OECD Economic Survey of the EU-EA 2023 - Presentation

THE EUROPEAN UNION AND THE EURO AREA

6 September 2023

Europe’s recovery has been slowed down by the war

Note: Data refers to the euro area including 19 countries.

Source: OECD Economic Outlook: Statistics and Projections database; and Eurostat National Accounts database.

Inflation remains elevated

Note: Until 2021, the ECB’s target for headline inflation was below but close to 2%. Since 2021, the ECB’s inflation target is 2% over the medium term. Data refer to the euro area including 19 countries. Core inflation excludes volatile energy, food, alcohol and tobacco prices.

Source: Eurostat Harmonised index of consumer prices (HICP) database; and OECD calculations.

Growth is projected to pick up gradually

Economic projections, euro area

1. Harmonised index of consumer prices.

Source: OECD calculations based on OECD Economic Outlook 113 database.

MACROECONOMIC POLICY IS FACING SIGNIFICANT RISKS

Risks from elevated house prices must be monitored

Source: OECD Price Statistics database; and OECD calculations.

Bankruptcies have risen, adding to financial risks

Source: Eurostat Business Registration and Bankruptcy Index database; and OECD calculations.

Fiscal support in the energy crisis was mostly untargeted

Note: EU unweighted average of the 24 EU countries presented in the Figure. Support measures are taken in gross terms, i.e., not accounting for the effect of possible accompanying energy-related revenue-increasing measures, such as windfall profit taxes on energy companies. Where government plans have been announced but not legislated, they are incorporated if it is deemed clear that they will be implemented in a shape close to that announced. Gross fiscal costs reflect a combination of official estimates and assumptions on how energy prices and energy consumption may evolve when the support measures are in place. Costs are estimates for announced spending over 2022 and 2023, naturally subject to greater uncertainty in the current year. Measures corresponding to categories “Credit and equity support” and “Other” have been excluded. When a given measure spans more than one year, its total fiscal costs are assumed to be uniformly spread across months. For measures with no officially announced end-date, an expiry date is assumed and the fraction of the gross fiscal costs that pertains to 2022-23 has been retained. The current vintage of the database has a cut-off date of 20 April 2023.

Source: OECD Energy Support Measures Tracker.

Compliance with fiscal rules has been partial

Note: Data refer to the 27 EU Member countries. Compliance rules are: (i) deficit rule, a country is compliant if the budget balance of the general government is equal or larger than -3% of GDP or, if the -3% of GDP threshold is breached, the deviation remains small and limited to one year; (ii) debt rule, a country is compliant if the debt-to-GDP ratio is below 60% or if the excess above 60% has been declining by 1/20 on average over the past three years; (iii) structural balance rule, a country is compliant if the structural budget balance is at or above the medium-term objective (MTO) or, if the MTO has not been reached yet, the annual improvement of the structural budget balance is at least 0.5% of GDP; (iv) expenditure rule, a country is complaint if the annual growth of primary government expenditure, net of discretionary revenue measures and one-offs, is at or below the ten-year average of the nominal potential output growth.

Source: EU Compliance Tracker, https://commission.europa.eu/business-economy-euro/economic-and-fiscal-policy-coordination/european-fiscal-board-efb/compliance-tracker_en; and OECD calculations.

Recommendations on macroeconomic policies

• Maintain a restrictive monetary policy stance to ensure inflation expectations remain anchored and inflation decreases durably toward target.

• Continue to use macroprudential policy, including countercyclical buffers, to bolster banks’ resilience.

• Complete the Banking Union by addressing all outstanding issues in a holistic manner.

• Implement prudent fiscal policy, consistent with the return of inflation to target, ensuring temporary and targeted income support that preserves energy saving incentives.

• Refocus fiscal rules on debt sustainability and multiannual expenditure plans.

DEEPENING THE SINGLE MARKET

EU countries should further reduce regulatory barriers in digital trade with non-EU countries

Note: The OECD Digital STRI identifies, catalogues and quantifies barriers that affect trade in digitally enabled services. The Digital STRI indices take values between zero and one, one being the most restrictive. Data for the European Union and euro area are unweighted averages of the Digital STRIs of the member countries that are also members of the OECD (22 and 17 countries, respectively), therefore preferential trade agreements within the Single Market are not taken into account.

Source: OECD Digital Services Trade Restrictiveness Index (Digital STRI) database.

Trade barriers in some services sectors could be lowered

Note: The STRI indices take values between zero and one, one being the most restrictive. The intra-EEA STRI quantifies barriers to services trade within the Single Market of the EEA. By contrast, the STRI database records measures on a Most Favoured Nations (MFN) basis, where preferential trade agreements are not taken into account. Air transport and road freight cover only commercial establishment (with accompanying movement of people). The Intra-EEA STRI regulatory database covers 24 EEA members.

Source: OECD Intra-EEA Services Trade Restrictiveness Index (STRI) database.

Anti-money laundering measures can be improved

Note: Panel A summarises the overall assessment on the exchange of information in practice from peer reviews by the Global Forum on Transparency and Exchange of Information for Tax Purposes. Peer reviews assess member jurisdictions' ability to ensure the transparency of their legal entities and arrangements and to co-operate with other tax administrations in accordance with the internationally agreed standard. The figure shows results from the ongoing second round when available, otherwise first round results are displayed. Panel B shows ratings from the FATF peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refers to money laundering. "Investigation and prosecution²" refers to terrorist financing.

Source: OECD Secretariat’s own calculation based on the materials from the Global Forum on Transparency and Exchange of Information for Tax Purposes; and OECD, Financial Action Task Force (FATF).

Key recommendations on protecting the Single Market and anti-corruption policies

• Protect the Single Market and avoid relaxing the state-aid rules further.

• Re-direct existing EU resources towards support for green R&D, innovation and early-stage support.

• Co-ordinate harmonisation of national regulations and their alignment with EU rules for digital services, the circular economy and building codes.

• Continue to co-ordinate national efforts to fight corruption and fraud.

• Align minimum standards across countries and strengthen anti-corruption prevention measures.

ACCELERATING THE GREEN TRANSITION

Emission reductions need to accelerate to meet targets

Note: Greenhouse gas (GHG) emissions include those from the land use/land use change and forestry sector (LULUCF). Projections “with existing measures” (WEM) refer to 2019 EU policies and “with additional measures” (WAM) to new policies under more the ambitious FIT for 55 package. GHG emissions as projected by the respective country. NDC stands for Nationally Determined Contributions under the 2015 Paris Agreement. IPCC stands for Intergovernmental Panel on Climate Change. The IPCC target is equivalent to a 43% reduction compared to 2019 emissions, which is needed to limit global warming to around 1.5°C according to the IPCC (2022).

Source: IPCC (2022), United Nations (2022).

Agriculture and transport need to contribute more to emission reductions

Note: Excluding land-use, land-use change and forestry (LULUCF).

Source: OECD Environment Statistics database.

Carbon prices differ across sectors and need to be more aligned

Source: OECD (2022), Pricing Greenhouse Gas Emissions: Turning Climate Targets into Climate Action, OECD Series on Carbon Pricing and Energy Taxation, OECD Publishing, Paris, https://doi.org/10.1787/e9778969-en.

Government support for renewables mostly benefits cost-competitive biomass,

solar and wind

Source: EC (2022), Study on energy subsidies and other government interventions in the European Union – 2022 edition.

Reliance on unsustainable biomass should be reduced

Source: OECD Energy Statistics database; and OECD calculations.

Retail electricity markets should be further integrated

Note: Electricity prices for household consumers in the consumption bands 2.5 MWh-5 MWh (band DC). "Other taxes" is negative when the environmental tax allowances' amount is higher than the amount of the environmental tax itself.

Source: Eurostat electricity prices components for household consumers database.

Occupational entry barriers should be further reduced

Note: Workers in licensed occupations declared that without having a professional certification, licence, or taking an entry exam, it would be illegal to practice their occupations. Workers in certified occupations proclaimed that they have a license, certificate, or that they passed an exam to practice their occupation. However, it would not be illegal to practice their occupations without it.

Source: Koumenta and Pagliero, 2017 and Koumenta and Pagliero, 2016, based on the EU Survey of Occupational Regulation; and Bambalaite, I., G. Nicoletti and C. von Rueden (2020), "Occupational entry regulations and their effects on productivity in services: Firm-level evidence", OECD Economics Department Working Papers, No. 1605.

Recommendations to accelerate the green transition

• Expand the coverage of the Emission Trading System, including in agriculture.

• Broaden the energy tax base by phasing-out exemptions and reduced rates for fossil fuels.

• Ensure that the EU state-aid framework allows government subsidies only for renewable technologies that are not yet competitive.

• Ensure that EU countries do not support the use of unsustainable biomass.

• Ensure that EU countries phase out regulated retail electricity prices.

• Increase investment in cross-border grid connections.

• Gradually withdraw direct payments for high livestock numbers.

• Concentrate future funding for alleviating the socio-economic impacts of the green transition on mobility support and training. Make it conditional on labour market outcomes.

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