Some challenges ahead for the EU

In the euro area growth is holding up but the general outlook is less bright than inrecent years. The anticipated slowdown largely results from the gradual attenuation of thepost-Great Recession recovery momentum and the convergence of growth rates towardsa lower potential growth path. It also coincides with a revival of political turmoil, consequently emphasizing the urgency to deal with external downsize risk by strengtheninginternal sources of growth—investment and private consumption. The sun has beenshining but the opportunity for structural repair has not been taken. Hence, imbalanceswithin the euro area need to be addressed in order to achieve sustainable development.The increase of public debt is one of the main legacies of the crisis. While it is currentlydeclining, long-run simulations suggest that without further consolidation, the publicdebt-to-GDP ratio will not reach the arbitrary 60% target by 2035 in a number of countries. To top it off, countries that are concerned are those whose unemployment rateremains above its pre-crisis level, yet the implementation of a new fiscal consolidationwould result in higher employment. It thus raises the question of this rule's sustainability.The euro area as a whole has a large trade surplus, which favors pressures for the appreciation of the euro, which can reduce growth prospects. Unlike the period before the crisis,the imbalance is clearly concentrated in surplus countries.Finally, the aforementioned imbalances make governance reforms more urgent thanever. Until now, progress in this area has proved rather timid.This work led us to three key policy insights. First, the structural adjustment needed tobring back public debt to its target would weigh on the reduction of unemployment.Euro area countries can pursue an additional fiscal consolidation provided output gap isclosed, and countries with fiscal leeway should use it to sustain growth in the euro area asa whole.Secondly, the ongoing debate on the reform of the economic governance of the euroarea must pay more attention to the evolution of nominal prices and wages, in order toreduce the sources of divergence. In the same time, the need to strengthen wagebargaining systems by giving the social partners a greater role is important. Finally yetimportantly, the need for a greater automatic stabilization, including of a cross-bordernature, in monetary union is undisputed. The proposals under discussion do go to someextent in this direction and deserve support