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Economic growth is projected to remain subdued. Despite supportive monetary conditions, investment weakness will persist, reflecting low demand, banking sector fragilities and uncertainties about European integration. High unemployment and modest wage growth will hold back private consumption, while exports will be hampered by soft global trade and by weaker growth in the United Kingdom following the Brexit referendum. Inflation is set to rise very gradually. Across euro area countries, major differences in growth and unemployment prospects will persist.
The monetary policy stance should remain accommodative until inflation is clearly rising to the target of near 2%. However, monetary policy has become overburdened and should get more support from fiscal and structural policies. The projected fiscal stance is only slightly expansionary: a stronger fiscal stimulus with accompanying growth-friendly changes in the spending and taxation structure would rebalance the policy mix and support long-term growth. Completing the Single Market in services and network sectors would boost investment and productivity. Faster resolution of non-performing loans is also essential for stronger investment and may require establishing asset management companies and waiving existing bail-in procedures. Completion of the banking union would strengthen confidence and resilience to future crises.
Very low interest rates have created additional fiscal space by reducing interest payments and allowing temporarily higher debt in several countries without triggering negative market reactions. This space should be used to support growth. High-quality infrastructure projects, like those reinforcing Trans-European networks, would support demand and raise output capacity. For this purpose, the conditions of the Stability and Growth Pact investment clause should be eased. To promote job creation and social mobility, countries should also shift taxes away from labour and prioritise spending on education and childcare.
Economic Survey of the Euro Area (survey page)
Economic Survey of the European Union (survey page)
The Economic Consequences of Brexit: A Taxing Decision (main web page with paper)