COMMISSION STAFF WORKING DOCUMENT 2023 Report on the euro area Accompanying the document 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

EN 

  EN 

   EUROPEAN COMMISSION  Strasbourg, 22.11.2022  SWD(2022) 382 final  COMMISSION STAFF WORKING DOCUMENT 2023 Report on the euro area Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on the economic policy of the euro area {COM(2022) 782 final}  
 
 
 
 
Introduction 

The  euro  area  report 
is  the  staff  working  document  accompanying  the  Commission’s 
recommendations  on  a  Council  recommendation  on  the  economic  policy  of  euro  area  Member 
States. It provides an analysis of recent economic developments and key policy challenges focusing 
on  issues  that  are  relevant  for  the  euro  area.  This  report  should  be  read  in  conjunction  with  the 
Annual Sustainable Growth Survey,(1) which outlines the key policy priorities and guidelines for the 
year ahead, the Alert Mechanism Report,(2) which provides an analysis of potential macroeconomic 
imbalances that may hinder the proper functioning of Member State economies, the Economic and 
Monetary  Union  or  the  EU  as  a  whole,  and  the  Commission  proposal  for  a  Joint  Employment 
Report,(3) which provides a yearly update on the employment and social situation. 

This report provides an analysis of the economic outlook for the euro area and of the related key 
policy challenges (Section 1). Taking into account the impact of the COVID-19 pandemic, the report 
looks  into  the  emerging  risks  of  divergence  stemming  from  the  ongoing  energy  crisis,  and  in 
particular from high and vastly different inflation rates recorded across the euro area (Section 2). 
This  situation  increases  the  need  for  coordinated  fiscal  and  monetary  policies,  also  taking  into 
account  sustainability  constraints  and  the  need  to  continue  supporting  public  investment  in  the 
green  and  digital  transition  (Section  3).  The  high  inflation  recorded  in  the  euro  area  also  poses 
several structural policy challenges to increase the resilience of the economy (Section 4). These are 
in  particular  related  to  developments  on  the  labour  market  and  to  social  policy.  The  report  also 
assesses  the  impact  of  the  high  inflation  on  financial  markets,  the  related  normalisation  in 
monetary  policy,  and  the  recent  deterioration  in  the  economic  outlook,  both  as  regards  financial 
integration and macro-financial stability (Section 5).  

(1)  Annual Sustainable Growth Survey 2023, COM (2022) 780. 

(2)  Alert Mechanism Report 2023, COM (2022) 781. 

(3)  Commission proposal for a Joint Employment Report, COM (2022) 783. 

 
 
                                                 
1. ECONOMIC OUTLOOK AND POLICY CHALLENGES 

0.3%  in  2023,  with  a  stagnating  private 
consumption, 0.5 % growth in investment, and 
only a negligible external sector contribution to 
GDP growth.  

Graph 1.1: GDP growth in the euro area 

(1) For Q2-2020 (-11.5) and Q3-2020 (+12.6) quarterly 
growth rate not visible. The light blue bars of quarterly 
growth based on the Commission’s autumn forecast. 
Source: Eurostat, European Commission. 

Increases in the price of energy and other 
commodities have been fuelling inflation. 
Energy  commodity  and  electricity  prices 
already started accelerating in the last quarter 
of  2021  and  have  skyrocketed 
in  2022 
following  Russia’s  invasion  of  Ukraine.  Other 
commodity  prices, 
including  cereals  and 
metals, have also experienced a rapid increase. 
Although  agricultural  commodity  prices  have 
moderated,  the Russian blockade  of Ukrainian 
wheat exports, shortage of fertilisers, extreme 
weather  patterns  and  food  export  restrictions 
imposed  by  some  countries  have  pushed 
prices higher than in 2021. Prices of industrial 
metals have retreated from peaks recorded in 
the first half of the year, though some metals 
remain  well  above  their  2021  levels.  The 
depreciation of the euro against the US dollar, 
driven  by  earlier  monetary  tightening  in  the 
US,  has  reinforced  the  terms-of-trade  shock 
linked  to  energy  and  other  commodity  prices 
(European Commission, 2022d).  

Macroeconomic developments 

the 

the 

the 

from 

(RRF) 

global 

improving 

labour  market, 

Economic  developments  in  the  euro  area 
reflect 
and 
uncertain 
geopolitical environment. In the first half of 
2022,  economic  activity  in  the  euro  area  was 
the  positive  momentum 
supported  by 
stemming 
the 
re-opening  of 
economy  following  the  COVID-19  pandemic. 
The 
large 
household  savings  accumulated  during  the 
pandemic, favourable financing conditions, and 
the deployment of the Recovery and Resilience 
Facility 
to  solid  GDP  growth. 
However,  the increase in global energy prices, 
heightened  uncertainty  and  renewed  supply 
chain  disruptions  induced  by  Russia’s  war  of 
aggression against Ukraine are set to result in 
a  deceleration  of  economic  activity  in  the 
second  half  of  the  year.  Over  the  summer  of 
2022,  the  Commission’s  economic  sentiment 
indicator dropped below its long-term average. 
In particular, consumer confidence plummeted 
to levels below those during the pandemic. (4) 
Altogether,  GDP  for  the  euro  area  is  expected 
to  grow  by  3.2  %  in  2022  but  with  a  much 
weaker growth outlook.  

led 

The  energy  crisis  has  led  to  a  downward 
revision  of  growth  forecasts  for  2023. 
Further  gas  and  electricity  price  increases 
since  the  beginning  of  July,  the  technical 
recession  in  the  US  and  the  sharp  drop  in 
activity  in  China,  together  with  deteriorated 
economic  sentiment  point  to  negative  growth 
in  the  last  quarter  of  2022  and  a  weak 
recovery 
the 
Commission’s  autumn  forecast,  real  GDP  in 
the  euro  area  is  now  expected  to  grow  by 

afterward. 

According 

to 

(4)  See the latest European Commission’s business and 

consumer surveys: https://economy-
finance.ec.europa.eu/economic-forecast-and-
surveys/business-and-consumer-surveys_en 

3 

859095100105110115-8-6-4-2024682017-Q22017-Q32017-Q42018-Q12018-Q22018-Q32018-Q42019-Q12019-Q22019-Q32019-Q42020-Q12020-Q22020-Q32020-Q42021-Q12021-Q22021-Q32021-Q42022-Q12022-Q22022-Q32022-Q42023-Q12023-Q22023-Q32023-Q4Index 2019Q4 = 100%Quarter-on-quarter growth, % (lhs)Summer 2022 forecast (rhs)Autumn 2022 forecast (rhs) 
 
                                                 
  
Graph 1.3: Current account balance of the euro 
area, 2005-2022, % of GDP 

has 

repeatedly 

Inflation  has  broadened  across  the 
economy  and 
is  expected  to  remain 
elevated in the coming months. Over 2022, 
inflation 
exceeded 
In  October  2022,  annual 
expectations. 
harmonised  index  of  consumer  prices  (HICP) 
inflation  stood  at  10.7 %,  its  highest  level 
launched,  a  record 
since  the  euro  was 
last  12 
breached  every  month  over  the 
months. As higher energy costs have gradually 
spread  to  other  goods,  price  increases  have 
been  broadening  across  categories  and  HICP 
inflation is expected to average 8.5 % in 2022.  

Graph 1.2: HICP and its components in the euro 
area, 2007-2022 (annual changes; monthly 
data) 

Source: European Commission. 

Source: Eurostat. 

Inflation  pressures  are  expected  to  ease 
gradually.  The  European  Central  Bank  (ECB) 
has taken steps to start normalising monetary 
policy  and  thereby  ensure  that  long-term 
expectations remain anchored (see Section 2). 
Despite  record  inflation  rates,  wage  dynamics 
appear moderated so far (see Section 4). This 
weighs  on  spending  power  of  workers  but 
limits 
inflation. 
Mending  global  supply  bottlenecks  and  the 
expected  weakening  consumption  should 
remove  some  pressure  from  core  inflation. 
is  expected  to 
Accordingly,  price  growth 
gradually  decelerate,  with  HICP 
inflation 
projected at 6.1 % in 2023 and 2.6 % in 2024 
(European Commission, 2022d). 

the  persistence  of  high 

receded.  Over  2022, 

The  current  account  surplus  for  the  euro 
the 
area  has 
deteriorating  energy  balance  was  the  most 
relevant factor behind a reduction in the euro 
area  current  account  surplus  (Graph  1.3). 
Meanwhile,  the  strong  variation  in  energy 
dependency  across  euro  area  Member  States 
has  translated  in  discrepancies  in  current 
account  dynamics  (see  Section  3),  in  some 
cases  increasing  risks  of  external  imbalances. 
Over the medium term, while measures taken 
to  support  investment,  and  in  particular  the 
RRF  (IMF,  2022a),  are  set  to  reduce  the 
surplus, current account developments remain 
uncertain  and  will  be  driven  by  dynamics  on 
the energy markets.  

The  labour  market  has  shown  resilience 
and  continued  to  improve.  In  the  first 
quarter  of  2022,  total  hours  worked  in  the 
euro  area  surpassed  the  pre-pandemic  level, 
while  the  employment  rate  (20-64  years  old) 
was  74.3 %  in  the  second  quarter,  1.6  points 
higher  than  the  best  pre-pandemic  reading 
(Graph  1.4).  The  unemployment  rate  also 
reached  a  record  low,  at  6.6 %  in  September 
2022,  and  vacancies  and  labour  shortages 
continued  to  increase  (see  Section  4).  While 
the deteriorating economic outlook for 2023 is 
set  to  weigh  on  labour  market  dynamics, 
unemployment  is expected  to  remain  close to 
historical lows, at 7.2 % for 2023.  

4 

-202468102007200820092010201120122013201420152016201720182019202020212022EnergyFoodNon-energy industrial goodServicesHICP%-6-4-202468200520062007200820092010201120122013201420152016201720182019202020212022Non-energy goodsEnergy goodsServicesPrimary incomeSecondary incomeCurrent account% 
   
   
Graph 1.4: Labour market developments in the 
euro area, 2009-2022 

(1) Employment and activity rates, as a percentage of 
the population aged 15-64. Unemployment rate 
calculated as percentage of the population aged 15-74 
in the labour force. Euro area-19. 
Source: Eurostat. 

resilient,  albeit 

(ESRB,  2022).  The  war 

The  European  financial  system  remains 
in  an 
stable  and 
environment  of  elevated  and  increasing 
risks. Financial market risks have increased as 
global  financial  conditions  have  tightened  on 
the  back  of  on-going  monetary  policy 
normalisation 
in 
Ukraine  has  led  to  increased  volatility  in 
financial  markets,  creating  new  pockets  of 
risks.  On  the  other  hand,  the  actions  by  the 
ECB have ensured that its monetary policy can 
be duly transmitted across the euro area. This, 
roll-out  of 
together  with 
NextGenerationEU,  has  mitigated  the  risk  of 
financial  fragmentation.  While  rising  interest 
rates and high inflation are set to represent a 
risk  to  financial  markets,  strong  balance 
sheets 
adverse 
banks 
developments.  In  contrast,  their  structurally 
low 
significant 
challenge. 

the  continuing 

remains  a 

profitability 

protect 

from 

The  dollar’s  nominal  exchange  rate  has 
appreciated  substantially.  The  strength  of 
the  dollar  against  the  euro  –  an  appreciation 
of  around  14%  between  the  beginning  of 
January  and  the  end  of  October  2022  –  and 
other  global  currencies  (Graph  1.5)  should  be 
understood  against  the  background  of  earlier 
and stronger increases in interest rates in the 
US  given  the  different  sources  of  inflation  in 

5 

to  geopolitical 

Europe  and  the  US.  Moreover,  the  euro  area’s 
exposure 
its 
geographic and economic proximity to Ukraine 
and Russia has also played a role in exchange 
rate markets. 

risks  and 

Graph 1.5: Value of the euro against selected 
currencies 

(1) EER-19: Effective exchange rate compared to 19 
trading partners including AU, CA, DK, HK, JP, NO, SG, KR, 
SE, CH, GB, US, BG, CZ, HU, PL, RO, CN, HR 
Source: ECB. 

developments 
Future  macroeconomic 
depend  on  the  roll-out  of  policies, 
evolution  of  the  war  and  commodity 
markets. Russia’s aggression against Ukraine 
represents  a  negative  supply  shock  that 
affects  the  real  economy  and  fuels  inflation. 
High  gas  price  levels  could  strengthen  these 
stagflationary  forces.  Second-round  effects 
could  prolong  price  pressures  and  lead  to  a 
sharper  tightening  of  financial  conditions  that 
would  not  only  weigh  on  growth,  but  also  on 
financing costs. At the same time, recent falls 
in oil prices and other commodity prices should 
ease inflation.  

Policy implications 

Ensuring  an  appropriate  policy  response 
to  high  inflation  and  a  deteriorating 
economic  outlook  is  a  significant  policy 
challenge.  It  calls  for  the  coordination  of 
fiscal, social, and structural policies. While the 
in  sharp 
COVID-19  crisis  did  not  result 

45678910111213626466687072747620092010201120122013201420152016201720182019202020212022%%Activity rate (lhs)Empl. Rate (lhs)Unempl. rate (rhs)8090100110Jul-21Oct-21Jan-22Apr-22Jul-22Oct-22CNYGBPJPYUSDEER-19Index,1 July 2021=100 
   
   
divergences across the euro area, thanks to an 
effective  policy  response,  the  energy  crisis  is 
having  a  more  varied  impact.  As  the  energy 
crisis  puts  the  external  positions  of  euro  area 
Member States under pressure, a coordination 
of  their  economic  policies  remains  a  key 
component  to  help  avert  divergences  that 
would  alter  the  good  functioning  of  the 
monetary union (see Section 2).  

and 

policy 

fiscal 

that  would 

normalisation, 

fragmentation 

Both  monetary 
policy 
authorities  are  confronted  with  trade-
offs.  The  ECB  has  started  the  process  of 
monetary 
also 
announcing  its  intention  to  address  signs  of 
financial 
risk 
hindering  an  even  transmission  of  monetary 
policy.  Meanwhile,  the  euro  area  fiscal  policy 
has  remained  supportive  in  2022.  While  the 
economic  outlook  for  2023  is  deteriorating, 
the  upward  revision  in  the  inflation  outlook 
suggests  that  a  broad-based  fiscal  expansion 
would  not  be  warranted  as  it  would  fuel 
inflationary  pressure.  By  contrast,  support  to 
vulnerable  households  and  companies  most 
affected  by  the  energy  crisis  would  be  best 
temporary 
achieved 
to 
measures,  while 
promote energy efficiency. Based on the draft 
budgetary  plans  submitted  by  euro  area 
Member  States,  the  fiscal  stance  is  projected 
to be broadly neutral in 2023 (see Section3).  

incentives 

retaining 

targeted 

and 

by 

Calibrated  wage  developments  would 
support  the  spending  power  of  workers 
while  helping  to  ease  price  pressure.  The 
euro  area  labour  markets  are  strong,  and 
labour  shortages  surged  as  economies 
recovered  from  the  pandemic.  Despite  the 
tight labour market, nominal wages have only 
partly  adjusted  to  rising  consumer  prices. 
While  this  has  averted  a  potential  second-
round  increase  in  inflation,  it  has  resulted  in 
significant  losses  in  workers’  spending  power 
and  will 
expected 
deceleration  in  private  consumption  in  2023. 
Nominal  wages  are  expected  to  accelerate  in 
2023 but would still lag the still high inflation. 
Labour  market  policies,  through  their  impact 
on  wages,  social  dialogue  and  collective 
bargaining  are  key  to  achieving  overall  wage 
developments 
in 
that  mitigate 
spending  power  of  workers  (in  particular  for 

contribute 

loss 

the 

the 

to 

reflecting 
low-income  workers),  while 
productivity  developments  and  averting  the 
risk of driving inflation expectations further up 
(see Section 4).  

Supply side policies can also contribute to 
lower  inflation  pressures.  The  increasing 
price – and decreasing availability – of energy 
makes  the  EU’s  green  transition  priority  even 
more pressing. In that respect, implementation 
of  the  RRF  –  an  EU-wide  instrument  but  with 
specific  relevance  for  the  euro  area  –  and 
REPowerEU  in  addition  to  the  cohesion  policy 
funds  should  increase  energy  efficiency  as 
well  as  alternative  renewable  energy  sources 
in the EU. This should help make the euro area 
more resilient. Structural policies can also help 
companies re-gain part of the competitiveness 
losses  linked  to  the  energy  supply  shock. 
Developing  skills  and  reducing  skill  shortages, 
through  education  and  training  and  active 
labour market policy, contribute to productivity 
growth.  Measures  to  improve  the  functioning 
of  product  and  service  markets  in  the  euro 
area,  which 
includes  reducing  barriers  to 
competition,  creating  a  more  supportive 
business  environment  and  more  effective 
insolvency  regimes,  support  the  effective 
allocation  of  resources  and  productivity  gains 
(see Section 4). 

to 

financial  stability 

require 
Risks 
continued  monitoring.  Financial  conditions 
have tightened on the back of monetary policy 
normalisation.  Against  the  background  of 
deteriorating  balance  sheets  in  the  private 
sector,  higher  interest  rates  could  lead  to 
repayment  difficulties.  They 
could  also 
contribute  to  asset  price  corrections,  for 
example in the still buoyant housing market. In 
that  context,  further  progress  on  the  Banking 
Union could support greater financial stability. 
Actions  to  strengthen  the  Capital  Markets 
Union  (CMU)  would  elicit  private  risk  sharing 
and  avert  financial  fragmentation  risks.  The 
CMU  could  also  spur  long-term  financing  of 
innovation  needed  to  support  the  green  and 
digital transition (see Section 5).  

6 

 
7 

Box 1.1: The euro area in the European UnionThe euro area now represents 85% of the EU’s economy. The euro was launched in 1999 with 11 EU Member States adopting the common currency. The euro area has been composed of 19 countries since 2015, following a series of enlargements. After the UK left the EU, the share of the euro area in EU GDP jumped from around 72% (EU-28) to 85% (EU-27). The euro area will soon encompass 20 EU Member States. All EU Member States except Denmark are supposed to adopt the common currency. On 1 January 2023, Croatia will join the euro area as the 20th member. The Commission’s 2022 convergence report – assessing the progress that Bulgaria, Czechia, Croatia, Hungary, Poland, Romania and Sweden have made on joining the euro area – concluded that Croatia fulfilled the four nominal convergence criteria (price stability, public finances, exchange rate, and long-term interest rate) and its legislation was fully compatible with the requirements of the Treaty on the Functioning of the EU. The ECB’s convergence report complemented the Commission’s assessment. On 12 July 2022, the Economic and Financial Affairs Council adopted legal acts to enable Croatia to introduce the euro. After joining the euro area, the Croatian Central Bank will become part of the Eurosystem, while the Croatian Minister of Finance will participate in the Eurogroup meetings. Croatia has already made steps to join the Banking Union and become a member of the European Stability Mechanism. In parallel, Bulgaria has been participating in the EU’s Exchange Rate Mechanism (ERM-II) since 10 July 2020 as it seeks to adopt the euro. The architecture of the euro area has changed considerably since the launch of the common currency. When the euro was created in 1999, monetary policy was centralised, while fiscal and structural policies were left with national governments. The coordination risk arising from the decentralisation of fiscal policies was identified early on as a potentially destabilising factor. This led to the creation of a framework for economic policy surveillance and coordination. The global financial crisis and the sovereign debt crisis underlined vulnerabilities in the euro area, revealing risks linked to financial interlinkages and macroeconomic imbalances. The crises led to the creation of the European Stability Mechanism. Due to a lack of consensus, some of the work launched at the time, in particular the Banking Union, is still in progress 10 years later.  The delineation between euro area and EU issues has become increasingly blurred. The processes that are most relevant for the future macro-financial stability of the euro area (Banking Union, single market) are adopted via EU legislation. The new crisis management tools – the Recovery and Resilience Facility and the European Instrument for Temporary Support to Mitigate Unemployment Risks in an Emergency (SURE) – address the entire EU rather than focusing only on the euro area. Albeit temporary, the new instruments strengthen the monetary union architecture. Reflecting the increasing relevance of the EU level, the long-term priorities of the EU such as the European Green Deal and digital transformation cover all EU Member States.     60%65%70%75%80%85%90%051015202519992000200120022003200420052006200720082009201020112012201320142015201620172018201920202021Graph 1: The euro area in the EUNumber of EA Member States (lhs)Number of non-EA EU Member States (lhs)EA GDP as % of EU GDP (rhs) 
 
 
   
 
 
2. STATE OF PLAY ON CONVERGENCE 

Large inflation differentials coupled with 
the  deterioration  in  economic  conditions 
cast  a  shadow  on  the  prospects  for 
convergence  in  the  euro  area.  In  the 
aftermath  of  the  COVID-19  pandemic,  the 
depth and speed of economic contractions and 
recoveries  have  been  very  different  across 
Member  States.  This  raises  concerns  about 
potential  scarring  effects  and  their  impact  on 
convergence.  The  external  shocks  of  2022 
have resulted in new sources of divergence, as 
energy mixes, the level  of energy dependency 
on  Russia  and  national  economic  policies  to 
mitigate  the  impact  of  the  energy  crisis  vary 
considerably across the euro area. 

Impact of COVID-19 crisis on 
convergence 

The  COVID-19  pandemic  has  led  to  deep, 
though  largely  transitory,  divergences  in 
macroeconomic  performances.  The  GDP 
contraction  following  the  COVID-19  shock  in 
2020  was  much  larger  than  during  the  2008 
global financial crisis. The bold policy response 
to  the  pandemic  at  EU  and  national  level 
mitigated the negative socio-economic impact 
of the crisis, supporting businesses, protecting 
incomes  and  preserving  jobs.  This  enabled  a 
strong rebound in economic activity, with euro 
area  GDP  already  reaching  its  pre-COVID-19 
level  by  the  end  of  2021,  with  the  dispersion 
of  income  per  head  expected  to  be  broadly 
back  to  its  pre-crisis  levels (5)  (Graph  2.1). 
Similarly,  the  standard  deviation  of  output 
gaps in the euro area Member States widened 
in 2020, but immediately declined on the back 
of the economy rebounding. (Graph 2.2).  

(5)  Having increased in the aftermath of the pandemic, 

dispersion in income per capita was expected to return 
to its declining trend by 2022, according to the spring 
2022 forecast. 

Graph 2.1: Dispersion in level of real GDP per 
capita in the euro area and the EU 

(1) Dispersion is measured by the coefficient of variation 
in the level of real GDP per capita in purchasing power 
standards (PPS). (2) All aggregates are defined in fixed 
composition. (3) The euro area-12 aggregate includes the 
founding Member States of the euro area and Greece.  
Source: Commission's calculations based on the AMECO 
database. 

Despite a quick recovery from the COVID-
19  crisis,  investment  was  more  affected 
in the euro area than, for example, in the 
US. Annual gross fixed capital formation in the 
euro  area  returned  to  pre-pandemic  level  in 
less  than  2 years. (6)  This  rapid  recovery 
contrasts  with  the  decade  after  the  global 
financial  crisis,  which  was  marked  by  a 
sustained  slump 
in  capital  accumulation. 
in  the  US  gross  fixed  capital 
However, 
formation decreased less than in the euro area 
and  has  recovered  at  a  much  faster  pace, 
returning  to  its  pre-crisis  level  at  the  end  of 
2020  and  continuing  on  previous  trend  since 
then  (Graph  2.3,  Licchetta  et  al.,  2022).  There 
is  a  risk  that  tighter  financial  conditions  and 
the  large  corporate  debt  burden  accumulated 

(6)  In the euro area, the impact of COVID-19 on gross fixed 
capital formation (along with other components of GDP) 
reflects in part the intensity of lockdown measures to 
contain the spread of the virus, with more stringent 
lockdowns (and consequent lower mobility) associated 
with lower investment. See also Licchetta and 
Meyermans (2022). 

8 

0,000,050,100,150,20199519971999200120032005200720092011201320152017201920212023Coefficient of variationRecession periodsEU27EA19EA12 
 
                                                 
  
                                                 
during  the  pandemic  in  the  euro  area  might 
act as a drag on investment in future. 

Divergence risks 

Graph 2.2: Output gaps in the euro area (1997-
2023) and dispersion of output gaps 

(1) Blue points refer to the output gap of different euro 
area Member States in each year. Red points refer to the 
output gap of the euro area. (2) The yellow line refers to 
the standard deviation of euro area output gaps (right-
hand side). 
Source: Commission's calculations based on the AMECO 
database. 

Graph 2.3: Gross fixed capital formation in the 
euro area and the US (2006-2022) 

(1) Gross fixed capital formation, volume estimates, fixed 
purchasing power standards. Shaded area refers to euro 
area recessions (CEPR). 
Source: OECD (2022). 

to 

supply 

constraints. 

The  recent  inflation  surge  is  largely 
The 
linked 
inflationary  pressures  in  the  euro  area  since 
2021 have been largely driven by supply side 
disruptions.  However,  after  being  very  weak 
during  the  pandemic,  there  are  signs  of 
demand  pressures  on  prices.  Analysis  of 
producer prices at sectoral level suggests that 
around 80% of the increase in producer prices 
in industry in the euro area over the past four 
quarters can be attributed to supply shortages 
and only 20% to demand pressures (Pasimeni, 
2022).  Recent  ECB  analyses  also  suggest  a 
predominantly  supply-driven  characteristic  to 
the  recent  increase  in  inflation,  although  the 
exact contribution was different. (7) 

Graph 2.4: Interquartile range in headline and 
core inflation 

Source: Commission's calculations based on Eurostat. 

Given  higher  inflation,  large  differences 
in  headline  (and  core)  inflation  rates 
across Member States have emerged. The 
annual  inflation  rates  ranged  from  7.1 %  in 
France  to  22.4 %  in  Estonia  in  October  2022. 
The  inflation  dispersion  rate,  as  measured  by 
the  interquartile  range,  spiked  in  2021  and 
2022 both for general inflation and to a lesser 
extent  for  core inflation (Graph  2.4).  Although 
intra-euro  area  dispersion  has  been  mainly 

(7)  See ECB macroeconomic briefing at the Economic Policy 
Centre, 30 September 2022 and ECB (2022), Account 
of the monetary policy meeting of the Governing 
Council 7-8 September 2022.  

9 

012345-20-15-10-50510151997199819992000200120022003200420052006200720082009201020112012201320142015201620172018201920202021202220232024Standard Deviation% of potential GDP60708090100110120130200620092012201520182021Index2006 = 100Recession PeriodsUnited StatesEuro area01234200220032004200520062007200820092010201120122013201420152016201720182019202020212022Interquartile rangeHICPHICP excl. energy and foodPercentage point 
      
 
  
  
                                                 
driven  by  changes  in  inflation  in  the  Baltics, 
stark  differences  exist  among  all  Member 
States. Different sensitivities to energy prices, 
above  all  Russian  gas,  as  well  as  different 
shares of energy and food in the consumption 
baskets  played  a  role  (Beynet  and  Goujard, 
2022). 

differences  in  inflation  rates  may  make  a 
single  monetary  policy  less  effective.  Real 
interest  rates  may  end  up  being  too  low  in 
countries  with  high  inflation,  with  a  monetary 
policy having a limited impact on demand and 
being  too  high  for  countries  with 
lower 
inflation (Beynet and Goujard, 2022). 

Graph 2.6: Natural gas imports from Russia 
and share of gas in energy mix 

(Graph 

The  degree  of  energy  intensity (8)  is  an 
important driver of inflation differentials. 
Eastern  European  countries  experienced  the 
their  higher  energy 
largest  shock  given 
Cross-country 
2.5). 
intensity 
differences  in  policies  to  mitigate  the  impact 
of the high inflation can also explain some of 
the  differentials.  In  particular,  energy  price 
caps or freezes implemented in some Member 
States  have  reduced  energy 
inflation  for 
consumers  (for  example  in  France),  though  at 
a large cost (see Section 3). In this context, the 
EU has taken a number of initiatives to reduce 
energy prices and improve energy security (see 
Box 2.1). 

Graph 2.5: Energy intensity and change in 
inflation rate since January 2021 

Source: Eurostat. 

Beyond  inflation,  the  energy  crisis  has 
very  different  macroeconomic  impacts  in 
the  euro  area.  Heightened  uncertainty  and 
higher  commodity  and  energy  prices  are 
expected  to  put  all  euro  area  Member  States 
on a weak real GDP growth path. Nevertheless, 
differences in sectoral specialisation, proximity 
to  the  conflict,  trade  exposure  to  Russia, 
Belarus  and  Ukraine,  and  dependency  on 
energy  fuel  imports  from  Russia  are  key 
sources  of  divergence  (Graph  2.6).  Member 
States  have  been  very  swift  in  diversifying 
away  from  Russian  energy.  In  September 
2021,  Russian  gas  accounted  for  41%  of  EU 
gas  imports.  In  September  2022,  this  fell  to 
9% (10).  However,  many  euro  area  countries 
remain  vulnerable  to  further  gas  pipeline 
shutdowns. 
in 
available  fiscal  space  and  insufficient  policy 
coordination among Member States constitute 
further  drivers  of  divergence,  which  may 

Furthermore, 

differences 

Source: Eurostat and the International Energy Agency. 

Inflation  differentials  make 
it  more 
challenging  to  conduct  monetary  policy. 
To  the  extent  that  they  are  temporary  and 
linked  to  the  energy  supply  shock,  inflation 
differentials  have  only  a  limited  impact  on 
policy. (9)  However, 
large  or  persistent 

(8)  Energy intensity is defined as the ratio of global total 

real interest rates to offset the impact of higher energy 
costs on domestic consumption. 

energy supply per unit of gross domestic product (GDP).  

(10)  European Commission’s estimations based on data 

(9)  Higher inflation in countries more affected by the 

energy shock may have a stabilising effect by lowering 

from the European Network of Transmission Operators 
for Gas. 

10 

BEBGCZDKDEEEIEELESFRHRITCYLVLTLUHUMTNLATPLPTROSISKFISER² = 0,346205101520253002468101214change in inflation rate 202209 vs 202101 YoYEnergy intensity (Energy supply/GDP) EU27EA19Linear (EU27)BEDEEEELESFRITCYLVLTLUMTNLATPTSISKFI02040608010012001020304050Natural gas import from Russia in 2020 (as % of total natural gas import)Share of natural gas in total energy available in 2020 (in %) 
  
                                                 
  
                                                                        
limit  the  impact  of  higher  energy  prices  on 
corporates  may  contribute  to  intra-euro  area 
competitiveness  developments  and  may  also 
negatively  affect  the  integrity  of  the  single 
market.  If  energy  prices  remain  permanently 
higher  in  the  EU  than  in  other  regions,  euro 
area  firms  will  become  less  competitive  than 
their international counterparts. 

Graph 2.8: Change in the real effective 
exchange rate between January 2021 and 
July 2022 

impact  confidence,  investment  and  growth 
prospects (see Section 3).  

Competitiveness risks  

in 

relative  competitiveness 
Changes 
across  euro  area  Member  States  are 
important  adjustment  channels  but  may 
also  exacerbate  vulnerabilities.  Within  the 
monetary  union,  as  exchange  rates  cannot 
adjust,  changes  in  nominal  costs  and  prices 
are  the  main  channel  to  adjust  following 
asymmetric  shocks  impacting  real  exchange 
rates across countries. However, a lasting gap 
lead  to  external 
between  countries  may 
weaknesses. 
in 
drifts 
competitiveness  between  countries  within  the 
euro  area  in  the  years  preceding  the  global 
financial  crisis  contributed  to  deteriorated 
external  positions  and  to  large  deleveraging 
pressures experienced in some Member States 
in the aftermath of the crisis.  

particular, 

In 

Graph 2.7: Real effective exchange rate based 
on unit labour costs for selected euro area 
Member States 

(1) The real effective exchange rate based on the 
harmonised index of consumer prices. 
Source: Commission's calculations. 

of 

costs 

determinant 

In addition to energy inputs, wages are a 
key 
and 
competitiveness  developments.  In  2022, 
the  dispersion  among  Member  States  in  the 
changes  in  employee  compensation  and  unit 
increased  somewhat.  Wage 
labour  costs 
growth differentials due to institutional factors 
(including indexation and multi-year contracts, 
see Section 4) across the euro area could feed 
into  divergence.  However,  the  wage  growth 
patterns have not translated into a significant 
shift  in  competitiveness  so  far.  In  particular, 
they  have  not  reversed  the  competitiveness 
gains  recorded  in  the  past  few  years  by 
countries  that  experienced  competitiveness 
losses prior to the global financial crisis (Graph 
2.7).  The 
inflation 
divergences  become  entrenched  also  depends 
on the features of wage setting mechanisms. 

that  wage  and 

risk 

Source: Eurostat. 

The  increase  in  energy  prices  is  set  to 
result  in  competitiveness  differentials 
intensity 
within  the  euro  area.  Energy 
differs  between  sectors  and  countries  within 
the  euro  area.  Member  States  with  energy-
intensive industries are set to see a significant 
deterioration  in  their  relative  competitiveness 
(see  Section  4).  In  that  respect,  the  different 
range  of  measures  taken  by  governments  to 

11 

909510010511011512002Q403Q404Q405Q406Q407Q408Q409Q410Q411Q412Q413Q414Q415Q416Q417Q418Q419Q420Q421Q4EU27DEFRITEA19Index 2003 = 100-8-6-4-2024681012EELVLTSKSINLELESBELUPTCYATMTITDEFIEA19IEFRAnnual % changeChange in NEERChange in relative HICPChange in REER 
 
   
  
 
(Continued on the next page) 

12 

Box 2.1: Energy policy packages at EU level in 2022The Commission has put forward a series of policy packages over the course of 2021 and 2022 to respond to rising energy prices and to ensure security of energy supply in Europe while reducing dependence on Russian fossil fuels. This box presents the main packages and highlights the key actions: 1. TOOLBOX FOR ACTION AND SUPPORT (OCTOBER 2021) The Communication aims to provide coherence to the response in Member States and at EU level to rising energy prices. It provides options for short term, and medium-term measures that Member States can take and announced steps the Commission would take at EU level. Short-term measures include the option for Member States to provide time limited compensation measures and direct support to energy-poor end-users, or provide more targeted support to industry in compliance with state aid rules. The Commission committed to investigate possible anti-competitive behaviour and enhance its international energy outreach. Additionally, a set of measures for the medium-term was announced, which has been followed up by the various proposals covered below.  2. REPOWEREU COMMUNICATION AND THE TEMPORARY CRISIS FRAMEWORK (MARCH 2022) AND REPOWEREU PLAN (MAY 2022) The REPowerEU Communication, including the related plan, sets out actions to reduce our dependence on Russian fossil fuels by fast forwarding the clean energy transition and achieve a more resilient energy system. Importantly, the Communication also announced a self-standing Temporary Crisis Framework for state aid.  The Temporary Crisis Framework complements the existing State aid toolbox by including measures providing compensation to companies for damages directly suffered due to exceptional circumstances as well as the additional costs incurred due to exceptionally high gas and electricity prices, with safeguards for the overall aid provided. A further amendment also enables Member States to provide aid for accelerating the rollout of renewable energy, storage, and renewable heat relevant for REPowerEU, the decarbonation of industrial production processes, and additional reduction of electricity consumption.  The REPowerEU Plan puts forward a set of short- and medium-term measures including inter-alia:   Short-term measures: build new energy partnerships with reliable suppliers, requirement to fill gas storage to 80% of capacity by 1 November 2022, rapid roll out of solar and wind energy projects combined with renewable hydrogen deployment, and EU Save Energy communication providing recommendations to citizens and firms.  Medium-term measures: a REPowerEU chapter to be included in the revised recovery and resilience plans supported by an additional financial envelope of EUR 20 billion, increased EU 2030 energy efficiency and renewable energy targets going beyond the Fit-for-55 proposal, new legislation and recommendations for faster permitting of renewables, and accelerated production of hydrogen by building 17.5 GW of electrolysers by 2025 to fuel EU industry. 3. ACTIONS TO REDUCE THE DEMAND FOR GAS (JULY 2022) AND ELECTRICITY BILLS (SEPTEMBER 2022)   Reduction in demand for gas: Voluntary reduction target of 15% from 1 August 2022 to 31 March 2023. If a gap emerges between supply and demand, the Regulation creates the possibility to call a ‘Union Alert’ and impose mandatory reductions on all Member States. The Commission also put forward a European Gas Demand Reduction Plan, which consists in guidelines to protect households, essential users and industries from a gas shortage and help Member States to reduce gas demand.  Reduction in electricity demand: mandatory reduction target of 5% in peak hours (defined as 10 hours each month with highest prices) and a general 10% reduction target for all consumers until March 2023.  Cap on market revenues from inframarginal technologies: Applicable to market revenues from the sale of electricity produced from technologies whose marginal costs are lower than the cap (e.g. wind, solar, geothermal, nuclear, etc.). the inframarginal revenue cap is set at €180 EUR/MWh and is estimated to collect up to EUR 117 billion annually.  
 
 
 
   
 
Box (continued) 

real 

rate,  which 

The  real  depreciation  of  the  euro  since 
2021 will provide only a modest boost to 
competitiveness. 
effective 
The 
exchange 
is  a  measure  of 
competitiveness,  has  depreciated  by  around 
6%  between  January  2021  and  July  2022 
(Graph 2.8). While such a depreciation would in 
principle  support  exports,  it  also  results  in 
higher  input  costs  for  firms,  especially  as 
global  energy  commodities  are  traded  in  the 
US  dollars,  putting  additional  pressure  on 
profitability. 

the 

back 

Divergences  in  current  account  balances 
have  widened 
of 
on 
deteriorating  energy  balance.  The  COVID-
19 crisis led to a temporarily lower euro area’s 
current  account  surplus.  The  changes  to 
external  balances  during  the  pandemic  were 
driven to a large extent by sectorial dynamics, 
and  in  particular  by  the  reliance  on  contact-
intensive  services  and  tourism.  For  instance, 
the  moderate  surplus  observed  in  previous 
years in Spain shrunk, whereas the Portuguese 
economy  moved  back  to  a  moderate  deficit, 
while  the  Greek  deficit  deepened.  The  recent 
jump  in  energy  prices  has  resulted  in  a 
deterioration in the balance of trade in energy 
goods.  Together  with  the  slowdown  in  China 
and  monetary  tightening  in  the  US,  this  adds 

to  the  deteriorating  of  the  overall  trade 
balances throughout the euro area (Graph 2.9), 
which  contributes  to  worsening  of  the  current 
account  balances 
(European  Commission, 
2022c). 

Graph 2.9: Trade balance (including energy 
balance) and net international investment 
position (NIIP) as of June 2022 

Source: Commission's calculations based on Eurostat. 

13 

DEELESFRITCYNLPTBEEEIELVLTLUMTATSISKFI-5-4-3-2-1012-200-150-100-50050100Goods trade balance chagne YoY, as % of GDPNIIP 2021, % of GDP2016-2021   One-off solidarity contribution from fossil fuel companies: A levy of 33% is proposed to be applied to (an estimation of) the profits of oil, gas, coal, and refinery companies that exceed those by 20% of previous years, which is estimated to generate around EUR 25 billion.  4. ENERGY EMERGENCY: PREPARING, PURCHASING AND PROTECTING THE EU TOGETHER (OCTOBER 2022) The Commission proposed that the Council adopts the following actions, but they still need to be adopted by the Council (as of 15 November):  Joint gas purchasing: A temporary joint purchasing tool is proposed to be developed, by early spring 2023, ahead of the next storage filling season. It would be mandatory for Member States to participate for volumes equivalent to at least 15% of their storage filling requirements for next year.  Development of a new complementary benchmark for LNG: The proposal tasks the European Agency for the Cooperation of Energy Regulators (‘ACER’) to create a benchmark of the EU’s LNG imports by collecting real-time information on all daily transactions, offering a fairer and more transparent price index, as an alternative to the Title Transfer Facility (TTF).Until the benchmark is in place, a Gas Market Correction mechanism is proposed to establish a maximum dynamic price at which natural gas transactions can take place in the TTF spot markets under specific conditions.  Intra-day price volatility management mechanism: the proposal lays down a requirement for trading venues to establish a new temporary intra-day price spike cap mechanism aimed at limiting large price movements in electricity and gas derivatives contracts within the same trading day.   
  
 
   
 
 
3. FISCAL AND MONETARY POLICY MIX 

The  challenging  economic  conditions  are 
posing  dilemmas  to  the  policy  mix  in  the 
euro  area.  In  the  face  of  rapidly  increasing 
inflation, the  ECB  has  embarked  on  a process 
of  monetary  policy  normalisation.  Striking  the 
right  balance  between  helping  the  most 
vulnerable  households  and  firms,  repairing 
supply  chain  disruptions  and  safeguarding 
investments  without  undermining  the  actions 
of  the  ECB  and  avoiding  blurring  energy price 
signals  is  a  significant  challenge  for  national 
governments.  Potential  effects  of  fiscal  policy 
on  inflation,  in  a  context  where  investments 
are  needed 
the  green  and  digital 
transitions and energy security, are particularly 
relevant. Debt sustainability will continue to be 
a  concern,  in  particular  given  the  large  public 
debt inherited from the pandemic. 

for 

Monetary policy stance 

have 

around 

the  world 

The  surge  in  inflation  led  to  a  rapid 
adjustment of the monetary policy stance 
globally.  For  more  than  a  decade,  central 
banks 
been 
implementing  extraordinary  measures  to  fend 
off  deflationary  risks,  raise 
inflation  and 
support  financial  stability.  This  has  brought 
policy rates close to or below zero (Graph 3.1) 
and  led  to  the  adoption  of  unconventional 
monetary  policy  measures  by  the  major 
central  banks.  Against  a  background  of  rising 
inflation, central banks in advanced economies 
started  normalising  their  policies,  albeit  at 
different  speeds,  reflecting  the  underlying 
macroeconomic contexts. The Bank of England 
already  started  to  gradually  increase  the  key 
policy rate at the end of 2021. In the US, the 
Federal  Reserve  started  to  increase  interest 
rates 
in  March  2022  and  accelerated 
monetary  tightening  in  July  2022,  with  most 
central  banks  following  suit.  This  translated 
into a substantial tightening of global financial 
conditions over the course of 2022. 

Graph 3.1: Key policy rates at leading central 
banks 

Source: Bank for International Settlements database. 

The  ECB  initiated  policy  normalisation  at 
the  end  of  2021.  In  December  2021,  it 
started  to phase out the temporary measures 
taken  to  address  the  pandemic. (11)  At  its 
Governing  Council  meetings, 
ECB 
accelerated  its  policy  normalisation  by  hiking 
policy  rates  by  50  basis  points  in  July  2022 
and  75  basis  points  twice,  in  September  and 
October, bringing the interest rate on the main 
refinancing operations to 2.0 %.  

the 

that 

indicated 

The  ECB  has 
the 
normalisation  of  interest  rates  would 
continue.  While  policy  rates  have  now  exited 
negative territories, the ECB Governing Council 
has 
rate 
that  further 
increases would be necessary in order to bring 
inflation 
inflation 
objective of 2% over the medium term. Given 

line  with  the  ECB’s 

indicated 

interest 

in 

(11)  The ECB conducted its last operation under the third 

series of its targeted long-term refinancing operations 
(TLTRO III) in December 2021 and announced a 
progressive phase-out of its temporary pandemic 
collateral easing measures between July 2022 and 
March 2024. The ECB ended its net asset purchases 
under the Pandemic Emergency Purchase Program 
(PEPP) at the end of March 2022 and the Asset 
Purchase Programme in July 2022. 

14 

01234567819992000200120022004200520062007200920102011201220142015201620172019202020212022%Bank of AustraliaBank of CanadaBank of EnglandFEDECB 
 
   
                                                 
the large uncertainty clouding the outlook, the 
ECB’s  future  policy  rate  decisions  will  remain 
data-dependent,  with  the  Governing  Council 
adopting  a  meeting-by-meeting  approach  to 
its monetary policy. The ECB has indicated that 
the  complex  situation  justifies  this  approach. 
Unlike  some  other  advanced  economies,  the 
euro area has been facing excess demand to a 
much  lesser  extent,  but  rather  a  series  of 
negative supply shocks. 

Graph 3.2: Sovereign bond spreads in selected 
euro area Member States 

Source: ECB. 

remains 

fragmentation 

to  deliver  on 

An even transmission of the policy stance 
across the euro area is a precondition for 
monetary  policy 
its 
mandate.  In  this  respect,  tackling  risks  of 
crucial. 
financial 
Sovereign yields in the euro area have been on 
an  upward  trend  since  mid-2021.  Over  the 
course  of  2022,  until  the  end  of  October, 
interest rates on long-term government bonds 
have  increased  on  average  by  2.6 percentage 
points,  with  the  highest  increases  recorded  in 
Latvia,  Cyprus,  Greece  and  Italy.  This  means 
that 
spreads  have  widened, 
although to a limited extent (Graph 3.2). While 
fragmentation  risks  have  been  contained,  the 
Transmission 
ECB 
Protection  Instrument,  with  eligibility  criteria 
that are linked to EU economic surveillance, to 
counteract disorderly market dynamics. (12) 

announced 

sovereign 

has 

its 

(12)  Eligibility will be decided by the ECB’s Governing Council 

based, among other things, on the following four 
criteria: (i) compliance with the EU fiscal framework; (ii) 
absence of severe macroeconomic imbalances; (iii) 
fiscal sustainability; and (iv) compliance with sound and 
sustainable macroeconomic policy. 

15 

Fiscal policy stance 

The euro area fiscal stance has continued 
to  be  very  supportive  in  2022.  Based  on 
the  Commission  2022  autumn  forecast,  the 
euro area fiscal stance has been expansionary 
in  2022,  at  around  2¼ %  of  GDP,  after 
expansions  of  1¼ %  and  ¼ %  of  GDP 
recorded  in  2021  and  2020,  respectively.  An 
expansionary  fiscal  stance  is  projected  in 
almost all euro area Member States, including 
high-debt Member States, driven by increasing 
net  primary  current  expenditure  (Graph  3.3). 
More  than  half  of  the  expansion  is  related  to 
measures  taken  by  governments  to  mitigate 
the 
impact  of  high  energy  prices.  The 
expansionary  stance  has  helped  support  the 
economy  while 
to 
inflationary  pressures  and  weighing  on  the 
fiscal  position  of  several  Member  States, 
including those with high debt. Investment and 
expenditure  paid  for  by  the  RRF,  which 
contribute to enhancing the supply side of the 
euro  area  economy,  are  set  to  contribute  to 
the expansionary stance.  

potentially 

adding 

Graph 3.3: Fiscal stance in 2022 

Source: Commission's calculations. 

to 

For  2023,  the  euro  area  fiscal  stance  is 
currently  projected 
turn  broadly 
neutral,  conditional  on  the  planned  roll-
back  of  energy-related  measures.  The 
Commission  2022  autumn  forecast,  which 
incorporates information provided in the 2023 
Draft Budgetary Plans, indicates that the euro 
area 
less 
fiscal  stance  would  become 
supportive  in  2023.  At  the  same  time,  the 

0501001502002503003504004502019202020212022basispointsBECYESFRELITPT-4.5-3.5-2.5-1.5-0.50.51.52.5ITESELPTBEFRSILVHRLTATDENLMTSKLUCYFIIEEEEA20RRF grants and EU fundsNationally financed investmentOther capital expenditureNationally financed net primary current expenditureFiscal stanceContractionaryExpansionaryLow/Medium debtcountriesHigh debtcountries% of GDP 
  
                                                 
   
Graph 3.5: Inflation rate and contributions by 
quintile (Semptember 2022 y-o-y) 

fiscal  stance  is  forecast  to  be  uneven  across 
Member  States 
(Graph  3.4).  This  neutral 
stance  is  driven  by  a  slightly  contractionary 
net primary current expenditure that, in turn, is 
related  to  the  roll-back  of  energy-related 
measures relative to 2022 currently planned in 
the DBPs. 

Graph 3.4: Fiscal stance in 2023 

(1) The chart shows the aggregate level of inflation and 
its contributions in the first and fifth quintile of 
consumption and the contribution of each item. Data 
available only for selected Member States. 
Source: Villani and Vidal Lorda, 2022JRC analysis. 

Source: Commission's calculations. 

Nationally and EU-financed investment is 
expected  to  expand  in  2023.  Nationally 
financed investment and expenditure financed 
by  the  RRF  grants  and  other  EU  funds, 
including  cohesion  policy  funds,  are  set  to 
contribute ¼ % of GDP to the fiscal  stance in 
2023.  This  would  help  reduce  reliance  on 
imported  fossil-fuel  energy,  in particular  from 
Russia. It would also have a positive impact on 
potential  growth  and 
fiscal 
sustainability in the medium term. Overall, the 
2023  euro  area 
its 
composition  appear  to  be  broadly  consistent 
with  the  need  to  not  add  to  the  high 
this 
inflationary 
assessment could change depending on (i) the 
prolongation of existing or the adoption of new 
energy  measures;  and  (ii) the  development  of 
energy  prices  and  their  actual  budgetary 
impact.  Going  forward,  fiscal  policy  needs  to 
remain  agile  to  respond  to  risks  linked  to  the 
high inflation environment. 

fiscal  stance  and 

pressures. 

thus  on 

However, 

calling 

The  current  energy  price  shock  has 
social  and  distributional 
significant 
impacts, 
for  adequate  and 
targeted  policy  support.  Higher  energy  and 
food  prices  tend  to  have  a  disproportionate 
impact on low- and middle-income households 
because household energy and food represent 
a  higher  share  of  their  consumption  (see 
Graph  3.5).  Only  few  countries  showed  the 
opposite 
top  quintile 
experiences  higher inflation  levels. (13)  Beyond 
the impact on their consumption baskets, low-
income  household  also  have  a  more  limited 
ability  to  use  savings,  and  they  have  fewer 
means to invest in energy-saving solutions.  

trend,  where 

the 

included  direct  price 

Governments in the euro area have taken 
several  measures  to  mitigate  the  impact 
of  high  energy  prices  on  households  and 
heavily  exposed  firms.  These  measures 
have 
interventions, 
changes in VAT and excise duties, cash and in-
kind  benefits,  and  other  measures,  such  as 
safeguards  for  the  basic  or  uninterrupted 
supply  of  energy  services.  In  2022,  the  net 
budgetary cost of such discretionary measures 
(which are specific as a reaction to the energy 
crisis,  and  exclude  other  fiscal  measures  that 
have  been  adopted  as  a  reaction  to  general 
inflation)  is  estimated  at 1.3 %  of  GDP in  the 

(13)  For additional analysis on the differential impact of 
inflation on households, see the Joint Employment 
Report 2023. 

16 

-3,5-2,5-1,5-0,50,51,52,53,5BEPTITFRESELSKLTSILUNLEEDEATFIHRCYMTIELVEA20RRF grants and EU fundsOther capital expenditureNationally financed investmentNationally financed net primary current expenditureFiscal stance% of GDPContractionaryLow/Medium debtcountriesExpansionaryHigh debtcountries05101520253035401515151515151515151515LTLVNLELBEITDEIEPTESFI%Food and clothingRentals for housingUtilities and energyServicesTransports 
  
   
                                                 
euro  area.  Three  criteria  are  important  when 
assessing  energy-related  measures:  (i) fiscal 
affordability;  (ii) the  social  and  distributional 
impact;  (iii) the  impact  on  the  demand  for 
energy.  Overall,  the  Commission’s  analysis 
shows  that  price  measures  represented  65 % 
of the total budgetary impact and only 20% of 
all  measures  were  targeted  income  measures 
to  vulnerable  households  or  energy  intensive 
companies (European Commission, 2022d). 

Graph 3.6: Budgetary impact of energy 
measures across the euro area in 2022 

Source: Commission's calculations. 

during 

measures 

is  a  considerable  potential  to 
There 
improve  the  quality  and  affordability  of 
energy 
their 
they  are 
implementation,  or  when 
revised. Almost all fiscal measures that have 
been  adopted  to  protect  households  from  the 
high  energy  prices  create  distortive  effects 
and  ultimately  increase  demand  for  energy. 
With  energy  price  projections  to  remain 
elevated,  the  measures  will  also  become 
increasingly costly to national budgets to keep 
in  place.  It  is  therefore  essential  to  focus  on 
measures that least distort the price signal on 
energy  demand, 
them  on  a 
temporary  basis  and 
target  vulnerable 
households  and  firms.  In  addition,  there  is  a 
need  to  continue  strengthening  a  targeted 
approach,  also  to  maintain  capacities  for 
mitigating  social  impacts  and  maintaining 
necessary 
fiscal 
period (14). In this respect, measures to directly 

affordability 

implement 

the 

for 

(14)  This was also recognised by the Eurogroup in its 

statement on ‘Fiscal policy response to high energy 
prices and inflationary pressures’ published in October 
2022. 

17 

the 

income  of 

the  vulnerable 
support 
households  are  preferable  to  price  measures 
(e.g.  cuts  in  indirect  taxation)  that  aim  to 
reduce the price paid by consumers. 

to 

as 

risks 

level 

fiscal 

lower 

A  more  coordinated  EU  approach  could 
help to address a number of these issues, 
as  well 
limit  macroeconomic 
spillovers. Even though the energy price paid 
by  households  and  firms  might  remain  at  a 
relatively 
in  Member  States 
implementing  more  generous  price  measures, 
it would contribute to pushing up energy prices 
in  the  rest  of  the  Union  because  of  supply 
constraints.  This  might  trigger  a  race  to  the 
top 
in  providing  budgetary  support,  with 
governments  trying  to  outbid  each  other, 
increasing 
sustainability 
especially  of  the  more  vulnerable  Member 
In  that  respect,  agreement  on  a 
States. 
common  approach  to  replace  broad-based 
price  measures  with 
an  appropriately 
calibrated and targeted two-tier energy pricing 
system,  with  a  lower  price  applied  on  a  pre-
defined  consumption,  would 
the 
protection  of  vulnerable  households  and 
companies,  preserve 
incentives  to  reduce 
energy  consumption  and  be  more  fiscally 
sustainable.  The  success  of  such  a  system 
would  depend  on  the  exact  calibration,  in 
terms  of  the  applied  regulated  price  and  the 
associated  volume  threshold  set,  in  order  to 
limit 
the  fiscal  costs,  support  economic 
stabilisation,  and  leave  the  price  signal  in 
place 
to 
incentivise  energy  savings.  Targeted  income 
support  and  support  to  undertake  energy 
efficiency actions and increase renewables can 
still  complement  such  an  energy  pricing 
system.  

last  unit  consumed) 

improve 

the 

(on 

the 

face 

strike 

finances 

Public 
significant 
challenges.  In  times  of  stretched  public 
finances and low growth, fiscal policy will have 
to 
right  balance  between 
strengthening  sustainability  and  coping  with 
costs. 
increasing 
Expenditure  reviews  are  a  valid  tool  to  direct 
public spending towards high priority areas. In 
particular,  governments  are  called  on  to 
increase investments for the green and digital 
transition  and  energy  security.  Shifting  taxes 
from  labour  taxation  towards  environmental 

necessary 

fiscal 

but 

-4-20246MTITELPTLVESATLTLUDENLBESIEEFRCYSKIEFIEA19(Taxes on) windfall profitsTargeted price measuresTargeted income measuresUntargeted price measuresUntargeted income measuresTotal% of GDP 
  
                                                 
taxes  in  line  with  the  ‘polluter  pays’  principle 
can also play a role, supporting both the green 
transition  and 
job  creation,  while  being 
budget-neutral.  Higher  defence  spending  may 
also be necessary in several Member States. In 
addition,  governments  will  have  to  face  costs 
related  to  climate  change  and  ageing,  while 
ensuring 
remain 
appropriate  and  competitive  in  the  global 
context.  This  highlights  the  need  to  carefully 
design  fiscal  policy  and  strengthen  public 
through  efficient 
financial  management, 
investment 
frameworks 
management and green budgeting in order to 
address recovery and resilience needs. 

tax  systems 

public 

that 

the 

for 

Debt dynamics and sustainability 

The COVID-19 pandemic has left a legacy 
of  record-high  debt  in  the  euro  area. 
Public finances took a serious hit as a result of 
the crisis. After reaching 7 % of GDP in 2020, 
its  highest  level  since  the  launch  of  the  euro 
at,  the  aggregate  government  deficit  in  the 
euro  area  is  expected  to  decline  to  3.7 %  of 
GDP  in  2023  and  3.3 %  in  2024.  The  large 
deficit ratios in the years of the pandemic led 
to  broad-based  increases  in  public  debts.  For 
the  euro  area  as  a  whole,  debt  reached  a 
historical  peak  of  99 %  of  GDP  in  2020.  It  is 
expected  to  drop  to  93.7 %  in  2022  and  to 
decline  further  to  92.5% of  GDP  in  2023  and 
91.6 %  in  2024,  still  around  6 percentage 
points above its pre-COVID level.  

In  2023,  public  debts  are  expected  to 
remain  much  above  pre-pandemic  levels 
in  most  Member  States.  By  2023,  only 
Ireland,  Greece,  Cyprus  and  Portugal  are 
projected  to  return  below  their  pre-pandemic 
debt  ratios  (Graph  3.7).  In  several  Member 
States,  including  those  with  large  public  debt, 
the  government  deficit  is  expected  to  remain 
above  the  3 %  of  GDP  threshold  over  2023 
and 2024. In a general manner, the pandemic 
has  increased  the  dispersion  in  public  debt 
ratios throughout the euro area.  

Graph 3.7: Changes in public debt ratios 

(1) With few exceptions, countries which recorded the 
highest increase in debt are not expected to reduce it 
significantly by 2023. 
Source: AMECO. 

Over the medium term, euro area debt is 
set  to  increase  again,  in  the  absence  of 
new  measures.  Projections (15)  show  that, 
under  the  assumption  of  unchanged  fiscal 
policy,  the  debt  ratio  would  decline  slightly 
until  the  late  2020s  for  the  euro  area  as  a 
whole.  Low 
is  an 
important  factor  that  helps  reduce  projected 
debt.  As  from  the  2030s,  the  rising  cost  of 
ageing, 
interest 
expenditure  and  lower  nominal  growth,  would 
reverse the debt dynamics. 

interest  expenditure 

coupled  with 

higher 

High 
inflation  does  not  permanently 
improve  debt  dynamics.  In  the  short  term, 
debt-to-GDP  ratios  might  fall  faster  because 
of  the  higher  nominal  GDP  growth.  In  the 
longer  term,  however,  the  increase  in  interest 
rates  will  eventually  feed  into  a  higher  debt 
burden.  Given  that  the  average  debt  maturity 
in  most  euro  area  Member  States  is  higher 
than  a  few  years  ago  (Graph  3.8),  this  will 
happen  only  gradually,  although  a  few 
Member  States  with  a  higher  share  of 
inflation-linked  bonds  will  see  a  more  rapid 
costs.  More 
service 
increase 
importantly 
that 
impact 
the  damaging 
persistent  inflation  could  have  on  growth 
prospects  would  be  detrimental  to  long-term 
debt dynamics and would affect sustainability. 

in  debt 

(15)  Methodology based on the 2021 Fiscal Sustainability 
Report and updated on the basis of the 2022 Autumn 
Forecast. 

18 

BEDEEEIEELESFRITCYLVLTLUMTNLATPTSISKFI-22610141822-33-29-25-21-17-13-9-5-137ppt. change in debt ratios  2019 -2021Expected ppt. change in debt ratios  2021 -2023 
  
                                                 
Graph 3.8: Average (residual) maturity of 
government debt (securities) in the euro area 
and Member States 

investment than they did before the pandemic. 
Around a quarter of that increase is related to 
investment  financed  by  the  EU,  especially  the 
RRF  and  cohesion  policy  funds. (16)  The  scale 
of the challenge linked to the green and digital 
transition,  or  the  repair  of  supply  chain 
disruptions  is  very  large. (17)  While  private 
investment is set to cover a large share of the 
effort,  maintaining  a  high  level  of  public 
investment will remain important.  

Graph 3.9: Gross and net capital formation in 
the public sector (% of GDP) 

(1) Grey lines refer to euro area Member States. Red line 
refers to the weighted euro area average. Dotted line 
refers to the simple euro area average. 
Source: ECB. 

Public investment needs 

The  euro  area  has  been  suffering  from 
low  levels  of  investment.  In  the  years 
following the global financial crisis both public 
and private gross fixed capital formation as a 
share  of  GDP  decreased  by  3.7  percentage 
points  and  only  started  to  gradually  recover 
from 2014. In 2021, the investment ratio was 
still 1.2 percentage points lower than in 2007. 
In  Member  States  with  large  deleveraging 
needs,  fiscal  consolidation  led  to  particularly 
acute  contraction  in  public  investment,  with  a 
detrimental impact on long-term growth.  

fiscal 

support 
The  RRF  and  REPowerEU 
investment-friendly 
strategies. 
Learning  from  the  years  following  the  global 
financial  crisis,  the  policy  response  to  the 
COVID-19  crisis  has  put  the  emphasis  on 
supporting  investment.  In  particular,  fiscal 
policy  guidance  provided  by  the  Commission 
and  the  Council  has  insisted  on  the  need  to 
support public investment to finance the green 
and  digital  transition.  In  the  euro  area,  the 
aggregate  public  investment-to-GDP  ratio  is 
projected  to  increase  from  2.8 %  in  2019  to 
3.2 %  in  2023,  as  almost  all  Member  States 
to  spend  more  on  public 
are  expected 

Source: AMECO. 

(16)  Between March 2020 and November 2022 cohesion 
policy funds payments to euro area Member States 
exceeded EUR 82 billion. 

(17)  The additional annual investment needs in the EU, 
including both private and public investment, are 
estimated at around EUR 650 billion per year up to 
2030. 

19 

246810122010201120122013201420152016201720182019202020212022Years-0,5%0,0%0,5%1,0%1,5%2,0%0,0%0,5%1,0%1,5%2,0%2,5%3,0%3,5%4,0%Gross Fixed Capital Form. - Public (%of GDP) (rhs)Net Fixed Capital Form. - Public sector (lhs) 
  
  
 
                                                 
20 

Box 3.1: Commission’s orientations for a reform of the economic governance frameworkOn 9 November 2022, the Commission presented a Communication outlining orientations for a reform of the economic governance framework (1). The orientations seek to create a transparent, simplified and more integrated architecture for macro-fiscal surveillance in order to ensure debt sustainability and promote sustainable growth. A revised EU fiscal framework should simplify the fiscal rules and focus on fiscal risks. National medium-term macro-fiscal plans would be the cornerstone of the new framework and surveillance will focus on policies that put debt sustainability at risk. Fiscal trajectories should be based on medium-term plans proposed by the Member State and endorsed by the Council. The plans would set the net expenditure path for 4 years and the fiscal path would be anchored on debt and expressed in (net) expenditure ceilings.   The revised framework should increase national ownership by providing leeway to Member States in proposing fiscal trajectories, within a common EU framework that has sustainable growth and risks to debt sustainability as a common basis. Reform and investment commitments could allow for a longer fiscal adjustment period. National fiscal institutions would be strengthened.  Enforcement should be strengthened as a necessary counterpart of providing more leeway to Member States to set their adjustment path. Assessment of compliance and enforcement would be carried out on a continuous basis, in particular based on the annual progress reports and EDP data notifications. For euro area Member States, the Commission would also assess compliance of the draft budgetary plans with the agreed multiannual net primary expenditure path in the autumn. The Treaty reference values (3% of GDP deficit threshold and 60% of GDP debt threshold) will be maintained. The Excessive Deficit Procedure (EDP) would be preserved and strengthened, with a credible debt-based EDP in case of deviations from the agreed path for Member States with debt above 60% of GDP. The range of sanctions would be broadened, for instance by adding reputational sanctions. The effective use of financial sanctions would be de-constrained by lowering their amounts.  The communication also proposes a more effective framework to detect and correct imbalances, as well as a more focused and streamlined post-programme surveillance framework assessing the repayment capacity of Member States that have benefited from financial assistance programmes.   The Macroeconomic Imbalance Procedure (MIP) would be strengthened through enhanced dialogue between the Commission and Member States to achieve higher policy traction. The assessment of imbalances would be made more forward-looking and more focus would be given to trend developments that are expected to be sustained, as well as to policies that have been implemented to correct imbalances. In addition, the reform would also give more visibility to the EU and euro area dimension of the imbalances.    Post-programme surveillance should be conducted with clear objectives. In particular, post-programme surveillance would focus on assessing repayment capacity, monitoring the implementation of unfinished reforms, and assessing whether corrective measures are needed in the context of concerns for repayment capacity or continued market access.  (1) Communication on orientations for a reform of the EU economic governance framework, COM(2022) 583 final  
 
 
   
 
 
4. STRUCTURAL CHALLENGES 

and 

supply 

Labour  market 
side 
developments  are  important  drivers  of 
the  euro  area  response  to  the  energy 
shock.  Beside  the  monetary  and  fiscal  policy 
response,  long-term  price  developments,  and 
their  impact  on  the  economy  will  depend  on 
structural  features  of  the  economies.  Labour 
market  dynamics  and  wage  developments, 
and  in  particular  the  extent  to  which  inflation 
translates into second-round effects on wages, 
will  be  a  key  driver 
in  determining  the 
response  of  euro  area  economies  to  the  on-
going inflation shock. Beyond labour and social 
policy,  productivity  growth  and  the  ability  to 
maintain  an  efficient  allocation  of  capital  will 
contribute to address the surge in inflation and 
mitigate  the  risk  of  divergences.  Labour 
market  and  supply  side  policies  therefore 
remain  critical  for  the  resilience  of  the  euro 
area and long-term growth.  

Labour market developments and 
policies  

Labour  markets  in  the  euro  area  are 
strong.  Unemployment  rates  are  below  pre-
pandemic levels – at 6.6% in September 2022 
–  the  lowest  since  the  euro  was  launched, 
while  output  is  just  above  its  pre-COVID-19 
(see  Section  1).  While  employment 
level 
recovered  rapidly  after  the  pandemic,  labour 
shortages (18)  also 
(Graph  4.1). 
According  to  the  European  business  and 
consumer  surveys (19),  labour  shortages  were 
rapidly  rising  since  2016.  The  COVID-19 
interrupted 
increase,  but  shortages 
returned  quickly  in  2021  on  the  back  of  the 

surged 

this 

(18)  Labour shortages emerge when employers cannot find 

the workers they need to fill open vacancies. 

(19)  The European business and consumer surveys collect 
data from employers on their difficulties in filling 
vacancies. 

21 

economy  reopening and reached new highs in 
to 
2022,  constraining  companies’  ability 
respond  to  demand. (20)  Labour  shortages  are 
influenced  by  cyclical  and  structural  factors, 
such  as  ageing,  skills  shortages,  changes  to 
the patterns of labour mobility, migration and, 
in some sectors and occupations, poor working 
conditions. (21) 

Graph 4.1: Labour shortages reported by 
employers in the euro area 

Source: European Business and Consumer Survey. 

There  are  significant  differences  at 
country and sectoral level. At country level, 
countries  with  high  labour  market  slack  are 
also the ones that still have comparatively low 
vacancy rates. Spain and Greece have vacancy 
rates below 1%, (22) while labour markets have 
been  very  tight  in  the  Netherlands,  Belgium, 
Austria  and  Germany  (Graph  4.2).  At  sectoral 

(20)  On the drivers of the upward trend in labour shortages 
including demographic change, skills shortages, the 
rapid technological progress and the creation of new 
jobs due to green and digital transitions see the 
Commission proposal for a Joint Employment Report 
2023.  

(21)  See European Commission (forthcoming), ‘Labour 
market and wage developments in Europe, Annual 
Review 2022’, Directorate-General for Employment, 
Social Affairs and Inclusion. 

(22)  Unemployment has dropped significantly in Greece and 
Spain from 17.1% and 16.3%, respectively, in the third 
quarter of 2020 to 12.2% and 12.5% in the second 
quarter of 2022. 

0510152025302004-Q12004-Q42005-Q32006-Q22007-Q12007-Q42008-Q32009-Q22010-Q12010-Q42011-Q32012-Q22013-Q12013-Q42014-Q32015-Q22016-Q12016-Q42017-Q32018-Q22019-Q12019-Q42020-Q32021-Q22022-Q12022-Q4Basis pointsServicesIndustryConstruction 
 
                                                 
  
                                                 
level,  with  the  exception  of  ICT,  sectors  with 
the  highest  vacancy  rates  in  2022,  including 
food  and  accomodation  and  construction,  are 
also those that recorded the largest declines in 
employment over the course of the pandemic. 
This  implies  that  part  of  the  shortages  could 
still  be  related to the economy  reopening and 
might therefore be temporary (Graph 4.3).  

Graph 4.2: Vacancies and unemployment 
across EU Member States in the first quarter 
of 2022 

(1) Note: Data are seasonally adjusted. 
Source: Eurostat. 

of 

with 

large-scale 

There  is  little  evidence  of  job  matching 
problems  getting  worse  (Kiss  et  al.,  2022). 
After  the  COVID-19  outbreak,  concerns  were 
in  the 
raised  over  a  possible  decrease 
labour  market  matching 
efficiency 
associated 
sectoral 
reallocation needs, highlighting the importance 
of  the  active  labour  market  policies  including 
reskilling  and  upskilling.  In  particular,  the 
pandemic  has  accelerated  the  adoption  of 
digital  tools  and  strengthened  the  shift  away 
from  lower-skilled  jobs  towards  higher-skilled 
jobs 
routine-intensive 
occupations. (23)  However,  a  large  part  of  the 
sector-specific shocks related to the pandemic 
proved temporary. Recent evidence shows that 
labour  market  mismatch  (where  employee 
qualifications  do  not  match  job  requirements 
or are not used on the job) picked up after the 
COVID-19  outbreak  but  started  to  ease  in 
2021, both across sectors and skill groups. 

less 

and 

promoted 

measures 

EU  policies  have  helped  make  the  labour 
markets resilient and help Member States 
prepare  for  an  inclusive  twin  transition. 
For  example,  the  European  Pillar  of  Social 
Rights  Action  Plan  sets  targets  for  2030  on 
employment,  skills,  and  poverty  reduction. (24) 
Meanwhile,  the  Commission  Recommendation 
on  Effective  Active  Support  to  Employment 
provides  a  framework  to  manage  reallocation 
pressures,  also  related  to  the  twin  transition. 
The 
the 
recommendation  are  still  appropriate  for 
addressing ongoing labour market reallocation, 
stimulating job creation and facilitating job-to-
job 
the  Council 
Recommendation  of  16 June  2022  on 
ensuring  a  fair  transition  towards  climate 
neutrality  outlines  among  other 
things 
employment  and  skills  policies  to  support 
smooth labour market transitions and to equip 
people  with  skills  for  the  green  transition  to 
help  reduce  labour  shortages  in  sectors  that 
contribute 
to  climate  and  environmental 
objectives. 

transitions. (25)  Moreover, 

by 

that  are 

certain  groups 

Investment 
in  quality  education  and 
training  is  key  to  mitigating  labour  and 
skills  shortages.  Promoting  job  quality  and 
tackling  barriers  to  labour  market  integration 
for 
currently 
underrepresented, including vulnerable groups, 
can  expand  the  available  workforce.  For 
example,  by  addressing  gaps  in  childcare 
availability,  providing  individual  support  to 
people with a migrant background so they can 
integrate  in  the  labour  market,  promoting 
active 
and  making  working 
environments more accessible to people with a 
labour  mobility  and 
disability.  Facilitating 
local 
migration  can  also  help  address 
shortages.  This  would 
require  a  better 
coordination,  among  other  things  in  the  area 
security  and  digitised  data 
of 
exchanges,  and  further  alignment  of  national 
labour  mobility  regulations  and  monitoring 
procedures between Member States. Migration 
policy could be coupled with support for more 

ageing 

social 

(24)  See the Commission proposal for a Joint Employment 

Report 2023 for details. 

(23)  It is estimated that 90% of jobs require digital skills. 
However, in 2021 only 54% of adults in the EU had 
basic digital skills (European Commission, 2019). 

(25)  See also the Council’s recommendation on ensuring a 
fair transition towards climate neutrality ‘Council takes 
action to ensure green transition is fair and inclusive’ 

22 

EA19BEBGCZDKDEEEIEELESHRITCYLVLTLUHUMTNLATPLPTROSISKFISE0123456024681012Job vacancy ratio (B-S)Unemployment rate (% active population Y25-74)EU27EA19 
  
                                                 
                                                 
the  EU 

effective  active  labour  market  policies  and 
skills  development  to  address  the  impact  of 
demographic  change  on 
labour 
markets.  This  is  reflected  among  other  things 
in  the  Skills  and  Talent  package  recently 
adopted  by  the  Commission.  The  European 
Year  on  Skills  2023  will  further  promote 
effective  and  inclusive  investment  in  training 
and upskilling, to harness the full potential  of 
the  European  workforce  and  make  sure  that 
skills are aligned with labour market needs. 

Graph 4.3: Change in employment and job 
vacancy rate in the euro area in Q1-2022 

euro  area  in  2019).  However,  such  increases 
remain well below inflation, which is projected 
to reach average 8.5 % in 2022 (Graph 4.4). In 
2023,  the  Commission’s  autumn  forecast 
the  purchasing  power  of 
considers 
household  would  continue  to  decrease  as 
nominal  wages  are  expected  to  be  outpaced 
by  inflation.  Only  in  2024  would  households 
recoup part of the losses. 

that 

Graph 4.4: Nominal compensation per 
employee 

Note: The size of the bubble indicates the size of 
employment in the sector. B= Mining and quarrying; 
C=Manufacturing; D=Electricity, gas, steam and air 
conditioning supply; E=Water supply; F=Construction; 
G=Wholesale and retail trade, repair of motor vehicles 
and motorcycles; H=Transportation and storage; I= 
Accommodation and food service activities; J= 
Information and communication; K= Financial and 
insurance activities; L= Property activities; M= 
Professional, scientific and technical activities; N= 
Administrative and support service activities; O= Public 
administration and defence; P= Education;  Q= Human 
health and social work activities;  R= Arts, entertainment 
and recreation; S = Other services activities. 
Source: Eurostat.  

Wage developments 

Source: AMECO. 

inflation  expectations  are 
Anchored 
to  avoiding  a  wage-price 
critical 
spiral. (26)  Most  measures  of 
longer-term 
inflation  expectations  derived  from  financial 
markets  and  from  expert  surveys  stand  at 
around  2 %. (27)  The  extent  to  which  wage-
price spirals could develop would depend on a 
broad  set  of  macroeconomic  conditions  (that 
could  derail 
inflation  expectations)  and 
institutional  factors,  including  prevailing  wage 
setting  practices 
is,  whether  wage 
(that 
increases  are  based  on  past  or  expected 
inflation).  Declining  spending  power  due  to 
high  and  persistent  inflation  tends  to  raise 
demands for compensation. In turn, this could 
contribute 
inflationary 
to  further  feeding 
pressures. In case wages would be set with the 
expectation  that  prices  will  rise  persistently 
and  at  a  high  pace,  this  could  contribute  to 

The  acceleration  in  inflation  in  2022 
resulted  in  losses  in  spending  power  for 
wage  earners.  The  autumn  forecast  projects 
compensation per employee to increase in the 
euro  area  by  4.2 %  in  2022  and  by  4.9 %  in 
2023.  These  growth  rates  are  above  those 
recorded  before  the  pandemic  (2.2%  in  the 

(26)  A wage-price loop entails mutually reinforcing increases 
in wages and prices leading to more persistent inflation. 
See BIS (2022a) and BIS (2022b). 

(27)  However, the ECB Survey of Professional Forecasters for 
the second quarter of 2022 highlighted longer-term 
inflation expectations being revised upward rather than 
downward, although the mode of the distribution was 
clearly at 2.0%.  

23 

BC = Manufacturing DEF = construction G = Whole sale and retail tradeH = TransportationI = Accomodation and FoodJ = ITKLM = professional activitiesN = Admin and supportOPQ = HealthR = Arts and recreationSR² = 0,18390123456-1100-700-300100500900Job Vacancy rate 2022 Q1Change in employment (thousands) between 2019 Q4 and 2021 Q402468101214LTLVEESISKITLUMTFRBEPTEU27EA19CYDEFIATESIEELNL20212022f2023f% 
  
  
                                                 
time, 

this  expectation  self-fulfilling. (28) 
making 
Fundamentally,  the  credibility  of  monetary 
policy  acts  as  a  safeguard  against  the  de-
anchoring  of  inflation  expectations.  At  the 
the  promotion  of  collective 
same 
bargaining,  in  line  with  prevailing  national 
practices,  social  dialogue  and  social  partner 
involvement  helps  mitigate  the  inflationary 
pressures  and  the  risk  of  a  wage-price  spiral 
by promoting the coordination of wage setting 
and  better  incorporating  the  macro-economic 
context. 

Graph 4.5: Nominal and real compensation for 
employee and ECB indicator of negotiated 
wages (y-o-y changes) 

Source: Eurostat and ECB. 

Second-round  effects  have  remained 
moderate so far.  The annual  growth rate of 
negotiated  wages  in  the  euro  area  increased 
from 1.6% at the end of 2021 to 2.8% in the 
first  quarter  of  2022,  although  this  was 
mainly due to one-off payments to employees 
in Germany (estimated at around 1 percentage 
point)  (Graph  4.5).  More  recently,  negotiated 
wage  growth  decelerated  to  2.4%  in  the 
second  quarter  of  2022  and  remained  below 
overall. 
actual 
Compensation  per  employee  –  a  broader 
measure  of  wage  growth  –  accelerated  in 
nominal terms in the second quarter of 2022, 
but fell in real terms. At the same time, profits 
across  a  range  of 
industries  have  risen 
markedly. This might suggest that many firms 

expected 

inflation 

and 

have  so  far  increased  their  selling  prices 
beyond the increase in the energy cost and in 
the  wage  bill. (29)  However,  it  must  be  noted 
can  become 
that 
(e.g., 
through  other  channels 
entrenched 
expectations or indexation mechanisms). 

inflation  differences 

Policies  can  help  address  the  loss  in 
spending power of wage earners. Given the 
gap  between  the  increase  in  prices  and  in 
wages,  the  spending  power  of  workers  has 
eroded  in  2022  and  is  expected  to  continue 
doing  so  in  2023.  The  impact  has  been 
particularly  strong  among  low-wage  workers. 
Regular  minimum  wage  updates  would  help 
maintain  the  spending  power  of  low-wage 
earners. (30)  The  adoption  of  the  EU  minimum 
wage  directive (31) 
is  expected  to  create 
positive  momentum  for  measures  that  boost 
adequate  minimum  wages.  The  strengthening 
of  collective  bargaining,  in  line  with  national 
practices,  could  also  help  ensure  that  wages 
conditions, 
respond 
and 
preserving 
employment. In addition, several targeted and 
temporary  policies  may  address  spending 
power  losses  compatibly  with  stable  inflation. 
instance,  the  targeted  use  of  social 
For 
benefits  and  wider  tax  brackets  (to  avoid 
‘fiscal  drag’,  where  inflation  pushes  more 
taxpayers  to  pay  higher  tax  rates)  can  also 
alleviate the loss of spending power. 

to  macroeconomic 

spending 

power 

both 

Supply side challenges 

Higher  energy  prices  and  supply  chain 
challenges put pressure on the corporate 
sector.  The  impact  of  the  energy  shock  is 
uneven  across  sectors,  with  the  energy-
intensive  sectors,  among  which  upstream 
the  most. 
production  processes,  affected 

(29)  See also speech by Isabel Schnabel at a panel on the 
“Fight against inflation” at the IV Edition Foro La Toja. 
La Toja, 30 September 2022. 

(30)  See also the Commission proposal for a Joint 

Employment Report (2022) for an assessment of how 
minimum wages declined in real terms in 2021 and in 
the first half of 2022. 

(28)  Ex-post inflation indexation plays a relevant role only in 
a few countries (Belgium, Cyprus, Luxembourg, Malta).  

(31)  Directive 2022/2041 of 19 October 2022 on adequate 

minimum wages in the European Union. 

24 

-6-4-20246803-201806-201809-201812-201803-201906-201909-201912-201903-202006-202009-202012-202003-202106-202109-202112-202103-202206-2022%Real compensation per employeeECB Negotiated wagesCompensation per employee 
  
                                                 
                                                 
the 

increases 

industrial  structure, 

Depending on the intensity of competition and 
on 
in 
production  costs  may  result  in  lower  margins 
and  higher  prices  being  passed  onto 
consumers  across  sectors.  Manufacturing 
firms  (especially  those  in  energy-intensive 
sectors)  are  more  exposed  to  international 
competition  than  services  and  their  ability  to 
increase  prices  is  more  constrained. (32)  EU 
industry is also more affected than industry in 
other parts of the world because of its greater 
exposure  to  foreign  sources  of  energy,  in 
particular from Russia. To the extent that part 
of the increase in the price of energy is set to 
be  permanent,  this  would  induce  a  need  to 
increase  energy  efficiency  and  the  production 
of  low-carbon  energy,  as  well  as  reallocate 
resources  away 
the  most  energy 
intensive  sectors  (Herrera  et  al.,  2019,  IMF, 
2022b).  

from 

Support provided to companies across the 
euro  area  takes  a  variety  of  forms. 
Current  energy  measures  range  from  liquidity 
support to  financial  support  to  help them  pay 
the energy bills. Soaring energy prices and the 
current  volatility  mean  that  a  number  of 
otherwise  viable  firms  that  are  able  to  pass 
through  producer  price  increases,  including 
energy  companies,  may 
temporary 
liquidity constraints (see Section 5). Depending 
on their design, measures to reduce the impact 
of energy prices on corporates, in particular if 
they are not temporary, may reduce incentives 
to  increase  energy  efficiency.  Addressing  the 
problem  of  late  payments  would  also  reduce 
the burden on companies. 

face 

State aid rules at EU-level set conditions 
for  support  to  firms,  but  fiscal  concerns 
and  risks  of  fragmentation  remain. 
Following the Russian invasion of Ukraine, the 
European  Commission  adopted  a  temporary 
crisis framework (TCF) for state aid measures 
to  support  the  economy.  The  framework 
contains  a  set  of  requirements  based  on  a 

(32)  A recent European Investment Bank assessment of the 
impact of high energy prices on EU firms suggests that, 
unless prices adjust, a doubling in energy prices could 
increase the proportion of firms losing money from 8% 
to 15% and the risk of default from 10% to 17% over 
1 year (EIB, 2022).  

two-tier  approach. (33)  However,  beyond 
compliance  with  state  aid  rules,  fiscal  space 
and the need to maintain a level playing field 
remain crucial constraints in providing support 
to  firms  across  the  euro  area  and  the  EU. 
Providing  support  in  an  asymmetrical  way 
could  create  imbalances  in  the  competitive 
positions  of  the  euro  area  (and  EU)  Member 
States  and  a  fragmentation  of  the  single 
market,  leading  the  Eurogroup  to  call  for 
preserving “the level playing field and integrity 
of the financial market”. (34). Moreover, there is 
a  risk  of  a  race  to  the  top  in  budgetary 
support, increasing risks to fiscal sustainability, 
especially  for  the  more  vulnerable  Member 
States. 

Graph 4.6: RRF allocation and GDP per capita 

Source: Eurostat, Commission analysis. 

The RRF and cohesion policy funds remain 
key  tools  to  make  the  euro  area  more 

(33)  As a general principle the TCF allows support for the 

costs that exceed by 150% the average costs of gas or 
electricity of the beneficiary in 2021. It is applicable for 
a share of consumption and the overall aid per 
beneficiary cannot exceed 50% of the eligible cost and 
cannot exceed EUR 4 million at any given point in time. 
For energy intensive firms or certain energy intensive 
firms active in specific sectors listed in the TCF the 
overall aid provided may be higher provided certain 
conditions are respected. Undertakings that receive aid 
exceeding EUR 50 million per year must submit a plan 
to improve their environmental performance. The 
conditions listed above are subject to changes 
depending on amendments to the TCF over time. Only 
the legal text of the TCF should be referred to for exact 
conditions. 

(34)  See the Eurogroup statement on ‘Fiscal policy response 

to high energy prices and inflationary pressures’ 
published in October 2022. 

25 

ATBECYEEFIFRDEELITLVLTMTPTSKSIES0246810121416182010000150002000025000300003500040000RRF allocation (in % GDP)GDP in EUR per capita (2021)% 
                                                 
  
                                                 
financing 

resilient  and  to  promote  convergence, 
including  by 
investments  and 
reforms  to  reduce  dependency  on  fossil  fuels 
and  primary  raw  materials.  The  key  driving 
financial allocation under the RRF benefit euro 
area  Member  States  that  record  lower  than 
average  GDP  per  capita  (Graph  4.6).  The 
instrument  will  thus  contribute  to  greater 
convergence  in  the  euro  area  in  the  long  run. 
In  addition,  the 
investment  and  reforms 
included  in  the  plans  of  euro  area  Member 
States are set to help deliver on the euro area 
policy priorities (see Annex 2), thus supporting 
greater growth and resilience of the euro area. 
These  relate  in  particular  to  reforms  of  the 
labour  market,  taxation,  business  regulatory 
environment  and  education  systems.  For  the 
euro  area,  more  than  60%  of  the  reforms 
included in the national recovery and resilience 
plans  directly  respond  to  the  euro  area 
challenges  identified  in  the  context  of  the 
European  Semester.  This  objective  has  been 
further  strengthened  by 
the  REPowerEU 
proposal.  It  put  forward  a  set  of  measures  to 
achieve  energy  savings,  diversify  energy 
supplies, substitute fossil fuels, and accelerate 
Europe’s clean energy transition.  

Supply  side  measures  can  support 
productivity  growth  and  make 
the 
business  environment  more  conducive  to 
private  investment.  Although  the  recovery 
and resilience plans add to public expenditure, 
in  a  medium  run  they  will  contribute  to 
mitigation of inflationary pressures due to the 
offsetting  effects  of  greater  productivity  on  a 
back  of  the  committed  reforms  (see  Section 
3). Total factor productivity growth, which was 
already low in the euro area before the global 
financial  crisis,  has  slowed  down  since  then 
with  marked  differences  across  countries  and 
regions. (35) Reforms that improve the business 
environment 
public 
administration  can  support  faster  productivity 
growth  and  more  efficient  allocation  of 
supportive 
resources  across 

sectors.  A 

quality 

and 

of 

(35)  The process of convergence in the euro area slowed 

significantly following the global financial crisis with a 
fall in investment rates of many converging countries 
and gradual reduction in total factor productivity growth 
(a key driver of income convergence) playing an 
important role in the slowdown. See Licchetta and 
Mattozzi (2022).  

26 

investment.  Given 

business  environment  can  also  stimulate 
private 
the  expected 
contribution  of  the  private  sector  to  fill  the 
investment gap linked to the green and digital 
transition,  a  number  of  Member  States  have 
included  measures  on  this  in  their  recovery 
and resilience plans.  

the 

effectiveness 

of 
Increasing 
insolvency  systems  across  the  euro  area 
would  support  the  economy.  Available 
indicators suggest that insolvency outcomes in 
the  euro  area  are  less  efficient  than  in  top-
performing  countries.  In  addition,  divergences 
exist  across  Member  States  on  a  number  of 
issues, including the time it takes to liquidate a 
company  and  the  value  that  creditors  can 
recover 
(Couthino  et  al.,  2022).  These 
divergences  are  among  the  factors  that 
hamper  cross-border 
investment,  as  they 
create legal  uncertainty  over the outcomes of 
insolvency  proceedings  and 
lead  to  high 
information  and  learning  costs  for  cross-
border  creditors  and  hinder  the  development 
of the Capital Markets Union. 

Reducing  entry  barriers  contributes  to 
lower  prices  and  makes  the  economy 
more resilient. By lowering transaction costs 
and 
increasing  the  resilience  of  national 
economies  (for  example  through  increased 
labour  mobility  in  case  of  shocks),  the  EU’s 
single  market  promotes  growth  and  makes 
euro  area  economies  more  dynamic.  2023 
marks  the  30th  anniversary  of  the  single 
market  and  the  COVID-19  crisis  showed  that 
keeping the single market open is an essential 
component  of  resilience.  In  the  longer  term, 
more  competitive  sectors  and  countries  tend 
the 
to  experience 
adoption  of  the  Services  Directive  in  2006, 
there  was  only  a  small  decrease  in  the 
absolute level of barriers. More reform efforts 
regulatory  and 
remove 
are  needed 
administrative  barriers 
faced  by  service 
providers when operating in the single market 
European 
(Barbero 
Commission,  2022a).  Nevertheless, 
the 
reforms 
implemented  between  2006  and 
2017  would  result  in  discounted  cumulative 
gains of 2.1% of GDP by 2027. Furthermore, if 
Member  States  were  more  ambitious 
in 
implementing  reforms  (so  they  reach  the 

inflation.  Since 

Jimenez, 

2022, 

lower 

to 

 
                                                 
average  of  the  five  least  restrictive  Member 
States),  the  additional  growth  potential  is 
estimated  to  be  2.5%  of  GDP.  This  calls  for 
renewed  efforts  to  remove  barriers  to  entry 
and  improve  competition  in  products  and 
services.  

27 

 
5. FINANCIAL INTEGRATION AND MACRO-FINANCIAL 
STABILITY 

The  European  financial  system  proved 
resilient  throughout  the  COVID-19  crisis. 
Despite  the  sharp  reduction  in  activity  and  a 
temporary  shift  to  lower  profitability,  euro 
area banks were able to maintain and improve 
their capital position. In particular, and thanks 
also  to  the  government  support  schemes  put 
in  place  for  companies  and  households,  non-
performing loans (NPLs) continued to decrease 
over the last two years. 

Nevertheless,  the  recent  deterioration  in 
the  economic  outlook  and  normalisation 
of  monetary  policy  give  raise  to  new 
challenges.  Global  market  conditions  have 
tightened,  and  new  sources  of  vulnerability 
have  appeared,  linked  in  particular  to  the 
Russian aggression in Ukraine and volatility in 
energy  markets.  Against  this  background, 
renewed policy attention is needed to address 
financial  risks  and  avoid  fragmentation.  More 
generally,  further  progress  is  warranted  to 
strengthen 
financial 
euro 
architecture.  

area’s 

the 

Recent trends in the euro area 
financial sector 

The financial integration of the euro area 
resumed  rapidly  after  the  COVID-19 
crisis,  also  thanks  to  a  strong  policy 
response.  In  the  first  few  months  of  2020, 
the different impact of COVID-19 across euro 
area  Member  States,  together  with  increased 
risk 
financial 
fragmentation.  In  particular,  sovereign  yields 
and  spreads 
rapidly.  However, 
following  the  ECB  announcement  of  a  set  of 
monetary  policy  and  banking  supervision 
measures and decisions on NextGenerationEU, 
financial  integration  rebounded  (ECB,  2022a), 
in  sovereign  spreads 
with  a 

increased 

reduction 

aversion 

sharp 

led 

to 

throughout 

resilience  shown 

compared  to  the  pre-crisis  period  (for  more 
details,  see  European  Commission,  2021a). 
Overall, 
the 
COVID-19 crisis is down to the efforts made to 
gradually  strengthen  the  euro  area  financial 
system,  and  in  particular  banking  institutions. 
The  ongoing  economic  downturn  combined 
with monetary policy tightening has again led 
to  widening  spreads,  although  so  far  these 
have  remained  relatively  contained  thanks  to 
the  ECB’s  anti-fragmentation 
(see 
Section 3). 

tools 

Graph 5.1: Euro area bank stability indicators 

(1) NPL ratio covers gross non-performing debt 
instruments as a percentage of total gross debt 
instruments. 
Source: ECB. 

The  banking  sector  benefits  from  strong 
balance  sheets  and  resilient  business-
models,  but  low  profitability  remains  a 
challenge.  Banks  included  in  the  European 
Banking  Authority’s  Risk  Dashboard  have 
maintained  strong  capital  levels  throughout 
the  COVID-19  crisis.  NPLs  continued 
to 
decrease throughout 2020 and 2021. In 2022, 
NPL  ratios  dropped  more  slowly,  and  some 
deterioration of banks’ asset quality is likely to 
occur.  The  aggregate  profitability  of  the 
banking  sector,  whose  low  level  is  a  concern 

28 

0246810121416180123456720152016201720182019202020212022Return on equity (lhs)NPL gross ratio (lhs)CET 1 ratio (rhs)% 
 
   
corporate 

for resilience and stability (see e.g., Andersson 
et  al.,  2018), 
in  2021  after 
recovered 
registering  a  COVID-19-related  blip  in  2020. 
(Graph  5.1).  The  euro  area  banks’  return  on 
equity is expected to be lower in 2022 than in 
2021 on the back of weaker economic activity 
and  weaker 
and 
sovereign, 
households’ positions. However, the increase in 
interest  rates  supports  banks’  net  interest 
margins.  In  addition,  with  the  ECB’s  deposit 
rate  now  above  zero,  banks  will  start  to 
receive income on their excess reserves. Euro-
area  banks’  overall  direct  exposure  to  Russia, 
Belarus and Ukraine is limited, and is restricted 
to a large extent to locally funded subsidiaries 
and  branches.  Nevertheless, 
large 
their 
exposure  of  domestic  banks 
sovereigns (Graph 5.3) means that tensions on 
sovereign  markets  in  the  euro  area  could 
affect  credit  provision  and  financial  stability. 
Overall,  the  profitability  outlook  for  euro  area 
banks remains mixed.  

the 
to 

Graph 5.2: Outstanding EU issuance as % of 
projected euro area GDP 

in  2021 

resilience.  In  that  respect,  the  EU’s  increased 
issuance  of  euro-denominated  safe  assets  to 
finance  the  implementation  of  SURE (36)  and 
NextGenerationEU  can  contribute  to  a  more 
stable  banking  system.  The  EU’s  share  in  the 
net  issuance  (calculated  as  the  total  of  euro 
denominated  issuances  by  AA/AAA  issuers) 
increased from less than 1% of the total AAA 
and AA issuances in 2019 to 12% in 2020 and 
to  27% 
(European  Commission, 
2022b).  EU  issuances  are  expected  to  exceed 
6%  of  the  euro  area’s  GDP  in  2026.  The 
increased  liquidity  of  EU  bonds  and  EU  bills 
(securities  with  a  shorter maturity  of below  1 
year)  is  viewed  favourably  by  the  majority  of 
EU primary dealers and provides liquidity to all 
parts of the yield curve. Although it is too early 
to assess the exact impact of EU issuances on 
strengthening  EU 
the 
additional supply of euro safe assets provides 
alternatives  to  domestic  sovereign  bonds  for 
banks'  treasuries.  The  issuances  have  also 
made  the  EU  one  of  the  largest  social  bond 
and green bond issuers in the world.  

financial  stability, 

Graph 5.3: Evolution of sovereign debt 
holdings by domestic banks, ratio to GDP, 
1995-2021 

(1) Other include the European Financial Stabilisation 
Mechanism, macro-financial assistance to non-EU 
partners, the balance of payments assistance facility for 
non-euro area Member States, and Euratom loans. 
Source: European Commission. 

large  bond 

issuance  by  the  EU 
The 
contributes  to  the  stability  of  the  euro 
area  banking  system.  The 
lack  of  a 
sufficiently large and diversified pool of euro-
denominated safe assets is among the factors 
contributing to domestic bias in the euro area 
banking  sector,  which  is  an  impediment  to  its 

(1) Consolidated gross government debt. 
Source: ECB. 

(36)  The European instrument for temporary Support to 
mitigate Unemployment Risks in an Emergency, 
https://ec.europa.eu/info/business-economy-
euro/economic-and-fiscal-policy-coordination/financial-
assistance-eu/funding-mechanisms-and-
facilities/sure_en 

29 

01234567202220242026202820302032203420362038204020422044204620482050% of GDPNGEUSUREOther0102030405060708019951997199920012003200520072009201120132015201720192021%EA19BEDEESFRITNLPT 
   
  
                                                 
is  expected, 

The  impact  of  the  energy  crisis  and  the 
increase  in  financing  costs  since  early 
2022  have  resulted  in  tighter  access  to 
finance.  The  ECB  bank  lending  survey  points 
to a sharp tightening in credit standards in the 
euro area in the third quarter of 2022 for both 
firms  and  households.  A  further  tightening  in 
standards 
including  higher 
financing costs (ECB 2022b). In parallel, stock 
markets  in  major  advanced  economies  lost 
value  throughout  the  first  half  of  2022. 
Against this background, euro area investment 
funds  have  reduced  the  credit  risk  of  their 
portfolios by selling high-yield corporate bonds 
and 
bonds. 
Nevertheless,  their  exposure  to  economic 
sectors  with  high  gas  usage  exposes  them  to 
the economic impact of the energy crisis (ECB, 
2022c).  Overall,  the  issuance  of  equities  and 
high-yield  corporate  bonds  declined  sharply, 
pointing  to  increasing  difficulties  for  large 
companies to obtain access to finance.  

lower-rated 

sovereign 

generation  (for  example  nuclear  or  renewable 
electricity). By contrast, energy companies that 
had  to  purchase  gas  at  high  prices  but  were 
not in a position to pass price increases on to 
customers  face  significant  profits  pressure. 
Even  for  companies  that  are  otherwise  still 
profitable, the sharp rise in gas and electricity 
prices  has  led  financial  market  operators  to 
require  increasing  amounts  of  collateral  to 
secure derivatives trades used to hedge future 
gas  and  electricity  sales.  This  has  resulted  in 
liquidity  stress  for  some  energy  companies. 
Several  Member  States  have  developed 
guarantees  and  financial 
to 
ensure  that  energy  market  participants  have 
sufficient liquidity to operate. (37) 

instruments 

Graph 5.4: Property price trends in the 19 euro 
area countries between 1999 and 2021, 
2015=100 

Risks emerging in the current 
context 

Private  sector  balance  sheets  are  set  to 
be  affected  due  to  higher  interest  rates 
and  the  energy  crisis.  The  corporate  sector 
weathered  the  COVID-19  crisis  much  better 
than  initially  feared  thanks  in  particular  to 
large-scale  government  support.  Corporate 
insolvencies remain below pre-pandemic levels 
even  though  most  payment  moratoria  have 
expired. Weak growth prospects, together with 
a combination of rapidly rising producer prices 
and higher funding costs could lead to a rise in 
NPLs.  Risks  differ  across  sectors,  depending 
among  others  on  their  energy  intensity  and 
pricing  power  (see  also  Section  2).  Despite 
overall  sound  balance  sheets,  late  payments 
may increase for low-income households. This 
might  be  particularly  the  case  in  Member 
States with variable rate mortgages.  

The  current  volatility 
in  the  energy 
markets  has  resulted  in  financial  stress 
for  some  energy  companies.  The  high 
energy prices have benefited energy producers 
that  use  relatively  cheap  forms  of  electricity 

(1) Real house prices are deflated by the consumption 
expenditure deflator. 
Source: European Commission. 

Housing  markets  have  been  experiencing 
buoyant  growth,  leading  to  a  build-up  of 
vulnerabilities.  House  price  growth,  which 
remained  strong  throughout  the  previous 
decade, continued during the pandemic. In the 
last  quarter  of  2021,  house  prices  increased 
by  almost  9%  year-on-year  and,  as  pointed 
in  the  Alert  Mechanism  Report,  are 
out 

(37)  See the European Securities and Markets Authority’s 

and the European Banking Authority’s responses to the 
Commission on the current level of margins and of 
excessive volatility in energy derivatives markets 
(22 September 2022 and 29 September 2022, 
respectively). 

30 

6070809010011012013014019992000200120022003200420052006200720082009201020112012201320142015201620172018201920202021Index2015 = 100Nominal house price indexDeflated house price index 
  
                                                 
2022c). 

Commission, 

overvalued  by  more  than  20%  in  seven  euro 
area countries (LU, AT, PT, NL, DE, FR, and BE) 
(European 
High-
frequency data for 2022 suggest that growth 
continued into spring 2022, although this price 
dynamic is likely to slow down. Rising interest 
rates  and  reduced  real  household  income  are 
set to weigh on house prices and could trigger 
a  correction  in  prices  in  Member  States  with 
large  overvaluations.  Prices  have  stabilised  in 
the commercial property sector, but the overall 
conditions remain challenging due to the post-
rates.  A 
pandemic  drop 
pronounced  correction 
the  commercial 
property market could have a negative impact 
on  the  financial  sector  and  limit  its  ability  to 
provide financing to non-financial corporations 
(ECB, 2022c). 

in  occupancy 
in 

Policies to improve financial 
integration and stability 

A  more 
integrated  European  capital 
market  could  facilitate  risk  sharing 
between  euro  area  Member  States. 
Fragmentation  of 
the  euro  area  capital 
markets prevents cross-border flows of equity 
and  credit  that  would  improve  private  risk 
integration  would 
sharing.  More  market 
facilitate  investment  in  profitable  businesses 
irrespective  of  their  location,  provide  capital 
for  the  green  and  digital  transition  and  make 
the euro area more immune to shocks. Further 
progress  in  the  Capital  Markets  Union  would 
bring  stronger  cross-border  flows  of  equity 
and would help reduce corporate leverage and 
Integrating  the 
reliance  on  bank 
capital  markets 
considerable 
approximation  of  national  laws,  and  several 
actions  are  now  under  way  (see  Box  5.1).  In 
particular,  effective,  and  more  harmonised 
insolvency  frameworks  in the  euro  area  could 
help 
credit  by 
facilitating  the  cleaning  up  of  bank  balance 
cross-border 
sheets 
investment  over  the  longer  term  (see  also 
Section 4). 

the  economy  maintain 

spurring 

requires 

lending. 

and 

by 

The  use  of  macro-prudential  tools  helps 
to  build  resilience  and  reduce  risks 
stemming  from  the  private  sector.  In  a 

31 

to 

enable 

support 

outlooks  and  banking 

recent warning (ESRB, 2022), the ESRB pleads 
to  preserve  or  further  build  up  macro-
credit 
buffers 
prudential 
institutions’ 
the 
resilience  and 
authorities  to  release  these  buffers,  if  and 
when  risks  materialise  and  negatively  impact 
credit institutions’ balance sheets. At the same 
time,  macro-prudential  policy  decisions  need 
to  consider  Member  State-specific  macro-
financial 
sector 
conditions, to limit the risk of procyclicality. To 
reflect on developments in the challenges met 
by  macro-prudential  authorities,  including  the 
vulnerabilities  linked  to  the  developments  of 
non-bank  financial  institutions  and  market-
based  finance,  the  European  Commission  has 
conducted a series of consultations to identify 
the  shortcomings  in  the  existing  EU  macro-
prudential  framework  for  the  banking  sector. 
Future 
legislative  reviews  of  the  macro-
prudential framework may further enhance its 
effectiveness, efficiency, and consistency, with 
a view to possibly simplifying it.  

for 

framework 

Further  progress  on  the  Banking  Union 
would  make  the  euro  area  banks  more 
resilient.  The  two  established  pillars  of  the 
(common  supervision  and 
Banking  Union 
resolution 
banks)  help 
strengthen  the  euro  area  banks.  Work  on 
setting  up  a  European  deposit 
insurance 
scheme,  the  third  pillar  of  the  Banking  Union, 
continues  (see  Box  5.1).  Further  progress  on 
the  Banking  Union  could  contribute  to  a more 
integrated  single  market  for  banking  services 
and greater diversification of banks’ sovereign 
bond holdings.  

A  digital  euro  could  unlock  a  number  of 
benefits for the euro area economy, so its 
design needs to be carefully chosen. As a 
new  form  of  central  bank  money  for  use  in 
retail  payments,  a  digital  euro  would  be 
complementary  to  cash.  As  such,  it  could 
nonetheless  safeguard  the  key  role  of  public 
money  for  the  monetary  system  and  for 
financial  inclusion.  In  addition,  its  introduction 
could  help  support  the  digitalisation  of  the 
economy,  further  spur  innovation  in  retail 
payments  and  beyond,  and  support  the  EU’s 
objective  of  open  strategic  autonomy.  At  the 
same  time,  the  digital  euro’s  design  needs  to 
address a number of important trade-offs, for 

 
instance  between  privacy  and  countering 
money laundering  risks,  and  will  need  to  limit 
potential  adverse  repercussions  on  financial 
intermediation  and  stability.  The  Commission 
is  preparing  a  legislative  proposal  that  would 
establish  the  digital  euro and  regulate  its  key 
aspects.  The  proposal  is  to  be  put  forward  in 
the  first  half  of  2023,  with  a  possible 
introduction  of  the  digital  euro  by  the  ECB  in 
2026. 

32 

Box 5.1: Stocktake of recent proposals to deepen the Economic and Monetary UnionIn June 2015, the Five Presidents’ Report outlined a number of proposals and an indicative roadmap to further deepen the Economic and Monetary Union. (1) This report resulted in a number of specific results, including the creation of the European Fiscal Board or the set-up of a network of national productivity boards. The report also called for completing the Banking Union and launching the Capital Markets Union. Substantial progress was made on both initiatives, although several milestones are still to be reached.  The Banking Union includes three pillars: the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM), and the European deposit insurance scheme (EDIS). While the SSM and the SRM have both been rolled out and are in use, further progress is needed on the EDIS. The EDIS proposal, according to which bank deposits under EUR 100 000 in the euro area, would be collectively protected, has not been adopted by the co-legislators (the European Parliament and the Council of the EU). In June 2022, the Eurogroup invited the Commission to bring forward legislative proposals focusing on the review of the crisis management and deposit insurance framework. (2) As part of the work on the Banking Union, Member States agreed to broaden the role of the European Stability Mechanism (ESM) to provide a common backstop to the Single Resolution Fund. Member States have agreed on the revised ESM and it must now be ratified by the parliaments of the 19 euro area countries. The Commission proposed several initiatives to build a Capital Markets Union. After the proposals included in the initial 2015 action plan were adopted and implemented, the Commission proposed a follow-up agenda in 2021. (3) Proposals include legislation to: i) improve investors’ access to information (e.g. a ‘European single access point’ collating company information, or giving investors better access to near real-time trading data), ii) increase the attractiveness of long-term investment funds for investors, iii) facilitate cross-border settlement and the development of a more integrated post-trading market in the EU, and iv) harmonise some requirements for alternative investment funds. The Commission also plans proposals on i) harmonising some aspects of corporate insolvency procedures, enabling companies – in particular small and medium-sized businesses – to be listed on public markets, and ii) increasing participation of retail investors by providing more suitable information to improve their protection.  (1) Juncker J-C et al. (2022), Completing Europe’s Economic and Monetary Union, available at https://ec.europa.eu/info/publications/five-presidents-report-completing-europes-economic-and-monetary-union_en  (2) https://www.consilium.europa.eu/en/press/press-releases/2022/06/16/eurogroup-statement-on-the-future-of-the-banking-union-of-16-june-2022/ (3) https://ec.europa.eu/commission/presscorner/detail/en/ip_21_6251  
 
 
   
 
 
ANNEXES 

 
 
 
 
CROSS-CUTTING PROGRESS INDICATORS 
ANNEX 1: PROGRESS IN EAR IMPLEMENTATION 

small 

(EAR 3),  although 

relevant  sub-CSR  have 
recorded  substantial 
progress  over  the  last  two  years,  which  may  be 
linked to the fact that such reforms are difficult to 
put  in  motion.  By  contrast  reforms  of  corporate 
support 
they  have  been 
proposed 
in  relatively  fewer  countries,  have 
generally  been  well  implemented.  These  relate  in 
general  to  liquidity  support  for  companies,  in 
particular 
enterprises. 
Measures related to business environment (EAR 4) 
are generally implemented with a slower pace, as 
reducing  the  regulatory  burden  and  barriers  to 
entry can be a long-lasting process. Relatively few 
sub-CSRs respond to the EAR 5 (supporting macro-
financial  stability,  monitoring  banking  asset 
quality,  non-performing 
loans  and  making 
progress  in  the  completion  of  the  Banking  Union) 
and 
is 
the 
moderate. 

implementation 

and  medium 

these  fields 

in 

taken 

recommendations 

The  implementation  of  the  2022  euro  area 
recommendations  (EARs)  can  be  assessed 
through  the  progress  on  the  relevant 
(CSRs). 
country-specific 
Euro  area 
into 
recommendations  are 
account  when  addressing  CSRs  to  euro  area 
Member  States  in  the  context  of  the  European 
Semester. 
the 
implementation  of  EAR-relevant  CSRs  provides  an 
estimate  of  the  degree  of  implementation  of  the 
EARs (Graph A1.1). In general, the number of EAR-
relevant sub-CSRs varies regarding different EARs, 
with a clear focus on labour market and business 
environment. 

Accordingly, 

progress 

in 

Overall,  while  the  implementation  of  EAR-
some  progress, 
shows 
relevant  CSRs 
implementation 
is  uneven  across  policy 
areas.  While  the  CSRs  related  to  fiscal  policy 
(EAR 1)  generally  show  a  good  progress,  the 
measures  linked  in  particular  to  sustainability  of 
public finances (e.g. pension reforms) present a  

much lower level of implementation. In spite of the 
labour 
large  number  of  sub-CSR  addressing 
market,  social  policy  and  tax  reform  (EAR  2), 
reform  in  those  areas  is  slow.  Only  14%  of  the 

Graph A1.1: Implementation of EAR-relevant country-specific recommendations (CSRs) 

(1) Analysis at sub-CSR level. CSRs and sub-CSRs for 2019 and 2020 are grouped according to 2022 EARs. 
Source: European Commission analysis based on the CeSaR database. 

34 

0%10%20%30%40%50%60%70%80%90%100%EAR 1EAR 2EAR 3EAR 4EAR 5No ProgressLimited ProgressSome ProgressSubstantial ProgressFull Implementationnumber of relevant sub-CSRs46119219016 
 
 
 
 
 
  
ANNEX 2: CONTRIBUTION OF THE RRF TO THE EAR 

the 

implementation  of 

The  implementation  of  the  Recovery  and 
Resilience  Facility  (RRF)  is  well  on  track. 
Overall,  Member  States  are  progressing  with 
reaching the milestones and targets for the reform 
and  investment  agenda  in  a  timely  manner.  Until 
now, 
recovery  and 
resilience plans (RRPs) has led to around 31 % of 
the RRF funds committed to the euro area Member 
States  being  disbursed,  with  over  EUR 50.8 billion 
paid in pre-financing and EUR 76.7 billion of grants 
and  loans  paid  after milestones  and targets  were 
reached.  This  confirms  the  RRF’s  crucial  role  in 
providing 
immediate  financial  support  to  the 
Member  States,  especially  given  the  recent  surge 
of inflation and rise in interest rates. By supporting 
investment  in  projects  of  strategic  importance 
(e.g., 
energy 
infrastructure),  the  RRF  also  helps  to  bolster  the 
EU’s  crisis  preparedness  and  response  capacity, 
therefore boosting the EU’s strategic autonomy.  

cybersecurity 

critical 

and 

(more  capital  being 

the  RRF  is  meant  to  help  achieve  long-term 
income  convergence  and  growth.  Modelling 
exercises confirm that the RRF’s impact on growth 
will initially mainly come through additional capital 
deepening 
invested  per 
worker),  a  direct  stabilisation  effect.  In  the  longer 
run,  and  provided  implementation  proceeds  as 
planned, the increase in potential output will come 
mainly  from  greater  productivity.  In  that  respect, 
the reforms planned as part of the RRPs will play 
an important role in helping the euro area to work 
better. (38)  

Graph A2.2: Investment milestones and targets 
planned in RRPs 

Graph A2.1: Reform milestones and targets 
planned in RRPs 

(1) Numbers reported relate to the number of milestones and 
targets planned for a given year. 
Source: European Commission. 

Investment and reforms included in recovery 
and  resilience  plans  contribute  to  achieving 
the  euro  area  priorities.  Mapping  the  various 
investments  and  reforms  planned  in  the  RRPs 
against  the  euro  area  recommendations  of  2022 
shows  a  good  match.  About  30%  of 
the 
to 
corresponding 
targets 
milestones 
investment  planned  over  2021-2026  respond  to 
the  EAR  2022.  For  reforms,  this  ratio  is  slightly 
above 60%. More in detail, the various policy areas 
addressed  in  the  EAR  2022  are  covered  in  a 
heterogeneous manner. For the 2022 EAR 1, which 
addresses  supportive  fiscal  policy  stance  and 
fiscal policy coordination underpinning sustainable 

and 

(38)  Bankowski et al. (2022), The economic impact of 

NextGenerationEU: a euro area perspective, Occasional paper 
series, ECB. 

(1) Numbers reported relate to the number of milestones and 
targets planned for a given year. 
Source: European Commission. 

The  implementation  of  the  recovery  and 
resilience  plans  (RRPs)  will  help  achieve 
through  a  number  of  channels  euro  area 
policies  that  were  identified  as  priorities. 
Together  with  strong  policy  measures  at  national 
level, the RRF helps prevent economic divergences 
between  Member  States  after  COVID-19. 
In 
particular, 
it  has  helped  maintain  a  positive 
investment dynamic. In a longer-term perspective,  

35 

0501001502002503003504004502020202120222023202420252026Euro area relevantOther01002003004005006002020202120222023202420252026Euro area relevantOther 
 
 
   
 
   
                                                 
firms  and 

capacity  of 

and  inclusive  recovery,  euro  area  RRPs  take  into 
account  measures  on  healthcare  and  pension 
systems  that  aim  at,  among  others,  quality  and 
sustainability  of  public  spending.  Priorities  in  the 
2022  EAR 2  (taxation,  labour  market  challenges, 
education and social protection systems, including 
regional  dispersion  aspects)  are  also  well  covered 
by the measures planed by Member States. On the 
2022  EAR 3,  providing  for  monitoring  of  the 
effectiveness  of  the policy  support  for  companies 
(including access to finance), solvency support for 
insolvency 
viable 
frameworks, many Member States took measures 
effectively  supporting  the business  sector prior to 
RRPs 
on 
insolvency  frameworks  and  private  indebtedness 
are addressed to a lower extent. As regards 2022 
EAR 4, Member States have taken a large number 
of  measures  to 
improve  business  regulatory 
environment,  and  some  of  their  RRPs  are  also 
effectively  addressing  a  number  of  challenges 
regarding  public  administration.  For  the  2022 
EAR 5 on, among other things, ensuring the macro-
financial  stability,  the  need  to  address  non-
performing  loans  and  the  completion  of  the 
Banking  Union,  relatively  fewer  measures  are 
taken by the Members States in their RRPs. 

submission.  However,  measures 

36 

 
   
ANNEX 3: KEY ECONOMIC AND FINANCIAL INDICATORS 

Table A3.1: Main macroeconomic indicators of the euro area 

Source: European Commission, autumn 2022 forecast 

37 

2021bn EURcurr. prices% of GDP03-18201920202021202220232024GDP12370,8100,01,21,6-6,15,33,20,31,5Private consumption6322,151,10,91,4-7,73,83,70,11,5Public consumption2730,622,11,31,71,04,31,40,30,8Gross fixed capital formation2713,921,91,06,9-6,23,62,80,52,3Exports (goods and services)6096,349,33,82,8-9,010,66,62,03,4Imports (goods and services)5618,645,43,74,8-8,58,46,81,93,5GNI (GDP deflator)12466,0100,81,31,4-6,45,93,30,11,5Contributions to GDP growthDomestic demand1,02,5-5,33,72,80,21,5Inventories0,0-0,2-0,30,30,20,00,0Net exports0,2-0,7-0,51,30,20,10,1Employment0,41,3-3,31,42,00,20,7Unemployment rate (a)9,77,68,07,76,87,27,0Compensation of employees / head2,22,21,03,94,24,93,6Unit labour costs whole economy1,41,94,60,13,04,82,7Saving rate of households (b)12,813,219,717,914,514,113,9GDP deflator1,51,71,82,14,65,33,4Harmonised index of consumer prices1,71,20,32,68,56,12,6Terms of trade goods-0,10,81,7-3,4-6,10,71,4Trade balance (goods) (c)1,92,83,22,60,00,30,8Current account balance (c)1,62,72,63,51,51,92,4General government balance (c)-2,7-0,6-7,0-5,1-3,5-3,7-3,3Structural budget balance (d)-2,3-1,2-3,8-4,2-3,6-3,4-3,2General government gross debt (c)82,185,799,097,193,692,391,4(a) as % of total labour force, (b) gross saving divided by adjusted gross disposable income, (c) as a % of GDP, (d) as a % of potential GDPAnnual percentage change 
 
 
  
 
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