Recommendation for a COUNCIL RECOMMENDATION on the economic policy of the euro area
Date: 2022-11-22
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: economic growth, economic reform, energy crisis, euro area, fiscal policy, investment promotion, macroeconomics, stability pact, structural adjustment, sustainable development

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   EUROPEAN COMMISSION  Strasbourg, 22.11.2022  COM(2022) 782 final  Recommendation for a COUNCIL RECOMMENDATION on the economic policy of the euro area {SWD(2022) 382 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(1) 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, 
After consulting the Economic and Financial Committee, 
After consulting the Economic Policy Committee, 
Whereas:  

(1) 

The euro area’s post-COVID economic recovery has been interrupted by a series of 
external shocks. Thanks, in particular, to decisive economic policy response, both at 
national  and  EU  level,  and  to  the  lifting  of  containment  measures,  the  euro  area 
posted  solid  GDP  growth  in  2021  and  2022,  5.3 %  and  3.2 %  respectively.  Labour 
market also proved resilient, with the unemployment rate set to reach the record low 
rate  of  6.8 %  in  2022.  However,  the  increase  in  global  energy  prices,  heightened 
uncertainty  and  supply  chain  disruptions  induced  by  Russia’s  war  of  aggression 
against  Ukraine  resulted  in  a  clear  deceleration  in  economic  activity  in  the  second 
half of 2022, and the energy crisis has led to a downward reassessment of forecasts 
for 2023.  Overall, GDP  growth in  the  euro area  is  set  to  decrease to  only  0.3 % in 
2023  before  returning  to  a  1.5  %  growth  in  2024.  The  energy  market  and  other 
commodities  markets  have  been  fuelling  inflation,  which  over  time  has  broadened 
into  other  items  and  reaches  8.5 %  in  2022.  Inflation  is  now  expected  to  remain 
elevated  in  the  coming  months,  staying  at  6.1 %  in  2023  before  easing  in  2024. 
Labour  markets  are  expected  to  remain  robust  as  demand  for  labour  remains  high. 
With a large share of businesses still reporting labour shortages, unemployment is set 
to  increase  only  moderately  next  year,  before  abating  again  in  2024.  Meanwhile, 
nominal wage growth is expected to increase in 2023 but to remain below inflation, 

1 
2 

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

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(2) 

(3) 

leading to a drop in purchasing power of households. In this context, the euro area’s 
current  account  surplus  has  receded,  in  line  with  the  strongly  deteriorating  energy 
balance  and,  going  forward,  the  nominal  depreciation  of  the  euro  against  the  US 
dollar  and  some  other  currencies  since  the  second  half  of  2021  is  likely  to  provide 
only a modest boost to competitiveness given the high energy costs.  

The  deterioration  in  macroeconomic  conditions  and  large  price  differentials  across 
Member  States  challenge  income  and  business  cycle  convergence  in  the  euro  area. 
While the COVID-19 pandemic led to deep, though largely transitory, divergences in 
macroeconomic  performance,  it  had  a  limited  and  temporary  impact  on  business 
cycle  synchronisation.  The  energy  crisis  brings  with  it  new  heterogeneous 
macroeconomic  impacts  in  the  euro  area.  Due  to  cross-country  discrepancies  in 
energy  mixes  and  in  policies  to  mitigate  the  impact  of  the  energy  shock,  large 
differences  in  headline  and  core  inflation  rates  have  emerged  across  the  euro  area. 
Higher  energy  prices  and  supply  chain  pressures  have  had  an  uneven  impact  on 
manufacturing  and  services  across  euro  area  Member  States  and  may  result  in 
that 
drifting 
competitiveness  gaps  within  the  euro  area  have  been  limited  so  far,  divergences  in 
current account balances in the euro area have recently widened mainly on the back 
of deteriorating energy balances. 

relative  competitiveness.  While  available 

indicators  suggest 

Ensuring  an  appropriate  policy  response  to  a  deteriorating  economic  outlook  and 
high inflation is a requires monetary and fiscal policies to be appropriately calibrated 
and  coherent.  Monetary  policy  normalisation  has  to  address  high  and  divergent 
inflation  while  tackling  possible  risks  of  unwarranted,  disorderly  market  dynamics 
that pose a serious threat to the transmission of monetary policy across the euro area. 
In  the  current  climate,  a  broad-based  fiscal  expansion  to  support  demand  would 
further  fuel  inflationary  pressure,  at  a  time  when  public  debt  is  elevated  in  several 
euro  area  Member  States.  This  calls  for  fiscal  policies  that  are  appropriately 
differentiated across Member States according to  the economic and fiscal situation, 
as recommended by the Council in July 2022.3 It also requires them to be prepared to 
adjust  current  spending  to  the  evolving  situation.  At  the  same  time,  targeted  and 
temporary  fiscal  measures  are  needed  to  support  vulnerable  people  and  companies, 
also  with  a  view  to  maintaining  jobs  and  human  capital,  while  preserving  price 
signals  and providing incentives to  reduce  energy  consumption.  Close coordination 
of  policy  responses  between  Member  States  remains  crucial.  Labour  market  and 
social policies are also instrumental in addressing the social impacts of high inflation. 
Average  wages  are  not  keeping  up  with  inflation  in  2022.  Going  forward,  wage 
developments  need  careful  balancing  to  protect  wage  earners’  purchasing  power  – 
with a focus on low-wage earners – while avoiding the risk that wages feed inflation 
and  deepen  emerging  competitiveness  differentials  within  the  euro  area  and 
worldwide.  Active  involvement  of  social  partners  helps  identify  challenges, 
including  on  the  specific  challenges  for  the  monetary  union,  improves  policy 
solutions, and ensures broader ownership of the economic and social policy agenda. 
Supply-side policies can also contribute to lower inflation by accelerating the build-

3 

Council  Recommendations  of  12  July  2022  on  the  National  Reform  Programmes  and  delivering 
Council opinions on the 2022 Stability Programmes, OJ C 334, 1.9.2022.  

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(4) 

(5) 

(6) 

(7) 

up of alternative energy supplies, enhancing competition, improving the allocation of 
resources,  and  supporting  productivity  growth.  Risks  to  financial  stability  also 
require continued monitoring. 

The Recovery and Resilience Facility (RRF) and cohesion policy funds are key tools 
to  strengthen  the  resilience  of  the  euro  area  and  support  convergence.  The 
implementation  of  the  RRF  in  the  euro  area  Member  States  is  well  on  track,  with 
over  EUR 128 billion  paid  in  pre-financing  and  following  the  fulfilment  of 
milestones  and  targets.  Since  the  outbreak  of  the  pandemic,  cohesion  policy 
programmes  disbursed  over  EUR 82 billion  to  euro  area  Member  States.  The  RRF 
and  cohesion  policy  funds  contribute  to  the  euro  area  policy  priorities  through 
several channels: both support economic activity through additional investment and, 
in the longer term, the planned investments and structural reforms are set to support 
the green and digital  transition  while  stimulating  higher  growth in  productivity  and 
potential output. A large proportion of investments and reforms carried out as part of 
the RRF is relevant for the implementation of euro area policy priorities identified in 
previous euro area recommendations. Accordingly, continuing to implement planned 
reforms and  investments based on the planned schedule is  essential to  maintain  the 
reform momentum.  

To  ensure  a  consistent  economic  policy  response  at  the  EU  level,  the  Annual 
Sustainable Growth Survey (ASGS)4 outlines the key policy priorities and guidelines 
for the year ahead. The ASGS is in line with the UN Sustainable Development Goals 
and  is  structured  around  the  four  dimensions  of  competitive  sustainability: 
environmental  sustainability,  fairness,  productivity,  and  macroeconomic  stability. 
The  Alert  Mechanism  Report5  provides  the  Commission’s  analysis  of  potential 
macroeconomic imbalances that may hinder the proper functioning of Member State 
economies, the Economic and Monetary Union and the Union as a whole.  

The rapid increase in inflation over the past year has prompted a rapid adjustment of 
the  monetary  policy  stance  worldwide.  The  European  Central  Bank  (ECB)  has 
started normalising monetary policy to ensure a timely return of inflation to the 2% 
medium-term target. It has also indicated that the normalisation of interest rates will 
continue, taking into account economic data developments. Supply constraints play a 
significant  part  in  the  recent  inflation  surge,  and  inflation  differentials  make  the 
conduct  of  monetary  policy  more  challenging.  An  even  transmission  of  the  policy 
stance  across  the  euro  area  is  a  precondition  for  monetary  policy  to  deliver  on  its 
mandate.  

The  euro  area  fiscal  stance,  measured  as  the  change  in  net  primary  expenditures 
relative  to  average  potential  growth,  is  projected  to  be  expansionary  in  2022  and 
broadly  neutral  in  2023,  conditional  on  the  planned  roll-back  of  energy-related 
measures.  In 2023,  fiscal  policy should  avoid  amplifying the inflationary  effects  of 
the  ongoing  supply  shocks  and,  both  at  national  level  and  for  the  euro  area  as  a 
whole, a broad-based fiscal impulse to the economy is not warranted. The challenge 
is particularly acute for Member States experiencing high core inflation, also in light 

4 
5 

Annual Sustainable Growth Survey 2023, COM (2022) 780. 
Alert Mechanism Report 2023, COM (2022) 781. 

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of  the  serious  economic  and  social  difficulties  inflicted  by  the  erosion  of  wage 
earners’  purchasing  power,  in  particular  for  low  wage  earners.  Moreover,  fiscal 
policy  should  remain  prudent  and  combine  higher  investment  with  controlling  the 
growth  in  net  primary  current  expenditure.  In  this  context,  the  expected  further 
increase  in  RRF  absorption  and  in  nationally-financed  investments  across  Member 
States  are  consistent  with  the  need  to  expand  public  investment  for  the  green  and 
digital transition and for energy security. At the same time,  the fiscal policy agility 
would help to respond to high uncertainty and strong downside risks to the economic 
outlook, while not undermining incentives for the energy transition. The COVID-19 
pandemic  has  left  a  legacy  of  record-high  debt  in  the  euro  area,  and  public  debt  is 
expected to remain much higher than pre-pandemic levels in most euro area Member 
States.  While  short-term  sustainability  risks  have  largely  decreased,  medium-  and 
longer-term  risks remain elevated in  several  Member States, and interest  rates  rises 
will eventually feed into higher debt burden. 

In order to  respond  to  the increase in  energy prices, euro area Member States have 
taken measures estimated to represent 1 ¼ % of GDP in 2022 and up to 1 % in 2023, 
with the expected decrease contingent on developments in the price of energy and on 
the planned roll-back of the related measures. The measures taken so far mainly aim 
at mitigating price increases, and only 20 % are targeted income measures. There is a 
need to limit the fiscal cost of such support measures, while taking into account their 
distributional impact across income brackets, the impact on energy demand, possible 
distortions to the single market and negative spillovers across countries. To this end, 
it  is  important  to  agree  on  a  common  approach.  A  two-tier  energy  pricing  model, 
whereby vulnerable consumers benefit from regulated prices up to a certain level of 
consumption,  can  be  helpful  here.  Besides  temporary  energy  measures,  public 
investment can help bolster energy security and the green transition. Since the global 
financial crisis, the euro area has been suffering from low levels of both private and 
public  investment.  Policy  steps  taken  in  response  to  the  COVID-19  crisis,  with  the 
exceptional support of NextGenerationEU, have helped maintain the level of public 
investment,  with  a  positive  impact  on  potential  growth,  especially  in  the  Member 
States  with  the  highest  public  debt  burden.  Further  public  investment,  in  particular 
through the implementation of the recovery and resilience plans, of cohesion policy 
programmes, and national energy and climate plans to be updated by Member States 
by June 2023, is critical for sustainable and cohesive growth and to achieve the green 
and digital transition. 

On 9 November 2022 the Commission published the Communication on orientations 
for  a  reform  of  the  EU  economic  governance  framework6  to  improve  the 
effectiveness  of  economic  surveillance  and  policy  coordination  in  the  Union.  The 
Communication aims to define a simpler and integrated architecture for macro-fiscal 
surveillance  to  ensure  debt  sustainability  and  promote  sustainable  and  inclusive 
growth.  The  key  elements  of  the  proposal  aim  at  simplifying  the  framework, 
improving national ownership, and strengthening enforcement. The Communication 
proposes  that  fiscal  trajectories  are  based  on  medium-term  fiscal-structural  plans 

(8) 

(9) 

6 

Communication on orientations for a reform of the EU economic governance framework, COM(2022) 
583 final 

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(11) 

proposed  by  Member  States,  within  a  transparent  common  EU  framework.  These 
plans  would  bring  together  fiscal,  reform  and  investment  commitments  supporting 
debt sustainability and sustainable growth and  reflecting EU and national priorities. 
Reform  and  investment  commitments,  which  would  be  adopted  by  the  Council, 
would  allow  for  a  longer  fiscal  adjustment  period.  While  maintaining  the  Treaty 
reference  values  (3%  of  GDP  for  the  deficit  and  60%  of  GDP  for  the  debt),  the 
framework  would  rely  on  a  more  risk-based  surveillance  focused  on  debt 
sustainability.  As  regards  the  Macroeconomic  Imbalance  Procedure  (MIP),  the 
communication  proposes  a  more  forward-looking  framework  to  be  able  to  identify 
emerging risks as they develop.  The assessment of whether imbalances exist would 
remain  based  on  the  three  criteria  of  gravity,  evolution  and  the  policy  response. 
However,  the  criteria  of  evolution  and  the  policy  response  by  the  Member  State 
concerned would be given more weight in the assessment 

The  euro  area  labour  market  has  shown  remarkable  resilience  thanks  to  policy 
support during the COVID-19 crisis. In the first quarter of 2022, total hours worked 
surpassed  pre-pandemic  levels,  and  employment  continued  to  grow  throughout  the 
first half of 2022 to historically high levels in the second quarter of 2022 pushing the 
unemployment  rate  to  6.8 %,  its  lowest  level  since  the  creation  of  the  euro.  Still, 
scope  for  improvement  remains  with  regard  to  the  labour  market  integration  of 
women,  young  people,  persons  with  disabilities,  and  vulnerable  groups.  Going 
forward, the expected slowdown in economic activity is set to weigh on employment 
prospects,  with  unemployment  rate  slightly  increasing  in  2023  and  2024.  There  is 
little  evidence  that  the  COVID-19  crisis  led  to  a  structural  deterioration  of  job 
matching  issues.  However,  there  are  significant  labour  market  differences  across 
Member  States  and  sectors.  Since  2019,  job  creation  has  been  the  strongest  in 
information 
transportation, 
professional 
accommodation and food have recorded job losses. Demographic change is likely to 
also play a role in the tightening of euro area labour markets.. Adequate and effective 
investment  in  quality  education  and  training  at  all  ages  will  be  key  to  mitigating 
current  and  future  skills  shortages.  Wage  growth  somewhat  increased  during  2022, 
leading to an aggregate increase in unit labour costs. However, it remained moderate 
overall and is projected to stay well below inflation. Real compensation by employee 
is  projected  to  contract  by  2.8%  in  2022  and  by  a  further  0.9 %  in  2023  before 
recouping part of the loss in 2024. Anchored inflation expectations play a key role in 
mitigating risks that rapid rises in wage claims push inflation further up.  

services  while 

technology 

and 

Structural  reforms,  including  those  carried  out  as  part  the  European  Green  Deal  or 
supported by the RRF and REPowerEU plan, are key to strengthen the Single Market 
and  the  resilience  of  the  euro  area  economies.  Further  improving  the  business 
environment,  including  by  reducing  barriers  to  investment  and  the  reallocation  of 
capital,  modernising  public  administrations, 
regulatory 
frameworks,  and  speeding  up  of  granting  permits,  can  increase  productivity  and 
growth.  Reforms,  together  with  investment,  are  instrumental  to  accomplishing  the 
green and digital transition, in particular for improving energy efficiency, supporting 
decarbonisation,  increasing  the  supply  and  deployment  of  renewable  energy  and 
clean energy technologies, as well as supporting upskilling and reskilling. The rapid 
and persistent rise in energy prices has put  the business models of energy-intensive 
industries and small and medium enterprises under pressure, with an impact on jobs 
and human capital. Efficient insolvency regimes can support the transition and make 
it easier to reallocate resources.  Insolvency  regimes across the  euro area still differ 

restrictive 

removing 

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(13) 

greatly and increasing their effectiveness and harmonisation would support economic 
adjustment and the single market for capital. 

So far, the banking sector has shown overall resilience in 2022. While the euro area 
banking  sector  as  a  whole  is  well  capitalised  and  has  seen  an  improvement  in 
profitability  since  2021,  a  sharp  deterioration  in  the  macroeconomic  outlook, 
together with  increasing  interest  rates, may translate into weaker  asset quality.  In  a 
context of tighter access to credit, timely monitoring of risks, proactive engagement 
with  debtors  and  active  management  of  non-performing  loans  is  important  to 
maintain banks’ ability to finance the economy.  The resilience of credit institutions 
may be hampered by structural factors, including overcapacity and competition from 
new  financial  service  providers.  Other  risks  may  also  emerge  on  the  financial 
markets. In particular, higher risk premiums and tightening liquidity conditions may 
lead  to  a  fall  in  asset  prices.  Due  to  margin  calls,  this  may  cause  further  pressures 
beyond the liquidity stress already experienced by some energy companies. How the 
residential  and  commercial  real  estate  markets  react  to  the  interest  rate  hikes  also 
requires  close  monitoring,  as  rising  mortgage  rates  and  worsening  debt-servicing 
capacity  can  exert  downward  pressure  on  house  prices  and  lead  to  cyclical  risks. 
Moreover,  increased  cyber  risks  call  for  greater  attention,  and  the  recently  agreed 
Digital Operational Resilience Act will strengthen financial firms’ resilience against 
risks related to information and communication technologies. In September 2022, the 
European  Systemic  Risk  Board  issued  a  warning  asking  private  sector  institutions, 
market  participants  and  relevant  authorities  to  continue  to  prepare  for  tail-risk 
scenarios.7 

In  June  2022,  the  Eurogroup  agreed  that  work  on  the  future  of  the  Banking  Union 
should focus on strengthening  the  common framework  for bank  crisis  management 
and the national deposit  guarantee scheme to have a framework that is suited  to all 
types  of  banks.  The  Eurogroup  committed  to  reviewing  the  state  of  the  Banking 
Union and identifying in a consensual manner further measures  regarding the other 
outstanding  elements  to  strengthen  and  complete  the  Banking  Union.  The 
Commission has announced that it intends to make a crisis management and deposit 
insurance  (CMDI)  legislative  proposal  in  early  2023.  Modifications  to  the  CMDI 
framework  can  help  make  the  euro  area  banking  sector  more  resilient.  The 
Commission has also announced that it will table in the first half of 2023 a legislative 
proposal  that  would  establish  the  digital  euro  and  regulate  its  core  aspects,  with  a 
possible introduction of the digital euro by the ECB  in 2026. A digital  euro, which 
would  be  complementary  to  cash,  could  unlock  several  benefits  for  the  euro  area 
economy.  It  would  support  in  particular  the  digitalisation  of  the  economy  and 
innovation in retail payments. While the international role of the euro has remained 
broadly  stable  in  recent  years,  it  could  be  strengthened.  Developing  a  digital  euro 
could, also against the background of the current geopolitical situation,  increase the 
economic and financial autonomy of the euro area and the Union and improve global 
financial stability. 

7 

Warning  of  the  European  Systemic  Risk  Board  of  22 September 2022  on  vulnerabilities  in  the  Union 
financial system (ESRB/2022/7). 

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RECOMMENDS:  

the 
take  action, 
Euro  area  Member  States  should 
implementation of their recovery and resilience plans, and collectively within the Eurogroup, 
in 2023 –2024 to: 

individually, 

including 

through 

1. 

2. 

3. 

4. 

5. 

Continue  to  coordinate  fiscal  policies  across  Member  States  to  support  the  timely 
return of inflation to  the ECB’s  2% medium-term  target.  Refrain  from  broad-based 
support to aggregate demand in 2023, while targeting fiscal measures to address the 
impact  of high  energy  prices  on vulnerable households and  companies.  Agree on a 
common approach and, in particular, replace broad-based price measures with a cost-
efficient  two-tier  energy  pricing  that  ensures  incentives  for  energy  savings.  Define 
appropriately  differentiated  medium-term 
to  ensure  debt 
sustainability and raise the growth potential in a sustainable manner, through gradual 
consolidation  to  achieve  prudent  medium-term  fiscal  positions,  as  well  as  through 
investments and reforms. 

fiscal  strategies 

Sustain  a  high  level  of  public  investment  needed  to  boost  economic  and  social 
resilience  and  support  the  green  and  digital  transition,  including  for  greater  energy 
efficiency  and  for  the  transition  to  renewable  energy  sources.  Implement  the 
cohesion policy programmes and  recovery and resilience plans, ensuring the timely 
delivery of reforms and investment, and ensure that updates to the plans are targeted 
and  do  not  reduce  the  overall  ambition.  Take  further  steps,  including  through 
REPowerEU  plan,  to  accelerate  the clean  energy  transition  and  increase  Union’s 
energy independence. 

In  accordance  with  national  practices  and  respecting  the  role  of  social  partners, 
support  wage  developments  that  mitigate  the  loss  in  purchasing  power  of  wage 
earners,  in  particular  for  low-income  workers,  while  reflecting  medium-term 
productivity  developments  and  limiting  second-round  effects  on  inflation.  Develop 
and adapt, where needed, social support systems to help vulnerable households deal 
with the energy shock and the green and digital transition, addressing the increased 
risk of poverty. Further improve active labour market policies and take measures to 
address  skills  shortages.  Ensure  the  effective  involvement  of  social  partners  in 
policy-making and strengthen social dialogue. 

Ensure  that  the  support  to  companies,  in  particular  small  and  medium-sized 
enterprises,  that come under financial  pressure because of the  energy  crisis is  cost-
effective,  temporary,  and  targeted  to  viable  firms.  The  support  provided  should 
maintain incentives for energy efficiency and preserve the level playing field and the 
integrity  of  the  single  market,  including  through  the  State  aid  Temporary  Crisis 
Framework. Increase the efficiency of insolvency frameworks by ensuring that they 
deal effectively and in a timely manner with bankruptcy and corporate restructuring. 
Contribute to progress towards the Capital Markets Union. 

Preserve macro-financial stability, maintain the credit channels to the economy and 
continue  supporting  financial  integration.  Monitor  risks  linked  in  particular  to 
tensions  in  the  energy  sector,  rising  interest  rates,  non-performing  assets,  and 
developments in real estate markets. Continue to actively engage in the  preparatory 
work on the introduction of a digital euro.  

Further  steps  in  deepening  the  Economic  and  Monetary  Union  (EMU)  should  take  into 
account the lessons learnt from the design and implementation of the Union’s comprehensive 
economic  policy  response  to  the  COVID-19  crisis,  including  the  RRF  and  the  economic 

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governance review. Progress in deepening the EMU should be continued in full respect of the 
Union’s single market and in an open and transparent manner towards non-euro area Member 
States. 

Done at Strasbourg, 

For the Council 
The President 

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