Title page
Contents
Executive summary 10
1. Key policy insights 15
The euro area is facing new and unprecedented challenges 16
The euro area is recovering from a recession of unprecedented nature and magnitude 17
Maintaining monetary policy effectiveness after reviewing its framework 24
Monetary policy should remain accommodative 24
Possible negative side-effects should be kept in check 27
The review of the monetary policy framework 31
The EU needs to evaluate it fiscal governance framework to improve its functioning 37
The COVID-19 crisis will have profound impacts on fiscal balances, but support is still needed 37
Improving EU fiscal rules will make fiscal policies more effective 39
Making the best use of crisis-related common fiscal tools, and providing input for the future economic architecture of the EU 47
The European recovery package will support the international role of the euro 48
A more global euro would benefit the euro area economy 48
A temporarily larger supply of euro denominated EU assets will contribute to support the euro as a global reserve currency 49
Enhancing the euro area architecture would increase confidence in the euro and its international use 51
Higher cyclical convergence would buttress the euro area 52
Increasing fiscal integration is key to reduce cyclical divergence 52
More resilient labour markets would reduce dispersion in business cycles 53
A more effective single market for capital and stronger banks can reduce the risk of financial fragmentation 55
References 58
2. Fostering cyclical convergence in the euro area 61
Euro area cyclical divergence has deep roots 62
Different economic structures generate dispersion in business cycles 63
Limited labour mobility impedes labour market convergence 66
Financial markets fragmentation generated diverging economic cycles 67
The absence of a common fiscal capacity amplifies diverging business cycles 69
Making labour markets more resilient to the economic cycle 70
European tools to support policies for resilient national labour markets 70
Improving labour mobility 73
Avoiding financial fragmentation during downturns 76
Increasing the resilience of European banks 77
Improving cross-border lending 80
Strengthening market-based finance 82
Establishing a fiscal framework for cross-country business cycle stabilisation 88
References 92
Table 1. The recovery is firming up 11
Table 1.1. Macroeconomic indicators and projections 23
Table 1.2. Events that could lead to major changes in the outlook 24
Table 1.3. Monetary and macroprudential policy measures taken since the 2018 Survey 31
Table 1.4. Reforming the European fiscal framework 47
Table 1.5. Strengthening resilience through a common fiscal capacity 53
Table 1.6. Reducing financial fragmentation to increase private risk-sharing 54
Table 1.7. KPI Recommendations on macro-economic and financial policies 57
Figure 1. Services were hit the most by the pandemic 11
Figure 2. Inflation has rebounded in 2021 12
Figure 3. Debt to GDP will rise to new highs 12
Figure 4. Provisions for credit losses had a negative impact on bank profitability 13
Figure 5. Insolvency regimes vary significantly across euro area countries 13
Figure 1.1. Tough containment measures reflected a pervasive spread of the epidemic 18
Figure 1.2. The large recession has been highly asymmetric across sectors 19
Figure 1.3. The current account surplus remains high, unemployment has started to decrease 20
Figure 1.4. The recovery will be robust 21
Figure 1.5. The ECB policy rates are at a historical low, and central bank balance sheet liabilities grew considerably 24
Figure 1.6. The ECB response to the pandemic calmed financial markets 25
Figure 1.7. Inflation rebounded in 2021 27
Figure 1.8. Non-performing loans remain for now low, but banks are expecting credit losses 28
Figure 1.9. House prices have increased markedly in 2020 30
Figure 1.10. Average inflation targeting and price level targeting require periods of above-target inflation after inflation undershooting 33
Figure 1.11. Agriculture-related products account for almost 20 percent of the euro area HICP 36
Figure 1.12. The fiscal response to the crisis was large 38
Figure 1.13. Deficits will remain high in 2021 39
Figure 1.14. Public debt increased substantially in 2020 and will remain high in the coming years 39
Figure 1.15. The fiscal stance in the euro area has frequently been pro-cyclical or neutral, rarely counter-cyclical 40
Figure 1.16. Fiscal policy tightened too soon after the global financial crisis 42
Figure 1.17. Compliance with EU fiscal rules has been low 43
Figure 1.18. The international role of the euro has decreased since the Global Financial crisis 50
Figure 1.19. The supply of euro safe assets has shrunk in the past 51
Figure 1.20. Redenomination risk abated since the global financial crisis and has remained low 52
Figure 1.21. Euro area labour markets respond differently to shocks 53
Figure 1.22. Financial fragmentation was one of the reasons of diverging business cycles during the last crisis 55
Figure 2.1. Euro area business cycles diverged during the global financial crisis 63
Figure 2.2. Global Value Chains did not improve cyclical convergence 64
Figure 2.3. Differences in industrial structures among euro area members have been rising 65
Figure 2.4. Labour markets in the euro area react differently to shocks 66
Figure 2.5. After the global financial crisis financial fragmentation increased, bank cross-border lending declined 68
Figure 2.6. Corporate investment declined asymmetrically in the aftermath of the global financial crisis 69
Figure 2.7. Government expenditure by level of government 70
Figure 2.8. The number of restructurings resulting in in European Globalisation Adjustment Fund interventions remains limited 72
Figure 2.9. In some euro area countries third-country citizens outnumber EU nationals among working-age foreign residents 74
Figure 2.10. Euro area banks are more capitalised but struggling with low profitability 78
Figure 2.11. Insolvency regimes vary significantly across European countries 81
Figure 2.12. The EU IPOs market has overtaken the one in the US in terms of deals, but volumes are declining 84
Figure 2.13. The number of publicly listed companies declined in the euro area and in the U.S. over the last 20 years 85
Figure 2.14. Corporate taxation favours debt over equity financing 85
Figure 2.15. Securitisation in Europe has not recovered since the global financial crisis 88
Figure 2.16. Unemployment benefits re-insurance scheme help smoothing economic shocks 90
Boxes
Box 1.1. The European monetary, financial and fiscal response to the COVID-19 crisis 22
Box 1.2. The new monetary policy strategy of the ECB 32
Box 1.3. The review of the monetary policy framework by the Federal Reserve 34
Box 1.4. Numerical rules and their choice 41
Box 1.5. Analytical assessment of expenditure rules 43
Box 1.6. Expenditure rules in EU national fiscal frameworks: the Netherlands and Sweden 45
Box 2.1. Mobility as an adjustment mechanism for labour markets in the EU and the U.S. 67
Box 2.2. Lessons from two decades of labour mobility in the EU 73
Box 2.3. Labour mobility versus brain drain 76
Box 2.4. Allowance for corporate equity (ACE) in Europe 86
Box 2.5. The stabilisation effect of a common employment insurance scheme 90