(1)

The euro area is entering its sixth year of uninterrupted economic growth, and the negative output gap is closing. Risks to the outlook are increasing, however, and growth is expected to be moderate. Potential growth remains low compared to levels recorded in recent decades, and country divergences persist as a result of notable differences in economic resilience across Member States. Real wage growth is still moderate and has been trailing behind productivity developments. Nominal wage growth and core inflation are picking up with continued employment growth, but pockets of labour underutilisation or high unemployment remain in some Member States, while in other Member States labour supply is scarce. The euro area has recorded a large current-account surplus over the past five years, as a result of the dynamics of euro-area exports and the improved competitive position of the euro area, while country divergences continue to be significant on the external side. Member States that recorded large external deficits for a long time still have large negative net international investment positions that represent vulnerabilities, as they are generally mirrored by large stocks of private or government debt. As stated in the 2019 Alert Mechanism Report adopted by the Commission on 21 November 2018, an appropriate pace of deleveraging, a supportive growth and inflation environment, and continued reforms to increase productivity are crucial for successful rebalancing in the euro area. Favourable demand dynamics are also important, and large surplus Member States would also contribute to rebalancing by strengthening the conditions that support wage growth while respecting the role of social partners as well as public and private investment.

(2)

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

(3)

Consistency and balance in the macroeconomic policy mix of the euro area, including monetary, fiscal and structural policies, is crucial to ensure robust, inclusive and sustainable economic growth. In recent years, the European Central Bank resorted to unconventional monetary policy tools to bring inflation back towards its medium-term inflation objective, while supporting growth and job creation. Appropriately differentiated fiscal policies and focus on structural reforms are needed in order to continue supporting growth in the short and long term.

(4)

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

(5)

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

(6)

Structural and institutional features of labour and product markets and well-functioning public administrations are important for the resilience of euro-area Member States. Resilient economic structures prevent shocks from having significant and long-lasting effects on income and labour supply. These structures can facilitate the operation of fiscal and monetary policy and contain divergences, creating conditions for sustainable and inclusive growth. Better coordination and implementation of structural reforms, in particular those prescribed in the country-specific recommendations, can create positive spillovers between Member States and strengthen the positive effects across the euro area. Reforms that increase competition in product markets, promote resource efficiency and improve the business environment and the quality of institutions, in particular the effectiveness of the justice system, foster economic resilience in the euro area and the Member States. The Single Market, which has proven to be a major engine of growth and convergence between Member States, still holds considerable unexploited potential; and progress is needed to deepen it, particularly in services, digital activities, energy and transport, thereby ensuring timely implementation and better enforcement of legislation.

(7)

The European Pillar of Social Rights sets out 20 principles to foster equal opportunities and access to the labour market, fair working conditions and social protection and inclusion. Reforms that promote labour market participation, support successful labour market transitions, promote the creation of quality jobs and reduce segmentation can help boost inclusive growth, improve economic resilience and automatic stabilisation, reduce inequalities, address poverty and social exclusion, and help face the challenges of a changing economy. Individualised support for job searching, training and requalification can result in effective and timely activation. Access to high-quality education and training throughout the life cycle is vital and requires adequate investment in human capital and skills, in particular for the low-skilled. Such reforms and investments improve employability, innovation, productivity and wages in the medium and longer term, increasing the resilience of the euro area and promoting social inclusion and mobility within Member States and across the euro area. The tax burden in the euro area is relatively high and skewed towards labour; a shift away from labour to tax bases that are less detrimental to growth, such as property, consumption or environmental taxes, could strengthen labour supply and demand. Employment protection legislation needs to provide for fair and decent working conditions for all workers, especially in view of emerging new forms of employment and new types of contract that bring along new opportunities but also challenges related to job security and social protection coverage.

Effective and sustainable social protection systems are also crucial to ensure adequate income and access to quality services. Pension reforms and policies on work-life balance are also key in fostering labour-market participation. Unnecessary restrictions on job, sectoral and geographical mobility may hamper reallocation within Member States and across the euro area. Social partners' involvement in employment, social and related economic reforms is crucial.

(8)

While the robustness of the euro-area financial sector has increased since the crisis, vulnerabilities remain to be addressed. Private-sector debt remains elevated, and tax systems still feature a debt bias. Substantial increases in sovereign bond yields risk eroding banks' capital, with the potential for negative spillovers across the euro area. The need to adapt banks' business models, the low-interest-rate environment and increasing competition from other forms of finance continue to exert pressure on banks' profitability. There has been sustained progress in risk reduction, notably on non-performing loan (NPL) reduction and minimum requirements for own funds and eligible liabilities build-up. Nonetheless, national NPL ratios that remain far above the euro-area average require further sustained efforts. In March 2018 the Commission presented a risk-reduction package both to allow for legacy NPLs to be addressed and to avoid their future build-up. The November 2016 banking package, which aims to further reduce risks by implementing internationally agreed norms on capital buffers, subordination of liabilities and liquidity in banks, preserving the balance of the Council compromise, is important for further progress towards risk reduction and thereby towards risk sharing.

Following serious breaches of anti-money-laundering rules, the Commission proposed measures to reinforce the European Banking Authority and supervisory cooperation to strengthen the enforcement of the regulatory framework in this area. Significant progress has been made in establishing the Banking Union, including through the recent agreement on the operationalisation of a common backstop for the Single Resolution Fund; but it remains unfinished. There are limitations in the current set-up for liquidity provision in resolution and the lack of a common deposit insurance scheme and of a common backstop for the Single Resolution Fund, hampering the ability of the Banking Union to sever the link from banks to sovereigns.

(9)

Strengthening the architecture of the EMU requires the completion of the Banking Union and the Capital Markets Union as a matter of priority, but also action on all the other elements in the statement of the Euro Summit of 14 December 2018. In December 2017 and May 2018 the Commission published a set of proposals setting further steps towards completing the EMU, including a European Investment Stabilisation Function and a Reform Support Programme (proposed under the Multiannual Financial Framework). The proposals build on the reflection paper on the deepening of the EMU of May 2017 and the Five Presidents' Report of June 2015. At the Euro Summit of 13-14 December 2018, decisions were taken on the Banking Union and the further development of the ESM, which leaders at the Euro Summit agreed will be the provider of the common backstop to the Single Resolution Fund (SRF) at the latest by the end of the transition period.

Work will proceed to prepare the necessary amendments to the ESM Treaty (including the common backstop to the SRF), based on the term sheet endorsed by leaders at the Euro Summit. The backstop will be introduced earlier, provided that sufficient progress has been made in risk reduction to be assessed in 2020. Work will continue in the first half of 2019, in particular through the setting-up of a high-level working group on the European deposit insurance scheme (EDIS) and further work on the set-up for liquidity provision in resolution. Work will also proceed on the design, implementation arrangements and timing of a budgetary instrument for convergence and competitiveness for the euro area and, on a voluntary basis, for the non-euro area Member States participating in the Exchange Rate Mechanism (ERM II). The features of the instrument will be agreed in June 2019. The instrument will be adopted in accordance with the legislative procedure, as foreseen by the Treaties, on the basis of the relevant Commission proposal, to be amended if necessary. All these reforms could contribute to strengthening the international role of the euro, making it more commensurate to the global economic and financial relevance of the euro area. It is important that they are discussed in an open and transparent manner vis-à-vis non-euro-area Member States, fully respecting the Union's internal market.

(10)

The Employment Committee and the Social Protection Committee have been consulted on the employment and social aspects of this Recommendation,

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