Economic activity is projected to recover in 2014 and 2015 as confidence improves further, financial market fragmentation declines and fiscal consolidation eases. The pace will remain moderate though, with deleveraging, weak bank balance sheets and tight credit conditions bearing on economic activity, especially in the vulnerable countries. High unemployment and large margins of excess capacity will recede only slowly and inflation will therefore remain subdued.
Fiscal consolidation should continue as planned, given debt levels that are still much too high. At the same time, the automatic stabilisers should be allowed to operate fully to avoid undermining the still-hesitant economic recovery. After reducing its policy rate in November, the ECB should consider further non-standard measures if the recovery flags or deflationary risks become serious. Credible stress tests, a rigorous asset quality review and, where needed, recapitalisation and restructuring of banks are required to support the upswing. Meaningful and rapid progress on the banking union is a precondition for resolving the financial crisis in the euro area. Structural reforms in labour and product markets are necessary to boost growth and jobs, with more emphasis given to completing the EU Single Market programme.
Note: All data definitions based on internationally comparable standards and may differ in specific cases from common national definitions.
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