COMMISSION STAFF WORKING DOCUMENT 2025 Report on the euro area Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on the economic policy of the euro area
Date: 2024-12-17
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: competitiveness, euro area, financial stability, fiscal policy, investment promotion, labour market, macroeconomics, stability pact, structural adjustment, sustainable development

EN 

  EN 

   EUROPEAN COMMISSION  Strasbourg, 17.12.2024  SWD(2024) 704 final  COMMISSION STAFF WORKING DOCUMENT 2025 Report on the euro area Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on the economic policy of the euro area {COM(2024) 704 final}  
 
 
1. EXECUTIVE SUMMARY 

The  euro  area  has  displayed  remarkable  resilience  weathering  rapid  disinflation  with 
minimal  impact  on  employment.  Headline  inflation  is  forecast  to  return  to  the  medium-term 
target by 2025 and decrease further in 2026, as the energy-induced high inflation proved mostly 
temporary. The successful disinflation has been accompanied by robust labour markets, which have 
defied fears of widespread job losses in the face of large macroeconomic shocks. Employment has 
risen by 3 million in the euro area between the end of 2022 and mid-2024, and real wages have 
started  to  grow  on  the  back  of  the  rapid  fall  in  inflation.  The  recovery  in  purchasing  power  is 
beneficial  from an economic and social  viewpoint, helping reducing inequality and contributing to 
aggregate demand. The euro area's ability to absorb shocks and rebound, as seen in its response to 
the pandemic and the energy shock, has contributed to this outcome. Overall, annual average real 
GDP growth is expected to be 0.8% in 2024 and to reach 1.3% in 2025 and 1.5% in 2026. 

Recent  shocks  and  longer  seated  issues  keep  denting  the  euro  area  competitiveness. 
Energy  prices  for  European  companies  declined  in  2023  but  remain  high.  This  puts  them  at  a 
disadvantage  vis-à-vis  main  international  peers,  particularly  for  what  concerns  energy-intensive 
productions.  Addressing  high  energy  prices  requires 
joint  focus  on  competitiveness  and 
decarbonisation  transferring  (or  anticipating)  the  benefits  of  decarbonisation,  to  most  vulnerable 
sectors  exposed  to  international  competition.  It  is  therefore  key  to  accelerate  decarbonisation, 
leveraging  on  all  technologies  compatible  with  climate  neutrality,  particularly  renewables,  to 
develop an overall cost-efficient system, including stability of supply and adequate investments in 
infrastructure.  In  the  short  term,  policy  objectives  might  still  require  some  well  targeted  energy 
support  schemes.  This  case  is  reinforced  when  considering  that  some  selected  energy-intensive 
industries carry implications for Europe’s strategic autonomy.  

Promoting productivity growth requires coordinated action. Like other developed economies, 
the euro area has witnessed a deceleration in productivity growth since the early 2000s. Compared 
to the US, Europe lags in the field of advanced digital technologies and infrastructure, including AI, 
microelectronics,  and  biotechnology,  though  excels  in  several  advanced  manufacturing,  robotics, 
and green technology fields. Limited translation of research to marketable innovations and too little 
private  sector  investment  in  R&D  and  the  need  for  stronger  and  better  coordinated  public  R&D 
hinders productivity growth. Moreover, European firms often focus on mid-tech industries, such as 
automotive and chemicals, rather than the high-tech sectors that now dominate in the US. Europe 
creates  fewer  breakthrough  innovations  and  market-leading  companies.  Structural  challenges, 
including  limited  and  uneven  diffusion  of  digital  technologies  ,  skills  shortages  and  demographic 
pressures have further exacerbated the productivity gap. 

Completing  and  broadening  the  scope  of  the  Single  Market,  including  in  services,  is 
Intensifying  economic 
critical  for  strengthening  competitiveness  and  productivity. 
integration  within  the  internal  market  and  reducing  excessive  business  regulation  and  taxation-
related barriers could lead to substantial efficiency and welfare gains and make investments in the 
EU more attractive. A bigger Single Market makes the capital market union works better. By scaling 
up, firms can take advantage of greater market opportunities, increase their investment in research 
and development, and adopt new technologies, ultimately leading to sustained productivity growth. 

Investment must be at the core of the euro area’s growth strategy. In recent years, public 
investment,  boosted  by  the  Recovery  and  Resilience  Facility  (RRF)  and  other  EU  funds,  has  been 
robust, but private investments have been less dynamic. Firms in the euro area are more reliant on 
bank lending rather than capital markets. Savings in the euro area are abundant, and if channelled 

2 

 
 
into productive investments via capital markets could provide significant financing support for the 
green  and  digital  transformations.  A  European  Savings  and  Investments  Union,  including  banking 
and capital markets, could help leverage private savings to contribute to higher support levels for 
innovation  and  the  clean  and  digital  transitions.  Venture  capital,  an  alternative  for  banking 
financing,  is  still  underdeveloped  in  the  euro  area  compared  to  global  peers.  The  Capital  Market 
Union  (CMU)  aims  to  create  a  truly  single  market  for  capital  across  the  EU  to  respond  to  the 
funding challenges.  

The euro area and the Union need targeted industrial policies to  secure investments in 
strategic technologies aimed at safeguarding European competitiveness  This can help to 
ensure that the euro area and the EU develop or preserves a competitive edge in technologies that 
are crucial for long-term prosperity. However, for this, industrial policies must be aimed at fostering 
innovation  and  not  sheltering  declining  industries  or  national  champions.  They  must  be  future-
oriented, not designed to protect incumbent. Crucially, industrial policies should be coordinated at 
European level, to avoid fragmenting of the Single Market. The Union has already taken significant 
steps  in  this  direction,  through  the  important  projects  of  common  European  interest  (IPCEIs), 
concerning sectors like microelectronics, cloud infrastructure and services, hydrogen, and batteries.  

To  bridge  skills  gaps  and  facilitate  a  smoother  transition  for  workers,  targeted  policy 
measures  are  needed.  Governments  and  educational  institutions,  as  well  as  the  private  sector, 
must  work  together  to  create  training  programs  that  address  the  shortages  in  digital  and  green 
skills.  Expanding  lifelong  learning  opportunities,  apprenticeships,  and  vocational  education  will  be 
crucial to enable workers to reskill and adapt. Experience shows that action in education and  skills 
not only is critical for competitiveness but is indispensable for inclusiveness and social progress. In 
the end, well-coordinated and timely policy interventions will be key to preparing the workforce to 
match the future economy's challenges and opportunities. 

The  euro  area  needs  to  balance  macroeconomic  stability  with  long-term  investment 
needs. Strengthening public debt sustainability remains a priority for several Member States, amid 
market  scrutiny  and  heightened  expenditure  pressures  from  demographic  changes,  security  and 
defence, the green and digital transitions, and the need to mitigate and prepare for climate-related 
events. Fiscal policy should continue working in tandem with monetary policy and focusing on debt 
sustainability. Policymakers are encouraged to adopt stable, realistic debt reduction paths aligned 
with  the  revised  economic  governance  framework,  prioritise  growth-enhancing  reforms  and 
investments,  and  carefully  manage public  finances  to  support  long-term  economic  stability.  After 
four  years  of  strongly  expansionary  policy,  the  fiscal  stance  is expected to  turn  contractionary  in 
2024 and 2025: this will help to improve public debt sustainability and support monetary policy.  

The progressive easing of monetary policy and the continued roll-out of the RRF will help 
to compensate for restrictive fiscal policy. The ECB eased monetary policy in June, September 
and October 2024. This followed a cumulative tightening of 450 basis points between July 2022 
and September 2023. The easing of the monetary policy stance and financing conditions, which is 
expected  to  continue  over  the  next  months  can  cushion  the  impact  of  the  fiscal  adjustment  on 
growth and provide cheaper funding for new investments, while preserving price stability.  

The  euro  area  financial  system  remains  robust  and  absorbed  the  shocks  of 
disinflationary policies with remarkable resilience. Non-Performing Loans (NPLs) are around 
historical lows across the monetary union. Arrears in the commercial real estate (CRE) sector have 
started to increase, but they are a small part of banks’ lending portfolios. Property prices have been 
falling,  especially  in  the  CRE  sector,  raising  concerns  about  the  debt  servicing  capacity  of  some 
firms.  Prices  for  residential  real  estate  (RRE)  have  also  fallen  in  several  Member  States  but  less 
than for commercials. Nevertheless, concerns for housing affordability remains a key policy issue 
for  many  Member  States.  Weaknesses  in  the  non-bank  financial  sector  (NBFI)  call  for  enhancing 
resilience  and macroprudential  policy.  Financial  risks  related  to  climate  change  and crypto  assets 
should  be  considered  in  the  framework.  In  this  context,  the  completion  of  the  Banking  Union 
remains a priority.   

3 

 
2. RESILIENCE 

The  euro  area  has  displayed  remarkable 
resilience  weathering  rapid  disinflation 
with  minimal  impact  on  employment.  In 
the  two  very  large  macroeconomic  shocks  of 
the last five years, the euro area has taken a 
hit,  but  rebounded  (1).  This  was  the  case  with 
the  COVID-19  pandemic,  and  the  economic 
consequences  of 
the  ongoing  war  of 
aggression of Russia against Ukraine, including 
the  energy  crisis,  the  inflationary  pressures  it 
produced  and  the  necessary  contractionary 
monetary stance to contain them. 

new 

States 

supported 

for  public 

implemented 

Crucial  to  this  resilience  were  timely 
policy  responses.  These 
included  robust 
fiscal  and  monetary  expansions  in  2020  and 
European 
by 
2021, 
instruments.  Additionally,  both  the  EU  and 
Member 
various 
measures, including to support households and 
firms exposed to surging energy prices, though 
these  measures  have  not  always  been 
targeted  and  were  in  some  cases  rather 
onerous 
(European 
the 
Commission, 
structural transformation of economies during 
the  previous  decade  significantly  enhanced 
their resilience to exogenous shocks. Financial 
systems  demonstrated  far  greater  robustness 
than  during  the  global  financial  crisis  and,  by 
2019,  the  fiscal  situation  in  many  Member 
States  had  improved  considerably,  providing 
them  with  crucial  fiscal  space  to  respond 
effectively  to  the  shocks.  At  the  same  time, 
over  the  last  five  years,  imported  energy  and 
fossil fuel dependency has decreased (2).  

Furthermore, 

finances 

2023a). 

(1)  Resilience  can  be  usefully  defined  as  the  capacity  to 
withstand a shock (often also described as robustness) 
and rebound. See Brunnermeier (2021). 

(2)  EU Member States have been very swift in  diversifying 
away from Russian energy. In September 2021, Russian 
In 
gas  accounted  for  41%  of  EU  gas 
September 2022, this fell to 9%. 

imports. 

Macroeconomic developments 

The  euro  area's  disinflation  has  been 
fast. Headline HICP inflation fell from a peak 
of  10.6%  in  October  2022,  a  level  which  was 
the  highest  since  the  creation  of  the  euro,  to 
1.7% in September 2024. Overall, annual HICP 
inflation is expected to decrease from 5.4% in 
2023  to  2.4%  in  2024,  2.1%  in  2025  and 
1.9%  in  2026.  In  2024,  five  Member  States 
are  projected  to  have  inflation  below  the 
target. 

Graph 2.1: Inflation breakdown, euro area 

Source: European Commission 

Headline  inflation  decreased  fast  after 
the  pressure  from  energy  prices  had 
dissipated  by  November  2023.  Food  and 
non-energy  industrial  goods,  due  to  weaking 
domestic and global demand, have been major 
contributors to  the  fall in inflation  throughout 
2024 (Graph 2.1). Services inflation has been 
slower  to  decline,  due  to  elevated  wage 
pressures  along  with 
less 
insurance). 
frequently  adjusted  items  (e.g. 
Although  some  factors  were  exogenous,  the 
ECB's monetary tightening since July 2022 has 

the  price  of 

4 

-2024681012Jan-19Jul-19Jan-20Jul-20Jan-21Jul-21Jan-22Jul-22Jan-23Jul-23Jan-24Jul-24EnergyUnprocessed foodNon-energy industrial goodsProcessed food incl alcohol &tobaccoServicesHICP, y-o-y % changeHICP-exc. energy and foody-o-y %change, pps. 
 
 
  
limit 

contributed  decisively  to  anchor  expectations, 
to 
the 
the  pass-through,  and 
convergence  of  inflation  towards  the  price 
stability  target 
(see  Macro-economic  and 
financial stability section). 

to 

Graph 2.2: Range of annual HICP inflation in 
euro area Member States 

Source: European Commission 

Differences  in  inflation  rates  among  the 
euro-area Member States have narrowed. 
The  inflation  rate  differentials  that  escalated 
after the outbreak of the energy crisis (3) have 
narrowed  further  in  2024  (Graph  2.2),  and 
they  are  now  expected  to  stay  close  to 
historical averages by 2025 reflecting country-
specific  factors.  This  narrowing  was  primarily 
due to the gradual dissipation of energy shock 
impact  and  phasing  out  of  associate  energy 
measures.  The  heterogeneity  of  the  projected 
core  inflation  (excluding  energy  and  food) 
reflects  country-specific  factors,  the  structure 
of  consumption,  as  well  as  real  wage  growth 
and 
Higher 
inflation  is  expected  in  central  and  eastern 
European  Member  States  due  to  higher  unit 
labour  cost  pressures  (European  Commission 
Autumn, 2024g) 

developments. 

productivity 

The  euro  area  avoided  a  recession  and 
set grounds for further rebound. After the 

(3)  Differences  in  the  energy  intensity  of  the  economies 
explain most of the country-specific impact of the 2022 
common  energy  price  shock  on  inflation.  See  Coutinho 
and Licchetta (2023).  

contraction  in  2020  and  subsequent  strong 
rebound, economic growth stagnated between 
late  2022  and  late  2023  as  the  energy  price 
shock  and  interest  rate  increase  reverberated 
through  the  economy.  The  forceful  tightening 
of  financial  conditions  contributed  to  five 
consecutive quarters of broad stagnation from 
late  2022 through 2023, but largely achieved 
its  goal  of  a  steady  decline  in  inflation. 
Remarkably,  employment  has  not  only 
continued  to  show  resilience,  but  expanded 
further  —  a  soft  landing  under  challenging 
circumstances. In 2024, the euro area returned 
to  growth,  and  it  is  projected  to  expand  by 
0.8%  (Graph  2.3).  At  the  country  level, 
growth  developments  and  outlook  remain 
diverse.  However,  dispersion  in  growth  rates 
has  decreased  quite  considerably  since  the 
pandemic  shock  and  is  expected  to  decrease 
further (see Box 2.1 on convergence). 

Graph 2.3: Range of annual GDP growth rates 
in the euro area 

Source: AMECO 

5 

-505101520252015-Q12016-Q12017-Q12018-Q12019-Q12020-Q12021-Q12022-Q12023-Q12024-Q12025-Q12026-Q1RangeInterquartile rangeEA20EU27y-o-y % changeforecast-20-15-10-505101520253020002002200420062008201020122014201620182020202220242026%Min-Max rangeEA20 
  
 
  
 
(Continued on the next page) 

6 

1  Box 2.1: Developments on income convergenceThe pandemic and the energy crisis have raised concerns over income divergences in euro area and, more generally, in the EU. These shocks led to disruptions that could threaten to widen the gap between the more advanced, resilient, and diversified economies, and those that are more heavily reliant on specific sectors or external energy supplies.  Four years after the onset of the pandemic and two years following the energy shock, convergence in real GDP per capita among euro area Member States does not appear to have been significantly affected. All Member States experienced large losses in income at the start of the pandemic, with losses in real GDP per capita in 2020 ranging from less than 2½% in Latvia, Estonia, and Luxembourg to over 9½% in Greece, Spain, and Malta. However, by the end of 2022, most Member States had recovered their 2019 income levels (Graph 1). Absolute beta convergence estimates (1), measured against 2019 income levels, confirm temporary disruptions in 2020 (as shown by the upward sloping curve in Graph 2) but convergence resumed on the back of the 2021-22 recovery. The ensuing energy shock did not lead to further divergences. Convergence in 2023 was driven by faster growth in the south and in some eastern countries associated with negative growth per capita in Germany, Finland, Austria, and Luxembourg.   Graph 1: GDP per capita (constant prices in PPS, thousands) Graph 2 : Absolute beta convergence since 2019                       Note: IE and LU are not shown in this chart for graphical reasons. For these two Member States the 2023 GDP per capita in constant prices (PPS) are estimated at 73 and 78 thousand euros, respectively. Source: AMECO  Note: A negative slope of the regression line means convergence. Source: Calculations based on AMECO Recent shocks had a more transient impact on convergence compared to the lasting disruptions during the global financial crisis (GFC). The GFC significantly undermined the Member States resilience and economic activity in the euro area as a whole. It took about seven years to return to pre-2008 levels. The temporary nature of the more recent shocks is well evidenced by the dynamics of sigma convergence (2) or the coefficient of variation of real GDP per capita (Graph 3).  During the GFC, the coefficient saw a large increase between 2008 and 2010 that took around 8 years to unwind. By contrast, during the pandemic in 2020 the increase was relatively small, and it returned to pre-crises levels in 2021, declining further in 2022 and 2023, despite the energy shock (3). The milder impact of recent crises on income convergence in the euro area, compared to previous shocks, was due to the very different nature of the shocks and the different policy responses. The global financial crisis, which emerged in 2008, originated from macro-financial imbalances that had built up for years in several large economies. This led to a prolonged period of adjustment for both the private sector and governments, which was further complicated by weaknesses in the financial systems. By contrast, the COVID-19 and the energy shock were major  (1) Absolute beta convergence implies that lower-income countries or regions grow faster than richer ones. It is measured by the slope of a regression line between the initial income level and subsequent growth rate. A negative slope indicates convergence, with a steeper slope suggesting a faster convergence rate, as economies with lower initial incomes grow more rapidly than those with higher starting points. (2) Sigma convergence refers to a reduction in the dispersion of income levels across regions, countries, or groups over time. When measured as the coefficient of variation, sigma convergence indicates a decrease in the relative spread of GDP per capita. In this context, sigma convergence occurs if the coefficient of variation decreases over time, suggesting that the disparities or variations between countries are shrinking, which indicates convergence toward a more homogeneous level. (3) Beta coefficient estimates (Licchetta & Mattozzi, 2023) based on the 1995-2023 show a relatively mild impact observed after the pandemic and energy shock. This contrasts the steep decline during the three years after the GFC.   
 
 
 
   
 
Box (continued) 

the 

initially 
Private  consumption  growth 
post-pandemic 
to 
contributed 
rebound but it has since lost momentum. 
Growth  in  private  consumption  slowed  at  the 
end of 2023 as households put aside a larger 
share  of  their  disposable  incomes  than  in 
preceding  quarters,  and  after  converging 
towards  its  pre-pandemic  long-term  average, 
the  saving  rate  (Graph 2.4),  edged  up  again 
reaching  an  average  of  15.7%  of  gross 
disposable 
in  Q2  2024.  Public 
consumption  was  supportive  of  growth 
throughout the period. 

income 

Graph 2.4: Gross households saving rate in the 
euro area (% of gross disposable income) 

Source: Eurostat 

7 

1012141618202224262015Q12015Q32016Q12016Q32017Q12017Q32018Q12018Q32019Q12019Q32020Q12020Q32021Q12021Q32022Q12022Q32023Q12023Q32024Q1per cent of disposable incomeGross household saving rate2015-2019 average2  exogenous shocks, mitigated by national and EU policies. Governments responded to the pandemic and the subsequent energy shock with a range of policy measures cushioning the economic blow and facilitating a swift recovery. The fiscal situation at the beginning of 2020 was much stronger in most Member States than it had been in 2008, creating space for effective policy action. Fiscal policies played a crucial role, with high public spending to support businesses, protect jobs, and sustain household incomes. In the Union, Next Generation EU provided significant financial resources for Member States to invest in their economies. The RRF aimed by design at supporting economic convergence; it proved useful and adaptable to the challenges of the subsequent disruption of energy markets (Graph 4). The SURE instrument also supported relevant institutional changes in several Member States in support of short-time work schemes and similar measures, which helped to keep people in jobs, avoiding unemployment, income losses and long-term scaring (4). Finally, several monetary policy measures avoided financial fragmentation and quickly adapted to face the new challenges generated by the inflation spike.   Graph 3: Sigma convergence since 1995 Graph 4: GDP per capita (PPS) growth and RRF (grants) absorption                 Note: Sigma convergence measured as the coefficient of variation (the ratio of the standard deviation to the mean). A reduction indicates an increase in the economies’ similarities. Source: Calculations based on AMECO. Source: AMECO and European Commission’s internal estimates   (4) The SURE instrument is estimated to have supported 31.5 million people and over 2.5 million firms in 2020. See European Commission (2023c).  
  
 
   
 
 
the end of 2023, net exports have contributed 
to  economic  growth,  mainly  on  the  back  of 
expanding  services  exports  and  weak  import 
growth.  Trade  in  goods  weakened  across  all 
categories  of  goods,  being  likely  affected  by 
growing  trade  fragmentation  and  expanding 
trade  restrictions  amid  deteriorating  trade 
policy environment.  

Graph 2.6: Private and public investment 

be  withholding 
Uncertainty  might 
consumption  and  investment.  With  the 
ongoing  Russia-Ukraine  conflict,  escalating 
tensions  in  the  Middle  East  (Graph  2.5),  and 
the  intensifying  adverse  impacts  of  climate 
change,  as  well  as  political  uncertainties  in 
some European countries, consumers might be 
hesitant  to  spend,  opting  instead  to  build  up 
their  financial  buffers.  Several  other  reasons 
may have pushed up households’ propensity to 
save,  including  the  erosion  of  real  wealth  by 
rapidly increasing prices and falling real estate 
value and the need to alleviate or contain their 
debt repayment burden (4).  

Graph 2.5: Geopolitical Risk Index (GPR) 

Source: European Commission 

A  return  to  stronger  growth  is  now 
expected  for  2025  and  2026.  Overall, 
annual average real GDP growth is expected to 
be  0.8%  in  2024  and  to  increase  to  1.3%  in 
2025 and 1.6% in 2026. Robust growth in real 
disposable  income  stemming  from  increased 
real  wages  and  employment  growth 
is 
expected  to  drive  the  rebound  in  private 
consumption  –  together  with  a  moderate  fall 
in the household saving rate (Graph 2.7).  

to 

Investment 
increase 
is  expected 
gradually  in  2025  and  2026  (Graph  2.7). 
Private  investment  is  set  to  recover  on  the 
back  of  the  easing  of  financing  conditions.  At 
the same time, investment funded by the RRF 
and other Union funds, notably cohesion policy 
funds,  is  expected  to  continue  to  support  the 
economy,  and  crowding-in  private  investment 
further 
digital 
transitions. 

supporting 

green 

and 

(1) 30-day moving average of daily GPR 
Source: Caldara and Iacoviello (2024) 

Total  investment  has  been  weak.  Public 
investment  gained  momentum 
in  some 
countries  on  the  back  of  the  Recovery  and 
Resilience  Facility  (RRF)  and  other  EU  funds 
(Graph 2.6). Despite support from the RRF, in 
2024,  private  investment  has  been  weak  in  a 
context  of 
tightened  financial  conditions, 
long-lasting 
widespread  uncertainty,  and 
structural  issues  (see  also  competitiveness 
section).  

The  contribution  of  net  exports  to  GDP 
growth  has  been  slightly  positive.  Since 

(4)  See Special Issue on “The cost of uncertainty – New 
estimates”, in European Commission (2024g). 

The  external  balance  is  expected  to  be 
neutral to GDP growth in 2025-26. Exports 
are  projected  to  expand  more  briskly  from 

8 

0501001502002503003502006200720082009201020112012201320142015201620172018201920202021202220232024Long term average809010011012013020192020202120222023202420252026Index 2019=100Total economyPublic investmentPrivate investmentforecast 
  
 
  
Graph 2.8: Current account balances in the 
euro area Member States 

2025  onwards,  driven  by  improved  global 
trade and demand, particularly for investment 
goods.  Despite  this,  the  growth  impact  of 
exports  is  expected  to  be  largely  offset  by  a 
rebound  in  imports,  driven  by  strengthening 
consumer  and  investment  demand  at  home. 
Risks  of  prolonged  geopolitical  tensions  and 
escalating  trade  fragmentation  might  risk 
damaging the euro area export market share. 

Graph 2.7: Real GDP growth and contributions 

Source: European Commission, AMECO 

Risks  of  large  external  imbalances  have 
reemerged,  though  the  outlook  points  to 
convergence. The euro area's current account 
surplus,  which  had  been  wiped  out  by  the 
2022 energy shock, has reemerged in 2023 as 
the terms-of-trade shock reversed. The current 
account is expected to increase from 2.5% of 
GDP  in  2023  to  3.8%  of  GDP  in  2024  and 
stabilise  at  3.6%  in  2025  and  2026.  While 
most  Member  States  saw  an  improvement  in 
their  current  accounts  in  2023,  divergences 
have  emerged,  with  some  countries,  including 
Germany  and  the  Netherlands,  experiencing 
notable  increases  in  their  surpluses  (Graph 
2.8), whereas other countries, including Cyprus 
and Greece, registering significant increases in 
their deficits. Going forward, dispersion among 
Member  States’  current  accounts  is  expected 
improving  deficts  and 
to  narrow  with 
norrowing  deficits 
(European  Commission, 
2024c).  

Note: explain CA to specific NIIP target. 
Source: European Commission 

Labour market developments 

The  resilience  in  labour  market  has  been 
crucial  to  support  the  economy.  Strong 
labour  markets  dynamics  supported  income 
and  consumption 
the  post-pandemic 
in 
recovery. The unemployment rate stabilized at 
the  historically  low  of  6.3%  in  October  2024 
and employment continued to grow, albeit at a 
slower  pace  than  during  the  post-pandemic 
recovery.  Consequently,  the  employment  rate 
reached  a  new  record  high  in  [Q2  2024], 
climbing  to  75.3%,  which  is  0.6  ppt.  higher 
than  in  2023  (Graph  2.9)  (5).  Good  labour 
market  performances  have  been  consistent 
across  Member  States.  This  contrasts  with 
previous  crises,  which  were  characterised  by 
strong divergences across Member States.  

(5)  In  parallel,  labour  productivity  growth  has  been  weak 
and  even  contracting  in  2023.  Still,  evidence  does  not 
suggest  a 
trade-off  between  productivity  and 
employment growth. See, Special Issue on “Productivity 
growth in the EU: Is there a trade-offi with employment 
growth?” in European Commission (2024c). 

9 

-8-6-4-20246817181920212223242526Net exportsInvestmentPriv. consumptionGov. consumptionInventoriesReal GDP (y-o-y%)forecastpps. IEDKNLLUSEMTDESIESATLTHUPTCZPLITBGBEHRFIFRSKEELVCYELROEA20-10.0-5.00.05.010.015.0% of GDP2024-Q2Pre-pandemic (3 year average)Required CA for specific NIIP target* 
   
 
  
 
Graph 2.9: Employment, activity, and 
unemployment rates in the euro area 

Graph 2.10: Change (%) in employment 
between Q4 2019 and (i) Q1 2021 (light 
colour); (ii) Q2 2024 

Source: Eurostat 

Employment  growth  has  been  broad-
based  across  gender,  age  and  education 
level  (6).  Between  Q4  2019  and  Q2  2024, 
total employment (age group 15-64) increased 
by  4.1%.  Employment  growth  for  women 
(4.7%) was higher than for men (3.6%). Youth 
employment, which was the hardest hit during 
the  pandemic,  has  experienced  substantial 
growth  (10.1%),  while  employment  among 
older workers, which was less affected during 
the  pandemic,  continued  to  increase  steadily. 
In 
attainment, 
employment  for  highly  educated  individuals 
has continued to grow at a robust pace (15%). 
Employment  for  those  with  low  to  medium 
education – which amounts to around 60% of 
total employment - has recovered more slowly 
and  remains  below  pre-pandemic  levels  (-
2.5% and -1.2% respectively) (Graph 2.10).  

educational 

terms 

of 

(1) Share of total employment in each category: (i) male 
(53%) and female (47%); (ii) 15-24 (9%), 25-54 (70%) 
and 55-64 (21%); low education (18%), medium 
education (43%), high education (39%). 
Source: Eurostat 

in 

their 

notably 

recovered 

information 

Employment  growth  has  been  positive 
across  essentially  all  sectors.  Except  for 
agriculture,  forestry,  and  fishing,  all  sectors 
have 
pre-pandemic 
levels  or  have  experienced 
employment 
further  increases  (Graph  2.11).  Employment 
growth was the strongest in the service sector, 
most 
and 
communication,  financial,  insurance  and  real 
estate and in the public sector. Notably, nearly 
44%  of  the  total  jobs  (around  2.7  million 
people)  created  since  Q4  2019  (and  20% 
created  since  2021)  were  within  the  public 
sector, underscoring its important role over the 
pandemic  and  the  recovery  (7).  However,  the 
rapid  expansion  of  public  employment  could 
raise concerns about its impact on productivity 
growth, which has remained subdued, and the 
increase  in  public  expenditure  that  is  likely  to 
be long-lasting.   

(6)  This  decomposition  does  not  accout  for  the  worker’s 
country  of  birth.  Active  population  has  been  largely 
driven by foreign-born workers (see Graph 1.14). 

(7)  By  contrast,  the  industrial  sector  has  only  partially 
exceeded  the  pre-pandemic  level.  Since  Q4-2019, 
employment  saw  an 
increase  of  approximately 
154,000 jobs. This includes a decline of 199,000 jobs in 
manufacturing, which was offset by a gain of 353,000 
jobs  in  sectors  such  as  mining,  electricity,  and  other 
industrial activities.  

10 

65676971737577798183024681012141618202018-Q12018-Q22018-Q32018-Q42019-Q12019-Q22019-Q32019-Q42020-Q12020-Q22020-Q32020-Q42021-Q12021-Q22021-Q32021-Q42022-Q12022-Q22022-Q32022-Q42023-Q12023-Q22023-Q32023-Q42024-Q12024-Q2%%Activity rate (20-64) (rhs)Employment rate (20-64) (rhs)Youth unemployement (15-24) (lhs)Unemployment rate (15-74) (lhs)-10-505101520TotalMalesFemales15-2425-5455-64LowMediumHighGenderAgeEducation% 
  
 
   
 
 
Graph 2.11: Sectoral change (%) in 
employment between Q4 2019 and (i) Q1 
2021 (blue bars); (ii) Q2 2024 (orange bars) 

Source: Eurostat 

The  labour  market  remains  tight  but  is 
easing. The rapid recovery in 2021-2022 and 
rotation  of  demand  from  industry  to  services 
has  led  to  significant  labour  shortages  that 
have  persisted  throughout  the  energy  crisis 
(Graph  2.12).  Recently,  at  the  aggregate 
level, there has been a decline in the share of 
firms  that  declare  labour  as  a  factor  limiting 
their  production.  The  job-vacancy  rate  has 
dropped  from  the  historical  peak  of  3.3%  in 
Q2 2022 to 2.6% in Q2 2024. Yet, it remains 
above pre-pandemic levels (2.3% in Q4 2019), 
which  were  already  high  by  historical 
standards.  Skill  shortages  also  continue  to  be 
a pressing issue. 

Graph 2.13: Labour market tightness indicators 

(1) Z-scores are used as measures and computed by 
subtracting the mean from a data value and then 
dividing by the standard deviation. A declining (or 
increasing) value indicates looser (tighter) labour market. 
Source: Eurostat and European Commission's Business 
and Consumers Survey 

11 

labour  market  tightness  reflects 
The 
labour  demand  outpacing  labour  supply. 
Strong  corporate  profits  and  balance  sheet 
dynamics  in  a  context  of  a  temporary  fall  in 
real  wages  have  contributed  to  sustained 
dynamics in  labour  demand,  which  has  grown 
faster  than  labour  supply  (Graph  2.13).  This 
is  different  from  the  US,  where 
labour 
shortages  have  been  partly  attributed  to 
supply factors such as reduced labour market 
participation. Going forward the recent decline 
in  the  profit  share  and  the  recovery  of  real 
wages  suggest  that  the  impact  of  this  driver 
on labour shortages will gradually fade. 

Graph 2.12: Labour demand and supply in the 
euro area 

(1) Labour supply is proxied by active population (20-64), 
, labour demand by the sum of employed (20-64) and 
vacancies in industry, construction, and services (Nace B-
S). 
Source: Own calculations based on Eurostat 

Migration  inflows  contributed  to  labour 
supply  and,  in  turn,  to  employment.  Like 
many  other  advanced  economies,  the  euro 
large  migration 
area  has  benefited  from 
inflows, both from Ukraine (8) and other areas. 
Foreign  workers  from  outside  the  EU  have 
influenced positively labour force trends since 
2021  easing  labour  market  shortages  (9). 

(8)  By  July  2024,  there  were  almost  4.1  million  people 
in  Ukraine  who  benefited  from 

fleeing  the  war 
temporary protection in EU Member States.  

(9)  In  the  early  phase  of  the  pandemic,  from  Q4  2019  to 
Q4 2020, the non-EU labour force saw a proportionally 
larger  decline  of  2.0%  compared  to  the  total  labour 
force's  1.2%  decrease.  By  contrast,  between  Q1  2021 
and  Q1  2024,  non-EU  workers  contributed  to  41%  of 
the total labour force growth. 

-13-371727TotalInformation and communicationFinancial, insurance andreal estate activitiesPublic administration, defence,education, human health andsocial work activitiesProfessional, scientific,technical, administrativeand support activitiesConstructionArts, entertainment andrecreation + OthersWholesale and retail trade,transport, accommodationand food service activitiesIndustryAgriculture, forestryand fishing%-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.52014-Q12014-Q32015-Q12015-Q32016-Q12016-Q32017-Q12017-Q32018-Q12018-Q32019-Q12019-Q32020-Q12020-Q32021-Q12021-Q32022-Q12022-Q32023-Q12023-Q32024-Q12024-Q2z-scoreJob vacancy rateLabour as factor limiting production - IndustryLabour as factor limiting production - ServicesLabour Market slack, inverted (20-64)Labour market loosening 
   
   
  
 
Overall,  the  share  of  non-EU  workers  in  the 
total  labour  force  in  the  euro  area  increased 
from  10.9%  to  13.2%  between  Q1  2021  and 
Q2 2024 (Graph 2.14).  

The  resilience  of  the  labour  market  can 
also  be  attributed  to  structural  factors.  
In some cases, employers may be reluctant to 
fire workers in the expectation of the difficulty 
of re-hiring once economic conditions improve. 
Additionally, the ageing workforce might have 
led to increased hiring to meet skill demands, 
especially in  a  context  of tight  labour  market. 
This trend may have been exacerbated by the 
decreased  cost  of  posting  vacancies,  such  as 
through 
virtual 
interviews. 

platforms 

online 

and 

Graph 2.14: Composition of the labour force by 
country of birth 

Source: Eurostat 

of 

labour 

The  weakening  of  economic  growth 
combined  with  resilient  labour  market 
outcomes  mechanically  implied  a  further 
weakening 
productivity 
dynamics.  In  2023,  this  resulted  in  labour 
productivity declining by 0.9% per person and 
0.8%  per  hour  worked.  It  reinforced  the  long-
term  slowdown  in  labour  productivity  growth, 
which 
is  mainly  stemming  from  factors 
beyond  the  labour  market  such  as  weak 
capital 
in 
a 
and 
diffusion, 
technological 
and 
innovation 
including  a 
limited  uptake  of  digital 
technologies. 

deepening 

decline 

12 

Wage developments 

growth  has 

In  Q2  2024,  annual  growth 

Nominal  wages 
been 
relatively  high 
decelerating  from  a 
growth  rate.  Nominal  wages  have  increased 
on  the  back  of  high  inflation  and  tight  labour 
in 
markets. 
nominal  compensation  per  employee  was 
4.5%, a slightly lower rate than what observed 
in  2023  (Graph  2.15).  The  Commission’s 
Autumn  forecast  project  that  compensation 
per employee will increase by 3% in 2025 and 
by 2.6% in 2026. 

Graph 2.15: Nominal wage growth indicators 

Source: ECB, Indeed. 

the 
increases  help 
Dynamic  wage 
recovery 
in  household’s  purchasing 
power.  Despite  strong  nominal  wage  growth 
in the past years, real wages declined in 2022, 
because  of  the  inflationary  shock  (Graph 
2.16). Starting from the second half of 2023, 
growth  in  real  compensation  per  employee 
turned  positive  on  a  quarter-on-quarter  basis, 
and  it  has  strengthened  in  the  first  two 
quarters  of  2024,  on  the  back  of  rapid 
disinflation. However, by Q2 2024, cumulative 
real  wage  growth  since  2019  has  remained 
behind  cumulative  productivity  growth  by 
about  2  ppt  (10).  Real  wage  increase  is 

(10)  Following 

labour 
productivity per employed person is set to remain weak 

the  decline  observed 

in  2023, 

6971737577798183854681012141618202018-Q12018-Q22018-Q32018-Q42019-Q12019-Q22019-Q32019-Q42020-Q12020-Q22020-Q32020-Q42021-Q12021-Q22021-Q32021-Q42022-Q12022-Q22022-Q32022-Q42023-Q12023-Q22023-Q32023-Q42024-Q12024-Q2%%EU Mobile workers (a) - lhsNon-EU workers (b) - lhsForeign Workers (a+b) - lhsNative workers - rhs-4-2024682019-Q12019-Q22019-Q32019-Q42020-Q12020-Q22020-Q32020-Q42021-Q12021-Q22021-Q32021-Q42022-Q12022-Q22022-Q32022-Q42023-Q12023-Q22023-Q32023-Q42024-Q12024-Q22024-Q3%Compensation of employeesNegotiated wagesIndeed Wage Tracker 
  
  
 
 
beneficial  from  a  social  and  macroeconomic 
viewpoint,  helping  reducing  inequality  and 
contributing to aggregate demand. 

Graph 2.16: Nominal compensation, real 
compensation (based on HICP), HICP Index and 
productivity 

Graph 2.17: GDP deflator decomposition 

Source: Based on Eurostat 

Social implications 

income 

Household  incomes  increased  in  2023 
after  declining 
in  2022.  Consumption 
represents  around  half  of  euro  area  GDP, 
underscoring  its  critical  role  in  the  economy. 
Household 
is  a  key  driver  of 
consumption,  and  its  growth  is  influenced  by 
wage  growth  and  inflation.  Wage  growth  in 
increase 
2023  supported  an  overall 
in 
households’ 
income.  The 
real  disposable 
impact  of  high 
inflation  on  real  wages 
prompted  real  gross  disposable  household 
income (GDHI) to decline by 0.5% in Q4 2022 
compared to the previous year  (Graph 2.18). 
However,  as  inflationary  pressures  eased  and 
nominal  wage  growth  gained  pace  in  2023, 
real  GDHI  was  1.8%  higher  in  the  Q4  2023 
compared to the same quarter of 2022. 

to 

shock  and 

The share of people at risk of poverty or 
social exclusion (AROPE) declined slightly, 
issues  persist.  Despite  the 
but  social 
strong 
thanks 
inflation 
employment  growth,  the  latest  data  point  of 
2023  (based  on  2022  income)  indicates  a 
slightly  decreasing  percentage  of  persons  at 
risk  of  poverty  in  the  euro  area,  compared  to 
the  previous  year  (from  21.8%  to  21.6%). 
According  to  Eurostat  Flash  estimates,  the 
share  of  people  at  risk  of  poverty  in  the  euro 
area is also expected to remain stable in 2024 
(based on 2023 incomes). In some countries, a 
drop  in  risk  of poverty  can  be  partly  linked  to 

Source: Based on Eurostat 

A  recovery  in  real  wages  is  compatible 
with  inflation  converging  to  the  policy 
target.  Relatively  high  nominal  wage  growth 
may have some short-term impact on inflation 
if businesses raise prices to offset  recent pay 
increases.  However,  recent  unit  profit  declines 
seem  to  be  acting  as  a  cushion,  absorbing 
wage hikes without pushing up prices (Graph 
2.17).  Past  growth  in  unit  profits  suggests 
that  some  buffer  for  further  wage  increases 
remains  and  that  firms  are  absorbing  further 
wage  increases  by  reducing  profit  margins 
instead  of  raising  consumer  prices.  Given  the 
importance  of  the  euro  area  as  a  trading 
partner  for  each  Member  States,  as  well 
differences in productivity, it might be sensible 
to  consider  the  euro  area  inflation  rate  and 
target,  rather  than  the  national  inflation  rate, 
when  setting  wage  bargaining.  This  approach 
helps  Member  States  align  their  wage  growth 
with  broader  economic  conditions,  avoid 
inflation 
maintain 
competitiveness. 

divergences, 

and 

this  year,  at  -0.2%,  before  gaining  strength  to  1%  in 
2026, which is above the long-term average. 

13 

8590951001051101151201252019-Q12019-Q22019-Q32019-Q42020-Q12020-Q22020-Q32020-Q42021-Q12021-Q22021-Q32021-Q42022-Q12022-Q22022-Q32022-Q42023-Q12023-Q22023-Q32023-Q42024-Q12024-Q2Index2019Q1 = 100Nominal wageReal wage (HICP defl.)Price index (HICP)Real productivity-4-3-2-1012345672019-Q12019-Q22019-Q32019-Q42020-Q12020-Q22020-Q32020-Q42021-Q12021-Q22021-Q32021-Q42022-Q12022-Q22022-Q32022-Q42023-Q12023-Q22023-Q32023-Q42024-Q12024-Q2%Unit profitsUnit labour costsUnit taxesGDP deflator 
  
 
  
strong  increases  in  statutory  minimum  wages 
(whose  updates  were  broadly  in  line  with 
inflation) and a mild rebound for higher wages 
in  the  second  half  of  2023  (11).  However,  it 
remains  higher  than  the  low  reached  in 2019 
(20.7%). The share of Roma at risk of poverty 
remains  significantly  high  (80%)  (European 
Union Agency for Fundamental Rights, 2023). 

Graph 2.18: Real GDHI (% change on previous 
year), and contribution of GDHI components 
(pp), 2021-2023 

lowest  income  households  reporting  financial 
distress ranged from 11.8% in Latvia to 35.6% 
in France on average in May-July 2024, with a 
share between 20% and 30% in 11 countries 
and  above  30%  in  three  countries.  Compared 
to  the  same  period  in  the  previous  year,  this 
share  increased  in  10  countries  of  the  euro 
area.  Financial  distress  remains  also  high  for 
lower  middle-income  households,  with  17.9% 
of  households  in  the  second  income  quartile 
reporting financial distress in July 2024. 

(1) Nominal GDHI converted into real GDHI by deflating it 
with the price index of household final consumption 
expenditure [prc_hicp_aind]. 
Source: Own calculations based on Eurostat 

Financial  distress  of  workers  remains 
high  after  increasing  during  the  energy 
crisis,  for  both  the  lowest  and  the  lower 
the 
middle-income  households.  Against 
background  of  higher  price  levels  and  higher 
financing  costs,  lowest-income  households  in 
the  EU  report  elevated  levels  of  financial 
distress, corresponding to 27.6% in July 2024, 
around  10 pps  or  more  above  other  income 
groups  (12).  At  the  country  level,  the  share  of 

(11)  Between  January  2022  and  January  2024,  statutory 
minimum  wages  increased  by  more  than  7 %  in 
nominal terms in all Member States where such wages 
are  in  place  and  by  more  than  20 %  in  most  of  these 
countries. See European Commission (2024i). 

(12)  The percentage captures the share of the people in that 
income  group  declaring  to  have  experienced  financial 
distress,  composed  by  the  two  sub-indicators:  adults 
reporting  having  to  draw  on  savings  and/or  run  into 
debt. 

14 

-4-3-2-1012345% change on previous yearEA20Net property incomeCompensation of employeesCompensation of self-employedNet other current transfersNet social benefitsTaxes on income, wealth (negative) 
  
 
 
 
 
 
 
 
 
 
(Continued on the next page) 

15 

Box 2.2: Selected macroeconomic and social aspects of housing affordabilityHousing occupies a fundamental position in the modern societies and economies. This is illustrated by the dominating size of housing-related expenses in households’ spending, the importance of housing in total assets of an economy, and in social and political relevance of the housing market. For many people, rental costs are the largest item in their monthly spending, and the purchase of a house if very often the largest purchase in their entire life, and therefore house mortgages account for most of household indebtedness. As housing costs have continued to outpace income growth, concerns about affordability have grown, with implications for economic stability, social cohesion, and the families’ well-being. Housing affordability refers to the costs of both buying accommodation or of renting. Many factors have been driving housing market trends. These include demographic developments (including total population, structure of families, and urbanisation), but also monetary policy, national and regional rules governing land use, urban planning and building regulations, public infrastructure, rental regulations including on the legal protection of tenants and landowners, rental subsidies and the availability of social housing. In some countries, higher transaction costs (taxes owed when buying and selling property and notarial fees) may have also contributed to high prices. Access to safe and affordable housing is a fundamental human need, essential for individual dignity, health, and well-being. It is also critical for social cohesion, enabling people to build communities and participate in society. Unaffordable or unavailable housing can lead to social exclusion, poverty, and aggravates the consequences of income inequality in particular among younger households, undermining the community fabric. House prices and some housing-related regulations, for example on mortgages regulation(1) may also be a blockage for regional (and even intra EU) mobility with damaging implication for economic dynamism and social progress.(2) Addressing housing affordability, therefore, requires several policies and tools, and policies with adverse effects need to be avoided. Housing is directly interconnected with the macroeconomy of the euro area, influencing and being influenced by the economic landscape. The residential construction and housing market sectors are pivotal, influencing employment, business cycles, and overall economic activity (3). Housing accounts for a sizeable share of output in the euro area. In the first quarter of 2024, housing construction contributed approximately to 6% of GDP, and investment in dwellings accounted for roughly 28% of gross fixed capital formation. Due to this, fluctuations in housing activities, house prices and rentals have substantial effects on the business cycle and GDP, and ultimately on wellbeing. Also, housing market cycles impact fiscal health, influencing tax revenues and social expenditure. In other words, policies that support the stability of the housing market also provide a contribution to economic resilience. Graph 1: Changes in real house prices (2000-23)  Graph 2: Number of houses completed by thousand persons per year    Source: European Commission. Source: European Commission.  Monetary policy is in part transmitted through housing-related lending, with policy rates steering mortgage costs and consequently housing demand and supply. The very low interest rates, which were common a few years ago constituted an important driver of the increase in asset prices in general, including of housing.  The higher interest rate environment since 2022 is estimated to have contributed to lower demand and more generally led to a healthy  (1) Borrower-based measures implemented in many countries often have flexibility embedded (e.g. different type for different type of borrowers and or flexibility for banks to lend above the established limits) which are geared towards minimizing their negative impact on housing affordability.  (2) House owners are usually more mobile than those that level in rented accomodation. (3) See also Valderrama L. et Al. (2023) and OECD (2021). 0510152025PTLVITESSIIEHRDESKNLLTEEELBELUFRCYFIATEU27EARange 1995-2023Average 2010 to 2023Average 1995 to 2009 
 
 
 
      
 
Box (continued) 

(Continued on the next page) 

16 

moderation of asset and house prices between 2022 and 2024. It is, however, still early to pinpoint how the new cycle of interest rates, since mid-2024 will impact the housing market, all the more as many other factors are at play.  Housing affordability in many euro area Member States has deteriorated over the last decade or so, with the situation worsening post-pandemic. House prices were increasing steadily between 2013 and 2022 but with significant differentiation across Member States. At the aggregate level (Graph 1), real house price growth (defined as housing prices deflated by consumption expenditure deflator) gradually built up to attain a cumulative increase of some 27% between 2013 and 2022. However, there is a large heterogeneity across Member States with a very large increase in real house prices in Ireland (an increase of 81% between 2013 and 2022), Luxembourg (77%) and Portugal (75%), and more moderate increases in other countries and even some declines in Italy (-13%) and Finland (-3%). The supply of housing has been insufficient over the past decade in several Member States. Housing availability has had a slow and often inadequate response to demand changes due to the process of planning and building being time-consuming and subject to important regulator barriers and capacity constraints. This stickiness in supply leads to price pressures to accumulate, whenever there are increases in demand as regional economies and populations grow. Moreover, rising construction and refurbishment costs, partly driven by stricter sustainability requirements and by limited supply of building materials and construction have further reduced housing affordability in many Member States. In most Member States, the relatively low returns from renting and regulatory uncertainty have not provided sufficient incentive to invest in build-to-rent projects, exacerbating the supply shortage. As shown in Graph 2, the number of houses completed (by thousand persons per year) between 2010 and 2023 in the euro area is at the bottom of the range of the longer 1995-2023 period, and well below the average of the 1995-2010 period. While these results are also an illustration of the boom in construction in the first years of the century, they suggest that the volume of construction in recent years has been insufficient. Given this shortage, many policy interventions may have unintended consequences if the underlying supply issues are left unaddressed. For instance, rental subsidisation, while intended to support low-income households, may add to demand and ultimately increase prices – this transferring resources to the asset owners - if there is not at the same time some policy effort to increase supply. In some countries, rental regulation may have reduced the incentive to build-to-rent and therefore reducing the size of the rental market, further limiting options for those seeking affordable housing.  In recent years, higher interest rates resulted in lower borrower capacity of households. This may have contributed to raise entry barriers to the housing market, which persist still in mid-2024 despite some stabilisation in house prices. House prices started to moderate in 2022 and 2023, on the back of the tightening of monetary policy. However, price-to-income ratios (4) for the euro area as a while (Graph 3) in the second quarter of 2024 are still about 5 percentage points. above the level a decade ago (after some decline since 2022), although with very large divergences between Member States, and within these among regions and cities. As a result, for most households the cost of a standard house or apartment far exceeds a decade's worth of the average annual income (Frayne et. Al, 2022). Furthermore, among lower-income, and younger, groups (Kouvavas and Rusinova, 2024), a substantial proportion of households have housing-related costs (5) taking up more than 40% of household disposable income. Distortive tax policies – for example favourable tax treatment of mortgage costs -- that support housing demand rather than promoting supply can also be negative for housing affordability.  Housing shortages can also harm longer term growth and competitiveness. Beyond the more immediate social implications, housing availability and affordability issues could discourage labor and residential mobility making it more difficult to overcome interregional inequalities, improve job matching and thereby lift aggregate productivity and social mobility. It also raises the cost of land and labour and hence also the cost of premises and infrastructure for businesses and governments. The consequence is a mismatch in labor allocation and investment opportunities foregone that stymie economic vitality in burgeoning regions, affecting not only national economies but also the euro area and the Union through diminished overall growth and productivity and impaired international competitiveness (IMF, 2024). Housing market is shaped by national and regional land-use policies and regulations. National governments usually handle social housing strategies, rental regulations, and tax treatment of mortgages, while regional and local authorities control land use, zoning, and building permits and licensing, which impact urban development. The primary responsibility for housing policies, including investing in social housing, ultimately remains with the Member States, which have adopted diverse approaches to meet their specific needs and preferences. However, the EU can offer  (4) Price to income is the price divided by gross disposable household income. (5) Housing-related costs include utilities, home maintenance, and rent or mortgage costs.  Graph 3: Price to income ratio   Note: data cover euro area countries Source: European Commission  
 
 
      
 
Box (continued) 

17 

funding and support EU-derived regulation (and the way it is implemented in Member States) has an indirect impact on how complex, costly or time-consuming it is to deliver housing provision. Policies supporting both private and social housing supply are needed. Investment in social housing, including new construction maintenance and refurbishment, could be part of the mix. Supply of social housing in particular has been very muted in most Member States in the last decade. Investments in social housing initiatives can alleviate overall supply constraints while enhancing affordability, particularly for low-income and younger families. These programs typically offer rental units at regulated prices or sell properties below market rates under specific conditions. Unlike housing allowances which may promote demand and therefore risk becoming counterproductive and costly for the public purse, construction of social housing expands supply. Policies aimed at reducing urban congestion can also play a role in alleviating pressure on the housing market. By incentivizing firms to relocate staff or moving services away from congested areas, these policies can redistribute housing demand and alleviate supply constraints, ultimately making it easier for policies supporting housing supply, such as social housing initiatives, to have a more significant impact. At the European level, a supportive environment can be built via complementary funding mechanisms and strategic initiatives to promote affordable housing. The European Commission, recognizing the importance of affordable housing for social cohesion and economic stability, is introducing a European Affordable Housing Plan, making this a key priority in the next term (6). Current efforts, requiring Member States' support, leverage funds (European Commission, 2024n) like the European Regional Development Fund (ERDF), European Social Fund Plus (ESF+), and InvestEU, as well as EUR 15 billion from the Recovery and Resilience Facility (RRF) for affordable housing and social infrastructure. By promoting deeper financial integration and attracting private investment, the EU enhances financing conditions, including for housing. Private financing will remain dominant in real estate investment, therefore integrated capital markets can help to attract private investment into long-term housing projects, increasing liquidity and diversifying funding, particularly in underserved sectors like social housing (7). Banking Union reduces risks across the banking sector and better integrates financial institutions, enabling them to offer new and affordable mortgages. Future Union initiatives on banking and capital markets, under the Savings and Investments Union, will contribute to improving housing finance and boost economic growth, providing a strong foundation for the targeted policies that will be essential in tackling housing affordability.  (6) Under this plan, Member States will be allowed to double cohesion policy investments in affordable housing as an immediate first step. See political guielines for the next European Commission (Von der Leyen, 2024). (7) Fransen et Al. (2018) identified a minimum annual investment gap of EUR 57 billion.  
 
      
 
 
3. COMPETITIVENESS 

Competitiveness is about the ability of an 
economy  to  grow  sustainably  without 
generating external imbalances.  There are 
different  notions  of  competitiveness  some  of 
which  capture 
to  ensure  a 
the  ability 
prosperous  life  to  citizens  over  the  longer 
term. The European social economy model has 
contributed  to  high  and  converging  level  of 
income  (see  resilience  section).  It  combines 
market  competition  and  strong  institutions  to 
allocate  resources,  ensure  economic  stability 
and redistribute incomes.  

pensions  may  help  to  mitigate  the  negative 
effects  of  demographic  change,  suggesting 
that  a  broader  perspective  on  prosperity  is 
needed  to  fully  assess  the  relative  GDP 
performance of the euro area (Terzi, 2021). 

Graph 3.1: Level of GDP and GDP per capita in 
the euro area and United States (1999-2025) 

structural 

Japan  among 

Long-standing 
challenges 
impact  the  euro  area  competitiveness. 
Economic  growth  in  the  euro  area  has  been 
sluggish  since  the  turn  of  the  century, 
outpacing  only 
the  G7 
economies but lagging significantly behind the 
US.  Based  on  current  trends,  by  2025,  euro 
area  GDP  may  have  cumulatively  grown 
around 30 percentage points less than the US 
since 2000. Part of the difference is related to 
different demographic trends, which therefore 
need  to  be  filtered  out  when  discussing 
prosperity. Since 2000, the US population grew 
by  19  per  cent,  while  the  population  in  the 
twenty  Member  States  that  are  now  the  euro 
area grew by much less (9 per cent) However, 
also in per capita terms (Graph 3.1), the euro 
area has been growing less than the US (13). At 
the same time, some welfare indicators favour 
the  euro  area  especially  in  the  context  of  an 
ageing  society  (14).  For  example,  the  euro 
area's  stronger  social  safety  net  and  higher 
level  of  public  spending  on  healthcare  and 

(13)  Furthermore,  population  growth  in  the  US  is  stronger 
than in the EU, where it is expected to turn negative in 
the  decades  to  come.  This  contrasts  to  the  projections 
for  the  US,  where  the  population  is  projected  to 
increase further.  

(14)  In  2023  the  life  expectancy  for  a  newborn  American 
was 79, three years shorter than the average in western 
Europe,  according  to UN  projections.  That  startling  gap 
was virtually nonexistent in 1980. 

18 

Source: European Commission, AMECO 

Productivity 

Productivity  is  the  essential  determinant 
of  competitiveness.  It  enables  firms  to 
produce  efficiently  goods  and  services.  By 
investing in technology, processes, and human 
capital,  firms  can  boost  productivity  and 
thereby 
and 
productivity  drive  economic  growth  and 
prosperity  through  investment,  job  creation, 
and expansion. Ultimately, economic prospects 
depend  on  productivity  trends,  driving  long-
term economic growth and Europe’s prosperity.  

competitiveness. 

Progress 

green 

supports 
The 
productivity  and  competitiveness.  In  the 
medium  term,  because  renewable  energy 

transition 

1001101201301401501601701801901999200220052008201120142017202020232026Index 1999=100US GDP PCUS GDPEA GDP PCEA GDP 
 
 
  
2021). 

(Eurostat, 

to  provide 
sources  are  widely  expected 
cheaper  electricity  compared  tofossil  fuels, 
they  too  will  boost  competitiveness  in  Europe 
(Stern and Stiglitz, 2023). As a matter of fact, 
data from the International Renewable Energy 
Agency shows that in 2023 solar photovoltaic 
and onshore wind are already cost-competitive 
vis-à-vis  the  cheapest  fossil  fuel  alternative, 
including  for  euro  area  countries  such  as 
France,  Germany  and  Italy  (IRENA,  2024). 
Based  on  current  trends,  this  is  likely  to 
become soon the case also for offshore wind. 
The  World  Bank  estimates  that  almost  all 
investments  in  more  resilient  infrastructure 
have  a  benefit-cost  ratio  higher  than  one 
(World  Bank,  2019).  The  economic  value 
provided by a wider set of ecosystem services 
in  the  EU28  amounted  to  EUR  234  billion  in 
2019 
Nature-based 
solutions,  such  as  protecting  and  restoring 
wetlands,  peatlands  and  coastal  and  marine 
ecosystems,  are  a  cost-effective  solution  for 
improving 
reducing 
greenhouse  gas  emission  and  adapting  to 
important  for 
climate  change.  Water 
Europe’s 
that  a 
competitiveness,  given 
climate-resilient  and  secure  supply  of  clean 
water  is  needed  by  all  economic  sectors, 
notably  agriculture,  energy  and 
industry. 
Stricter  standards  for  air,  water  and  soil 
pollution  decrease  health  costs  and  reduce 
damage  to  crops  and  buildings  (European 
Commission, 
Commission’s 
analysis supporting a new 2040 climate target 
(European  Commission,  2024q)  shows  that  a 
more circular economy can reduce investment 
needs in the energy system by about 7% over 
the  2031-2050  period,  cut  spending  on 
transport  by  some  9%  and  reduce  GHG 
emissions by around 25%, thus bolstering the 
Union’s  strategic  independence  and  economic 
resilience. 

the  water 

2022). 

cycle, 

The 

is 

Like  other  advanced  economies,  the  euro 
area  has  experienced  a  slowdown  in 
productivity  since 
the  early  2000s. 
Looking  at  total  factor  productivity  (TFP),  one 
metric of productivity that removes the impact 
of  labour  and  capital  on  output,  the  euro 
area’s  TFP  growth  rate  was  0.7%  annually 
between 2002 – 2007. But 20 years later (i.e. 
between  2019  and  2024),  it  is  growing  at  an 
annual  rate  of  only  around  0.4%.  Moreover, 
the  euro  area  averages  hide  a  substantial 

19 

heterogeneity  across  euro  area  Member 
States.  The  Commission  services’  analysis,  as 
well other international organisations including 
the IMF and OECD, expect productivity growth 
to  rebound  over  the  next  few  years  on  the 
back of a recovery in output and high level of 
employment.  This  assumption  is  consistent 
with 
the  post-pandemic 
weakness  in  productivity  growth  might  be 
largely temporary. 

the  view 

that 

in 

and 

labour-hoarding 

The decline in productivity growth can be 
attributed to both cyclical and structural 
factors.  Cyclical  factors  include  the  post-
financial  crisis  slowdown  in  global  trade  and 
investment 
during 
economic uncertainty. The COVID-19 pandemic 
has  also  disrupted  supply  chains  and  reduced 
investment 
productivity-enhancing 
technologies.  On  the  structural  side,  rapid 
ageing  is  expected  to  divert  public  resources 
away  from  growth-enhancing 
investments, 
reduce the  workforce,  and  hamper  innovation, 
while geopolitical tensions, trade wars, and the 
loss of competitiveness in manufacturing (e.g. 
in  the  automotive 
  energy 
intensive industries, such as manufacturing of 
fabricated  metals  and  manufacturing  of 
chemical  products)  have  also 
reduced 
productivity-enhancing 
in 
investment 
technologies, 
the 
further 
productivity  trend  (Bergeaut,  2024  and  ECB, 
2021). 

industry  and 

exacerbating 

The productivity slowdown has been more 
pronounced  in  the  euro  area  than  in  the 
US  (Graph  3.2).  This  has  resulted  in  an 
increasing  productivity  gap  between  the  two 
economies. (15) The euro area’s aggregate TFP 
growth  gap  reflects  differences  in  industry 
composition. The TFP growth advantage of the 
US is linked to larger shares in value added of 
sectors  generating  large  productivity  gains 
(e.g.  ICT).  The  innovation  landscape  further 
illustrates  this  divide,  with  Europe  trailing 
behind  in  key  areas  such  as  AI,  big  data,  and 
cloud  computing,  which  is  also  repeated  in  a 
noticeable deficit in high-value startups known 
as “unicorns”. 

(15)  Moreover,  the  euro  area  averages  hide  a  substantial 

heterogeneity across euro area Member States. 

 
 
Graph 3.2: Potential output growth 
decomposition in the euro area and the 
United States (2000-2024) 

Graph 3.3: Business registrations and 
bankruptcies in the euro area 

Source: Eurostat 

In 

resources  by 

(Lalinsky  et  al.,  2024). 

The  decline  in  productivity  growth  in  the 
euro area seems largely unrelated to the 
COVID-19  support  measures.  While  some 
argue  that  widespread  public  support  policies 
in  the  pandemic  times  could  have  led  to 
misallocation  of 
keeping 
unproductive  firms  alive  (Bundesbank,  2024), 
evidence  suggests  that  these  measures  did 
not  disproportionately  benefit  less  productive 
fact, 
firms 
bankruptcies have risen above trend since late 
2022,  indicating  a  correction  in  the  economy. 
Also,  new 
remained 
firm  entries  have 
consistent  with  pre-pandemic  levels  (Graph 
3.3),  suggesting  no  negative  reallocation 
effect  (Lalinsky  et  al.,  2024).  However,  in 
contrast  to  the  euro  area,  the  US  has 
experienced  a  surge  in  business  applications 
since the pandemic. New business applications 
dropped initially at the onset of COVID-19, but 
then surged to all-time highs in the summer of 
2020 and have remained elevated  ever since, 
albeit  with  some  cooling  in  recent  months 
(Decker and Haltiwanger, 2024). This suggests 
that the US has seen a significant increase in 
could 
activity, 
entrepreneurial 
potentially  contribute  to  stronger  productivity 
growth in the future.  

which 

Source: Eurostat 

TFP and innovation  

For  an  advanced  economy,  innovation  is 
essential  for  growth.  This  is  a  feature  of 
Europe and all economies at the technological 
frontier.  Furthermore,  TFP  growth  is  the  only 
way of sustainably increasing living standards 
in  the  long  term  -  capital  accumulation  has 
diminishing  returns,  making  it  a  limited  driver 
of  long-term  economic  growth  and  increased 
living  standards.  At  the  same  time,  working 
age population is expected to shrink over time. 
The  importance  of  research  and innovation  to 
long  been 
Europe’s  growth  model  has 
recognised, 
the  Lisbon 
exemplified  by 
Strategy,  which  set  the  objective  of  reaching 
3%  of  GDP  in  R&D  spending.  While  spending 
on  R&D  has  shown  a  slight  upward  trend,  to 
this date, the 3% goal  has not been achieved 
in  the  euro  area,  hovering  at  around  2.3%  of 
GDP (Graph 3.4). 

20 

0.00.51.01.52.02.5USEA20%LabourTFPCapital accumulationPotential output growth50607080901001101201301402017-Q12017-Q32018-Q12018-Q32019-Q12019-Q32020-Q12020-Q32021-Q12021-Q32022-Q12022-Q32023-Q12023-Q3Index 2015Q1=100BankruptcyRegistrationsAverage 15-19Average 15-19 
   
  
Graph 3.4: R&D expenditure in the euro area, 
and selected global partners 

remains  relatively  weak  in  other  strategic 
areas,  such  as  biotechnology,  which  have  a 
major  enabling  and  transformative  nature  for 
agriculture,  environment,  healthcare, 
life 
science,  food  chains  or  biomanufacturing 
(European Commission, 2024m).  

Graph 3.5: World share of green patents by 
region 

Source: OECD, Eurostat 

Productivity  heterogeneity  has  been 
persistent  within  the  euro  area.  In  2022, 
most of the euro area’s R&D was performed in 
Germany (40%), France (19%)  and Italy (8%). 
These three countries are responsible for close 
to  67%  of  R&D  expenditure  in  the  euro  area. 
Three  euro  area  countries  are  spending  at 
least  3%  of  GDP  on  R&D:  Germany,  Austria 
and  Belgium.  The  2024  European  Innovation 
Scoreboard  underscores  this  heterogeneity 
between  innovation  leaders  such  as  Finland 
and the Netherlands, and less-well performing 
euro  area  countries,  such  as  Croatia  and 
Slovakia (European Commission, 2024a). 

The  euro  area's  global  position 
in 
innovation  might  be  at  risk.  It  lags  in 
critical areas (Draghi, 2024). In 2000, the euro 
area accounted for around 25% of the world’s 
green  patent  applications,  while  its  share  had 
declined to around 15% in 2021 (Graph 3.5). 
Meanwhile,  China’s  share  has 
increased 
significantly  to  25%,  up  from  5%  in  2010. 
Euro area countries retain strength in some of 
the  advanced  manufacturing  segments  and 
itself  above  the  US. 
robotics,  positioning 
However,  they  perform  the  lowest  in  micro- 
and nano-electronics and photonics, as well as 
AI.  At  the  same  time,  the  euro  area  keeps 
leading  in  global  high-value  patent  filings 
related  to  the  green  transition,  notably  in 
renewables  and  energy  efficiency.  Its  position 

21 

(1) Patent Cooperation Treaty (PCT) patent applications. 
Fractional counting method, inventor's country of 
residence and priority date used. 
Source: DG Research and Innovation, Common R&I 
Strategy and Foresight Service, Chief Economist Unit, 
based on data from the OECD 

the 

Europe continues to lag behind in applied 
research  and 
in  the  translation  to 
marketable  products.  The  EU  has  a  solid 
research base and is ranked second globally in 
terms  of  scientific  output.  China  is  the  global 
leader,  not  only  in  terms  of  volume  of 
scientific  publications  but  also  in  terms  of 
top  10%  of  most  cited 
share  of 
publications. Recently, its share of the top 1% 
of most cited publications overtook that of the 
US.  Europe  has  comparable  levels  of  public 
spending  on  R&D  vis-à-vis  its  competitors.  In 
2022,  the  R&D  intensity  of  the  euro  area  in 
the  public  sector,  gathering  government  and 
higher  education,  was  higher  than  that  of 
(European 
Japan, 
Commission, 
this 
investment  is  largely  uncoordinated  across 

the  US  and  China 
2024m). 

However, 

1.52.02.53.03.54.04.55.05.5201420152016201720182019202020212022% of GDPEA20UKUSJPKOCH29%35%1%13%22%24%23%5%26%21%18%16%25%15%25%0 %5 %10 %15 %20 %25 %30 %35 %40 %Euro AreaUSChinaJapanRest ofthe World200020102020 
  
   
Member  States  (16)and  seems  insufficient  to 
bridge  the  overall  gap  in  R&D  investment  in 
comparison 
countries.  Overall 
spending is lower because private sector R&D 
in  Europe  is  low,  especially  in  comparison  to 
the US.  

these 

to 

this 
(European  Commission,  2024m).  All 
suggests that fostering innovation will require 
measures  that  go  beyond  a  narrow  focus  on 
research spending and include policies such as 
Capital  Markets  Union  to  allow  start-ups  to 
access the necessary funds.  

The  gap  with  the  US  in  R&D  come  from 
private rather than public investment. The 
euro area spent 0.8% of its GDP in public R&D 
the  US,  but  firms 
in  2021,  similar 
underinvested 
Business 
expenditure on R&D in the EU, at 1.2% of GDP 
in 2021, represents about half that of the US 
(2.3% of GDP) in the same year.  

to 
(Graph 

3.6). 

Graph 3.6: Gross domestic expenditure on R&D 
(GERD) - government and non-government 

(1) No data for China available for 2021 
Source: DG Research and Innovation Chief Economist, 
R&I Strategy and Foresight Service, Chief Economist Unit, 
based on Eurostat data (online data code: rd_e_gerdtot) 

The EU keeps lagging in terms of unicorn 
firms  (17),  suggesting  R&D  spending  is 
failing to fully translate  into  marketable 
products.  As  of  May  2024,  the  number  of 
unicorn  companies  in  the  US  (741)  and  China 
(336) exceeds by far that in the euro area (79) 

is 

(16)  Draghi (2024) highlights that public R&D investment in 
Europe 
the  Framework 
Programme represents only about 0.05% of GDP, while 
in  the  United  States,  the  Federal  Government  R&D 
budget represents 0.65% of GDP. 

coordinated 

through 

(17)  A unicorn is a privately held company with a valuation 

of more than USD 1 billion. 

of 

helps 

limited 

diffusion 

explaining 

in  general 

digital 
The 
the 
innovations 
productivity  slowdown.  Several 
factors 
specific  to  digital  technologies  may  limit  the 
diffusion  of  innovation.  First,  the  adoption  of 
requires 
ICT  and  high-tech 
substantial  complementary  investments  and 
reorganisation to adjust the business model of 
the firm. Second, it also needs skills that are in 
high  demand  but  short  supply  to  make 
appropriate use of complex innovations. Third, 
data capital  – the fuel  of the digital economy 
– 
easily 
transmissible  than  other  forms  of  intangible 
capital)  and  often  available  only  to  a  few  big 
players,  which  are  the  ones  benefiting  from 
associated dynamic scale economies in ‘winner 
takes  all’  markets.  Moreover,  market  leaders 
have  an  incentive  to  reduce  the  adoption 
capacity of rival firms and exercise this e.g. by 
strategically  acquiring  critical  patents  and 
promising startups.  

proprietary 

(hence 

less 

is 

Graph 3.7: Defence expenditure as a share of 
GDP, 2024 (expected) 

(1) Only euro area NATO member states are featured (in 
blue). US and UK for comparison (in orange). 
Source: NATO 

Military 
spending,  when 
adequately  underpinned  by  defence  R&D 

investment 

22 

0100200300400500600700USEACNJPKRUSEACNJPKRUSEACNJPKRUSEACNJPKRUSEACNJPKR20172018201920202021EUR billionNon-governmentGovernment01234EstoniaLatviaGreeceLithuaniaFinlandSwedenGermanyFranceNetherlandsSlovak RepublicCroatiaPortugalItalyBelgiumLuxembourgSloveniaSpainUnited KingdomUnited States% of GDP 
  
 
   
and 

to  various 

innovation 

can help advance technologies that drive 
broader 
growth. 
Investments  in  defence  could  have  important 
technological  spillovers 
fields 
(Moretti  et.  al.,  2023).  Several  technological 
innovations were initially pioneered for military 
use and found their way to civil use, including 
the  internet,  GPS,  voice  recognition,  or  the 
In  nominal  terms,  euro  area 
microwave. 
countries combined are the largest spender on 
defence  in  the  world  after  the  US  and  China 
(Graph  3.7).  However,  defence  investments 
are  focused  on  the  acquisition  of  defence 
equipment 
(European 
Commission,  2024m).  The  recent  European 
Defence  Fund  aims  to  increase  the  attention 
on R&D. 

than  R&D 

rather 

Graph 3.8: Private R&D investment by region 
and sector type, 2022 

(1) Due to the scope of the scoreboard, the Euro Area 
data represents 13 Member States. No data was 
available for Croatia, Cyprus, Estonia, Greece, Latvia, 
Lithuania and Slovakia. 
Source: DG Research and Innovation, Common R&I 
Strategy and Foresight Service, Chief Economist Unit, 
based on data from the 2023 EU Industrial R&D 
Investment Scoreboard. Adaptation of Figure 2.1-0 in 
SRIP (2024) 

The R&D gap with respect to competitors 
also  originates  from  structural  factors. 
Using  data  from  Eurostat,  Fuest  et  al.  (2024) 
show that the main difference between the US 
and  Europe  is  in  fact  that  US  private  R&D 
investments  are  concentrated  in  sectors  that 
are usually referred to as “high tech” such as 
software, computers and biotechnologies. Most 
notably,  within  the  US,  investment  in  R&D  in 

high-tech sectors such as health, ICT hardware 
and  ICT  services  account  for  approximately 
85%  of  all  US  private  R&D 
investment 
(European  Commission,  2024m).  European 
firms invest proportionally more in sectors that 
are  defined  as  “middle  tech”  such  as 
automobile, 
transportation 
chemical  and 
(Graph  3.8).  The  main  reason  for  US  private 
R&D  being  twice  that  of  Europe  is  the  much 
higher weight of high-tech industries in the US. 
Looking  at  AI, 
in  private 
investment  is  immediately  apparent,  with  the 
investing  67  billion  dollars,  whereas 
US 
Germany and France each invested less than 2 
billion,  and  Europe  as  a  whole  (including  the 
UK) invested 11 billion (Bergeaud, 2024). 

the  disparity 

for 

skilled 

labour 

Cumbersome 

Excessive  red  tape  stifles  European 
firms’  growth  and  hinders  Single  Market 
administrative 
potential. 
procedures,  including  for  public  procurement, 
and  taxation  issues  are  among  the  biggest 
barriers for businesses (Graph 3.9), alongside 
(European 
shortages  of 
Investment  Bank,  2024).  Overregulation  and 
excessive administrative requirements (Draghi, 
2024) hinder European firms' competitiveness, 
digital 
particularly 
limited  by  often 
companies,  which  are 
restrictive 
inconsistent, 
regulations.  In 
the 
is  often 
phenomenon  of 
observed,  in  which  the  EU  Member  States 
issue  additional  regulatory  requirements  on 
top of the ones envisaged by the EU directives 
tendency  multiplies 
(Letta,  2024).  This 
administrative  burden  the  companies  need  to 
face and often contribute to fragmentation of 
the  Single  Market  and  emergence  of  uneven 
playing fields in the EU economies. 

EU 
“gold  plating” 

overlapping 
the 

innovative 

context, 

and 

and 

Trade 
fragmentation  poses  growing 
challenges  to  euro  area  companies.  The 
euro  area's  openness  to  trade  has  driven 
growth,  with  net trade  contributing  0.2  p.p.  to 
GDP  growth  over  1999-2023  (relative  to  an 
annual  GDP  growth  of  1.3%).  However,  global 
trade  fragmentation  is  rising,  with  a  sharp 
increase  in  non-tariff  trade  restrictions  since 
2020  (see  Box  3.1)  and  decoupling  between 
the  US  and  China  in  key  sectors.  Trade 
remedies  (antidumping,  countervailing  duties 
implemented  by  the  EU 
and  safeguards) 

23 

0%20%40%60%80%100%Euro AreaUSChinaJapanRoWHigh-tech industriesMid-tech industriesLow-tech industries 
   
contributing 

against  China  or  tied  to  China  more  than 
doubled  between  1995  and  2019  (Bown, 
2024), 
this 
fragmentation.  This  is  expected  to  lead  to 
(18),  costing 
trade  growth 
slower  world 
companies  and  consumers  through  relocation 
of activities. 

as  well 

to 

Graph 3.9: Barriers to investment 

Source: European Investment Bank 

Physical capital  

The  euro  area  needs  substantially  more 
investment.  In  terms  of  capital  stock  and 
investment  capacity,  the  euro  area  is  lagging 
with respect to the US, which has seen a much 
faster rise in capital  intensity per worker over 
the  past  25  years  especially  since  the  global 
financial  crisis.  (Graph  3.10).  Covering  this 
difference  requires  access  to  large  financing 
sources (see section on funding).  

Investment will be particularly important 
to  support 
the  green  and  digital 
transition.  Achieving  Europe’s  climate  goals, 
including reaching net zero emissions by 2050, 
will  require  significant  investments  both  at 
public  and  private  level.  A  failure  to  boost 

(18)  The IMF projects world trade to grow at 3.2% over the 
medium  term,  a  pace  well  below  its  annual  average 
from 2000-19 of 4.9%.  

therefore 

jeopardise 
investment  would 
Europe’s  legislated  target  to  become  the  first 
climate-neutral  continent,  while  also  reducing 
the  changes  of  seizing  on 
the  growth 
opportunities associated with being a leader in 
green  technologies.  Equally,  achieving  the 
Digital  Decade  targets  and  objectives  will 
require  significant  investments  on  public  and 
digital 
private 
transformation 
Europe’s 
competitiveness and resilience. 

Boosting 
crucial 

the 
for 

level. 

is 

investments 

rebounded  after 

Supporting  investments  must  be  at  the 
core  of  the  EU’s  growth  strategy,  since 
private  investments  have  been  too  slow. 
Private 
the 
COVID-19  pandemic,  but  they  have  slowed  in 
2023  due  to  tighter  financial  conditions  and 
increased 
new 
geopolitical  tensions  (see  also  Graph  1.6  in 
resilience  section).  These  factors  continue  to 
weigh on firms’ confidence.  

uncertainty 

following 

Graph 3.10: Capital intensity in the euro area 
and the US 

(1) Net capital stock at 2015 prices per person employed, 
total economy 
Source: European Commission 

Human capital and skills 

Education  and  skills  development  are 
vital  for  innovation,  productivity  and 
competitiveness.  As  economies  are  facing 
pressures  of 
technological  change, 
investing in human capital has become crucial. 

rapid 

24 

0%10%20%30%40%50%60%70%Availability of staffwith the right skillsEnergy costsUncertainty aboutthe futureBusiness regulationsand taxationLabour marketregulationsDemand for productor serviceAvailability of adequatetransport infrastructureAvailability of financeAccess to digitalinfrastructureShare of firms 2023 Major obstacle2022 Major obstacle2023 Minor obstacle2022 Minor obstacle1001101201301401501601701996199920022005200820112014201720202023Index1996=100USEA20 
  
 
  
labour  market 

Educational attainment of young people in the 
euro area is improving  — with 42% of 25- to 
34-year-olds  holding  a  tertiary  degree  in 
2022,  approaching  the  51%  seen  in  the  US, 
relevance  of  higher 
but 
education  needs  to  be  improved.  In  particular 
the  number  of  graduates  from  STEM  fields 
falls  short  of  demand  in  many  countries.  At 
the  same  time,  performance  among  younger 
students is declining. For instance, the average 
PISA  score 
in  reading,  mathematics,  and 
science  for  15-year-olds  fell  by  10  points 
since  2018  and  18  points  over  the  past 
decade 
(Graph  3.11).  Although  similar 
downward  trends  were  observed  in  other 
industrialised  nations,  with  a  9-point  drop 
since 2018 and a 19-point decline since 2012 
across OECD countries, the euro area lags the 
US,  UK,  Canada,  and  Japan.  In  2022,  the  last 
year for which data is available, the euro area 
had  the  highest  proportion  of  low-achieving 
students and one of the lowest proportions of 
top  performers,  with  the  COVID-19  pandemic 
potentially exacerbating this decline. 

Graph 3.11: PISA scores in Europe 

Source: OECD 

The dual transition towards digitalisation 
and  greening  also  requires  developing  a 
new  set  of  basic  and  advanced  digital 
technological 
fast  pace  of 
skills.  The 
innovation  demands  a  swift  evolution  in  the 
workforce's skill set, with emerging job roles in 
areas like cloud computing and data analytics. 
However,  this  shift  poses  challenges  for 
groups  with  limited  digital  skills  that  are 
underrepresented in tech fields. As pointed out 
in the State of the Digital Decade report 2024 
44%  of  adults  in  the  EU  lack  of  basic  digital 
skills.  Moreover,  the  shortage  of  people  with 
advanced  digital  skills  and  ICT  specialists is  a 

25 

significant  factor  hindering  the  development 
and deployment of digital technologies across 
the economy (European Commission, 2024r). 

industries  move 

toward  more 
As 
sustainable  practices,  the  importance  of 
green  skills  is  also  on  the  rise.  Climate 
change  is  set  to  cause  substantial  changes in 
in  carbon-
job  patterns,  with  positions 
dependent  sectors  likely  to  decline  and  new 
opportunities  in  green 
industries  to  grow 
(Graph  3.12).  The  transition  to  a  low-carbon 
is  expected  to  generate  a  net 
economy 
increase  in  employment.  For  the  EU,  the 
impact assessment of the ‘Fit for 55’ initiative 
projects  an  aggregate  employment  growth  of 
somewhere  between  -0.3%  and  0.5%  by 
2030,  based  on  simulations  with  different 
macro-economic  modelling  tools.  A  recent 
additional 
study 
employment  growth  by  2030  may  be 
associated  with  the  implementation  of  the 
European  Green  Deal  (CEDEFOP,  2021).  New 
in  green 
occupations  are 
industries  and  technologies,  including  energy, 
agriculture,  manufacturing, 
and 
environmental services. 

likely  to  arise 

that  1.2% 

estimates 

R&D, 

Graph 3.12: Importance of different skills for 
SMEs in the EU 

Source: Draghi Report 

Energy prices and cost 
competitiveness  

High  energy  prices  in  Europe  hinder  the 
competitiveness  of  European 
firms 
especially energy-intensive ones. This was 
already  the  case  before  the  2022  energy 
crisis, suggesting high energy costs have been 
to  Europe’s 
a 

long-standing 

impediment 

 
  
  
for 

especially 

competitiveness. The situation was aggravated 
by  the  crisis,  putting  the  EU  at  a  greater 
disadvantage for what concerns price and cost 
competitiveness, 
energy-
intensive industries. Most notably the share of 
firms  identifying  energy  costs  as  a  major  or 
minor  obstacle  to  investment  remains  high  in 
the  EU  (while  declining  in  the  US  in  2023). 
Energy  prices  decreased  significantly  in  2023 
and  2024,  but  they  remain  high  compared  to 
before 
(Graph  3.13) 
(European  Investment  Bank,  2024).  Moreover, 
European  companies  face  significantly  higher 
energy  prices  than  international  competitors. 
For 
face 
instance,  European  companies 
electricity  prices  that  are  2-3  times  those  in 
the US. Natural  gas prices paid are 4-5 times 
higher.  

the  energy  crisis 

Graph 3.13: Electricity prices in selected euro 
area countries and international peers 

increase 

high inflation, nominal wage increased in some 
euro  area  countries.  However,  strong  wage 
increases,  unmatched  by  an 
in 
productivity,  led  to  a  significant  increase  in 
unit labour cost (ULCs) in 2023  (Graph 3.14) 
most  notably  in  the  Baltic  countries  and 
Slovakia, where the surge was sharp compared 
to pre-pandemic levels. Recent ULCs increases 
are  mainly  a  result  of  wage  adjustments 
aimed  at  compensating  for  the 
in 
purchasing power from the previous two years 
and are likely to promote the domestic market. 
Indeed, unit profits started to slow as of early 
2024, a sign that wage and cost increases are 
cushioned by the sizeable accumulated profits 
from  2022  and  2023 
(see  section  on 
resilience). In 2025 and 2026, ULCs are overall 
expected to slow down following wage growth 
moderation  and  expected 
in 
productivity. 

increases 

loss 

Graph 3.14: Decomposition of the change in 
unit labour costs (ULC) 

(1) NP stands for wholesale electricity prices of the Nord 
pool market (NO, DK, FI, SE, EE, LT, LV); (2) EPB5 stands 
for European Power Benchmark. It represents the 
weighted average of wholesale electricity prices of main 
EU electricity markets (DE, ES, FR, NL) and Nord pool 
market (NO, DK, FI, SE, EE, LT, LV); (3) USA is the 
arithmetic average of the day ahead prices of the 
following most representative US power Hubs: PJM 
Western, NYISO Hudson Valley, MISO Indiana, ISONE 
Internal , ERCOT North , CAISO SP15; (4) Average first 
half of 2024. 
Source: S&P Global Platts, Japan Electric Power 
Exchange (JEPX), Indian Energy Exchange Limited IEX 
India 

Source: European Commission, AMECO 

to  world 

The  euro’s  real  effective  exchange  rates 
trading 
(REERs)  compared 
partners  appreciated  in  2023-24.  The 
2022  energy  crisis  induced  a  large  terms  of 
trade shock for a net energy importer like  the 
euro  area,  which,  according  to  Eurostat, 
imported  62.5  per  cent  of  its  total  energy 
consumption in 2022. As a result of the more 
pervasive  role  of  the  energy  price  shock  for 
the  euro  area  than  for  its  competitors,  as  of 
Q3  2024,  the  HICP-based  REER  (19)  has 

Rising nominal wages in 2023 contributed 
to a recovery in purchasing power and an 
increase in unit labour costs. In the face of 

(19)  The  real  effective  exchange  rate  (REER)  aims  at 
assessing  a  country  (or  currency  area's)  price  or  cost 
competitiveness  relative  to  its  trading  partners.  The 

26 

0 €/MWh20 €/MWh40 €/MWh60 €/MWh80 €/MWh100 €/MWh120 €/MWh140 €/MWhITUKDEAUNLJPINEPB5 (2)NONP (1)FRESUS (3)Avg 2017-2120232024 (1)-6%-4%-2%0%2%4%6%8%10%09101112131415161718192021222324*25*26*nominal CoE per hourlabour (hours worked)TFP contributionnominal ULC growthRate of change y-o-y 
  
   
 
 
cumulatively appreciated by more than 3.6 pps 
compared  to  Q3  2022  (Graph  3.15).  In  turn, 
the  ULC-based  REER  has  appreciated  at  a 
slower  pace,  and  it  is  broadly  unchanged 
compared  to  Q1  2019,  as  the  temporary  real 
wage  compression  in  the  post  COVID  period 
mitigated the impact of the energy shock.  

Graph 3.15: Euro area real effective exchange 
rate (REER), Q1 2019 = 100 

(1) REER refers to the real effective exchange rate of the 
euro against the currencies of 37 of the euro area's most 
important trading partners. A positive (negative) change 
corresponds to an appreciation (depreciation) of the euro. 
Source: Eurostat 

COMPETITIVENESS AVENUES 

Strengthening  competitiveness  on  a 
sustainable  basis 
requires  boosting 
productivity.  This  involves  the  deepening  of 
capital,  the  effective  use  of  labour,  and  the 
acceleration  of  innovation  and  its  diffusion. 
Deepening  capital  can  be  achieved  through 
investment  in  infrastructure  and  cutting-edge 
digital  technologies,  fostered  by  strategic 

HICP-based  REER  is  calculated  from  deflating  the 
nominal  effective  exchange  rate  (NEER)  by  consumer 
price  harmonised  index  deflator.  By  an  analogy,  The 
ULC-based REER derives from using the unit labour cost 
deflators.  The  NEER  It  is  calculated  as  a  weighted 
geometric  average  of  the  bilateral  exchange  rates 
against the currencies of a panel of the most important 
trading partners of a country (or currency area). 

27 

funding  and  agile  procurement.. 
growth 
Increasing labour might require a combination 
of extended career lifespan, targeted managed 
legal  migration, 
capital 
and 
development.  Accelerating  innovation  and  its 
through  a 
diffusion 
combination  of  strategies 
from 
increasing  Research  and  Development  (R&D) 
spending to improving digital infrastructure.  

can  be  achieved 

ranging 

human 

Competitiveness  and  productivity  can  be 
revived  along  three  major  avenues: 
knowledge, markets,  and  funding.  Each  of 
these  elements  plays  a  vital  role  in  driving 
innovation,  and  overall 
economic  growth, 
in  enhancing 
development.  A  key  factor 
the 
is 
competitiveness  and  productivity 
generation  and  dissemination  of  knowledge. 
Investing  in  research  and  development  (R&D), 
lead  to  the 
education,  and  training  can 
development  of  new  technologies,  products, 
and  services,  as  well  as  improvements  in 
existing  ones.  Second,  competitive  markets 
and 
promote 
productivity  by  encouraging  businesses  to 
continually  improve  their  offerings  to  meet 
evolving consumer demands. Competition also 
drives  firms  to  adopt  best  practices  and  new 
technologies, leading to increased productivity. 
Third,  access  to  funding 
is  crucial  for 
businesses  to  invest  in  R&D,  expand  their 
operations, and hire skilled workers.  

innovation, 

efficiency, 

Knowledge   

The  green  and  digital  transition  hold 
potential  of  reviving  TFP  and  potential 
output  growth.  Green  technologies,  such  as 
renewables, hold the potential to lower energy 
costs  for  the  euro  area,  boosting  overall 
Indeed, 
competitiveness  and  productivity. 
technologies  such  as  solar  photovoltaic  and 
onshore wind are already capable of producing 
electricity  at  competitive  costs  vis-à-vis 
fuel  alternatives.  Digital 
available 
technologies, 
including  AI  and  Big  Data 
applications,  are  widely  expected  to  allow 
production 
efficiency 
processes  once  they  get  fully  rolled  out 
(Acemoglu, 2024). 

improvements 

fossil 

in 

96981001021041061081101121142019-Q12019-Q32020-Q12020-Q32021-Q12021-Q32022-Q12022-Q32023-Q12023-Q32024-Q12024-Q3Index2019Q1=100REER(ULC)REER(HICP)NEER 
  
 
To  bridge  skills  gaps  and  facilitate  a 
smoother transition for workers, targeted 
policy  measures  are  needed.  Governments 
and  educational  institutions,  as  well  as  the 
private  sector,  must  work  together  to  create 
training  programs  that  address  the  shortages 
in  both  digital  and  green  skills.  Expanding 
lifelong learning opportunities, apprenticeships, 
and  vocational  education  will  be  crucial  to 
enabling  workers  to  reskill  and  adapt.  To 
ensure  that  these  initiatives  are  inclusive, 
policies  should  also  aim  to  lower  barriers  for 
disadvantaged  groups  and  promote  gender 
diversity  in  sectors  like  ICT.  In  the  end,  well-
coordinated and timely policy interventions will 
be  key  to  preparing  the  workforce  to  match 
and 
future 
the 
opportunities. 

challenges 

economy's 

are  equipped  to  thrive  in  a  rapidly  changing 
job market. 

fragmentation 

Geopolitical 
could 
negatively  affect  innovation  capacity.  A 
fragmentation  of  the  global  economic  order 
could  disrupt  the  free  flow  of  ideas  and 
therefore  innovation  capacity,  with  negative 
growth  impact  (Aiyar  et  al.,  2023).  Policies 
aimed  at  alleviating  geopolitical  concerns 
should  be  designed 
these 
detrimental effects, or else risk further slowing 
productivity in Europe (Terzi, 2024). The recent 
signing  of  association  agreements  between 
Horizon  Europe  and  third  countries  such  as 
Canada,  the  UK,  and  South  Korea  is  an 
safeguarding 
important 
international research collaborations in a tense 
geopolitical environment. 

to  minimise 

towards 

step 

from 

crucial 

technologies,  with 

impact  on 
the  direct 
Aside 
productivity,  key  enabling  technologies 
are 
to  safeguard  strategic 
autonomy.  This  is  due  for  instance  to  the 
potential  application  of  AI  in  both  civil  and 
military 
significant 
repercussions  on  strategic  autonomy.  As 
the  European  Defence 
acknowledged  by 
cutting-edge 
Agency,  many 
technologies, ranging from AI to biotechnology, 
will define the future of military capabilities in 
an 
tense  geopolitical  world 
(European Defence Agency, 2023).  

increasingly 

these 

of 

Boosting  productivity  will  require  an 
acceleration in innovation. This will require 
positioning  Europe  as  a  global  leader  in 
innovation,  particularly 
research  and 
in 
groundbreaking 
technologies  such  as  AI, 
semiconducors,  quantum  and  biotechnologies, 
and  striving  to  achieve  the  goal  of  dedicating 
3%  of  GDP  to  R&D  by  2030.  However,  the 
adoption  of  new  technologies  needs  to  be 
carefully  managed  to  mitigate  its  potential 
downsides, 
the  exacerbation  of 
inequalities  (Bloom  et  Al.,  2019).  The  rapid 
pace  of  innovation,  driven  in  part  by  the 
adoption of technologies like AI, could lead to 
a  faster  obsolescence  of  certain  professions, 
causing  short-term  job  displacement.  As  we 
consider  the  implications  of  this  accelerated 
the 
innovation, 
development  and  adaptability  of  human 
capital will be crucial in ensuring that workers 

it  becomes 

including 

clear 

that 

Markets 

Firms need reliable framework conditions 
to create jobs, drive growth, and thrive in 
global markets. These conditions need to be 
robust enough to facilitate economies of scale, 
which  allow  businesses  to  reduce  costs  and 
enhance 
expand. 
Simultaneously,  the  environment  must  be 
competitive,  encouraging  innovation  and  the 
development  of  new 
technologies  and 
processes.   

efficiency 

they 

as 

Industrial  policy  tools  can  help  drive 
innovation  aimed  at  promoting  European 
competitiveness This can help to ensure that 
the  euro  area  develops  or  preserves  a 
competitive  edge  in  technologies  considered 
crucial for long-term prosperity, to improve the 
resilience of EU supply chains and to increase 
defence  readiness  and  capabilities.  However, 
it  must  be  aimed  at  fostering 
for  this, 
innovation  and  providing 
the  necessary 
conditions so that European firms can scale up 
and compete on global markets. They must be 
future-oriented,  not  designed 
to  protect 
incumbents  (Terzi  et  al.,  2022).  Crucially, 
industrial  policies  should  be  coordinated  as 
much as possible at European level, to exploit 
possible  cross-border  synergies  and  avoid  a 
fragmentation  of  the  Single  Market.  The  EU 

28 

 
sectors 

has  already  taken  significant  steps  in  this 
direction, including by means of the Important 
Projects of Common European Interest (IPCEI), 
concerning 
like  microelectronics, 
hydrogen,  and  batteries.  Furthermore,  there  is 
a need of ensuring resilient and secure digital 
infrastructures  to  act  against  the  increasing 
sophistication  and  frequency  of  high-risk 
internal  and  external  cybersecurity  threats. 
Unified  action  across  national  borders,  the 
pooling  of 
sharing  of 
intelligence and data and the establishment of 
common  mechanisms  for  incident  response 
are key in this regard. 

resources, 

the 

its  potential  to 

Completing  and  broadening  the  scope  of 
the Single Market is critical to strengthen 
competition and productivity. More than 30 
years  after  the  creation  of  the  Single  Market, 
the EU still needs to take full advantage of its 
(440  million  consumers,  23  million 
size 
companies)  and 
increase 
private  investment  and  innovation.  A  more 
integrated  Single  Market  would  make  the 
capital  market  union  works  better.  By  scaling 
up,  firms  can  take  advantage  of  greater 
market opportunities making investment more 
further  economic 
attractive. 
integration  (including  effective  enforcing  of 
existing  Single  Market  rules),  improving  public 
procurement  practices  (in  particular  opening 
access  to  tenders  and  preventing  single  bid 
tenders)  and  reducing  remaining  barriers  to 
the 'four freedoms' (in particular to the cross-
border provision of services) within the internal 
market  would  lead  to  substantial  efficiency 
and welfare gains (Letta, 2024).  

Intensifying 

Simplifying  reporting  requirements  could 
further  stimulate  a  business-friendly 
on 
environment, 
reducing 
companies, 
The 
especially 
introduce 
Commission  has  committed 
concrete measures, such as reducing reporting 
requirements  by  at  least  25%  by  mid-2025 
and 
and 
its 
competitiveness 
proposals.  

burdens 
SMEs. 
to 

incorporating 

assessments 

red-tape 

into 

Strategic  projects  under  the  Net-Zero 
Industry  Act  and  the  Critical  Raw 
Materials 
from 
accelerated  and  streamlined  permitting 

Act  will 

benefit 

to 

as 

(such 

areas 

in  a 

related 

technologies 

rules  on  permitting 

speed  are  essential 

procedures  while  ensuring  compliance 
with  the  existing  environmental,  social 
and  governance  standards.  Predictability 
and 
facilitate 
investments  in  industrial  projects.  The  Single 
Market  could  also  benefit  from  a  broader 
usage  of  regulatory  sandboxes  for  testing 
innovative 
controlled 
environment  for  a  limited  amount  of  time. 
Special 
to 
geographical 
net-zero 
Acceleration  Valleys  in  the  context  of  the  Net 
Industry  Act)  will  allow  for  faster 
Zero 
deployment  and  dissemination  of  innovation 
and new technologies. In addition, derogations 
or  a  special 
framework  can 
temporary 
facilitate  simplification  of  certification  and 
placement  of  new  products  in  the  Market.  As 
risks  of  geopolitical 
rise, 
deepening  the  Single  Market  would  also 
reinforce  resilience.  Given  the  euro  area’s 
trade  openness  and  its  exposure  to  external 
shocks, the size and diversity of the euro area 
economies  provide  the  scope  and  scale  to 
build European-based supply chains (Gopinath 
2023).   

fragmentation 

link 
Recent  evidence  shows  a  clear 
between  scaling  up  and  productivity 
increases.  Firms  that  scale  up  typically  not 
only become bigger but also more productive, 
allowing  these  firms  to  offer  goods  and 
services  at  lower  prices  or  with  higher  value. 
Accounting  also  for  capital  inputs  confirms 
that scaling-up firms make more efficient use 
of  their  workforce  and  capital  stock  as  they 
grow.  After  scaling  up,  scalers  generate  at 
least  10%  higher  output  than  other  SMEs 
using the same amount of labour and physical 
capita (OECD, 2024). 

grid 

interconnections, 

Sufficient 
in 
particular  cross-border,  are  crucial  for 
connecting  energy  producers  and  users 
across  wide  geographic  areas.  An 
integrated  and  flexible  European  electricity 
market  will  lead  to  lower  and  more  stable 
prices,  attract  private  investment,  reduce  the 
need  for  storage  and  public  subsidies  for 
renewable  energy  production,  and  strengthen 
our  energy  security.  This,  in  turn,  would  lower 
fiscal  pressures  by  reducing  the  need  for 
energy subsidies and support economic growth 

29 

 
lowering  costs 

by 
households.  

for  businesses  and 

the forthcoming Competitiveness Coordination 
Tool  (20) may improve  coordination  across  the 
EU. 

is 

to 

key 

climate 

therefore 

neutrality, 

The  euro  area’s  high  energy  prices  are  a 
challenge  for  competitiveness.  Addressing 
high  energy  prices  requires  joint  focus  on 
competitiveness 
decarbonisation, 
and 
transferring  (or  anticipating  where  possible) 
the benefits of decarbonisation, to the sectors 
exposed  to  international  competition  or  the 
sectors more dependent on energy as an input. 
It 
accelerate 
decarbonisation, leveraging on all technologies 
compatible  with 
in 
particular  renewables,  to  develop  an  overall 
cost-efficient  system,  including  stability  of 
supply  (flexibility  and  storage)  and  adequate 
investments  in  infrastructure.  In  the  short 
term,  policy  efforts  might  require  some  well 
targeted  energy  subsidisation  schemes  and 
in 
other  measures  to  de-risk 
investment 
case 
decarbonisation 
is 
that  some 
reinforced  when  considering 
industries  might 
selected  energy-intensive 
carry 
for  Europe’s  strategic 
implications 
autonomy.  Several  EU  initiatives  and  long-
term  policy  orientations  supports  reinforcing 
the  strategic  autonomy  angle,  form  energy-
oriented projects under the Important Projects 
of  Common  European  Interest  (IPCEIs)  to 
country-specific 
the 
REPpowerEU  chapters  of  the  national  RRPs. 
Broader usage of power purchase agreements 
(PPAs) could also help mitigate the volatility of 
energy  costs, 
investors' 
expectations and reinforcing overall sentiment.  

thus  stabilising 

stipulations 

projects. 

This 

of 

productivity 

in  designing  and 

Addressing 
and 
competitiveness issues sets an important 
role  for  National  Productivity  Boards 
(NPBs) 
(Garcia  et  al,  2024).  NPBs  are 
independent  bodies  that  support  Member 
implementing 
States 
Their 
productivity-enhancing 
effectiveness  depends  on 
legal  provisions 
guaranteeing sufficient financial resources and 
embedding  NPBs  in  domestic  policy  making. 
Further  progress 
in  establishing  the  NPB 
network 
(i.e.,  completion  of  the  network, 
strengthening  NPBs’  functional  autonomy, 
resources  and  participation  in  domestic  policy 
processes)  could  contribute 
to  enhance 
European  economies’  competitiveness.  Also, 

reforms. 

in 

The euro area – and the EU as a whole – 
faces an urgent need to adapt to the new 
geopolitical 
and 
geoeconomic 
environment. 
security 
Economic 
importance, 
considerations  are  growing 
including the necessity to secure access to key 
raw  materials  and  strenghten  strategic  value 
chains. Therefore, the EU will need to carefully 
navigate  its  competitiveness,  security  and 
sustainability  objectives  which  calls  for  a 
coordinated 
policy 
complementarity  at  both  the  Member  State 
and EU levels (see Box 3.1). 

approach 

and 

Funding 

Public  investment  in  the  euro  area  has 
received  a  significant  boost  from  the 
Recovery  and  Resilience  Facility  (RRF), 
REPowerEU,  and  other  Union’s  funds 
(Graph  3.16).  As  of  November  2024,  around 
EUR  230  billion  (over  a  total  Next  Generation 
EU (NGEU) financing power of EUR 723bn) has 
been  disbursed  under  the  RRF  to  euro  area 
Member  States,  supporting  the  green  and 
transitions.  The  new  REPowerEU 
digital 
chapters  of 
the  national  Recovery  and 
Resilience Plans have also provided additional 
financial  support  of  EUR  150  billion  in  grants 
and  EUR  125.5  billion  in  loans  (European 
Commission,  2024j).  aimed  at  mitigating  the 
energy  crisis  and  promoting  the  Green  Deal 
objectives. In addition, over EUR 275 billion of 
cohesion policy funding has been disbursed to 
Member States since the start of the pandemic 
in  March  2020  to  boost  investment  and 
growth. 

(20)  See, “Mission Letter to Stéphane Séjourn” from Ursula 
Von Der Leyen, Presdent of the European Commission 

30 

 
 
Graph 3.16: RRF and other Funds in 2024 and 
public investment in 2024 

Source: European Commission 

reforms 

a  more 

competitive 

RRF-funded 
enhance 
competitiveness  and  deepen  Single 
Market  integration.  The  time-bound  RRF 
business 
fosters, 
environment.  A  significant  number  of  reforms 
and  investments  are  being  deployed  in  the 
Member  States  covering,  among  others, 
digitalisation  and  up-  and  reskilling  of  the 
labour  force.  The  simultaneous  roll-out  of the 
national  RRPs 
to  bring  a 
is  estimated 
considerable  positive  spillover  via  the  Single 
Market,  stimulating  further  growth  (21).  In  the 
political  guidelines  for  the  next  European 
Commission  of  2024-2029  President  Ursula 
von  der  Leyen  has  announced  the  creation  of 
the new European Competitiveness Fund (22). 

Firms in the euro area are mostly reliant 
on  bank  lending  and  much  less  so  on 
capital  markets.  A  large  proportion  of  the 
European  companies  (nearly  50%  of  SMEs) 
use  bank  financing  as  a  relevant  financing 
source  (European  Commission,  2023d).  The 
tightened financing conditions have depressed 
demand for loans by firms, likely adding to the 
recent  slow-down  of  corporate  investment 

(21)  Spillovers can increase the impact of the RRF on added 
value  between  a  quarter  and  a  third  (European 
Commission, 2024o). 

(22)  See 

“Political  Guidelines  for 

the  next  European 

Commission 2024-2029”. 

In 

turn, 

the  high-interest-rate 
dynamics. 
environment  is  set  to  weigh  on  corporate 
investment,  particularly  on  projects  with  a 
long-time  horizon  such  as  research  and 
development (European Commission, 2024h).  

The  euro  area  large  current  account 
surplus  (131.6  billion  or  3.5%  of  GDP  in 
the  second  quarter  of  2024)  indicates 
that  it  has  the  savings  to  fund  the 
investment  gap.  EU  households  saving  rate 
has  been  elevated  (see  also  Graph  1.3  in 
resilience)  and  households  keep  around  one 
third  of  their  savings  in  bank  deposits,  not 
investing those in stocks and bond markets. In 
combination  with  the  Single  Market,  amore 
developed  Capital  Market  Union  may 
encourage  a  better  allocation  of  resources 
from  bank  deposits  to  portfolio  or  direct 
investments.  To  tackle  the  fragmentation  of 
the  European  financial  market,  Letta  (2024) 
proposed a European Savings and Investments 
Union, including banking and capital markets. 

in  Europe's  financing 
to 

Venture  capital  can  play  a  much  larger 
landscape, 
role 
particularly  compared 
the  more 
developed  market  in  the  US.  Enhancing 
Europe’s competitive and innovative capacities, 
as  well  as  pushing  for  further  progress  in 
green  and  digital  transformations  require 
more  diverse  financing.  Innovative  companies 
are  an  important  contributor  to  productivity 
growth  and  job  creation  (IMF,  2024)  and 
require  tailored  types  of  financing,  matching 
specific  phases  of  the  innovation  process. 
Bank  financing,  one  of  the  main  sources  of 
loans for European companies, is typically risk-
too 
averse  and  home-biased, 
expensive  or  not  available  for  start-ups  and 
fast-growing  companies.  Private  equity  and 
venture capital markets are essential elements 
innovative  ecosystem 
for  a 
(European  Investment  Bank,  2024).  Despite 
large  innovation-oriented  investment  needs, 
the 
remains 
underdeveloped  in  the  EU  and  is  significantly 
smaller than in the US (Graph 3.17). 

capital  market 

successful 

therefore 

venture 

The  Capital  Market  Union  can  provide 
better  access  to  financing,  enhancing 
competitiveness. Capital markets in the euro 
area remain fragmented into national markets 

31 

BEDEEEIEELESFRHRITCYLVLTLUMTNLATPTSISKFIEA y = 0.8135x + 3.5475R² = 0.182423456780.00.51.01.52.02.5Public investment in 2024, per cent of GDPRRF and other EU Funds in 2024, per cent of GDP 
   
 
of  the  European  economy.  The  challenge  for 
CMU will therefore be to develop a better and 
more  integrated  financial  ecosystem  and  to 
complete  the  EU  Single  Market  from  services 
to capital markets. 

from 
with  persisting  strong  home  bias 
financing  seekers  and  regulatory  environment 
of  the  national  capital  markets  (European 
Commission,  2023a).  Fragmentation  reduces 
the potential of European capital markets and 
hide  the  full  benefits  from  the  Single  Market. 
As  a  result,  European  companies  bear  higher 
cost  of  financing  at  the  expense  of  higher 
potential  returns  that  could  be  allocated  for 
further productivity enhancement. 

Graph 3.17: Venture capital investments in the 
euro area and other international peers 

Source: OECD and AMECO 

to 

the 

the  Commission 

The Capital Market Union agenda aims to 
respond 
funding  challenges 
inclusing  through  the  creatioon  of  an 
integrated capital market.  As set out most 
recently  by  the  European  Council  in  March 
2024, 
(CMU) 
the  Capital  Market  Union 
initiative aims to “create a truly single market 
for  capital  across  the  EU”.  The  CMU  Action 
Plan,  adopted  by 
in 
September 2020, comprises 16 legislative and 
non-legislative  measures,  envisaging  three 
main objectives: i) to integrate national capital 
markets  into  a  genuine  single  capital  market; 
ii) making  the  EU  a  safer place to invest;  and 
iii)  support  a  green,  inclusive  and  resilient 
economic recovery. Bringing the Capital Market 
Union 
to  an  effective  operation  should 
facilitate  the  access  to  a  well-developed 
capital market responding to specific financing 
needs  of  innovative  companies  and  start-ups 
and to SMEs more generally – as the backbone 

32 

0.00.10.20.30.40.50.60.70.80.91.01.11.220132014201520162017201820192020202120222023% of GDPCAJPKOEA (17 countries)UKUS 
  
33 

Box 3.1: Geo-Economic Fragmentation and Multilateral CooperationGeoeconomic fragmentation has emerged as a significant economic concern. The once very dynamic cross-border trade and foreign direct investment has decelerated since the Global Financial Crisis (Graph 1). This trend towards what has been dubbed slowbalisation has been recently accelerated by geopolitical tensions, increasing protectionism, disruptions caused by the COVID-19 pandemic and Russia's full-scale invasion of Ukraine. Geoeconomic fragmentation signals a potential unravelling of global trade into rival economic blocs, with nations increasingly pursuing trade-inhibiting measures and strategies that foster the reshoring or friend-shoring of value chains. In this context, the risk of geoeconomic fragmentation is of relevance for the euro area, given strong economic interlinkages – in trade, financial flows and investment - between its Member States. Also, the relatively large degree of euro area’s economy openness and its strong integration with the global value chains are likely to imply greater costs from geoeconomic fragmentation (European Commission, 2024f). Policy plays a key role in fragmenting the global economy. Recent years registered a sharp rise in measures harmful to trade and foreign investment. Global Trade Alert data show a continuous increase in the number of measures harmful to trade and investment since 2019, with an all-time peak of over 3,000 new measures announced in the course of 2023. By October 2024, the number of new harmful measures during the year reached nearly 2,300  (Graph 2). This policy-driven push back against globalisation has come along with a weakening of key multilateral institutions, notably the World Trade Organisation (WTO) (Dadush, 2022). Graph 1: Global trade openness (per cent of GDP) Graph 2: Measures harmful to trade and investment (October 2024)     Note: Global trade openness is calculated as the sum of global exports and imports divided by world GDP. Source: World Development Indicators Source: Global Trade Alert.  The rise in harmful policy measures has been concentrated in some of the largest bilateral trade and investment relationships, in particular those of China with the US. Thus, bilateral trade data available confirms that harmful trade measures are triggering a reorientation in trade flows, with Chinese trade partially pivoting away from the US and towards emerging economies. In this process, the EU maintains a relatively stable share in Chinese trade, particularly as an export market (1). Amid calls for more economic resilience, the EU’s Economic Security Strategy of June 2023 aims to maximise the benefits of trade openness while minimizing risks in the areas raising specific economic security concerns. The EU’s economic resilience will be further strengthened by implementing structural reforms and increasing public and private investment. Strengthening the rules-based multilateral system of cooperation remains a policy priority for the EU. A reformed and strengthened WTO and international coordination remain the best guardrail against global trade fragmentation. The EU also strives to ensure a well-resourced and efficient global financial safety net with the IMF at its centre. Finally, there is a need to maintain an open and frank dialogue with all trade partners and step-up cooperation with both like-minded and less like-minded countries to deliver on global public goods in areas of common interest, such as climate change, global health, global debt vulnerabilities, or peace and security.  (1) According to Comtrade data, the EU’s share in China’s export basket increased from 13% to 14.2% in the 2015-22 interval. In the same period, the EU share in Chinese imports decreased from 11.3% to 9.5%.  
 
 
  
 
 
4. MACRO-ECONOMIC AND FINANCIAL STABILITY 

The euro area has successfully contained 
incurring  major 
inflation  without 
economic costs. Recent resilience in the face 
of  major  shocks  has  come  at  the  cost  of 
increasing debt levels and large deficits. Fiscal 
consolidation  is  needed  to  restore  long-term 
sustainability,  but  it  cannot  come  at  the 
investments. 
expense  of  necessary  public 
Policymakers  face 
task  of 
reducing  deficits  while  reshaping  expenditure 
to meet growing demands for key areas, such 
as security, defence, and the green and digital 
transitions  key  areas  for  safeguarding  future 
competitiveness.  Success  in  this  effort  will 
require monetary and fiscal  policy to go hand 
in hand to ensure macroeconomic stability and 
future-proofing the long-term growth potential 
of the euro area. 

the  complex 

the  debt-to-GDP 

such as the United States, the United Kingdom 
and  Japan  (Graph  4.1)  (23).  After  peaking  in 
2020, 
ratio  has  been 
declining, reaching 88.9% in 2023. However, a 
reduction  in  the  debt  ratio  is  not  expected  to 
continue in the coming years unless there is an 
improvement  in  the  primary  balance.  Indeed, 
the  debt-to-GDP  ratio  is  projected  to  increase 
slightly  in  2024-2026,  up  to  90%  in  2026. 
This  is  driven  by  a  shrinking  interest-growth 
rate  differential,  as  debt  servicing  costs  are 
set  to  rise  slightly  while  nominal  GDP  growth 
is  expected  to  slow  down  due  to  falling 
inflation  -  while  primary  deficits  continue  to 
weigh on debt dynamics.  

Graph 4.1: Developments in government debt 
in the euro area and outher countries 

FISCAL POLICY 

the  years  ahead.  Despite 

The  high  debt  levels  in  many  euro  area 
countries  call  for  prudent  fiscal  policies 
in 
recent 
improvements,  the  euro  area's  fiscal  position 
remains  markedly  deteriorated  compared  to 
pre-pandemic  levels.  The  deficit  for  the  euro 
area  as  a  whole  increased  from  an  almost 
balanced budget in 2019 to a deficit of around 
7% of GDP in 2020. The sound deficit position 
at end-2019 was one of the main reasons why 
the  euro  area  was  more  resilient  in  the  last 
number of years than it had been at the time 
of  the  great  financial  crisis.  The  support  of 
new EU instruments and the swift activation of 
the general escape clause of the Stability and 
Growth  Pact  were  also  essential  for  a  strong 
recovery.  The  aggregate  general  government 
gross  debt  of  the  euro  area  increased  from 
85.4% of GDP in 2019 to the historically high 
level  of  98.5%  of  GDP  in  2020  altought  it 
remains  lower  than  in  other  peer  countries 

Source: AMECO 

Member  States  with  greater 
fiscal 
sustainability  risk  face  the  challenge  to 
put  public  debt  ratios  on  a  credible 
declining path. There are stark differences in 

(23)  The  euro  area  aggregate  data  for  general  government 
debt are non-consolidated, as they are not adjusted for 
intergovernmental loans, including those made through 
the European Financial Stability Facility. 

34 

0306090120150180210240270200020012002200320042005200620072008200920102011201220132014201520162017201820192020202120222023202420252026% of GDPEA20UKUSJPforecastShaded grey lines correspondto individual euro area Member States 
 
  
 
public  debt  ratios  across  Member  States.  By 
the end of 2026 (Graph 4.2), eleven Member 
States are set to have debt ratios greater than 
60%  of  GDP,  and  in  five  of  them  (Belgium, 
Greece,  Spain,  France  and  Italy)  the  debt-to-
GDP  ratio  is  expected  to  remain  greater  than 
100% of GDP. This growing divergence in debt 
burdens  complicates  the  prospects  for  fiscal 
stability,  as  heavily  indebted  countries  will 
face  stricter  constraints  on  their  fiscal  policy, 
limiting their capacity to address future shocks 
or  invest  in  critical  priorities.  In  addition,  the 
disparity  in  debt  levels  risks  undermining 
cohesion  within the euro area  and  could  pose 
a  challenge  to  its  long-term  stability.  At  the 
same  time,  enhancing  sustainable  growth  by 
incentivising reforms and investments will also 
contribute to fiscal sustainability. 

Graph 4.2: Public debt-to-GDP ratio 

Source: AMECO 

to 

aims 

ensure 

revised 

supporting 

investments 

Economic  Governance 
The 
Framework 
debt 
sustainability on a country-specific basis, 
while 
and 
reforms.  Given  the  high  debt  and  deficit 
levels  and  the  expected  increase  in  some 
categories of public expenditure in the coming 
years,  there  is  a  need  to  tackle  sustainability 
challenges in several countries. Sustained and 
gradual  fiscal  adjustments  in  line  with  the 
Economic  Governance 
recently 
to  ensure  debt 
Framework  are  needed 
sustainability  and  to  rebuild  fiscal  buffers  in 
the medium term.  

revised 

35 

than 

The  use  of  net  expenditure  as  single 
operational  indicator  will  enhance  the 
role of automatic stabilisers.  The indicator 
of  net  expenditure  is  less  polluted  by  the 
the  structural 
windfall  or  shortfall 
balance  and  thus  more  demanding  in  good 
times  and  less  in  bad  time.  This  stronger 
countercyclical  property  will  mitigate 
the 
impact of fiscal policy on the economic activity 
in  highly  indebted  euro  area  Member  States 
for  which  the  discretionary  fiscal  policy  will 
need to be overall restrictive over the next few 
years. This would have a stabilising impact for 
the euro area as a whole.  

large 

The euro area fiscal stance is expected to 
turn contractionary in 2024 as monetary 
policy  eases  and  domestic  demand  is 
projected  to  recover  (Graph  4.3).  The 
contraction  of  ½%  of  GDP,  projected  in  the 
Commission’s  autumn  forecast,  follows  four 
years  of 
crisis-related  expansion, 
totalling  around  3½%  of  GDP.  In  terms  of 
composition,  the  contraction  is  driven  by  the 
phase-out of large subsidies to support private 
investment  (especially  housing  renovations  in 
Italy)  and  somewhat 
lower  expenditure 
financed  by  the  EU  budget  (also  due  to  the 
end of MFF 2014-2020 spending). Net current 
expenditure  has  been  overall  neutral  despite 
the  phase-out  of  measures  to  mitigate  the 
impact of high energy prices (by 0.8% of GDP).  
Importantly,  public  investment  financed  by 
national  budgets  continues  to  provide  an 
expansionary contribution. 

to 

result 

The  new  EU  fiscal  rules  applied  to 
individual  EU  Member  States  are 
into  a  slightly 
expected 
contractionary  euro  area  fiscal  stance  in 
2025. The euro area fiscal stance is projected 
to  be  slightly  contractionary  in  2025  (by  just 
above  ¼%  of  GDP).  In  terms  of  composition, 
net  current  expenditure  is  contractionary  due 
to  consolidation  policies  in  some  Member 
States  (0.4%  of  GDP),  which  are  largely 
consistent  with  the  new  EU  fiscal  framework 
(Graph  4.3). 
in  net 
expenditure is for ¾ explained by discretionary 
revenue  measures.  Importantly,  some  further 
expansion  is  projected  in  investment  financed 
by  national  budgets  and 
(high-quality) 
expenditure financed by RRF grants  and other 

contraction 

The 

050100150200250ELITPTESFRCYBEHRATSIFIDESKIENLMTLTLVLUEEEA20% of GDP202020242026 
  
EU  funds  (Cepparulo  et  al.  2024).  Moreover, 
taking  a 
longer  perspective,  this  gradual 
contractionary stance in 2024-25 occurs after 
a  large  expansion  between  2020-23  (Graph 
4.3). 

The  slightly  contractionary  stance  for 
2025 can be considered appropriate. Such 
a stance would be consistent with the need to 
improve  public  debt 
sustainability  and 
reassure market scrutiny. The anchoring of the 
public  finance  in  sustainable  net  expenditure 
path  would  limit  the  uncertainty  and  the  risk 
of  future  brisk  fiscal  adjustments  in  case  of 
erosion  of  lenders’  confidence.  Moreover,  the 
support from the RRF will be phased out after 
2026,  so  delaying  the  adjustment  where  it  is 
needed  does  not  appear  to  be  desirable. 
Importantly,  the  stance  will  also  support 
monetary  policy  in  the  fight  against  inflation 
at  the  time  when  the  output  gap  is  projected 
to gradually close.  

Graph 4.3: Euro area fiscan stance and 
components (% of GDP) 

In  a 

conditions 

in  which 

(Graph  4.4). 

The 
cyclical 
revenue-toGDP  ratio  is  projected  to  increase 
slightly  in  2024,  as  energy  support  measures 
are  phased  out  and  tax  revenue  and  social 
contributions benefited from the strong labour 
market  performance,  implying  some  revenue 
windfall. 
the 
context 
sustainability  of  public  finance  needs  to  be 
improved  and  investment  encouraged,  some 
important  trade-offs  in  tax  policy  need  to  be 
considered  given  the  role  of  taxation  to 
support  a  competitive  economy.  There  is  a 
tax 
to  properly  assess  existing 
need 
expenditures to ensure their cost-effectiveness 
and 
room  for  any 
government  support  to  the  digital  and  green 
transition  (European  Commission,  2024d).  In 
addition,  the  tax  wedge  (i.e.  the  share  of 
labour  costs  caused  by  taxes  and  social 
contributions)  is  relatively  high  in  the  euro 
the  OECD  average. 
area  compared 
Therefore, a shift towards less distortive taxes 
like environmental and property taxation could 
be  beneficial,  especially  in  the  context  of 
labour shortages. 

to  potentially  make 

to 

Graph 4.4: Revenue and expenditure 
developments in the euro area 

(1) The fiscal stance is measured by Commission 
services as the net expenditure developments relative to 
medium-term potential output growth 
Source: European Commission 

The composition of the public finances is 
important  to  minimise  the  negative 
impacts  of  the  fiscal  adjustment  (Box 
4.1).  Revenue  as  a  share  of  GDP  in  the  euro 
area  has  been  relatively  stable,  while  the 
increased 
public  expenditure-to-GDP 
during  the  global  financial  crisis  and  the 
COVID-19  pandemic  also  due  to  negative 

ratio 

Source: AMECO 

Expenditure-to-GDP  ratio  has  declined  in 
the  last  four  years,  but  it  remains  well 
above its long-term average. The complete 
phase-out  of  pandemic-related  and  energy 
support measures is expected to maintain the 
expenditure  ratio  on  a  downward  path  until 
2024,  when  it  stabilises  at  49.5%  of  GDP, 
above  its  long-term  average  level.  According 

36 

-4.0-3.5-3.0-2.5-2.0-1.5-1.0-0.50.00.51.02020-202320242025%Expenditure financed by RRF grants and EU fundsOther capital expenditureNationally financed  primary current expenditureNationally financed investmentFiscal stanceContractionary/ ConsolidationExpansionary/Relaxation404244464850525456200020052010201520202025% GDPRevenueExpenditureAvg expenditure 00-19Avg revenue 00-19 
  
      
on 

payments 

to  the  Commission  2024  Autumn  forecast,  in 
2024  the  projected  decrease  in  subsidies  and 
capital  transfers  will  be  partially  offset  by 
spending 
and 
social 
compensation  of  employees  (Graph  4.5). 
Interest expenditure as a share of GDP is also 
set  to  continue  increasing  despite  the  recent 
easing  of  monetary  policy.  Contrary  to  the 
period  after  the  2010  sovereign  debt  crisis, 
the adjustment has not been driven by cuts in 
nationally  financed  public  investment,  which 
has been preserved, while the RRF continues to 
support  overall  investment  and  other  growth 
enhancing 
forward, 
expenditure  pressures  are  mounting,  namely 
due  to  ageing,  investment  needs  for  the  twin 
transition  and  competitiveness,  as  well  as 
defence  given 
increased  geopolitical 
tensions.  Moreover,  climate-related  events 
also constitute a risk to public finance through 
revenue  and  expenditure  channels  (European 
Commission, 2024k).  

spending. 

Looking 

the 

Graph 4.5: Change in euro area revenue and 
expenditure components (2020-24) 

Source: AMECO 

the 

Ensuring  long-term  sustainability  of  the 
pension,  healthcare  and  long-term  care 
systems  is  key  to  strengthening  public 
finances.  According  to  the  Commission’s 
2024  Ageing  Report  (European  Commission, 
2024b), 
cost  of  age-related 
including  pensions,  education, 
expenditure, 
health  care  and  long-term  care  is  set  to 
increase in the euro area by 1.4 pps. over the 
projection period (from around 25% of GDP in 
2022  to  27%  of  GDP  in  2070).  Most  of  this 
increase  is  expected  by  the  mid-point  of  the 
projections  in  2045,  with  age--related  costs 

total 

continuing  to  rise  slightly  on  average  in  the 
euro area thereafter. Both the time profile and 
the  projected  change 
in  spending  vary 
considerably across Member States. Looking at 
the  different  components,  spending  on  health 
and  long-term  care  rises  across  the  board 
largely 
after  COVID-related  spending 
discontinued. 
pension 
expenditure  in  most  countries  that  drives  the 
overall  change  in  ageing  costs  by  2070 
(Graph 4.6).  

However, 

is 

is 

it 

Graph 4.6: Main drivers of the change in cost 
of ageing in the long run 

(1) Changes in 2022-2070 
Source: 2024 Ageing Report 

Monetary policy  

The  ECB  tightened  its  monetary  policy  in 
response  to  a  significant  and  rapid 
inflation.  Like  many  other 
increase  in 
central  banks  in  other  jurisdictions  (Graph 
4.7),  the  ECB  began  a  rapid  tightening  cycle, 
raising  interest  rates  between  July  2022  and 
September  2023,  with  a  cumulative  increase 
of  450  basis  points.  This  was  done  to  return 
inflation  to  the  two  per  cent  medium-term 
target  in  a  timely  manner  and  keep  inflation 
expectations close to the inflation aim. 

37 

-2.0-1.00.01.02.03.0InterestSubsidiesOther capital expenditureOther current expenditureGross fixed capital formationIntermediate consumptionCompensation of employeesSocial paymentsCapital taxesOther revenueIndirect taxesDirect taxesSocial contributions20202021202220232024*Expenditure                                 Revenue-4-2024681012LUMTSKSIBEESIELTCYNLFIATDEEEHRPTFRLVITELEAbasis pointsPensionsHealth careLong term careEducationTotal cost of ageing 
   
  
 
(Continued on the next page) 

38 

Box 4.1: Designing Fiscal Adjustment StrategiesOver the next years, several Member States will have to implement sizable fiscal adjustments. This results from the high government deficits and public debt which followed the successful policies adopted in recent years to support economic activity, jobs and income in response to large macroeconomic shocks. After several years of fiscal expansion, policymakers are called to turn to fiscal consolidation strategies to strengthen fiscal sustainability and rebuild fiscal buffers. The recent reform in economic governance (which applies to all EU Member States) is supportive of medium-term fiscal adjustment strategies that are tailored to the specific needs of each economy. Moreover, it promotes structural reforms and investments which help modernising the economies, increase the resilience and potential growth of the economy, and ensure fiscal sustainability. Designing effective consolidation strategies is a complex task, requiring careful consideration of a range of factors. This box examines aspects to consider when preparing medium-term fiscal adjustment strategies, drawing on evidence from the economic literature, and focuses on elements for which there is broad consensus. It summarizes the main findings on the dimensions to consider including the socio-economic context, size and pace of the fiscal adjustment, instrument choice, and the complementary role of structural reforms.  The socio-economic context in which a country implements fiscal strategies can have a significant impact on the outcomes. This includes the country’s position in the economic cycle (Corsetti et al., 2012 and Batini et. al., 2014), as well as the social and political environment. Fiscal adjustments correlate with higher social instability and can entail electoral costs (1). In addition, the existence of well-functioning fiscal institutions increases the likelihood of success of the adjustment, via increased transparency, credibility and accountability (Debrun and Kumar, 2007). Considering the country's specific circumstances when designing consolidation plans can help minimize the detrimental effects on economic growth and equity.  The careful design of the consolidation path, in particular the size and pace of consolidation, is key to minimize the negative impact on the economy. Fiscal adjustments have a lower negative impact on economic growth during normal or good economic times, whereas pursuing consolidation during times of crisis risks exacerbating its impact on economic growth (Auerbach and Gorodnichenko, 2012). The literature suggests that a gradual pace of adjustment may be necessary to avoid significant output and employment losses, particularly in the face of escalating government deficits and debt (Belasundharam et al., 2023). In addition, simultaneous consolidation across countries during the EU sovereign debt crisis has contributed to sharper recession due to negative cross-country spillovers (Terzi, 2020). The new EU macroeconomic governance has duly considered those lessons from the past, notably allowing for a gradual adjustment spanning over four to seven years. There is evidence that some instruments have a more adverse growth effect than others. The composition of the adjustment is another element to consider when selecting the most appropriate instruments. Studies have identified that successful adjustment strategies focus on reducing current expenditure while preserving investment (Alesina and Ardagna, 2013). If a considerable adjustment is needed, successful strategies rely on a mix of both expenditure and revenue measures (Molnar, 2012). Spending and tax system reviews underpinned by a medium-term perspective can also mitigate the impact on growth. Carefully designing well-thought fiscal adjustment strategies that give due consideration to policy objectives, choosing the most appropriate instruments and country-specific circumstances, will improve the efficiency and effectiveness of public spending and tax systems. On the expenditure side, spending reviews are in-depth assessments that have proven to be a useful and flexible tool for the identification of saving opportunities (Doherty and Sayegh, 2022). Revenue measures would benefit from being based on a review of the tax system, to avoid inefficiency and undermine distributional objectives. Measures such as strengthening the role of tax authorities and exchanging information across countries contribute to fighting tax evasion and avoidance. In addition, reviewing, for instance, tax exemptions, deductions, credits and other tax benefits, helps to identify redundancies, ineffectiveness, or distortive effects (Turrini et al., 2024).   (1) Ponticelli and Voth (2020) found a positive correlation between consolidation and instability and Alesina et al. (2021) also shows that the electoral cost of consolidation is higher if introduced in crisis times.  
 
 
 
   
 
Box (continued) 

and 

further 

The  ECB  also  continued  to  unwind  the  Asset 
Purchase  Programme  (APP)  and  Pandemic 
Emergency  Purchase  Programme 
(PEPP) 
portfolios, 
reduced 
it 
reinvestments  of  principal  payments  from 
In  addition,  the  ECB 
maturing  securities. 
introduced 
Protection 
Instrument  (TPI)  in  July  2022  to  support  the 
effective  transmission  of  monetary  policy  in 
event  of  unwarranted,  disorderly  market 
dynamics and ensure that the monetary policy 
stance is transmitted smoothly across all euro 
area countries.  

Transmission 

the 

The  ECB  has  recently  started  to  reduce 
the  level  of  monetary  policy  restriction. 
With headline inflation falling to more normal 
levels  in  the  euro  area  in  recent  months,  the 
ECB  decided  to  cut  its  main  policy  rate  by 
25bps in June, September, and October 2024. 
As  a  result,  the  interest  rate  on  the  deposit 
facility  decreased  from  4.0%  in  September 
2023 to 3.25% in October 2024. Real interest 
rates remain in the positive territory but, more 
recently, they have started decreasing towards 
zero.  

39 

Graph 4.7: Central banks' key policy rates in 
the euro area and selected countries 

Source: Bank for International Settlements 

European 

Commission’s 

Financial  conditions  remain  tight  but 
there  are  signs  of  easing.  Financial 
conditions  previously  tightened  significantly 
following  the  ECB’s  rate  hikes,  as  reflected  in 
the 
composite 
financing cost indicators for both non-financial 
corporations  (NFCs)  and  households,  which 
combine interest  rates  on  all lending  to  these 
sectors  (Graph  4.8).  While  borrowing  costs 
remained  elevated  at  the  end  of  2023,  some 
easing  has  been  observed  recently.  The  ECB’s 
decision  to  cut  policy  rate  suggests  that 

-2-101234567819992000200120022003200420052006200720082009201020112012201320142015201620172018201920202021202220232024%EACACNNOCHUKUSThe literature suggests that structural reforms play an important role in complementing fiscal policy. They may mitigate the negative effects of consolidation on growth and equity (Cournede et al., 2014). For example, reforms that strengthen the institutional setting, improve tax and social security systems, and support the labour market. Main findings from the literature  Investment should be preservedFor instance, reduction of the public wage bill and social transfers seems to be less detrimental than in education and healthSpending reviewsTwin transitionFairnessInvestment, productivity and competitiveness Re-evaluate tax expenditureReduce tax burden on labourUse less distortive taxes like the property taxReview of tax systemEnsuring principles of simplicity, efficiency, stability and fairness (e.g. fight aggressive tax planning, tax evasion and avoidance)Interaction with monetary policy should be consideredLarge adjustments require a combination of instruments: expenditure and revenue measures, complemented by structural reformsStructural reformsContextDesignCompositionReduction in current expenditure preferable to capital expenditureProviding the right incentives in line with policy prioritiesMoving towards less distortive taxationExpenditureRevenueFiscal multipliers are higher in crises Electoral costs and political feasibilitySocial instabilitySize and speed of adjustment depend on economic situation and cyclical position: adjust in normal/good timesSimultaneous consolidation should be avoided: priority to those with more sustainability challenges 
   
 
   
 
 
financial  conditions  may  continue  to  ease  in 
the  months  ahead,  slightly  improving  credit 
access for corporations and households. 

Financial stability 

Graph 4.8: Cost of borrowing indicators 

(1) Cost of borrowing for NFCs and households are 
measured by the the European Commission's Composit 
Credit Cost Indicator (CCCI) and Composite Financing 
Cost Indicator (CFCI) respectively. 
Source: European Commission 

In  the  euro  area,  most  sovereign  bond 
spreads  remained  stable  or  declined.  In 
euro  area  countries  with  public  debt  above 
100%  of  GDP  (Graph  4.9),  spreads  versus 
German  bonds  are  either  relatively  stable  or 
decreasing (Greece, Italy, Spain). However, the 
French  sovereign  bond  spreads  widened  amid 
political and fiscal development. 

in 

recent 

strong 

The  euro  area  banking  sector  has 
years, 
remained 
underpinned  by  strong  capital  positions. 
The  aggregate  Common  Equity  Tier  1  ratio 
stood  at  15.9%  at  the  end  of  the  year,  well 
above  minimum  and 
combined  buffer 
requirements (Graph 4.10). The ratio of non-
performing  loans  (NPLs)  remains  close  to 
historical lows in aggregate although there are 
some  mild  signs  of  deterioration.  Banks' 
profitability  peaked  in  2023,  with  Return  on 
Equity  around  10%  level  over  2023  and 
loan-loss 
remains  stable 
provisions 
(Graph  4.10)..  Loan  growth 
appears  subdued  due  to  the  high  cost  of 
borrowing, weak loan demand, and tight credit 
standards. (ECB, 2024a). 

in  2024,  higher 

effective 

The  EU  prudential  framework  for  banks 
has  significantly  improved  the  resilience 
of  the  financial  system.  The  2023  banking 
turmoil,  european  banks  have  been  supported 
by 
a 
supervision 
comprehensive  regulatory  framework.  This 
framework  will  be  further  enhanced  by  the 
implementation  of  the  final  elements  of  the 
Basel  III  standards  in  the  EU  via  the  new 
Banking  Package,  largely  applicable  on  1 
January 2025.  

and 

by 

Graph 4.9: Sovereign bond spreads in selected 
euro area Member States 

Graph 4.10: Euro area bank stability indicators 

(1) 10 years maturity, spread versus Germany. 
Source: ECB 

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

40 

0.00.51.01.52.02.53.03.54.04.55.02018201920202021202220232024%NFCHouseholds050100150200250300350400450192021222324basis pointsBEESFRELIT024681012141618012345678915161718192021222324Return on equity (annual data,%) (lhs)NPL gross ratio (lhs)CET 1 ratio (%) (rhs) 
  
   
  
Higher  financing  costs  have  impacted 
real  estate  markets,  with  commercial 
real  estate  facing  additional  post-Covid 
challenges.  Property  prices  have 
fallen 
especially  in  the  CRE  sector  raising  concerns 
about  the  debt  servicing  capacity  of  real 
estate  firms,  in  a  context  of  deteriorating 
asset quality. Prices for residential real estate 
in  countries  where 
(RRE)  fell 
properties were the most overvalued. Concerns 
remains  about  housing  affordability  (see  Box 
2.2. in the resilience section) (ECB, 2024a).  

the  most 

Graph 4.12: Residential and commercial real 
estate prices 

The  euro  area  financial  system  is  solid 
although 
some  vulnerabilities  have 
emerged  in  some  non-financial  firms. 
Strong  post  pandemic  profitability  has  helped 
firms’  repayment  capacity  in  a  context  of 
tighter 
recently, 
lending  standards.  More 
however,  weaker  economic  growth  and  higher 
labour  costs  have  increased  vulnerabilities  in 
sectors most exposed to the impact of higher 
interest rates such as firms in the real  estate 
sector. Default rates on bank loans are slowly 
increasing even if from low levels. Due to their 
smaller  profit  margins  and  limited  liquidity 
buffers,  SMEs  are  also  a  vulnerable  to  a 
weaker economic environment.   

The main risks lie in the commercial real 
estate  (CRE)  sector.  Most  notably,  CRE 
arrears have started  to increase  – although it 
remains  a  small  part  of  most  banks’  lending 
portfolios.  Further  stress  in  the  sector  can 
impair  asset  valuation  and  a  decline  in  asset 
quality  may  ultimately  require  additional 
provisioning, possibly leading to a reduction in 
CET1 capital. 

Graph 4.11: Stage 2 loans by counterpart and 
stage 3 loans in the euro area 

(1) Year-over-year growth of nominal quarterly 
residential and commercial real estate prices 
Source: ECB 

sector 

financial 
The  euro  area  non-bank 
faces 
(NBFI) 
intermediation 
diverse risks. NBFIs have grown significantly 
in recent years and account for around EUR 57 
trillion  of  the  European  financial  sector’s 
assets.  NBFIs  consist  of  very  diverse  sectors 
which  can  be  subject  to  important  risks.  This 
sector  benefited  from  increased  investment 
income  since  2023.  However,  its  resilience  is 
challenged  by  a  decline  in  the  share  of  liquid 
assets,  more  concentrated  equity  exposures 
and  downside  risks 
to  asset  valuations, 
particularly  via  exposures  to  real  estate  and 
corporates.  Investment  funds  continue  to  be 
important investors in euro area issued bonds, 
however,  investments  in  euro  area  equities 
(ECBb, 
has  been  comparatively  moderate 
2024).  By  contrast,  euro  area  equity  funds 
exposure  to  US  stocks  have  continued  to 

41 

(1) The International Financial Reporting Standard 9 (IFRS 
9) aims to improve the recognition of banks’ credit 
losses, based on a more forward-looking estimation and 
loan staging approach. Stage 1 consists of performing 
loans, Stage 2 underperforming loans that have seen a 
significant increase in credit risk, and Stage 3 credit 
impaired loans. 
Source: ECB 

-113579111367891011121314152020 Q32020 Q42021 Q12021 Q22021 Q32021 Q42022 Q12022 Q22022 Q32022 Q42023 Q12023 Q22023 Q32023 Q42024 Q12024 Q2Stage 2 loans NFCs (%, lhs)Stage 2 loans households (%, lhs)Total stage 2 loans (%, rhs)Total stage 3 loans (%, rhs)-10-6-2261001 Q101 Q402 Q303 Q204 Q104 Q405 Q306 Q207 Q107 Q408 Q309 Q210 Q110 Q411 Q312 Q213 Q113 Q414 Q315 Q216 Q116 Q417 Q318 Q219 Q119 Q420 Q321 Q222 Q122 Q423 Q324 Q2Residential real estate (%)Commercial real estate (%) 
  
  
increase  and  become  more  concentrated 
among  a  small  number  of  issuers,  which 
exposes the sector to spillover from shocks to 
individual firms or in global financial markets. 
While insurance corporations’ solvency is solid, 
there  are  some  profitability  challenges,  such 
as  an  uncertain  outlook  for  underwriting 
profitability, 
risks  and  potential 
revaluation losses on real estate investments.  

liquidity 

sector 

resilience. 

Weaknesses  in  the  NBFI  sector  call  for 
enhancing 
Specific 
vulnerabilities  stem  from  structural  liquidity 
mismatches,  build-up  of  pockets  of  excessive 
leverage  and  interconnectedness  with  other 
NBFIs and with banks. In the European context, 
a lack of consistency and coordination among 
macroprudential  frameworks  across  the  EU  is 
another  source  of  vulnerability.  Even  though 
there  are  EU  directives  and 
regulations 
applicable  to  certain  NBFIs  that  include  some 
macroprudential  tools,  there  is  no  overall  EU 
macroprudential  framework  for  them.  To 
address  potential  gaps,  in  May  2024  the 
European  Commission  put  forward  a  targeted 
consultation  on  macroprudential  policies  for 
the  NBFI  sector  to  collect  insights,  identify 
gaps in  the  framework  and  other  factors that 
may  contribute  to  the  build-up  of  systemic 
risks (European Commission, 2024l) (24).  

buffer 

framework 

requirements, 

for 
The  macroprudential 
banks has also improved the resilience of 
the  system.  The  banking  sector  has  proved 
resilient,  supported  by 
its  multi-layered 
macroprudential  framework,  including  existing 
capital 
and 
borrower-based  measures  ensuring  healthy 
lending  standards.  Going  forward,  there  is  a 
need to monitor the usability and releasability 
of  capital  buffers,  to  strengthen    consistency 
in the use of macroprudential tools by national 
authorities,  to  reduce  administrative  burdens, 
including via the use of digital technologies as 
a  facilitator,  by  simplifying  the  application  of 
macroprudential  measures  where  possible,  as 

(24)  The  Financial  Stability  Board 

(FSB)  has 

issued 
recommendations  to  promote  a  level  playing  field 
across  the  NBFI  sector,  in  order  to  mitigate  the  risk  of 
regulatory  arbitrage, 
cross-border 
global 
from 
risks 
business 
interconnectedness. 

fragmentation, 
and 

reallocation, 

42 

well  as,  to  tackle  systemic  risks  stemming 
from  conventional  (i.e.  real  estate  markets) 
and newer risks (such as digital risks including 
the increased speed of bank runs in the digital 
age).  

The  completion  of  the  Banking  Union 
remains  apriority.  A  key  step  to  further 
develop the Banking Union is the reform of the 
crisis  management  and  deposit 
insurance 
(CMDI)  framework  in  a  way  that  does  not 
create  additional  impediments  to  a  swift 
the 
resolution.  Following  a  proposal  by 
Commission in April 2023, the Parliament and 
the Council have agreed on their positions and 
inter-institutional  negotiations  are  ongoing  as 
of  December  2024.  The  European  Deposit 
Insurance Scheme (EDIS) is another important 
missing element of the Banking Union. In April 
2024 
ECON 
the 
the 
Committee  adopted 
Commission  EDIS  proposal  of  2015.  To  go 
forward,  the  Commission  will  continue  to 
promote  further  development  of  the  Banking 
Union, including EDIS. 

European  Parliament 
its 

report  on 

the 

risk  build-up  and 

The  macroprudential  framework  could 
further consider financial risks related to 
climate  change  and  nature.  Since  the 
overarching  nature  of  climate  and  nature-
related  risks  has  the  capacity  to  threaten  the 
stability of the financial system, it is essential 
to complement the micro prudential measures 
taken by banking supervisors to tackle climate 
change  and  nature  degradation  with  a 
macroprudential framework. This could help to 
mitigate 
increase 
resilience  against  climate  and  nature  risks.  In 
December  2023,  the  ECB  and  the  European 
Systemic  Risk  Board  (ESRB)  presented  policy 
options for addressing climate risks both in the 
banking  sector  and  the  non-bank  financial 
intermediation sectors though macroprudential 
frameworks  (ECB/ESRB  2023).  These  include 
measures  for  the  lenders  (such  as  general  or 
sectoral  systemic  risk  buffers)  as  well  as  for 
the  insurance  sector  (tackling  the  insurance 
protection  gap)  and  investment  funds  sector 
(primarily related to disclosures). In April 2024, 
the  Basel  Committee  on  Banking  Supervision 
(BCBS)  (BIS,  2024)  put  forward  a  climate 
scenario  analysis 
strengthen 
management  and  supervision  of  climate-

(CSA) 

to 

 
 
the 

framework 

implementation  of 

and  the  use  of  crypto-assets  as  a  form  of 
payment (FSB, 2022). While all these channels 
are increasing in size and complexity, they lack 
internal  shock  absorbers  that  could  provide 
liquidity  at  times  of  stress.  For  example,  the 
wider  involvement  of  financial  institutions  or 
the use of crypto assets as a form of payment 
would  increase  the  potential  for  spillover  to 
the  wider  economy,  particularly  if  leverage 
the  global 
were  employed.”  Concerning 
regulatory 
crypto-asset 
for 
activities, the Financial Stability Board (FSB) is 
its 
focusing  on 
high-level recommendations for the regulation, 
supervision  and  oversight  of  crypto-asset 
activities  and  markets,  as  well  as  of  global 
In  the  EU,  the 
stablecoin  arrangements. 
implementation 
in 
Crypto-assets  (MiCA)  Regulation  (Regulation 
(EU) 2023/1114) is progressing. The amended 
Capital  Requirements  Regulation  already 
introduced rules on a transitional treatment of 
banks'  exposures 
crypto-assets  and 
to 
supervisory powers in relation to crypto-assets 
based on a simplified Basel approach until the 
entry  into  application  of  a  possible  future 
legislative framework that considers the Basel 
in  a  more 
Crypto  Standard 
comprehensive manner.  

the  Markets 

(SCO60) 

of 

related  financial  risks.  The  European  Central 
Bank (ECB), the European Systemic Risk Board 
and  national  central  banks  now  consider  the 
assessment  of  risks  stemming  from  climate 
change,  nature  degradation  and  biodiversity 
loss as falling within their mandate (ECB/ESRB 
Project  Team  on  climate  risk,  2023).    The 
Global  Risks  report included  nearly  all  climate 
and  environment  risks  such  as  extreme 
weather  events  and  critical  changes  to  earth 
systems in the top 10 global risks ranking for 
the  next  decade  (World  Economic  Forum, 
2024). According to the ECB, nearly 75% of all 
bank  loans  in  the  euro  area  are  provided  to 
companies  that  are  highly  dependent  on  at 
least one ecosystem service (Elderson, 2023). 

Additional  ongoing  policy  initiatives  to 
support  macro-financial  stability  cover 
the digital euro. The introduction of a digital 
euro  could  spur  efficiency  and  innovation  in 
the  european  payments  markets,  unlock 
benefits for the euro area economy and foster 
the international role of the euro. The proposal 
for  a  regulation  on  the  establishment  of  the 
digital  euro  was  tabled  in  June  2023  and  is 
subject  to  discussions  in  the  Council  and  the 
European  Parliament.  In  parallel,  the  ECB 
started  in  November  2023  its  ‘preparatory 
phase’ on the digital euro (25), which is to last 
until October 2025. Its main steps include the 
preparation of a rulebook, selection of service 
providers,  and  developing further  on  technical 
aspects.  The  next  progress  report  is  expected 
next  autumn.  After  that,  the  ECB’s  Governing 
potential 
Council  will  decide  on 
development of a digital euro. Any digital euro 
issuance decision by the ECB is conditional on 
the Regulation having entered into force.   

the 

Crypto  assets  can  also  pose  a  risk  to 
financial  stability  if  current  growth  and 
market  integration  trends  persist.  Crypto-
assets including stablecoins can have financial 
four  main 
stability 
transmission 
effects, 
confidence  effects,  financial  sector  exposures 

channels  wealth 

implications 

through 

(25)  The  ECB  provided  its  Opinion  on  the  digital  euro  in 
October  2023  and  in  June  2024,  a  year  after  the 
proposal by the Commission, the first progress report on 
digital euro preparation phase was published. See, ECB 
(2023). 

43 

 
 
ANNEXES 

 
 
 
 
ANNEX 1: THE EURO AREA IN THE WORLD 

Table A1.1:  Key Indicators 

46 

 
 
 
 
 
 
ANNEX 2: SUSTAINABLE DEVELOPMENT GOALS 

Graph A2.1: Progress towards the SDGs in the euro area and the EU (26) 

Source: Eurostat 

This  annex  assesses  the  pace  at  which  the  euro 
area and the EU have progressed towards each of 
the  17  sustainable  development  goals  over  the 
last  five  years.  An  assessment  of  progress  in  the 
euro  area  is  only  available  for  four  SDGs,  for 
which  the  indicators  underpinning  the  goals  have 
an aggregate for the euro area (Graph A2.1). 

Overall,  over  the  five-year  period  the  euro  area 
Member States have, as a whole, made significant 
progress  towards  ensuring  decent  work  and 
economic growth (SDG 8). Good progress has also 
been achieved in relation to the goals on reducing 
inequalities (SDG 10) and gender equality (SDG 5). 
Progress  has  also  been  made  in  reducing  poverty 
(SDG 1). 

For  the  other  goals  (in  lighter  shading),  progress 
refers  to  the  EU  as  a  whole.  Overall,  the  EU  as  a 
whole has shown good progress towards the goals 

(26)  SDGs were adopted by the international community in 2015 
for  Sustainable 
the  UN  2030  Agenda 
as  part  of 
Development 
the  world 
through  which  countries  of 
collectively  pledged  to  eradicate  poverty,  find  sustainable 
and  inclusive  development  solutions,  ensure  human  rights, 
and make sure that no one is left behind by 2030. In 2019, 
the European Commission committed to integrate the SDGs 
into the European Semester. Integrating the objectives of the 
SDGs 
into  the  European  Semester  provides  a  unique 
opportunity to put people, their health and the planet at the 
centre of economic policy. 

on  zero  hunger  (SDG  2),  industry,  innovation  and 
infrastructure  (SDG  9),  responsible  consumption 
and  production  (SDG  12),  life  below  water  (SDG 
14),  quality  education  (SDG  4).  Progress  has  also 
been recorded towards the goals on peace, justice 
and strong institutions (SDG 16), sustainable cities 
and  communities  (SDG  11),  partnerships  for  the 
goals  (SDG  17)  and  climate  action  (SDG  13). 
Progress  towards  the  goal  on  clean  water  and 
sanitation  (SDG  6)  was  limited,  with  several 
indicators  showing  positive  developments  but 
others  showing  no  progress  or  even  movement 
away. For affordable and clean energy (SDG 7), a 
slight  movement  away  from  the  goal  was 
observed  due  to  the  negative  impact  on  energy 
affordability of Russia’s war of aggression against 
Ukraine  and  the  consequent  energy  crisis  in  the 
EU. Progress towards the goal on good health and 
wellbeing  (SDG  3)  was  disrupted  by  the  setbacks 
of  the  COVID-19  pandemic  that  are  now  fully 
visible  in  the  available  data.  The  goal  on  life  on 
land 
is  characterised  by  several 
unsustainable  trends  in  the  areas  of  biodiversity 
and  land  degradation,  leading  to  a  moderately 
unfavourable  assessment  of  the  EU’s  progress  in 
this area over the short-term period assessed. The 
European  Commission  has  proposed  important 
policy  initiatives  to  reverse  the  degradation  of 
ecosystems  as  part  of  the  European  Green  Deal, 
such as the EU Biodiversity Strategy, the EU Forest 
Strategy,  the  EU  Soil  Strategy  for  2030  and  the 
Farm to Fork strategy. 

(SDG  15) 

47 

 
 
 
 
 
 
 
ANNEX 3: THE RRF IMPLEMENTATION IN THE EURO AREA 

The  Recovery  and  Resilience  Facility  (RRF)  is 
the core component of the NextGenerationEU 
package,  reinforcing  public  investment  and 
incentivising  structural  reforms  to  boost 
economic  growth  potential  in  euro  area 
economies.  It  has  evolved  beyond  its  original 
design, with over 600 reform measures and 6,000 
milestones  and  targets  addressing  key  structural 
challenges  in  Member  States.  The  RRF's  total 
financial  allocation  for  the  euro  area  amounts  to 
around  €532  billion,  with  €295  billion  in  grants 
and €237 billion in loans. Notably, RRF allocations 
reach  up  to  17.4%  of  GDP  for  some  euro  area 
Member States, providing crucial financing support 
for public investments. 

Graph A3.1: The actual payments vs total RRF 
allocations (grants and loans, as of Q3 2024, % 
of GDP) 

were  disbursed  by  the  end  of  November  2024, 
comprising €55.6 billion in pre-financing and €187 
billion  in  grants  and  loans.  This  represents  nearly 
50%  of  committed  RRF  funds  to  the  euro  area 
(Graph  A3.1).  The  RRF  has 
contributed 
significantly to public investment in the euro area, 
supporting  GDP  growth  and  sustaining  economic 
momentum.  By  driving  targeted  investments  and 
reforms, the RRF continues to counteract economic 
challenges, positively impacting  domestic  demand 
and  overall  EU  growth  in  2024,  while  promoting 
convergence within the EU. 

some  delays 

The implementation of national Recovery and 
Resilience  Plans  (RRPs)  accelerated  in  2024, 
with  most  euro  area  Member  States 
investment 
advancing  their  reform  and 
agendas.  Despite 
in  2023, 
significant  progress  has  been  made  in  achieving 
investment  and  reform  milestones  and  targets. 
Over  1,500  milestones  and  targets  have  been 
positively  assessed  by  the  Commission  for  Euro 
area Member States while an additional 890 have 
been  reported  as  completed  by  Member  States, 
bringing the total amount of fulfilled and reported 
as  completed  milestones  and  targets  to  47%. 
Member  States  have  generally  prioritised  the 
implementation  of  reforms  in  the  first  years  of 
their  plan,  paving  the  way  for  a  focus  on 
investment  in  the  final  two  years  of  the  RRF  life 
cycle. 

from 

spillovers 

The medium-term impact of the RRF is yet to 
be seen but is expected to be significant. The 
estimates  based  on  the  European  Commission’s 
modelling  suggest  that  the  RRF  is  expected  to 
contribute to an increase of the EU real GDP by up 
to  1.4%  in  2026,  compared  to  a  counterfactual 
no-NGEU  scenario.  The  medium-term  impact  is 
estimated to come from higher public investment, 
with  positive 
simultaneous 
investments  across  Member  States,  crowding-in 
more private investment (Pfeiffer et al., 2023). The 
other  channel  is  the  increase  in  productivity 
derived  from the RRPs’ structural  reforms agenda 
(Bankowski  et  al.,  2022),  which  may  translate  to, 
among  others,  an  increase  of  real  wages  in  the 
medium  term  (European  Commission,  2024p). 
Most 
the 
combined fiscal and structural channels of the RRF 
transmission  are  expected  to  contribute  to  euro 
area’s GDP increase between 0.4% and 0.9% up to 
2026  and  0.8%,  and  1.2%  up  to  2031,  when 
compared  to  a  scenario  without  the  NGEU 
(Bankowski et al., 2024). 

recent  estimations 

indicate 

that 

Source: European Commission 

to 

proven 

The  Recovery  and  Resilience  Facility  (RRF) 
has 
emerging 
adaptable 
challenges. 
It  addresses  six  policy  priorities 
aligned  with  the  euro  area  recommendations, 
focusing  on  green  and  digital  transitions,  labour 
market participation, social cohesion, and business 
environment  support.  In  response  to  the  energy 
crisis and Russia's aggression against Ukraine, the 
RRF  has  been  updated  with  RepowerEU  chapters, 
introducing  new  priorities  to  reduce  the  EU's 
energy dependence. 

The  actual  RRF  payments  have reached over 
50%  of  total  allocations  in  several  Member 
States. The Commission has received 53 payment 
requests (including partial payments) from the 20 
euro area Member States, of which €242.7 billion 

48 

0%10%20%30%40%50%60%70%80%90%0%2%4%6%8%10%12%14%16%ELHRITPTESSKLTLVSICYEEFRMTATDEBEFINLIELUremaining allocation (including RepowerEU)amounts paid (loans and grants)amounts paid % of total allocation (rhs) 
 
  
ANNEX 4: PROGRESS IN EARS IMPLEMENTATION 

proxy  for  EAR  progress  can  provide  a  useful 
approximation.  

increasing 

investment  under 

reforms,  have  a 

Overall,  the  implementation  of  EAR-relevant 
CSRs in 2023 cycle shows some progress, but 
the  degree  of  implementation  varies  across 
policy areas (Graph A4.1). Relatively many CSRs 
are  linked  to  euro  area-relevant  fiscal  policy 
challenges (as per 2023 EAR 1). The CSRs related 
to  prudent  medium-term  positions  and 
to 
mitigation  of  pandemic  and  energy  crisis  effects, 
show  overall  good  progress.  However,  measures 
linked  to  long-term  public  finance  sustainability, 
such  as  pension 
lower 
implementation  level.  Large  number  of  CSRs  are 
linked 
includes 
to  2023  EAR  2,  which 
recommendations  on  the  public  and  private 
investment  and  a  variety  of  measures 
responding  to  the  energy  crisis.  Most  of  the 
relevant  sub-CSRs  are  showing  some  progress  in 
implementation,  mainly  thanks  to  accelerating 
the  RPPs  and 
rollout  of 
measures  aimed  at 
the  energy 
efficiency  and  reduction  of  energy  dependency. 
There  are  relatively  fewer  EAR-relevant  CSRs 
regarding  reforms  on  labour  market,  including 
skills shortages, and wages developments and 
social  policy  (2023  EAR  3).  In  general,  these 
show  slightly  less  positive  picture,  with  an  overall 
some  progress  achieved  and  best  results  in 
addressing  skills  shortages  and  delivery  of  social 
services.  Much  less  CSRs  respond  to  business 
environment, 
corporate  sector  solvency 
support and completion of the Capital Markets 
Union (CMU) (2023 EAR 4), partially because the 
progress  on  the  CMU  requires  rather  collective 
action. 
good 
implementation record can be observed, mainly in 
liquidity  support  for  small  and 
the  field  of 
medium-sized  enterprises,  and 
improving 
business  environment.  Collective  action  would  be 
also  required  for  the  2023  EAR  5  related  to 
of 
stability, 
macro-financial 
Banking  Union  and  introduction  of  digital 
euro, hence only very few CSRs of the 2023 cycle 
are  tied  to  these  challenges.  However,  the  CSRs 
implementation in these fields was moderate, and 
this is mainly due to progress in mitigating risks in 
the financial sector. 

Nevertheless, 

completion 

generally 

in 

can 

The 
implementation  of  the  euro  area 
be 
recommendations 
(EARs) 
approximated  through  the  progress  on  the 
relevant  country-specific  recommendations 
(CSRs). Each year, in the context of the European 
Semester  for  economic  policy  coordination,  the 
Council adopts policy recommendations addressing 
country-specific  mid-term  structural  challenges. 
The CSRs implementation progress is continuously 
monitored  by  the  Commission  services  with  the 
progress  assessment  available 
in  the  CeSaR 
database (27). The assessment is qualitative based 
on a progress gradation: from “no progress” to “full 
implementation”.  Moreover,  for  a  given  annual 
cycle  of  policy  coordination,  the  CSRs  and  their 
components 
(sub-CSRs)  are  tagged  with  the 
corresponding  EARs  if  are  found  relevant  for  the 
euro-area dimension, e.g. euro-area relevant 2024 
sub-CSRs  are  tagged  with  corresponding  2024 
EARs  in  CeSaR  database.  Therefore,  the  progress 
assessment on the implementation of EARs can be 
seen though the progress of relevant CSRs. 

Graph A4.1: EARs implementation, 2023 cycle 

Source:  

The  2024  EAR  progress  based  on  the  2024 
CSRs  progress  assessment  can  be  possible 
only  after  the  cut-off  date  for  this  staff 
working document. However, as the policy areas 
covered  by  the  Euro  Area  Recommendations 
(EARs) have remained largely consistent, using the 
previous  cycle's  (2023)  euro-relevant  CSRs  as  a 

(27)  https://ec.europa.eu/economy_finance/country-specific-

recommendations-database  

49 

0%10%20%30%40%50%60%70%80%90%100%EAR.1EAR.2EAR.3EAR.4EAR.5No ProgressLimited ProgressSome ProgressSubstantial ProgressFull Implementationnumberof relevant sub-CSRs601303284 
 
   
 
 
REFERENCES 

Acemoglu D. (2024). The Simple Macroeconomics 
of  AI.  NBER  Working  Paper  No.  w32487  SSRN 
Electronic Library - PIP Journal Information. 

Alesina  A.,  &  Ardagna  S.  (2013).  The  design  of 
fiscal  adjustments.  Tax  policy  and  the  economy, 
27(1), 19-68. 

Alesina, M. A., Ciminelli, G., Furceri, D., & Saponaro, 
G.  (2021).   Austerity  and  Elections.  International 
Monetary Fund. 

Aiyar S. et al. (2023). Geoeconomic Fragmentation 
and  the  Future  of  Multilateralism.  IMF  Staff 
Discussion Note n. 2023/001. 

Batini, N., Eyraud, L., & Weber, A. (2014). A simple 
fiscal  multipliers. 
method 
International Monetary Fund. 

compute 

to 

Bańkowski  K.,  Benalal  N.,  Bouabdallah  O.,  De 
Stefani  R.,  Dorrucci  E.,  Huber  C.,  Jacquinot  P., 
Modery  W.,  Nerlich  C.,  Rodríguez-Vives  M.,  Szörfi 
B.,  Zorell  N.  &  Zwick  C.  (2024).  Four  years  into 
NextGenerationEU:  what impact  on  the  euro  area 
economy? ECB Occasional Papers, n. 363.  

Balasundharam V., Basdevant O., Benicio D., Ceber 
A., Kim Y., Mazzone L., Selim H. & Yang, Y. (2023). 
Fiscal  consolidation:  Taking  stock  of  success 
factors, 
International 
Monetary Fund. https://doi.org/10.2866/3562074  

impact,  and  design. 

Bergeaud A. (2024). The Past, Present, and Future 
of  European  Productivity.  ECB  Forum  on  Central 
Banking, July 2024. 

BIS. (2024).  The role of  climate scenario analysis 
in strengthening the management and supervision 
of climate-related financial risks, Basel Committee 
on Banking Supervision Discussion Paper.    

Bloom N., Van Reenen J. and  Williams, H. (2019). 
A  Toolkit  of  Policies  to  Promote 
Innovation. 
Journal of Economic Perspectives (Vol. 33, Issue 3, 
pp.  163–184).  American  Economic  Association. 
https://doi.org/10.1257/jep.33.3.163 

Bown  C.  P.  (2024).  Modern  Industrial  Policy  and 
the  WTO.    Peterson  Institute  for  International 
Economics  Working 
23-15: 
https://doi.org/10.2139/ssrn.4816776. 

Paper 

n. 

Brunnermeier, M., Palia, D., Sastry, K. A., & Sims, C. 
A.  (2021).  Feedbacks:  Financial  Markets  and 
Economic  Activity.  American  Economic  Review 

50 

111, 

(Vol. 
Issue 
https://doi.org/10.1257/aer.20180733 

pp. 

6, 

1845–1879). 

Bundesbank  (2024).  Development  in  euro  area 
business  dynamism.  Monthly  Report  –  March 
2024 

Caldara,  D.  &  Iacoviello  M.  (2024),  Measuring 
Geopolitical  Risk.  American  Economic  Review, 
April, 112(4), pp.1194-1225. 

CEDEFOP.  (2021).  The  green  employment  and 
skills  transformation:  insights  from  a  European 
scenario.  
Green 
https://doi.org/10.2801/112540  

forecast 

skills 

Deal 

Cepparulo,  A.,  McDonnell  C.  and  Reitano  V.  E. 
(2024).  An  Assessment  of  the  Euro  Area  Fiscal 
Stance.  European  Economy  Economic  Brief,  n. 
080. https://doi.org/10.2765/555052  

Corsetti, G., Meier, A., & Müller, G. J. (2012). What 
determines  government  spending  multipliers? 
Economic Policy, 27(72), 521-565.  

Cournède  B.,  Antoine  G.  &  Pina  A.  (2014). 
Reconciling  fiscal  consolidation  with  growth  and 
equity.  OECD  Journal:  Economic  Studies,  Vol. 
2013/1. 

Coutinho  L.  and  Licchetta  M.  (2023).  Inflation 
differentials  in  the  euro  area  at  the  time  of  high 
energy  prices.  European  Economy  Discussion 
Paper 
197. 
https://doi.org/10.2765/052803  

Series, 

n. 

Dadush,  U.  (2022).  The  future  of  global  value 
chains  and  the  role  of  the  WTO.  Staff  Working 
Paper ERSD-2022-11. 

Debrun  X.  &  Kumar  M.S.  (2007).  The  Discipline-
Enhancing  Role  of  Fiscal  Institutions:  Theory  and 
Empirical 
Papers 
IMF  Working 
2007/171, International Monetary Fund. 

Evidence. 

Decker  R.  A.  &  Haltiwanger  J.  (2024).  Surging 
Business  Formation  in  the  Pandemic:  A  Brief 
Update. Working Paper, September 2024. 

Doherty L. & Sayegh A. (2022). How to Design and 
Institutionalize  Spending  Reviews,”  How-To  Note 
No. 2022/004, International Monetary Fund. 

Draghi,  M. 
competitiveness. 

(2024).  The  future  of  European 

 
 
ECB/ESRB  Project  Team  on  climate  risk.  (2023). 
for 
Towards  macroprudential 
managing climate risk.   

frameworks 

Elderson F. (2023). The economy and banks need 
nature to survive. ECB blog, June 2023. 

European  Union  Agency  for  Fundamental  Rights. 
(2023).  Roma  in  10  European  countries:  main 
2021. 
results 
https://doi.org/10.2811/221064 

survery 

Roma 

- 

European Central Bank. (2021). Key factors behind 
countries.  ECB 
productivity 
Occasional  Paper  Series,  n.  268  /  September 
2021.  

in  EU 

trends 

European  Commission.  (2024b).  Ageing  Report 
2024. Economic and Budgetary Projections for the 
EU  Member  States 
(2022-2070).  European 
Economy Institutional Paper, n. 279. 

European  Commission.  (2024c).  Alert  Mechanism 
Report. COM(2024) XXX final, Novcbember 2024 

European  Commission.  (2024d).  Annual  report  on 
taxation 2024 – Review of taxation policies in the 
European Union. https://doi.org/10.2778/10846   

European  Commission.  (2024e).  Employment  and 
2023. 
developments 
social 
https://doi.org/10.2767/089698 

Europe 

in 

European  Central  Bank.  (2023).  Opinion  of  the 
European Central Bank of 31 October 2023 on the 
digital euro. CON/2023/34. Official Journal of the 
European Union.  

European  Central  Bank. 
Stability Review, May 2024. 

(2024a).  Financial 

European  Central  Bank. 
Stability Review, November 2024 

(2024b).  Financial 

European  Commission.  (2022).  Commission  Staff 
Working  Document  –  Executive  summary  of  the 
impact  assessment  report  accompanying  the 
document 
the 
European  Parliament  and  of  the  Council  on 
ambient  air  quality  and  cleaner  air  for  Europe 
(recast). SWD(2022) 345 final, October 2022. 

“Proposal  for  a  Directive  of 

European  Commission.  (2023a).  2024  Euro  Area 
Report.  European  Economy  Institutional  Paper 
Series, n. 259. https://doi.org/10.2765/049223  

European Commission. (2023b). Recommendation 
on critical technology areas for the EU’s economic 
security for further risk assessment with Member 
States. COM(2023) 6689 final, October 2023. 

European  Commission.  (2023c).  SURE  after  its 
sunset:  final  bi-annual  report.  COM(2023)  291 
final, June 2023. 

European  Commission.  (2023d).  Survey  on  the 
access  to  finance  of  Enterprises  –  Analitycal 
Report 2023. 

European  Commission. 
Innovation 
Scoreboard 
https://doi.org/10.2777/779689  

(2024a). 

  European 
2024. 

European  Commission. 
(2024f).  Euro  area 
competitiveness:  Trade  performance  and  risks  of 
trade fragmentation. Note to the Eurogroup.  

European 
economic 
Economy Institutional Paper Series, n. 296.  

European 
Commission. 
forecast:  Autumn  2024.  European 

(2024g). 

European 
economic 
Economy 
https://doi.org/10.2765/219276  

European 
Commission. 
forecast:  Spring  2024.  European 
Institutional  Paper  Series,  n.  286. 

(2024h). 

European  Commission.  (2024i).  Labour  market 
and wage developments in Europe: Annual Review 
2024 (Forthcoming) 

European  Commission.  (2024j).  Report  from  the 
Commission  to  the  European  Parliament  and  the 
Council  on  the  implementation  of  the  Recovery 
and  Resilience  Facility.  COM(2024  474  final, 
October 2024.  

European  Commission.  (2024k).  Report  on  Public 
Finances  in  the  EMU,  2023.  European  Economy 
Institutional Paper Series, n 295.  

European  Commission.  (2024l).  Report  on  the 
macroprudential review for credit institutions, the 
systemic  risks  relating 
their 
interconnectedness  with 
institutions. 
credit 
COM(2024) 21 final, January 2024.  

to  NBFIs  and 

innovation  performance  of 

European Commission. (2024m). Science, research 
and 
the  EU:  a 
competitive  Europe  for  a  sustainable  future. 
https://doi.org/10.2777/965670  

European  Commission.  (2024n).  Social  housing 
and  beyond:  operational  toolkit  on  the  use  of  EU 

51 

 
funds  for  investments  in  social  housing  and 
services. 
associated 
https://doi.org/10.2767/924036  

European Commission. (2024o). Strengthening the 
EU  through  ambitious  reforms  and  investments. 
COM(2024) 82 final, February 2024. 

Commission. 

European 
(2024p).  Mid-term 
evaluation of the Recovery and Resilience Facility 
–  Staff  Working  Document.  COM(2024)  70  final, 
February 2024. 

European  Commission.  (2024q).    Securing  our 
future:  Europe's  2040  climate  target and  path  to 
climate neutrality by 2050 building a sustainable, 
just  and  prosperous  society.  COM(2024)  63  final, 
February 2024. 

European  Commission. 
(2024r).  2030  digital 
decade:  report  on  the  state  of  the  digital  decade 
2024. https://doi.org/10.2759/922  

European  Defence  Agency.  (2023).  Enhancing  EU 
military  capabilities  beyond  2040:  main  findings 
from  the  2023  long-term  assessment  of  the 
Capability Development Plan.  

European 
investment 
overview. 

EIB 
Investment 
survey  2024:  European  Union 

(2024). 

Bank. 

Eurostat.  (2021).  Accounting  for  ecosystems  and 
their  services in  the  European Union (INCA):  Final 
report from phase II of the INCA project aiming to 
develop  a  pilot  for  an  integrated  system  of 
EU. 
for 
ecosystem 
https://doi.org/10.2785/197909  

accounts 

the 

Financial  Stability  Board.  (2022).  Assessment  of 
risks to financial stability from crypto-assets. 

Franse  L.,  Del  Bufalo  G.  &  Reviglio  E.  (2018). 
Boosting  investment  in  social  infrastructure  in 
Europe:  report  of  the  High-Level  Task  Force  on 
Investing 
in  Europe. 
European Economy Discussion Paper Series, n. 74. 
https://doi.org/10.2765/794497  

Infrastructure 

in  Social 

Frayne, C., Szczypińska A., Vašíček B. & Zeugner S. 
(2022). Housing market developments in the euro 
area:  focus  on  housing  affordability.  European 
Economy  Discussion  Paper  Series,  n.  171.. 
https://doi.org/10.2765/74242 

52 

Fuest  C.,  Gros  D.,  Mengel  P.  L.,  Presidente  G.  and 
Tirole  J.  (2024).    EU  Innovation  Policy  –  How  to 
Escape  the  Middle  Technology  Trap?.  European 
policy Analysis Group, April 2024. 

Garcia L., Leodolter A. & Turrini A. (2024). National 
Productivity  Boards  after  Seven  Years:  An 
Assessment. European Economy Discussion Paper 
Series, n. 203. 

Gopinath  G.,  Gourinchas  P.O.,  Presbitero  A.  & 
Topolova  P.  (2024).  Changing  Global  Linkages:  a 
new cold war? IMF Working Paper, WP/24/76. 

(2024).  Staff  Report 

IMF. 
the  2024 
consultation  with  the  member  countries  on 
common euro area policies.  

for 

IRENA. (2024). Renewable Power Generation Costs 
in  2023.  International  Renewable  Energy  Agency, 
Abu Dhabi. 

Kouvavas O. & Rusinova D. (2024). How big is the 
household housing burden? Evidence from the ECB 
Consumer  Expectations  Survey.  ECB  Economic 
Bullettin, Issue 3/2024. 

Lalinsky,  T,  M  Anastasatou,  S  Anyfantaki  et  al. 
(2024).  The  impact  of  the  COVID-19  pandemic 
and policy support on productivity: a report by the 
ESCB expert group on productivity, innovation and 
technological  change.    ECB  Occasional  Paper 
Series No 341. 

Letta  E.  (2024).  Much  more  than  a  market  – 
Empowering  the  Single  Market  to  deliver  a 
sustainable  future  and  prosperity  for  all  EU 
citizens. 

Licchetta,  M.  &  Mattozzi,  G.  (2023).  Convergence 
in GDP per Capita in the Euro Area and the EU at 
the  Time  of  COVID-19.  Intereconomics  (Vol.  58, 
Issue  1,  pp.  43–51).  https://doi.org/10.2478/ie-
2023-0012  

Molnár  M.  (2012).  Fiscal  Consolidation:  What 
Factors  Determine  the  Success  of  Consolidation 
Efforts?  OECD  Journal:  Economic  Studies,  Vol. 
2012/1, pp. 123-149. 

Moretti  E.,  Steinwender  C.  &  Reenen  J.  V.  (2023). 
The  Intellectual  Spoils  of  War?  Defense  R&D, 
Productivity,  and  International  Spillovers.  Review 
of Economics and Statistics (pp. 1–46). MIT Press. 
https://doi.org/10.1162/rest_a_01293  

 
OECD.  (2021).  Brick  by  Brick:  Building  Better 
Housing Policies. OECD Publishing, Paris. 

OECD.  (2024).  Unleashing  SME  potential  to  scale 
up:  draft  final  synthesis  report.  OECD  Secretariat 
and  Committee  on  SMEs  and  Entrepreneurship 
(CSMEE). 

Ponticelli,  J.,  &  Voth,  H.  J.  (2020).  Austerity  and 
anarchy: Budget cuts and social unrest in Europe. 
1919–2008.  Journal  of  Comparative  Economics, 
48(1), 1-19. 

Bank. 

World 
new 
infrastructure  assets:  a  cost-benefit  analysis. 
Policy research working paper, n. 8899. 

Strenghtening 

(2019). 

World  Economic  Forum.  (2024).  The  Global  Risks 
Report 2024: 19th edition. 

in 

crypto-assets 

Regulation  (EU)  2023/1114  of  the  European 
Parliament and of the Council of 31 May 2023 on 
markets 
amending 
Regulations  (EU)  No  1093/2010  and  (EU)  No 
1095/2010  and  Directives  2013/36/EU  and  (EU) 
2019/1937. 
http://data.europa.eu/eli/reg/2023/1114/oj  

and 

Stern n. & Stiglitz J. (2023).  Climate change and 
growth.  Industrial  and  Corporate Change,  Vol.  32, 
Issue 2, pp. 277-303. 

Terzi A. (2020). Macroeconomic adjustment in the 
euro area. European Economic Review, Vol. 128. 

Terzi  A.  (2021).  Economic  Policy-Making  Beyond 
GDP:  An 
Economy 
Discussion Paper Series, n. 142. 

Introduction. 

European 

Terzi  A.  (2024).  The  green  industrial  revolution: 
consequences  and  policies.  Bennett  Institute  for 
Public Policy Working Paper. 

Terzi  A.,  Sherwood  M.  and  Singh  A.  (2022). 
Industrial  Policy  for  the  21st  century.  European 
Economy Discussion Paper Series, n. 157.  

Turrini  A.,  Guigue  J.,  Kiss  Á.,  Leodolter  A.,  Leventi 
C., Van Herck K., Neher F., Picos F., Ricci M. (2024). 
Tax  Expenditures  in  the  EU:  Recent  Trends  and 
New  Policy  Challenges.  European  Economy 
Discussion Paper Series, n. 212. 

Valderrama  L.,  Gorse  P.,  Marinkov  M.  &  Topalova 
P. (2023). European Housing Markets at a Turning 
Point, IMF Working Paper n. 2023/076. 

Von  der  Leyen  U.  (2024).  Europe’s  Choice  – 
Political  Guidance 
the  next  European 
Commission  2024-2029.  Strasbourg,  18  July 
2024. 

for 

53