COMMISSION STAFF WORKING DOCUMENT Analysis of the Euro Area economy Accompanying the document Recommendation for a Council Recommendation on the economic policy of the Euro Area
Date: 2018-11-21
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, labour market, stability pact, structural adjustment, sustainable development

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 21.11.2018  SWD(2018) 467 final  COMMISSION STAFF WORKING DOCUMENT Analysis of the Euro Area economy Accompanying the document Recommendation for a Council Recommendation on the economic policy of the Euro Area {COM(2018) 759 final}  
 
 
Introduction 

This  Staff  Working  Document  provides  an  analytical  underpinning  for  the  euro  area 
recommendation  which  outlines  an  overall  orientation  for  the  collective  challenges 
ahead, focusing on the years 2019 and 2020. Since 2015, the recommendation is adopted at 
the  beginning  of  the  European  Semester,  to  precede  and  inform  the  package  of  country-
specific recommendations which is adopted in the Spring.   

The  euro  area  is  entering  its  sixth  year  of  uninterrupted  economic  growth  and  the  negative 
output  gap  is  closing,  but  risks  to  the  outlook  are  increasing  and  growth  is  expected  to 
moderate. Against the backdrop of a gradual normalisation of monetary policy, appropriately 
differentiated fiscal policies and focus on structural reforms are needed to continue supporting 
growth in the short and long term. Strengthening fiscal sustainability in the euro area and its 
Member  States  while  differentiating  national  policies  in  full  respect  of  the  Stability  and 
Growth Pact and taking into account fiscal space is imperative to be able to react to the next 
crisis. Fiscal structural reforms also remain crucial for improving economic resilience, fiscal 
sustainability and strengthening the economic growth potential.  

The  robustness  of  the  euro  area  financial  sector  has  increased  since  the  crisis,  but 
vulnerabilities remain to be addressed and some urgent actions are pending. Strengthening the 
architecture  of  the  EMU  requires  completing  the  Banking  Union  and  the  Capital  Markets 
Union as a matter of priority, but also action on all the elements of the Commission roadmap 
for the EMU for the period until 2024. 

1. Macroeconomic context and developments  

The euro area is entering its sixth year of uninterrupted growth, but risks to the outlook 
are increasing. The economy has been expanding at rates above potential, also as a result of 
the dynamics of euro area exports and improved competitive position, and the output gap is 
expected to turn positive at some 0.3% of potential GDP in 2018 up to 0.8% in 2020 (Graphs 
1 and 2). Growth is forecast to continue at a moderate pace of some 2.1%, 1.9% and 1.7% for 
2018,  2019  and  2020  respectively.  The  expansion  is  still  supported  by  robust  domestic 
demand, with private consumption growth projected to move from 1.6% in 2018, to 1.8% in 
2019, and back to 1.6% in 20201. Nonetheless, the outlook is subject to a number of downside 
risks which have become more pronounced and  inter-connected, arising from the impact  on 
confidence of trade tensions, volatility in emerging markets, heightened uncertainty and rising 
energy  prices.  Inflation  is  accelerating,  driven  mainly  by  energy  prices,  but  core  inflation 
(excluding  energy  and  unprocessed  food  prices)  is  forecast  to  rise  only  slowly  to  1.6%  in 
2019.  Wages  are  also  gradually  rising  –  following  several  years  of  stagnation  –  as  seen  in 
recent data and collective bargaining agreements reached in a number of Member States, but 
pockets of labour underutilisation at country level remain.   

Notwithstanding  the  closing  of  the  output  gap,  potential  GDP  growth  is  set  to  remain 
below  pre-crisis  levels  over  the  forecast  horizon.  Potential  GDP  growth  is  projected  at 

1 All forecast figures in this document are from the European Commission autumn 2018 forecast. 

1 

 
 
 
                                                 
some 1½% for 2018-20, significantly below its pre-crisis level of some 2 percent (Graph 2). 
Structural  unemployment,  as  measured  by  the  non-accelerating-wage  rate  of  unemployment 
(NAWRU),  has  been  declining  since  2013  from  9.4%  to  7.8  in  2020  but  is  still  far  above 
levels of best performers in the euro area, at around 4%, and the contributions of capital and 
total factor productivity (TFP) growth remain subdued. 

The  euro  area  has  recorded  a  large  current  account  surplus  over  the  past  five  years 
while country divergences continue to be significant on the external side. The euro area 
current  account  surplus  is  forecast  at  3.8%  in  2018  and  3.6%  for  2019  and  2020,  though 
declining  from  a  peak  of  4%  in  2017.  The  euro-area  surplus  gradually  built  up  during  the 
post-crisis period. Private sector deleveraging and subdued real wage growth has contributed 
to shifting deficit positions into surpluses. Fiscal consolidations have more recently added to 
private  sector  deleveraging  in  driving  current  account  dynamics.  At  country  level,  the 
correction  of  large  deficits  was  not  matched  by  a  symmetric  adjustment  of  large  surpluses, 
which remain persistent or are further increasing particularly in countries with already a net 
creditor  position,  which  therefore  continues  to  increase  their  net  international  investment 
positions (NIIP).  The NIIP/GDP ratios of the most indebted Member States have improved 
only  recently,  supported  by  improving  nominal  growth  and  external  surpluses,  although 
sustained rebalancing efforts are still needed. Countries that recorded large deficits for a long 
time still have large negative NIIPs that represent  vulnerabilities, and are often mirrored by 
large  stocks  of  private  and/or  government  debt.  An  appropriate  deleveraging  pace,  a 
supportive growth and inflation environment and continued reforms to increase productivity 
are crucial for successful rebalancing in the euro area. 2 Favourable demand dynamics are also 
key,  and  large  surplus  countries  would  also  contribute  to  rebalancing  by  strengthening  the 
conditions that support wage growth, as well as public and private investment. 

2 European Commission (2018), Alert Mechanism Report 2019 

2 

 
 
 
 
 
                                                 
Graph 1: GDP and its components, euro area 

pps. 

% of pot. GDP 

forecast 

Output gap (rhs)
Net exports
Inventories
Investment
Government consumption
Private consumption
GDP (y-o-y%)

3

2

1

0

-1

-2

-3

-4

3

2

1

0

-1

-2

-3

-4

10

11

12

13

14

15

16

17

18

19

20

Source: European Commission 2018 autumn forecast, Ameco. 
2. The policy mix  

Graph 2: Contributions to potential growth, euro 
area 

2,0

1,5

1,0

0,5

0,0

-0,5

pps. 

forecast 

10

11

12

19

20

18

17

16

15

14

13
TFP
Capital accumulation
Changes in hours per empl
Labour (persons)
Potential GDP (y-o-y%)
Pre-crisis ('02-'07) (y-o-y%)

Monetary policy in the euro area is gradually adjusting in line with the ongoing cyclical 
upswing, but remains highly accommodative. Interest rates were lowered at historically low 
levels  in  the  aftermath  of  the  crisis  while  non-standard  measures  were  implemented  to  deal 
with the crisis and led to a considerable expansion of the ECB’s balance sheet (Graph 3). The 
ECB began progressively lowering its monthly net asset purchases in 2018 and has announced 
that, subject to data confirming their medium-term inflation outlook, it will end net purchases 
at the end of December 2018. Key interest rates remain at very low levels and the ECB has 
indicated that it expects  them to  stay  at  current  levels  at  least  through the summer of 2019. 
Overall credit costs have remained supportive for households and non-financial corporations. 

The euro area fiscal stance3 remained on average broadly neutral over 2015-18 (Graph 
4).  However,  national  fiscal  policies  are  currently  insufficiently  differentiated  according  to 
Member  States’  available  fiscal  space.  Several  Member  States  face  fiscal  sustainability 
challenges  due  to  a  high  level  of  public  debt,  while  others  have  some  fiscal  scope  for 
increasing investment. Going forward, and in view of the ongoing economic expansion, it is 
the time to rebuild fiscal buffers in Member States with still high level of public debt, which 
would  also  reduce  their  vulnerability  to  shocks  and  allow  for  full  functioning  of  automatic 
stabilisers.  Besides  reforms  in  the  broad  economy,  fiscal  structural  reforms  could  also 
strengthen  economic  growth  potential  and  consequently  contribute  to  fiscal  sustainability. 
Member  States  with  fiscal  space  could  increase  investment  to  sustain  the  expansion  in  a 
durable way. 

Pursuing structural reforms is ever more important to support both fiscal and monetary 
policies  and  help  boost  productivity  and  resilience.  Ongoing  reforms  should  focus  on 
boosting  productivity  and  economic  resilience  to  ensure  that  countries  are  better  able  to 

3 Measured by the change in the structural primary balance. 

3 

 
 
 
                                                 
 
 
Graph 3: Monetary policy, euro area 

Graph 4: Fiscal stance, euro area   

Jan-07 = 100 

ECB deposit facility rate
EONIA
Balance sheet total (rhs)

2

% 

1,5

1

0,5

0

-0,5

11

12

13

14

15

16

17

18

400

300

200

2

1,5

1

0,5

0

-0,5

-1

-1,5

100

-2

-2,5

-3

-3,5

0

% GDP 

Output gap (% pot. GDP) (rhs)
Change in structural primary balance

12

13

14

15

16

17

18

19

20

withstand shocks that could disrupt growth and convergence in the euro area. Deepening the 
Single Market also increases productivity by creating opportunities for innovative investment. 
Focusing  on  completing  the  reform  agenda  would  help  upward  convergence  in  terms  of 
institutional  and  market  structures,  which  are  equally  important  drivers  for  resilience, 
investment  and  productivity.  Spillovers  from  structural  reforms  are  generally  found  to  be 
positive  too,  although  smaller  than  for  fiscal  policy.4  The  simultaneous  implementation  of 
structural  reforms  throughout  the  euro  area  would  have  a  bigger  effect  on  output  than  they 
would  if  they  were  implemented  by  countries  in  isolation.  This  highlights  the  benefits  of 
coordinated policy action such as through the recommendations for the euro area. 

4 European Commission (2014), Quarterly report on the euro area, Issue 4, December 2014. 

4 

 
 
                                                 
 
 
Graph 5: Government budget balance, euro area 

Graph 6: Government debt, euro area 

0

-1

% GDP 

Graph 7: Government gross debt, 2018 

forecast 

100

% GDP 

95

Graph 8: Government headline balance, 2018 
90

forecast 

-2

-3

14

15

16

17

18

19

20

Structural budget balance
General government headline budget balance

85

80

75

14

15

16

17

18

19

20

Sources: European Commission 2018 autumn forecast(Graphs 4, 5, 6), ECB (Graph 3). 

3. Fiscal policy 

3.1 Fiscal balance, government debt and the fiscal stance 

Over  the  five  years  up  to  2017  deficits  gradually  fell  on  the  back  of  the  consolidation 
packages adopted in 2011-2013 and the economic recovery. The euro area headline budget 
deficit declined by 5.2 percentage points to 1.0% in 2017, from 6.2% in 2010 (Table 1, Graph 
5). It is forecast to decline further to 0.6% of GDP in 2018 with the improvement being driven 
mainly  by  cyclical  conditions.  Looking  ahead,  the  aggregate  deficit  is  projected  to  remain 
around 0.8% in 2019 and 0.7% 2020, after incorporating policy measures from the 2019 Draft 
Budgetary Plans. 

The euro area debt to GDP ratio is gradually decreasing (Graph 6). The aggregate debt-
to-GDP ratio has been on a declining path since 2014 (Table 1 and Graph 6), when it reached 
a peak of 94%. In 2017, the debt ratio fell to 89% and it is projected to fall further over the 
forecast period to reach around 83% in 2020, under a no-policy-change assumption. Despite 
low  interest  rates  paid  on  debt  and  robust  nominal  GDP  growth  supporting  deleveraging  of 
the government sector such dynamics are offset in some countries by pro-cyclical fiscal  

loosening,  with  implications  on  the  room  for  cushioning  shocks  in  bad  times  via  fiscal 
expansions.  In  countries  with  high  levels  of  public  debt,  deleveraging  by  government  has 
started  only  recently  and  proceeds  at  low  pace,  with  large  differences  remaining  among 
Member States in 2018 (Graph 7).  

5 

 
 
 
 
 
200

180

160

140

120

100

80

60

40

20

0

% GDP 

% GDP 

4

3

2

1

0

-1

-2

-3

EE LU LT LV SKMT NL FI DE IE SI AT ES FR BE CY PT IT EL

S
E

R
F

T
I

E
B

V
L

I
F

T
P

K
S

T
A

E
I

I
S

E
E

T
L

L
E

L
N

T
M

U
L

E
D

Y
C

Graph 9: Government expenditure, euro area 

Graph 10: Composition of tax revenues, 2017* 

4

4

3

3

2

% GDP 

% GDP 

Government investment expenditure
Compensation of employees (rhs)
Social benefits (rhs)

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

18

16

14

12

10

8

45

40

35

30

25

20

15

10

5

0

% GDP 

Labour
Consumption
Recurrent property
Environmental

I
F

R
F

T
A

T
I

E
B

I
S

L
N

E
D

E
E

L
E

T
P

V
L

K
S

Y
C

U
L

S
E

T
L

T
M

E
I

U
E

A
E

* Consumption taxes often include environmental taxes, thereby total tax revenues presented in Graph 10 may be inflated.  
Source: European Commission 2018 autumn forecast, Ameco (Graphs 7, 8, 9), Tax report (Graph 10). 

The aggregate structural balance remained broadly unchanged between 2014 and 2018. 
This  follows  a  significant  decline  in  the  structural  deficit  (i.e.,  the  headline  budget  deficit 
corrected  for  cyclical  factors,  one-offs  and  other  temporary  measures)  of  over  3  percentage 
points between 2010 and 2014. The structural deficit is projected to increase slightly in 2019 
and 2020, to 1.1%. 

6 

 
 
 
 
 
 
 
 
 
 
 
Table 1: General government budgetary position 

Source: European Commission 2018 autumn forecast, Ameco. 

According  to  both  the  Commission  forecast  and  the  Member  States’  budgetary  plans, 
the aggregate fiscal stance of the euro area is projected to become slightly expansionary 
in 20195. Several Member States with high debt-to-GDP ratios are currently forecast to have 
sizeable and in one case increasing structural deficits in 2019, which in some cases, would not 
be consistent with requirements under the Stability and Growth Pact. Failure to reduce public 
debt hampers the rebuilding of fiscal buffers and would have negative effects on the countries 
concerned and on the euro area as a whole. In contrast, large net  external creditor countries 
with  ample  fiscal  space  and  large  current  account  surplus  countries  have  room  to  increase 
investment. Based on the Commission forecast, Member States with sizeable budget surpluses 
are  projected  to  use  some  of  their  fiscal  space.  An  increase  in  public  investment  in  these 
countries would be appropriate as it would also generate positive spillovers to the rest of the 
euro  area:  long-term  GDP  effects  would  exceed  the  short-term  impact  as  public  investment 
would also raise the productivity of private capital and labour over a sustained period of time.  

3.2. The composition and quality of public finances  

Between  2014  and  2018,  the  reduction  in  the  headline  budget  deficit  reflected  the 
positive  budgetary  impact  of  the  economic  expansion  and  a  decline  in  interest 
expenditure.  This  resulted  in  a  larger  fall  in  the  expenditure  ratio  as  compared  to  the 
marginal  drop  in  the  revenue  ratio  (Table  1).  The  expenditure-to-GDP  ratio  decreased  from 
49.5% in 2014 to 46.7% in 2018 with one-third being explained by lower interest expenditure. 
Over the same period, the revenue ratio also declined, but by a smaller amount from 47.0 to 

5 For an analysis of the 2019 Draft Budgetary Plans, see Commission  Communication of 21 November 2018, 

COM(2018)XXXX, “2019 Draft Budgetary Plans: Overall Assessment” 

7 

2014201520162017201820192020Total receipts  (1)46.746.246.046.146.045.745.5Total expenditure  (2) 49.148.347.547.046.746.546.1Actual balance  (3) = (1)-(2)-2.4-2.1-1.5-1.0-0.6-0.8-0.7Interest expenditure   (4)2.62.32.12.01.91.81.8Primary balance (5) = (3)+(4)0.20.20.61.01.21.01.1One-Offs (6)-0.2-0.20.1-0.1-0.1-0.20.0Cyclically-adjusted budget balance (7)-1.1-1.0-1.0-0.9-0.8-1.2-1.1Cyclically-adjusted primary balance =(7)+(4)1.51.41.11.11.00.60.7Structural budget balance =(7)-(6)-0.9-0.8-1.1-0.8-0.7-1.0-1.1Structural primary balance = (7) -(6)+(4)1.71.51.11.21.10.80.7Change in actual balance:of which change in:                 - Cycle0.20.60.40.30.20.1                - Interest (reverse sign)0.30.20.10.10.00.0                - One-Offs0.10.2-0.10.0-0.10.2                - Structural primary balance (fiscal stance)-0.2-0.40.10.0-0.3-0.1Change in structural budget balance0.1-0.30.20.1-0.3-0.1Public debt (% GDP)94.292.191.188.986.984.982.8 
 
 
 
 
                                                 
46.0%  of  GDP  in  2018.  This  follows  the  period  between  2011  and  2013,  when  the  fiscal 
consolidation  was  driven  mainly  by  revenue  increases.  Going  forward,  the  decline  in  the 
expenditure  ratio  is  forecast  to  be  driven  by  lower  interest  expenditure,  set  to  fall  by  0.2 
percentage points of GDP from 2017 to 1.8% in 2019 and 2020, and by current expenditure. 
As the revenue ratio is forecast to decline as well, there would be no further improvement of 
the headline budget balance.  

Public investment spending is a clear priority since it remains at historically low levels 
(Graph 9). The ratio of public investment to GDP remains historically low and is projected to 
increase only marginally over the forecast horizon (close to 2.8% in 2020, from 2.6% in 2016) 
and  thus  remain  below  its  pre-crisis  average  (3.2%  of  GDP  over  2000-2007).  At  the  same 
time, social benefits as a percentage of GDP remained around the same level since 2009 while 
public  sector  wages  declined  by  around  1  percentage  point  of  GDP    since  2009  (Graph  9). 
Increasing  public  investment  can  be  achieved  in  a  budgetary-neutral  way  in  those  countries 
that lack fiscal space by improving the efficiency of current spending. This can be achieved 
through  improved  public  procurement  processes  and  other  savings  identified  in  spending 
reviews as well as efficient use of EU cohesion policy funding. In surplus countries additional 
investment  spending would  boost potential growth  while also  contributing to  rebalancing in 
the euro area.  

Against  the  need  to  build  fiscal  buffers  as  well  as  to  increase  public  investment,  the 
efficiency  of  public  spending  and  of  the  tax  system  is  crucial.  Spending  reviews  can  in 
general  help  improve  the  quality  of  spending  and  create  room  for  rebuilding  much-needed 
buffers.  Member  States  spend  a  considerable  part  of  their  public  expenses  on  procurement. 
Yet  in  several  countries,  the  publication  rate remains low and  the  use  of  procurement 
procedures restricting competition remains high in many countries. This results in insufficient 
openness to  cross-border business opportunities  and  indicates that  the  Single  Market  for 
public procurement is not sufficiently integrated. On taxation, a number of challenges remain: 

  The overall tax burden in the euro area is skewed towards labour (Graph 10). The 
tax  burden  on  labour,  measured  by  the  tax  wedge,6  is  among  the  highest 
internationally.  Reducing  the  tax  burden  on  labour,  particularly  for  low  income  and 
second earners, can improve labour demand and supply. To finance its reduction, the 
tax  burden  could  be  shifted  towards  tax  bases  that  are  less  detrimental  to  growth, 
including consumption taxes, recurrent property and environmental taxes, while taking 
into account the redistributive impact of taxation systems.7  

6  Tax  wedge:  sum  of  personal  income  taxes  and  employee  and  employer  social  security  contributions  net  of 
family allowances, as a percentage of total labour costs (sum of gross wage and social security contributions 
paid by the employer). 

7 Kalyva, A., Princen S., Leodolter, A., and C Astarita (2018), ‘’Labour taxation & Inclusive growth’’, European 

Commission Discussion Paper 084, Publications Office of the European Union. 

   Johansson, Å., Heady, C., Arnold, J., Brys, B. and L. Vartia (2008), "Taxation and  economic growth", OECD 

Economics Department Working Paper 620, OECD Publishing. 

8 

 
 
                                                 
  Addressing tax fraud, evasion and aggressive tax planning (ATP8) are essential to 
make  tax  systems  more  efficient  and  fairer.  These  are  essential  to  secure 
government  revenues,  impede  distortions  of  competition  between  firms,  preserve 
social  cohesion  and  fight  increasing  inequalities.  The  mobility  of  capital,  which  has 
increased  with  the  introduction  of  the  euro  and  the  ensuing  suppression  of  currency 
risks,  facilitates  tax  arbitrage  by  multinational  enterprises  operating  within  the  euro 
area,  which  make  the  adoption  of  measures  to  address  ATP  particularly  urgent  for 
euro  area  Member  States.  This  is  therefore  a  particularly  relevant  issue  for  the  euro 
area9.  A  study  by  the  European  Parliament  estimates  corporate  income  tax  revenues 
losses between EUR 40-60 billion in the euro area.10  

  Simplifying  tax  systems  and  addressing  the  debt  bias  would  make  tax  systems 
more  resilient  and  investment-friendly.  Corporate  income  taxation  (CIT)  in  most 
euro  area  Member  States  still  favours  debt  over  equity  financing.  Reducing  or 
eliminating  this  debt  bias  would  provide  an  incentive  to  reduce  firms’  leverage, 
making economies less prone to financial stability risks. In addition, efforts should be 
concentrated on simplifying tax systems and considering well-designed tax incentives 
to boost real investment. 

Overall euro area countries could consider joint action in a number of areas to improve 
the efficiency and fairness of their tax systems. Policies that simplify tax systems and shift 
taxes away from labour, particularly for low-income and second earners would support labour 
participation and higher potential growth.  A coordinated action to deal with ATP at European 
level – notably by fostering progress on the relaunched Common Consolidated Corporate Tax 
Base11 (CCCTB) or the VAT Action Plan, – would strengthen the business environment in the 
euro area and therefore  of the Single Market  by  contributing to  increasing tax certainty  and 
enhancing the simplification of tax systems. All measures to tackle tax abuse can also provide 
additional  revenues  to  support  labour  tax  reductions.  At  the  international  level,  enhancing 
cooperation on tax matters  can further contribute to a fairer tax competition.  

4. Structural reforms, economic resilience and real convergence  

Structural  and  institutional  reforms  are  essential  for  productivity,  resilience  and 
convergence. Well-designed structural policies can foster the convergence of Member States 
while bringing the euro area closer to an optimal currency area, including by supporting the 
transmission  mechanism  of  monetary  policy.  Co-ordinating  economic  and  social  policies  is 

8  ATP  consists  in  taxpayers'  reducing  their  tax  liabilities  through  arrangements  that  may  be  legal  but  are  in 
contradiction  with  the  intent  of  the  law.  It  occurs  through  three  main  channels:  debt  shifting,  strategic 
location of intellectual property rights and intangibles assets and misuse of transfer pricing. 

9 ATP negatively affects government revenues, has clear spillover effects within the euro area and distorts the 
level playing field between firms. Profits shifted to or through one country implies tax base loss for another 
country. ATP creates therefore a tax-induced redistribution of tax revenues across euro area Member States 
on top of an overall loss due to lower effective taxation. 

10 Estimates based on Dover, Ferrett, Gravino, Jones, and Merler (2015), "Bringing transparency, coordination 
and convergence to corporate tax policies in the European Union", European Parliament Research Centre 
11 The relaunch of the CCCTB provides as a first step a single set of rules to calculate companies' taxable profits 
in the EU and as a second step the allocation of the consolidated taxable profits shared between the Member 
 States using an apportionment formula. 

9 

 
 
                                                 
important to absorb the effects of shocks, avoid economic and social divergence, and increase 
potential  growth.  These  remain  key  challenges  that  require  a  broad  set  of  policies,  notably 
those  that  support  well-functioning  labour  and  product  markets,  decrease  barriers  to  an 
efficient resource allocation and support a balanced territorial and social development.  

The  economic  and  financial  crisis  had  a  deep impact  on  real  convergence  among  euro 
area  countries,  but  it  started  to  improve  again.  Progress  in  real  convergence  has 
substantially  weakened  since  the  crisis.  Disparities  in  terms  of  real  GDP  per  head  –  which 
were  declining  at  a  fast  pace  prior  to  2008  –  had  increased  significantly  during  the  crisis 
years. On the back of the continued economic expansion, convergence in living standards in 
the  euro  area  has  resumed  albeit  at  a  lower  pace..  Real  convergence  has  been  stronger  for 
Member  States  that  have  joined  more  recently  as  the  difference  between  euro  area-12  and 
euro area-19 countries reveals12. Slow total factor productivity growth linked to lower levels 
of investment appear to be factors holding back real convergence. Considerable disparities are 
also present within countries and, for more than half of the euro area Member States for which 
data  at  sub-national  level  is  available,  they  have  widened  in  recent  years,  in  some  cases 
significantly. .  

Graph 11: Dispersion of real GDP per capita and unemployment 

0,4

0,3

0,2

0,1

0,7

0,6

0,5

0,4

0,3

0,2

0,1

0

90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

GDP per capita EA 12
Unemployment EA 12

GDP per capita EA 19
Unemployment EA 19

Source: Eurostat. 
Note: Changing composition of the aggregates excluding LU and IE.  Germany prior to 1991 has been extrapolated using the growth rates of West Germany. 
Source: AMECO. 

Euro  area  countries  made  significant  reform  efforts  following  the  crisis  but  pace  has 
slowed  down,  not  taking  full  advantage  of  the  favourable  economic  environment.  In  a 
in  Country  Specific 
multiannual  perspective, 
Recommendations  (CSR)  implementation,  which  takes  into  account  the  time  needed  to 
consult stakeholders and social partners, design and implement reforms.13 Overall, since the 
outset  of  the  European  Semester,  almost  half  of  the  CSRs  have  been  implemented  with  at 

there  has  been  visible  progress 

12 European Commission spring 2018 forecast. 
13 Estimations are based on the Country Reports which assess annual progress in terms of CSR implementation 

(see figure 11) 

10 

 
 
 
 
                                                 
least ‘some progress’.14 However, in recent years, CSR implementation seems to have slowed 
down as  the pressure of the crisis  has abated.  It  is  important  to step up the pace of  growth-
enhancing  reforms  both  in  the  labour  and  product  markets,  while  avoiding  reversal  of 
previously enacted  reforms.  The growing  external  risks, and the past  experience in  the euro 
area, make the need to strengthen the resilience of national economies and the euro area as a 
whole  more  pressing.  Institutional  quality  and  administrative  capacity  are  important  factors 
behind a country's ability to implement needed structural reforms. In the euro area, Member 
States  still  vary  considerably  in  terms  of  administrative  capacity  as  measured  by  the  World 
Bank indicators of government effectiveness and regulatory quality.   

Graph 12: Annual assessment of implementation of CSRs (2011-2017) 

0

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Employment protection legislation & framework for labour…

Unemployment benefits
Active labour market policies
Incentives to work, job creation, labour market participation
Wages & wage setting
Childcare
Health & long-term care
Poverty reduction & social inclusion
Education
Skills & life-long learning
Research & innovation
Competition & regulatory framework
Competition in services
Telecom, postal services & local public services
Energy, resources & climate change
Transport
Business environment
Insolvency framework
Public administration
State-owned enterprises
Civil justice
Shadow economy & corruption

Euro area

Source : European Commission. 
Note: This graph shows the average of the annual implementation scores of country-specific recommendations per policy area. The scores attributed are 25 for 
'limited progress', 50 for 'some progress', 75 for 'substantial progress', and 100 for 'fully implemented'. 

Recent  implementation  of  structural  reforms  focused  on  areas  most  affected  by  the 
financial  crisis15.  Although  the  pace  of  reforms  has  differed  across  countries,  in  terms  of 
policy areas most of the reform efforts appear to have been concentrated in financial services, 
followed by fiscal policy and fiscal governance, employment protection legislation, access to 
finance  and  unemployment  benefits  (Graph  12).  These  reforms  were  triggered  in  many 
instances by the recent crisis and aimed at addressing the impact of the shock and to increase 
the  adjustment  capacity  of  the  economies  and  improve  competitiveness.  Conversely,  little 
progress  was  visible  in  broadening  the  tax  base  and  addressing  debt  bias  in  taxation,  in 

14 A total of 47% according to the European Commission CSR database. 
15 European Commission CSR database. 

11 

 
 
 
 
 
                                                 
 
 
 
 
 
reducing distortions in the housing market, weaknesses in healthcare systems and in boosting 
competition in services. These areas however remain crucial for the long-term sustainability 
of  the  economy.  The  European  Commission’s  proposal  for  a  Reform  Support  Programme 
aims  at  aiding  Member  States  to  pursue  and  implement  reforms  aimed  at  modernising  their 
economies, notably reform priorities identified in the context of the European Semester. Also, 
channelling  EU  Cohesion  policy  funding  to  address  country-specific  investment  needs,  as 
identified  in  the  European  Semester,  could  in  particular  contribute  to  strengthen  economic, 
social and territorial cohesion in the euro area. 

4.1 Labour market and social protection systems  

The  situation  in  the  labour  markets  of  the  euro  area  as  a  whole  is  improving  and 
employment  continues  to  expand.  The  current  job-rich  expansion  has  brought  total 
employment to 155.9 million in 2017 – compared with some 148.9 million at the depth of the 
crisis in 2013.16  The number of persons employed is forecast to continue increasing by some 
1½ % in 2018 and 1% in 2019-2017 with the employment rate expected to rise from 61.8% in 
2018  to  62.7%  in  2020.18  The  unemployment  rate  is  ebbing  and  is  projected  to  continue  to 
decline from 8.4% of the labour force in 2018 to 7.5% in 2020, 1 percentage point below pre-
crisis  levels.  Youth  unemployment  declined  to  16.9%19  in  September  2018  while  long-term 
unemployment also continued to decline to 3.9% in the second quarter of 2018 (Graph 13).20 

However,  despite  these  broadly  positive  developments,  pockets  of  slack  remain,  and 
significant  divergences  among  Member  States  persist  while  in-work  poverty  is  still  on 
the rise in many Member States. Despite the recovery in employment, the total number of 
hours worked remains below pre-crisis levels reflecting both a longer-term structural decline21 
– hours worked per person have been on a steady  decline, down by 3.8% between 2008-17 
(Graph  14)  –  and  the  level  of  part-time  work  being  still  above  its  pre-crisis  level  as  a 
percentage of total employment (Graph 15). Involuntary part-time work also remains high at 
29.2%  of  part-time  employment,  though  it  has  declined  from  a  peak  of  31.7%  in  2014.  In 
addition, important country divergences remain in a number of areas e.g., youth and long-term 
unemployment  rates,  participation  rates  in  education  and  training  (Graphs  16,  17,  18).22   

16 See Eurostat. 
17 See European Commission autumn 2018 forecast. 
18  Employment  as  a  percentage  of  population  of  working  age  (15-64)  based  on  full-time  equivalents  where 

available. See European Commission autumn 2018 forecast.  

19 Among the active population less than 25 years old. 
20 Source: Eurostat (code une_ltu_q). 
21  Driven  by  factors  such  as  the  rise  of  services  and  the  diffusion  of  flexible  working  arrangements,  so  that  a 
reversal of this trend seems unlikely. See, for instance, DG Employment (2018), Labour market and wage 
developments in Europe. Annual review. 

22  For example, youth unemployment stood at 6.3% of active population less than 25 years in Germany and at 
7.2% in the Netherlands, but at 39.1% in Greece and 34.2% in Spain (Graph 17). At the same time, while 
the  participation  rate  in  education  and  training  of  the  low  skilled  was  36.2%  in  Lithuania  and  28.8%  in 
Finland, it  was only 3.8% in Greece and 4.9% in Malta.  For more details on country divergences, see DG 
Employment (2018), 'Chapter 1: Main Employment and Social Developments', in Employment and Social 
Developments in Europe 2018 Report  

12 

 
 
 
                                                 
Overall,  these  developments  reflect  an  uneven  capacity  of  Member  states  to  absorb  and 
recover from the adverse shocks that have hit the euro area in the last decade. 

In some sectors and some countries, on the other hand, labour shortages are emerging. 
The  Commission’s  quarterly  surveys  indicate  that  firms  are  facing  challenges  from  a 
tightening labour market. The share of euro area firms mentioning the availability of labour as 
a  factor  limiting  production  in  the  industry  has  almost  steadily  increased  in  recent  years. 
There  is  also  evidence  of  binding  labour  shortages  from  unmet  demand  for  labour,  as 
expressed by the job  vacancy  rate.  It  has broadly  risen since late 2014 in the euro area and 
reached its highest value since 2006 at 2.1% in the first quarter of 2018. 

Graph 13: Youth unemployment and long-term 
unemployment, euro area 

Graph 14: Employment and hours worked, euro 
area 

28

24

20

16

12

8

4

0

% labour 
force 

Youth unemployment (lhs)
Long-term unemployment (rhs)

2008 = 100 

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88

Hours worked per employed person
Employment
Total hours worked

06 07 08 09 10 11 12 13 14 15 16 17

06 07 08 09 10 11 12 13 14 15 16 17

Graph 15: Part-time and temporary work, euro 
area 

Graph 16: Participation in education and training 
(last 4 weeks), euro area 

22

20

18

16

14

12

10

% total 
employment 
15-64y 

% part-time 
employment 

06 07 08 09 10 11 12 13 14 15 16 17

Part-time employment (lhs)
Temporary employment (lhs)
Involuntary part-time employment (rhs)

40

22

% population 
18-64y 

High skilled
Medium skilled
Low skilled

06 07 08 09 10 11 12 13 14 15 16 17

36

32

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13 

 
 
 
 
 
 
Graph 17: Youth unemployment, June 2018 

Graph 18: Participation in education and training 
(last 4 weeks), 2017

% active population <25y 

% pop. 18-64 

40

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Source: Eurostat 

Wage growth remained subdued in recent years at the euro-area aggregate level, despite 
continued  improvements  in  the  labour  market  but  is  slightly  accelerating.  Nominal 
compensation per employee has remained moderate in 2016 (+1.2%) and 2017 (+1.6%) but is 
projected to grow at some 2–2½% over 2018-20. In a context of rising inflation, real wages 
have stagnated in 2017, but are forecast to increase by some 0.5% in 2018.23 Unit labour cost 
dynamics  in  the  post-crisis  period  have  contributed  to  contain  external  imbalances,  as  net-
debtor  countries  benefited  from  stronger  cost  competitiveness  gains  as  compared  with  net-
creditor  countries.  More  recently,  the  advantage  of  net-debtor  countries  in  terms  of  cost 
competitiveness dynamics has slowed in comparative terms due to tightening labour markets 
and  a  reduced  pace  of  productivity  improvements.24  Against  this  background,  and  while 
respecting the role of social partners, maintaining wage growth in net-creditor countries and 
productivity  growth  in  net-debtor  countries  would  be  supportive  of  further  euro-area 
rebalancing. Additionally, – especially in countries characterised by low productivity growth 
– upgrading skills, in particular those of the low-skilled through well-designed education and 
training  systems  and  participation  rates  in  adult  learning,  remains  crucial  to  help  increase 
productivity, while addressing skill shortages and creating room for sustainable wage growth. 

While technological change and the digital revolution create new job opportunities, they 
also raise challenges related to the loss of low-skill jobs and the increase in non-standard 
work. In this context, investment in skills is key to ensure that all citizens reap the benefits of 
technological  transformation. Significant  differences across euro area Member States persist 
in  terms  of  the  share  of  early  leavers  from  education  and  training  and  participation  rates  in 
adult learning, which has been recovering slowly.25 Reducing labour market segmentation has 
positive effects  in  terms  of higher investment  in  human capital  as, employers tend to  invest 

23 See European Commission autumn 2018 forecast. 

24 European Commission (2018), Alert Mechanism Report 2019 
25  For  more  details  see  DG  Employment  (2018),  'Chapter  1:  Main  Employment  and  Social  Developments',  in 

Employment and Social Developments in Europe 2018 Report 

14 

 
 
                                                 
 
 
less in upgrading the skills and competencies of temporary employees. In turn, such reduction 
may translate in higher productivity, stronger resilience and long-term growth. 

A broad set of reforms would help to address the challenges facing labour markets and 
their  social  and  economic  implications.  In  this  perspective  it  is  important  that  national 
reforms  aim  at  implementing  the  principles  of  the  European  Pillar  of  Social  Rights  which 
aims at delivering effective rights for citizens in terms of equal opportunities and access to the 
labour  market,  fair  working  conditions  as  well  as  social  protection  and  inclusion.  Such 
reforms will help to strengthen inclusive growth and resilience across the euro area.26 Social 
dialogue  remains  of  key  importance  to  strengthen  the  implementation  of  reforms  as  well  as 
the  effectiveness  of  collective  bargaining  frameworks.  Reforms  at  national  level  should 
promote  quality  job  creation  and  reduce  labour  market  segmentation  and  structural 
unemployment while promoting social cohesion. Key elements of such reforms include high-
quality, efficient and inclusive life-long education and training systems in combination with 
well-designed  skills  anticipation  strategies  that  aim  at  better  matching  skills  with  labour 
market needs, employment legislation that provides fair working conditions for all workers, as 
well as  flexibility  and security for employees and employers,  effective active labour market 
policies that support labour market transitions, and sustainable and adequate social protection 
systems.    The  latter  –  which  should  be  adapted  to  cover  all  workers  as  new  forms  of  work 
emerge  -  provide  automatic  stabilization  during  economic  downturns,  support  labour 
reallocation, and pave the way for higher living standards in the longer term. Adequate social 
protection  systems,  together  with  the  portability  of  social  rights  and  pension  entitlements, 
promote a fair labour mobility, which also improves the resilience of the euro area.  

4.2 Product markets and the business environment 

Product market and business environment reforms can improve allocative capacity and 
foster economic resilience with positive impact on innovation, competition, productivity 
and potential growth. In markets where firm entry, exit and growth is easier, resources are 
allocated to the most productive sectors and firms, which have a higher propensity to make 
high-quality investment, with a positive impact on productivity and potential growth. At 
national level, structural reforms to decreasebarriers to investment would  improve the 
business environment. Relevant reforms include better justice and administrative systems, 
decreasing investment uncertainty, easier licensing procedures to speed up investments and 
promoting Research and Innovation (R&I) investments.27  

26 The Social Pillar sets out 20 key principles and rights to support fair and well-functioning labour markets and 

welfare systems. For more details see http://ec.europa.eu/social/main.jsp?catId=1226&langId=en  

27 "The third pillar of the Investment Plan", European Commission 2018. 

15 

 
 
 
                                                 
Graph 19: Ease of doing business indicators, euro 
area 

Graph 20: Ease of doing business, per Member State, 
euro area 

2012

2018

100
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AT BE CY EE FI FR DE EL IE IT LV LT LU MT NL PT SK SI ES

The  business  and  investment  environment  have  improved  but  a  number  of  challenges 
and  significant  country  differences  persist,  underlying  the  need  for  national  reforms 
(Graphs 19, 20). In 2018, the euro area scored the highest in starting a business and trading 
across  borders  while  access  to  credit,  protection  of  minority  investors  and  contract 
enforcement  remain  key  challenges.28  Member  States  have  also  made  some  progress  in 
facilitating  investment  notably  by  improving  the  regulatory  environment  and  public 
administrations  but  companies  continue  to  report  that  improvements  in  the  business 
environment would facilitate conditions for investment.29,30 Further, skill shortages remain a 
major concern for businesses and require action across the euro area.31 Finally, a number of 
Member States further improved the effectiveness of national justice systems but challenges 
remain. The 2018 Justice Scoreboard shows positive developments in most euro area Member 
States,  including  those  facing  challenges  for  the  effectiveness  of  their  justice  systems,  inter 
alia in terms of length of first instance proceedings, backlog of pending cases, online access 
to court judgments. 32  

Member States have taken measures to support intangible investment including private 
R&I and skills. These include financing private R&I either through indirect aid (for instance 
tax advantages, e.g. in France, and various types of fiscal incentives, as with the "Impresa 4.0" 
strategy in Italy). In addition, a number of Member States have put forward policies to better 

28 Ease of Doing Business (2018), World Bank Database. 
29 Eurobarometer Flash 459 
30 A majority of respondents still see two main regulatory obstacles to doing business as a barrier to investments, 
namely administrative burdens other than costs (67%) and the lack of stability in the legislation concerning 
products or services (57%). The administrative costs of starting a business, the length of legal proceedings, 
and  building  permits  and  other  authorisations  are  seen  as  detrimental  by  relatively  fewer  firms  but  still 
significant with 44%, 43%, and 42% of respondents, respectively. 

31 EIB Group Survey on Investment and Investment Finance (2017) 
32 EU Justice Scoreboard (2018), European Commission COM(2018) 

16 

 
 
                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
exploit the economic benefits of the public and private research by encouraging cooperation 
between  academia,  research  and  businesses,  for  instance  by  encouraging  the  set-up  of 
competitiveness  clusters,  or  through  Smart  Specialisation  Strategies  supported  by  Cohesion 
policy. However, overall investment levels remain low. Investment in R&D in the euro area 
was 2.1% of GDP in 2016, still far from the EU 2020 target of 3%.33 Skilled-staff shortages 
coupled with uncertainty about the future remain the main barriers for EU businesses. 

The  insufficient  Single  Market  integration  also  remains  a  major  barrier  for  firms  to 
grow and invest in the euro area, as returns can be much higher than at national scale. 
At  present,  many  of  the  potential  gains  in  terms  of  both  growth  and  inclusiveness  from 
improving the functioning of the Single Market  have  yet  to  be realised.  Several  key sectors 
are still not covered by the Services Directive, and there is high heterogeneity in regulations 
and  in  transposition  of  EU  legislation34  while  the  mutual  recognition  principle  in  the  goods 
market  remains  unsatisfactory.35    Making  decisive  progress  in  deepening  the  Single  Market 
would probably be the single most important way to increase resilience in the euro area. 

5. Financial markets and completing the Banking Union and Capital Markets Union 
Risk reduction in the banking sector continued to progress in 2017 and in early 2018.36 
Banking sectors in nearly all Member States continued to increase the quantity and quality of 
their capital and reduce their leverage (Graph 21). Their reliance on short-term funding also 
continued  to  fall  and  asset  quality  improved  further.  Non-performing  loans  (NPLs)  fell  to 
4.5%  of  total  loans  in  the  first  quarter  of  2018  in  the  euro  area,  compared  to  6.1%  a  year 
earlier, and provisions increased by 8.39 percentage points. NPLs fell faster in most Member 
States with the highest stock of such loans but some national NPL ratios remain far apart from 
the euro area average and continue to require attention (Graph 22).  

Bank performance has recovered moderately but the sector continues to face challenges 
from the economic environment and business-model transformation. Profitability remains 
low by historical standards but recovered moderately in 2017 amidst improved asset quality 
and market conditions. However, some national banking sectors still post negative or very low 
margins  given  tight  interest  margins,  legacy  assets,  market  fragmentation  and  operational 
inefficiencies  (Graphs  23  and  24).  A  number  of  challenges  lie  in  the  horizon,  including  the 
gradual normalisation of monetary policy and competition from fin-tech firms. The continued 
fragmentation  of  retail  banking  markets  limits  the  ability  of  the  sector  to  respond  to  these 
challenges and is another reason to progress faster in the completion of the Banking Union.37  

33 Eurostat Europe 2020 indicators - R&D and innovation 
34 QREA 2018, Economic resilience, the Single Market and EMU. 
35 EC Goods market package 2017.  
36  "Overview  of  Progress  in  Achieving  Risk  Reduction  Measures",  Follow-up  Note  to  the  February  2018 

discussions on EMU deepening, Economic and Financial Committee, June 2018.  

37 "Financial integration in Europe", ECB 2017. 

17 

 
 
 
 
 
                                                 
7

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Graph 21: Bank stability indicators 

Graph 22: Non-performing loans 

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% 

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% 

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% of loans 
and advances 

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CET 1 ratio (lhs)
Levarage ratio (lhs)
Loan-to-deposit ratio (rhs)

2016-Q1

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Graph 23: Return on equity and on assets 

Graph 24: Return on investment 

% 

% 

1,0

4

% 

2018Q1

2017Q1

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Return on equity, (lhs)
Return on assets, (rhs)

2010Q2 2012Q2 2014Q2 2015Q3 2016Q3 2017Q3

Note:  Euro  area  changing  composition,  unless  otherwise  indicated.  Domestic  banking  groups  and  stand-alone  banks,  foreign  (EU  and  non-EU)  controlled 
subsidiaries and foreign (EU and non-EU) controlled branches, All institutions. 
Source: ECB - CBD2 - Consolidated Banking data. 

Additional measures are being put in place to strengthen banks resilience and financial 
sector integrity further. Following a request from the Council, the Commission published a 
dedicated  Action  Plan  to  address  legacy  NPLs  and  avoid  their  build-up  in  the  future,  with 
actions at euro area and national level.38 The adoption, by the end of 2018, of the November 
2016  Banking  Package,  which  further  reduces  risks  by  implementing  internationally  agreed 
norms on capital buffers and liquidity in banks, also remains crucial for the completion of the 
Banking  Union.  The  Commission  has  also  proposed  to  reinforce  the  European  Banking 
Authority  and  supervisory  cooperation  to  address  the  recent  serious  breaches  of  anti-money 
laundering  rules.39  Moreover,  the  work  of  the  Single  Resolution  Board  also  contributes  to 
reducing  risks  by  increasing  the  preparedness  for  bank  orderly  resolution  and  setting  the 

38 http://europa.eu/rapid/press-release_IP-18-1802_en.htm?locale=en 
39 ECOFIN conclusions 02 October 2018. 

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targets for increasing loss absorption. Overall, the EU has adopted more than fifty legislative 
proposals to increase the resilience of the financial sector since the crisis.  

However, other important areas remain to be completed, including notably the backstop 
to  the  Single  Resolution  Fund  and  a  European  Deposit  Insurance  Scheme  (EDIS).  In 
June  2018,  the  EU  Heads  of  State  and  Government  agreed  that  the  backstop  to  the  Single 
Resolution Fund will be provided by the European Stability Mechanism and that work should 
start on a roadmap for political negotiations on EDIS. Fast progress in both areas is necessary 
in  light  of  their  key  stabilising  properties  and  their  importance  for  promoting  financial 
integration. This can allow for the emergence of more pan-European banks that are less linked 
to their own sovereigns and local economic developments, given the impact of these factors 
on the credit channel in periods of turbulence.  

The  share  of  non-bank  finance  in  the  euro  area’s  financial  system  has  continued  to 
grow,  creating  a  more  diverse  mix  of  funding  sources.  Assets  under  management  by 
investment  and  pension  funds,  venture  capital  and  online  alternative  financing  continued  to 
grow in 2017 and non-financial corporations have increased their reliance on market funding 
and, in particular, on bond issuance. Capital markets are therefore becoming more prominent 
in the euro area in line with policy goals, which also demands additional efforts to strengthen 
supervisory capabilities and fill data gaps to monitor and appraise risks.40 Low yields continue 
to challenge pension funds and insurance companies offering guaranteed returns.  

The  implementation  of  the  Capital  Markets  Union  (CMU)  action  plan  continues  but 
regulatory, legal and tax divergences need to be more decisively addressed.  Deeper and 
more integrated capital  markets  create more funding opportunities for companies to  support 
investments  at  lower  costs  and  are  also  essential  for  making  the  euro  area  more  resilient  to 
economic  shocks 
the 
Commission’s CMU action plan, as reinforced by its mid-term review, progressed further in 
2017  in  several  important  areas.41  However,  advancing  in  the  harmonisation  of  insolvency 
and securities law, and some parts of taxation that  make it difficult  for agents  to  invest and 
raise funds across borders, are also necessary steps to build a genuine CMU. 

through  private  sector  risk  sharing.  The 

implementation  of 

6. Deepening the Economic and Monetary Union 

Completing  the  Economic  and  Monetary  Union's  (EMU)  is  essential  to  address  the 
remaining  weaknesses  of  its  construction.  The  economic  and  financial  crisis  of  the  last 
decade  exposed  the  limits  of  individual  Member  States  in  absorbing  the  impact  of  large 
shocks.  It  also  interrupted  the  convergence  trend  within  the  euro  area  and  the  start  of  a 
divergence of economic and social performance, which is only being slowly corrected. These 
regional and social imbalances imply that a substantial part of the euro area population cannot 
make  the  most  of  the  EMU  and  fails  to  fully  grasp  its  benefits.  Moreover,  high  levels  of 

40 European financial stability and integration review (EFSIR), European Commission SWD (2018). 
41  Investment  funds,  pension  funds,  venture  capital,  access  to  public  markets,  crowdfunding,  covered  bonds, 
securitisation, investment firms and supervision. 

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public and private debt, non-performing loans and exposures of banks to their sovereigns in a 
bond  market  characterised  by  national  safe  assets  with  asymmetric  perception  of  risk  bear 
risks  for  the  future  stability  of  the  financial  system.  The  incomplete  nature  of  the  financial 
union and the absence of a fiscal stabilisation function for the euro area result in insufficient 
mechanisms  for  risk-sharing  and  shock-absorption    –  notably  at  the  euro  area  level  to  deal 
with large shocks, – while governance has become too complex.  

The  currently  robust  economic  growth  provides  a  unique  opportunity  to  complete  the 
EMU,  also  on  the  basis  of  Commission’s  proposals.  Significant  reforms  have  been 
implemented  in  the  past  decade  but  the  EMU  architecture  remains  incomplete.  Besides  the 
reforms in the areas of Banking Union and Capital Markets Union mentioned in the section 
above, the Commission presented a number of proposals in December 2017 and May 2018, as 
part of the roadmap to complete the EMU, and building on the actions taken since the Five 
Presidents'  Report.  Among  these  proposals:  (i)  a  Reform  Support  Programme,  open  to  all 
Member States wishing to benefit from it, would provide budgetary incentives and technical 
support to implement structural reforms identified in the European Semester; (ii) a European 
Investment  Stabilisation  Function  would  protect  public  investment  in  the  event  of  large 
asymmetric  shocks  and  help  the  economy  rebound  quickly  and  (iii)  a  European  Monetary 
Fund,  would  build  on  the  structure  of  the  European  Stability  Mechanism,  with  additional 
functions  and  an  improved  decision-making  framework.  These  reforms,  which  would  make 
EMU  function  more  smoothly  and  more  resilient,  could  also  contribute  to  strengthen  the 
international role of the euro, making it more commensurate to the euro area global economic 
and financial relevance. 

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