IMF Concludes 2024 Euro Area Consultation

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the 2024 discussions on common euro area policies with member countries^[1]

The euro area is recovering gradually, with a modest acceleration of growth projected for 2024, gathering further speed in 2025. Increasing real wages together with some drawdown of household savings are contributing to consumption, while the projected easing of financing conditions is supporting a recovery in investment. Inflation is also coming down as past monetary tightening and the decline in commodity prices are having an effect on prices in the euro area. However, disinflation will continue to be gradual, and the inflation is projected to return to target in the second half of 2025.

Risks to growth are on the downside while they are two-sided for inflation. Past monetary policy tightening could put a stronger drag on output than expected. Adverse external developments—such as intensifying geopolitical tensions and/or weaker global demand—could also hold back growth. Were labor markets to weaken, the projected consumption growth may not materialize. Such developments could also drag inflation below the baseline. However, there are counterbalancing upside inflation risks from stronger-than-expected wage pressures or continued high company profits margins. Renewed commodity price spikes or shipping disruptions could also put upward pressure on inflation.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed the euro area's resilience, in the face of multiple shocks, with inflation declining toward its target. Directors concurred with the positive growth outlook, while recognizing the downside risks to growth and the two‑sided inflation risks. In that context, Directors encouraged the authorities to focus their near‑term efforts on finalizing the task of returning inflation to target and ensuring credible fiscal consolidation, particularly in high‑debt countries. Noting the need to address challenges related to population aging, the green transition, and security needs, Directors also emphasized the importance of labor market reforms and boosting investment and innovation to generate productivity growth.

Directors commended the European Central Bank for its skillful monetary policy management. They welcomed the recent start to monetary policy easing and stressed that the pace of further easing should continue to be data dependent. Directors underscored the importance of maintaining anchored inflation expectations, while avoiding an overly restrictive policy stance. Clear communication and credible commitment to bring inflation back to target remain essential.

Directors agreed on the need to rebuild fiscal buffers to guard against future shocks and higher spending needs, while minimizing any adverse effects on growth. They highlighted that sustained fiscal adjustment in high‑debt and high‑deficit countries would help to restore fiscal sustainability and reduce risks to the euro area. Medium‑term fiscal adjustment should primarily rely on expenditure measures that protect priority spending. Directors also noted that countries with lower risk of debt becoming unsustainable could use fiscal space to enhance growth and resilience.

Directors welcomed the new EU economic governance framework, recognizing its potential to enhance fiscal policy coordination and fiscal sustainability also via growth‑enhancing reforms and investments. Noting its complexity, Directors highlighted that capacity and political support is essential to ensure its effective implementation. Timely preparation of the medium‑term fiscal structural plans mandated under the framework is important.

Directors noted the strong capital and liquidity positions of European banks and saw merit in using temporarily high profits to build safeguards, including by increasing countercyclical buffer requirements. Continued monitoring of pockets of vulnerabilities from the commercial real estate sector and nonbank financial sector is important. Directors also encouraged policymakers to develop nonbank macroprudential tools, while continuing efforts to bridge data gaps.

Directors welcomed the authorities' efforts to boost productivity and labor supply. They recommended policies to address skills mismatches and improve labor mobility across the Union, including through better integration of migrants into the labor market. Deeper financial market integration, including by completing the capital markets and the banking unions, is essential to increase productivity and mobilize investment necessary for the green and digital transformations. Directors also underscored the need for higher and better targeted EU public investment and lower barriers within the European Union, to help strengthen the single market. Establishing a common Climate and Energy Security Facility would also be important.

Directors welcomed the European Union's efforts to strengthen the rules‑based international system and generally agreed with the need to continue to engage with partners as it implements trade‑related environment and climate policies. They also agreed with the need to avoid distortive trade and industrial policies.

It is expected that the next consultation on euro area policies in the context of the Article IV obligations of member countries will be held on the standard 12‑month cycle.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. Staff hold separate annual discussions with the regional institutions responsible for common policies for the countries in four currency unions – the Euro-Area, the Eastern Caribbean Currency Union, the Central African Economic and Monetary Union, and the West African Economic and Monetary Union. For each of the currency unions, staff teams visit the regional institutions responsible for common policies in the currency union, collect economic and financial information, and discuss with officials the currency union's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis of discussion by the IMF Executive Board. Both reports subsequently are considered an integral part of the Article IV consultation with each member.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.