to speed up the digitalisation of economic activities as a necessary step to 
improving the performance of product markets and global competitiveness.  

(15)  While  the  overall  robustness  of  the  euro  area  banking  sector  has  increased  since  the 
crisis  and  bank  lending  started  to  rise  again,  vulnerabilities  remain  and  need  to  be 
addressed. Banks, and especially small and medium-sized institutions, are confronted 
with low profitability,. The costs of adapting banks' business models, the low interest 
rate environment and increasing competition from other forms of finance continue to 
exert pressure on banks' profitability. Business models therefore need to further adapt 
to become sustainable in the long term. NPL ratios have stabilised in nearly all more 
affected  euro  area  Member  States  or  are  on  a  declining  trend,  but  progress  remains 
slow.  High  NPL  ratios  hinder  banks'  ability  to  lend,  the  transmission  of  monetary 
policy  as  well  as  economic  adjustment  capacity.  They  are  also  a  source  of 
vulnerability  for  the  banking  system  as  a  whole.  On  the  basis  of  the  Action  Plan  to 
tackle  NPLs  that  was  agreed  by  the  Council  in  July  2017,  and  as  announced  in  its 
Communication on Banking Union of 11 October 2017, the Commission is currently 
working to deliver a comprehensive package of measures to reduce NPLs by 2018.  

(16)  Strengthening  the  institutional  architecture  of  EMU  requires,  as  a  matter  of  priority, 
completing the Banking Union and further progressing on the Capital Markets Union. 
The establishment of the Banking Union has made significant advances, but it remains 
unfinished.  The  Commission's  recent  Communication  on  completing  the  Banking 
Union attempts to set out a path on how an agreement on completing the Banking Union 
can be achieved, based on existing commitments by the Council. 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  from banks  to  sovereigns. 
Efforts to further reduce risk and improve risk management in banks must continue. In 
this context, swift work towards agreement on the regulatory package proposed by the 

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Commission in November 2016 is crucial, as well as further advances in reducing non-
performing loans and helping banks diversify their investments in sovereign bonds. 

(17)  The  Commission’s  White  Paper  on  the  future  of  Europe  marked  the  beginning  of  a 
process  of  reflection  for  the  EU27  to  decide  on  the  future  of  the  Union,  outlining 
possible  scenarios.  The  Commission  further  contributed  with  a  series  of  reflection 
papers,  among  which  the  Reflection  Paper  on  the  Deepening  of  EMU  offered  an 
overall vision for the completion of EMU with a clear sequencing of what needs to be 
done to complete its architecture. The 2017 State of the Union address identified key 
elements  to  push  the  EMU  agenda  further  and  the  Commission  made  relevant 
proposals in autumn 2017. 

HEREBY  RECOMMENDS  that  euro  area  Member  States  take  action,  individually  and 
collectively, within the Eurogroup in the period 2018-2019 to:  

1. 

2. 

3. 

Pursue policies that support sustainable and inclusive growth and improve resilience, 
rebalancing  and  convergence.  Make  significant  progress  towards  completing  the 
Single Market, particularly in services, including financial, digital commerce, energy 
and  transport.  Given  the  positive  cyclical  conditions,  all  Member  States  should 
prioritise  reforms  that  increase  productivity  and  growth  potential,  improve  the 
institutional  and  business  environment,  remove  bottlenecks  to  investment,  support 
the  creation  of  quality  jobs  and  reduce  inequality.  Member  States  with  current 
account deficits or high external debt should additionally aim at containing growth in 
unit  labour  costs.  Member  States  with  large  current  account  surpluses  should 
additionally promote wage growth and implement as a priority measures that foster 
investment, support domestic demand and facilitate rebalancing in the euro area. 

Aim at a broadly neutral fiscal stance at the aggregate level for the Euro Area and a 
balanced  policy  mix.  Fiscal  policies  should  strike  the  appropriate  balance  between 
ensuring the sustainability of public finances, in particular reducing debt ratios where 
they  are  high,  and  supporting  the  economic  recovery.  While  ensuring  the  effective 
functioning  of  national  fiscal  frameworks,  Member  States  should  pursue  fiscal 
policies in respect of the SGP and which support investment and improve the quality 
and  composition  of  public  finances,  also  by  making  use  of  spending  reviews  and 
adopting  growth-friendly  and  fair  tax  structures.  Member  States  should  take  and 
implement measures to reduce debt bias in taxation and fight aggressive tax planning 
to  ensure  a  level  playing  field,  provide  fair  treatment  of  taxpayers  and  safeguard 
public  finances  and  stability  within  the  euro  area.  This  includes  continuing  work 
towards the Common Consolidated Corporate Tax Base (CCCTB). 

Implement reforms that promote quality job creation, equal opportunities and access 
to  labour  market,  fair  working  conditions,  and  support  social  protection  and 
inclusion. Reforms should aim at: (i) reliable and flexible labour contracts combined 
with  adequate  support  during  transitions  and  avoiding  labour  market  segmentation; 
(ii)  quality,  efficient  and  life-long  education  and  training  systems,  which  aim  at 
matching skills with labour market needs; (iii) effective active labour market policies 
that foster labour market participation; (iv) sustainable and adequate social protection 
systems that respond to new types of employment and employment relationships; (v) 
smooth  labour  mobility  across  jobs,  sectors  and  locations;  (vi)  effective  social 
dialogue and wage bargaining at the appropriate level; (vii) shifting taxes away from 
labour, particularly for low-income and second earners. 

4. 

In  line  with  the  Council  (ECOFIN)  roadmap  of  June  2016,  continue  work  to 
complete the Banking Union with regard to risk reduction and risk sharing, including 

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a European Deposit Insurance Scheme, making the common backstop for the Single 
Resolution Fund operational and strengthening the European supervisory framework 
to prevent the accumulation of risks. Take measures to tangibly accelerate reduction 
of the levels of non-performing loans on the basis of the agreed Council (ECOFIN) 
Action Plan and promote orderly deleveraging in Member States with large stocks of 
private  debt.  Enhance  the  integration  and  development  of  EU  capital  markets  to 
support growth in the real economy while safeguarding financial market stability. 

5. 

Make swift progress on completing the economic and monetary union, notably on the 
basis of the Commission  initiatives launched in autumn 2017, in  full respect of the 
Union’s  internal  market  and  in  an  open  and  transparent  manner  towards  non-euro 
area Member States. 

Done at Brussels, 

For the Council 
The President 

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