Macroeconomic imbalances

Commission concludes in-depth reviews to identify macroeconomic imbalances and assesses progress in fiscal consolidation.

The European Commission has today published its conclusions emerging from the in-depth reviews (IDRs) carried out into 17 Member States’ economies¹ In the same document, the Commission assessed progress in the correction of fiscal deficits in the Member States concerned, updating its opinions on Draft Budgetary Plans from last year. This is a key step in the now well-established European Semester of economic policy coordination, the yearly economic governance cycle through which the Commission works with the Member States to create the conditions for sustainable growth and employment based on sound public finances, in line with the Europe 2020 growth strategy.

“Our analysis presented today shows that Member States are making progress in addressing their economic challenges. But this progress is uneven and in some cases must be stepped up,” said Olli Rehn, European Commission Vice President responsible for Economic and Monetary Affairs and the Euro. “We hope to see a strong response from Member States and stand ready to support them in a constructive partnership for reforms to strengthen the recovery and lift job creation.”

The economic recovery is gaining ground but challenges remain. Imbalances built up over more than a decade and it will require continued policy action to ensure that Europe returns to stronger but sustainable growth rates and steadily reduces unemployment. A number of imbalances are common to several Member States. Among the challenges are the large external liabilities in some economies, persistent large current account surpluses reflecting subdued domestic demand in a few countries, cost competitiveness for the countries which used to register the largest current account deficits and those experiencing large losses in export market shares. Improving competitiveness beyond cost-related factors is important for most Member States analysed, as is the impact of deleveraging on private consumption and investment. It will be essential to continue to address these imbalances in order to bring down the unacceptably high levels of unemployment in many parts of Europe.

The focus of macroeconomic challenges in the Member States is also gradually shifting. Current account deficits have been significantly reduced, which also reflects the progress made in some Member States in recouping competitiveness losses. However, persistent challenges include the impact of deleveraging on medium term growth, the high levels of private and public debt in the context of very low inflation, the difficulties faced by viable businesses in accessing affordable credit, and the high levels of unemployment.

On fiscal issues, the latest forecasts show that the average pace of adjustment is set to decelerate in the EU and the euro area thanks to the successful consolidation efforts of the last few years. However, some Member States need to step up fiscal consolidation if their deficit targets are to be reached. Both in the EU and in the euro area, the debt-to-GDP ratio is forecast to have increased in 2013 but should peak this year before starting to decline.

The contribution of large Member States to growth in Europe is important. Among the largest euro area Member States, the policy priorities should be on: strengthening domestic demand and medium-term growth in Germany; addressing bottlenecks to medium-term growth while working on structural reforms and fiscal consolidation in France and Italy; and continuing the orderly deleveraging and structural transformation of the economy that will contribute to sustainable growth, and addressing social issues inSpain.

Several macroeconomic challenges need to be addressed in the context of the euro area. There is a need to increase investment and boost demand, address financial fragmentation and the challenge of indebtedness and rebalancing in a very low inflation scenario and a difficult economic climate. As recommended by the Council last June, Member States should take responsibility, individually and collectively, for the aggregate policy stance in the euro area in order to ensure the good functioning of the Economic and Monetary Union and to increase growth and employment.

Imbalances and excessive imbalances

The Commission considers that 14 Member States are experiencing imbalances: Belgium, Bulgaria, Germany, Ireland, Spain, France, Croatia, Italy, Hungary, the Netherlands, Slovenia, Finland, Sweden,and the United Kingdom. In Croatia, Italy and Slovenia, these imbalances are considered excessive.

Member States with excessive imbalances

Croatia needs to respond to sizeable external liabilities, declining export performance, highly leveraged firms and fast-increasing general government debt, all within a context of low growth and poor adjustment capacity. There is a need for significant additional fiscal consolidation efforts to curtail the deficit and prevent debt from rising unsustainably. Croatia has an excessive fiscal deficit and needs to take effective action by end-April 2014 to address this. In the absence of additional measures, it risks missing its targets in 2014.

Italy must address its very high level of public debt and weak external competitiveness. Both are ultimately rooted in the country’s protracted sluggish productivity growth and require urgent and decisive action to reduce the risk of adverse effects on the Italian economy and of the euro area.

Slovenia continues to experience excessive macroeconomic imbalances which require monitoring and continued strong policy action, though the imbalances have been unwinding over the past year thanks to macroeconomic adjustment and decisive policy action.

In the case of Spain, which a year ago was also classified as having excessive imbalances, the Commission considers that a significant adjustment has taken place over the last year and that on current trends imbalances would continue to abate over time. While this is the basis to conclude that imbalances in Spain are no longer excessive, the Commission stresses that risks are still present.

Although IDRs have also been carried out for Denmark, Luxembourg and Malta, the Commission has concluded that there are no imbalances in the sense of the MIP.

As part of its continuous monitoring of obligations under the Excessive Deficit Procedure, the Commission is today also making use of a new instrument under the strengthened Stability and Growth Pact to draw the attention of two euro area Member States, France and Slovenia, to the risk of non-compliance with the budgetary target recommended for this year.² In the context of the European Semester in June, the Commission will reassess the overall situation as regards the obligations under the Stability and Growth Pact and, where necessary, propose the appropriate steps to the Council.

Next steps

The imbalances and excessive imbalances that the Member States will have to address vary in nature. The individual in-depth reviews are an analytical base that should open a dialogue with the Member States as they prepare their National Reform Programmes and Stability and Convergence Programmes (medium-term fiscal plans). These must be submitted to the Commission by the end of April and will be assessed in early June, when the Commission will present an updated set of country-specific recommendations in the concluding phase of the European Semester. For the Member States with excessive imbalances it will also decide in June whether other steps are necessary.

Programme countries (Greece, Cyprus, Portugal and Romania) are not covered by the Macroeconomic Imbalances Procedure, as they are already under surveillance as part of their economic adjustment programmes.

For more information:

http://ec.europa.eu/economy_finance/economic_governance/macroeconomic_imbalance_procedure/index_en.htm

Synoptic Table: Integrated surveillance of macroeconomic and Fiscal imbalances
(Member States for which an IDR has been prepared)

¹ : These are the 16 Member States identified in last November’s Alert Mechanism Report as showing signs of macroeconomic imbalances, plus Ireland, which has since successfully exited its economic adjustment programme and is thus again covered by the EU’s normal economic surveillance procedures.

² : In accordance with Article 11 (2) of Regulation 473/2013