OECD Economic Surveys: Euro Area 2018

Annex. Progress in structural reform

Abstract

This annex reviews action taken on recommendations from previous Surveys since the June 2016 Euro Area Economic Survey.

 

Main recommendations		Action taken since the previous Survey (2016)
A. Monetary and fiscal policies
Commit to keep monetary policy accommodative until inflation is clearly rising to near the target.	Monetary policy has been very accommodative to secure a sustained convergence of inflation towards the inflation target. The continued monetary policy support is provided by the asset purchase programme, the reinvestment of maturing assets, and by the forward guidance on interest rates.
Countries with fiscal space should use budgetary support to raise growth.	The aggregate euro area fiscal stance is projected to stay broadly neutral over 2016-2018. Fiscal policy in some large countries with fiscal space is projected to turn expansionary, while other countries are expected to keep their fiscal stance unchanged.
Ensure that the application of the debt reduction rule of the Stability and Growth Pact does not threaten the recovery.	The implementation of structural reforms and adherence to the adjustment path towards the medium term objective are considered relevant factors in assessing progress in debt reduction.
B. Financial policies
When NPLs create a serious economic disturbance, speed up and facilitate the resolution of NPLs by not triggering bail-in procedures within the existing rules.	The existing framework under the Bank Recovery and Resolution Directive implies full bail-in under ordinary resolution. Under liquidation with state-aid there is bail-in up to subordinated debt.
Consider establishing asset management companies where needed, and possibly at the European level.	Several member countries have established AMCs. A non-binding blueprint for national Asset Management Companies (AMCs) providing recommendations based on best practices is being prepared by the Commission and other institutions (ECB, EBA and SRB).
Take supervisory measures to encourage banks to resolve NPLs, which might include raising capital surcharges for long-standing NPLs.	The Commission consulted EU banks on the introduction of common binding minimum levels of provisions and deductions from own funds needed to cover losses on new non-performing loans. The ECB published guidance on non-performing loans calling for banks to adopt ambitious and credible strategies for tackling NPLs. In addition, an addendum by the ECB provides quantitative guidance on supervisory expectations regarding timely provisioning practices for new NPLs.
Reinforce national deposit insurance schemes and implement a European Deposit Insurance Scheme, in tandem with continued risk reduction in the banking sector.	In its Communication on completing the Banking Union, the Commission suggested that transition to co-insurance phase of a European Deposit Insurance Scheme (EDIS), could be made conditional on sufficient progress in reducing banks’ non-performing loans and Level 3 assets.
To reduce links between national governments and their banks, create a common fiscal backstop to the Single Resolution Fund.	The creation of a backstop for the Single Resolution Fund was agreed by Member States in 2013, as a complement to the Single Resolution Mechanism Regulation. The Commission proposed a regulation establishing a European Monetary Fund, which should provide a fiscally-neutral backstop to the Single Resolution Fund.
Further harmonise banking regulation in Europe.	The Single Rule Book was strengthened by further implementing and delegated acts and European Banking Authority guidelines, for example on internal governance. Further harmonisation of supervisory practices was achieved as the number of options and national discretions available in the EU banking legislation decreased.
C. Making public finances more growth-friendly
As intended in the Investment Plan for Europe, the European Investment Bank should finance higher-risk projects that would not otherwise be carried out.	The extension of the European Fund for Strategic Investments, including more precise definition of additionality of projects, was adopted by the European Parliament and the Council in 2017. Under new conditions, projects need to address sub-optimal investment situations and market gaps as part of the eligibility criteria. Specific elements giving a strong indication of additionality include investment in innovation and physical or other infrastructure projects linking or extending the link between two or more Member States.
Countries should increase targeted public support to investment while enhancing the framework conditions for private investment.	In the Country Specific Recommendations the Commission encourages countries to improve national investment performance by accelerating structural reforms and tackling regulatory and administrative barriers and lengthy approval procedures.
Allow longer initial deadlines for correcting excessive deficits if countries implement major structural reforms in spending and tax policies which enhance potential growth and long-term sustainability.	Regulation 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure and the Communication on the best use of flexibility within the existing rules of the SGP indicate relevant factors when considering a multiannual path for the correction of the excessive deficit.
Adopt national expenditure rules and conduct spending reviews linked to budget preparation.	Although most of the euro area countries use spending reviews, the link with budget making only exists in a minority of euro area countries, where expenditures are regularly reviewed as part of the budget process.
Ensure that national independent fiscal institutions have resources to fulfil their mandate.	About half of national independent fiscal institutions still find their budgets inadequate and the draft directive on strengthening fiscal responsibility from December 2017 calls for Member States to provide stable own resources for effective fulfilment of the IFIs’ mandates.