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

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   EUROPEAN COMMISSION  Brussels, 21.11.2018  COM(2018) 759 final  Recommendation for a COUNCIL RECOMMENDATION on the economic policy of the euro area {SWD(2018) 467 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  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.  Potential  growth  remains  significantly  below  pre-crisis  levels 
and  country  divergences  persist  resulting  from  notable  differences  in  economic 
resilience  across  Member  States.  Real  wage  growth  is  still  moderate  and  has  been 
trailing  behind  productivity  developments.  Nominal  wage  growth  and  core  inflation 
are  picking  up  with  continued  employment  growth,  but  pockets  of 
labour 
underutilisation or high unemployment remain in some Member States. The euro area 
has  recorded  a  large  current  account  surplus  over  the  past  five  years  linked  to  the 
dynamics  of  the  euro-area  exports  and  improved  competitive  position  while  country 
divergences  continue  to  be  significant  on  the  external  side.  Member  States  that 
recorded  large  external  deficits  for  a  long  time  still  have  large  negative  net 
international  investment  positions  that represent  vulnerabilities, as they  are  generally 
mirrored by large stocks of private or government debt. An appropriate deleveraging 
pace,  a  supportive  growth  and  inflation  environment,  continued  reforms  to  increase 
productivity  are  crucial  for  successful  rebalancing  in  the  euro  area.3  Favourable 

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3 

OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
European Commission (2018), Alert Mechanism Report 2019. 

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(2) 

(3) 

(4) 

(5) 

demand  dynamics  are  also  important,  and  large  surplus  countries  would  also 
contribute to rebalancing by strengthening the conditions that support wage growth, as 
well as public and private investment. 

Increasing long-run growth potential and overcoming national and regional disparities 
requires  further  increases  in  labour  participation  rates,  growth-enhancing  structural 
reforms  and  investment  in  tangibles  and  non-tangibles  to  increase  productivity  and 
innovation, in particular in those Member States where it is clearly lower than the euro 
area  average.  This  is  important  for  strengthening  economic,  social  and  territorial 
cohesion in the euro area.  

Consistency and balance in the macroeconomic policy mix of the euro area, including 
monetary,  fiscal  and  structural  policies,  is  crucial  to  ensure  robust  and  sustainable 
to 
economic  growth.  In  recent  years, 
unconventional monetary policy tools to bring inflation back towards its medium-term 
inflation objective, while supporting growth and job creation. 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. 

the  European  Central  Bank  resorted 

The  strengthening  of  fiscal  sustainability  of  the  euro  area  and  its  Member  States 
requires differentiated national policies in full respect of the Stability and Growth Pact 
and  should  take  into  account  fiscal  space.  Coordination  of  national  fiscal  policies  in 
accordance with the common fiscal rules is essential for the proper functioning of the 
Economic and Monetary Union (EMU). The common fiscal rules are geared towards 
pursuing  debt  sustainability  at  the  national  level,  while  providing  room  for 
macroeconomic stabilisation. The euro area fiscal stance remained on average broadly 
neutral  over  2015-2018  and  based  on  the  Commission  forecast  it  is  projected  to 
become  slightly  expansionary  in  2019  in  spite  of  output  being  above  potential. 
Rebuilding  fiscal  buffers  is  especially  important  in  Member  States  with  still  high 
levels  of  public  debt.  Doing  so  would  also  reduce  their  vulnerability  to  shocks  and 
allow for the full functioning of automatic stabilisers in the next downturn. Increasing 
public  investment,  in  particular  in  Member  States  with  fiscal  space,  would  support 
growth and rebalancing. 

Fiscal  structural  reforms  remain  crucial  for  improving  fiscal  sustainability  and 
strengthening  the  economic  growth  potential.  Better  functioning  national  fiscal 
frameworks,  well-managed  spending  reviews  and  effective  and  transparent  public 
procurement can strengthen the efficiency and effectiveness of public expenditure and 
the  credibility  of  fiscal  policies.  Improving  the  composition  of  national  budgets,  on 
both revenue and expenditure sides, including shifting resources towards investment, 
would  increase  the  growth  impact  of  public  budgets  and  raise  productivity  in  the 
longer  term.  Simplifying  and  modernising  tax  systems  and  addressing  tax  fraud, 
evasion and avoidance, namely through measures against Aggressive Tax Planning are 
essential  to  making  tax  systems  more  efficient  and  fairer.  Ensuring  that  tax  systems 
favour the deepening of the single market, and encourage competition between firms is 
key in improving the business environment in and the resilience of the euro area and 
Member States’ economies. The Common Consolidated Corporate Tax Base would be 
instrumental in this endeavour.  

(6) 

Structural  and  institutional  features  of  labour  and  product  markets  and  well-
functioning  public  administrations  are  important  for  the  resilience  of  euro-area 
Member States. Resilient economic structures prevent shocks from having significant 

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(7) 

and long-lasting effects on income and labour supply. This can facilitate the operation 
of  monetary  policy  and  contain  divergences,  creating  conditions  for  sustainable  and 
inclusive  growth.  Better  coordination  and  implementation  of  structural  reforms,  in 
particular  those  prescribed  in  the  country-specific  recommendations,  can  create 
positive spillovers  between Member States and strengthen the positive  effects  across 
the euro area. Reforms that increase competition in product markets, promote resource 
efficiency and improve the business environment, and quality of institutions, including 
an  effective  justice  system,  foster  economic  resilience  of  the  euro  area  and  Member 
States. The Single Market still holds considerable unexploited potential and progress is 
needed  to  deepen  it,  particularly  in  financial  services,  digital  activities,  energy  and 
transport, ensuring timely implementation and better enforcement of legislation. 

The  European  Pillar  of  Social  Rights  sets  out  twenty  principles  to  foster  equal 
opportunities  and  access  to  the  labour  market,  fair  working  conditions  and  social 
protection and inclusion. Reforms that promote labour market participation,   support 
transitions  and  reduce  segmentation  can  help  boost  growth,  improve  economic 
resilience and automatic stabilisation, reduce inequalities, and help face the challenges 
of  a  changing  economy.  Individualised  support  for  job  searching,  training  and 
requalification  can  result  in  effective  and  timely  activation.  Access  to  high-quality 
education and training is vital and requires adequate investment in human capital and 
skills,  notably  for  the  low  skilled.  Such  reforms  and  investments  improve 
employability,  innovation,  productivity,  and  wages  in  the  medium  and  longer  term, 
increasing  resilience  of  the  euro  area  and  promoting  social  inclusion  and  mobility 
within  Member  States  and  across  the  euro  area.  The  tax  burden  in  the  euro  area  is 
relatively high and skewed towards labour; a shift away from labour to tax bases that 
are less detrimental to growth, such as property, consumption or environmental taxes, 
could strengthen labour supply and demand. Employment protection legislation needs 
to provide for fair and decent working conditions for all workers especially in view of 
emerging new forms of employment and new types of contracts that bring along new 
opportunities but also challenges related to job security and social protection coverage. 
Effective and sustainable social protection systems are also crucial to ensure adequate 
income and access to quality services. Pension reforms and work-life balance policies 
are  also  key  to  foster  labour-market  participation.  Unnecessary  restrictions  on  job, 
sectoral and geographical mobility may hamper reallocation within Member States and 
across the  euro  area. Social partners’ involvement  in  employment, social and related 
economic reforms is crucial. 

(8)  While  the  robustness  of  the  euro  area  financial  sector  has  increased  since  the  crisis, 
vulnerabilities  remain  to  be  addressed.  Private  sector  debt  remains  elevated,  and  tax 
systems  still  feature  a  debt  bias.  Substantial  increases  in  sovereign  bond  yields  risk 
eroding  banks’  capital  risking  negative  spillovers  across  the  euro  area.  The  need  to 
adapt  banks'  business  models,  the  low  interest  rate  environment  and  increasing 
competition  from  other  forms  of  finance  continue  to  exert  pressure  on  banks' 
profitability. Non-performing loan (NPL) ratios are falling as a share of total loans and 
at a higher rate in Member States with the highest stocks. Nonetheless, national NPL 
ratios that remain far above the euro area average require further sustained efforts. In 
March  2018  the  Commission  presented  a  risk-reduction  package  to  address  legacy 
NPLs and avoid their future build-up which should be fully adopted by Parliament and 
the  Council.  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,  remains  crucial  for  the  completion  of  the  Banking 
Union.  Following  serious  breaches  of  anti-money  laundering  rules,  the  Commission 

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(9) 

proposed reinforcing the European Banking Authority and supervisory cooperation to 
strengthen  the  enforcement  of  the  regulatory  framework  in  this  area.  Significant 
progress has been made in establishing the Banking Union, but it remains unfinished. 
The  lack  of  a  common deposit  insurance  scheme  and  of  a  common  backstop  for  the 
Single  Resolution  Fund  hampers  the  ability  of  the  Banking  Union  to  sever  the  link 
from banks to sovereigns.  

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. Given 
the  common  monetary  policy  and  a  decentralised  fiscal  policy,  more  risk  sharing  is 
needed  considering  the  achieved  progress  on  risk  reduction.  In  December  2017  and 
May 2018, the Commission published a set of proposals setting further steps towards 
completing  the  EMU,  including  a  European  Investment  Stability  Function  and  a 
Reform Support Programme (proposed under the Multi Annual Financial Framework). 
The  proposals  build  on  the  reflection  paper  on  the  deepening  of  EMU  of  May  2017 
and the Five Presidents' Report of June 2015. In line with the agreement of euro area 
Finance Ministers in June 2018, political decisions and concrete steps are to be taken 
on  the  Banking  Union,  including  beginning  political  negotiations  on  the  European 
Deposit  Insurance  Scheme  and  to  further  strengthen  the  European  Stability 
Mechanism, which leaders agreed should be the provider of the backstop to the Single 
Resolution  Fund.  All  these  reforms  will  contribute  to  strengthening  the  international 
role of the euro, making it more commensurate to the euro area global economic and 
financial relevance. It is important that they are discussed in an  open and transparent 
manner towards non-euro area Member States. 

(10)  The  Employment  Committee  and  the  Social  Protection  Committee  have  been 

consulted on the employment and social aspects of this recommendation, 

HEREBY  RECOMMENDS  that  euro  area  Member  States  take  action,  individually  and 
collectively within the Eurogroup, in the period 2019–2020 to: 

1.  

2.  

3.  

4.  

Deepen the Single Market, improve the business environment, and pursue resilience-
enhancing  product  and  services  market  reforms.  Reduce  external  debt  and  pursue 
reforms  to  boost  productivity  in  euro  area  Member  States  with  current  account 
deficits and strengthen the conditions that support wage growth respecting the role of 
social partners and implement measures that foster investment in euro area Member 
States with large current account surpluses.  

Rebuild fiscal buffers in euro area countries with high levels of public debt, support 
public  and  private  investment  and  improve  the  quality  and  composition  of  public 
finances in all countries.   

Shift  taxes  away  from  labour  and  strengthen  education  systems  and  investment  in 
skills,  as  well  as  the  effectiveness  of  active  labour  market  policies  that  support 
transitions.  Address  labour  market  segmentation  and  ensure  adequate  social 
protection systems  across the euro area.  

Make  the  backstop  for  the  Single  Resolution  Fund  operational,  set  up  a  European 
Deposit  Insurance  Scheme  and  strengthen  the  European  regulatory  and  supervisory 
framework.  Promote  orderly  deleveraging  of  large  stocks  of  private  debt.  Swiftly 
reduce the level of non-performing loans in the euro area and prevent their build up, 
including by removing  debt bias in taxation.  

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5.  

Make swift progress on completing the Economic and Monetary Union, also with the 
perspective  to  strengthen  the  international  role  of  the  euro,  taking  into  account  the 
Commission proposals, including those concerning the financial sector as well as the 
Reform  Support  Programme  and  the  European  Investment  Stabilisation  Function 
under the proposal for the 2021-2027 Multiannual Financial Framework. 

Done at Brussels, 

For the Council 
The President 

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