Growth in the euro area slumped as 2014 wore on, and inflation — already negative in some countries — continued to drift down, reflecting considerable excess capacity. Economic activity is projected to recover slowly as confidence improves and uncertainty about banks’ balance sheets declines. However, growth will remain weak because of still-high public and private debt, tight credit conditions and high unemployment. A number of countries are still vulnerable to financial turmoil or other negative shocks. High unemployment and large margins of excess capacity will recede only slowly, putting continued downward pressure on inflation.
The pace of fiscal consolidation has eased considerably, significantly reducing one of the drags on growth. Going forward, countries should take all available room under EU fiscal rules to avoid procyclical fiscal contraction, and should allow the automatic stabilisers to operate fully. Given the very weak euro area economy and the risk of deflation, the ECB should further expand its monetary support, including through asset purchases (“quantitative easing”). Structural reforms in labour and product markets are urgently needed to boost growth and jobs; in particular, the EU Single Market programme should be completed.
Note: All data definitions based on internationally comparable standards and may differ in specific cases from common national definitions.
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