GDP growth is projected to rise to almost 2 per cent in 2016 and 2017, despite a slowdown in several emerging markets. Activity will continue to be supported by sustained monetary stimulus, a broadly neutral fiscal stance and lower oil prices. High private indebtedness will remain a drag on consumption and investment in many countries. Unemployment will decline only gradually, and the stark differences across countries within the euro area will persist. Inflation should edge up to just under 1½ per cent by the end of the projection horizon as the effects of cheaper energy wane and cyclical slack decreases, even though high uncertainties surround inflation projections.
Improving the credit channel of monetary policy transmission is a key priority, and requires completion of the banking union, swifter recognition of non-performing loans and, in many countries, better insolvency procedures. To foster growth and make it more inclusive, euro area countries should pursue fiscal and structural reforms to promote employment and social mobility, such as decreasing labour taxation and enhancing prioritisation of growth-enhancing investments, including in education and childcare. Joint actions to increase public investment could spur growth without raising debt ratios in the near term. Policies to better integrate immigrants have taken on heightened urgency, as they will be key to managing the recent wave of asylum seekers. Further product market reforms at the national level and completing the Single Market are essential to raise living standards and well-being.
The 2030 EU climate and energy framework commits to a domestic reduction in greenhouse gas emissions of at least 40% relative to 1990 levels. This framework can foster investment in both large-scale projects, such as energy interconnections and public transportation, and small-scale ones, such as improvements in residential energy efficiency. Reducing the multiple forms of budgetary support for fossil fuels, ranging from low taxation of company cars as a fringe benefit to diesel tax advantages, would help to reduce CO2 emissions in a cost-efficient way and to create fiscal space. In some cases, accompanying measures to prevent adverse redistributive impacts would be needed.