1. IMF Article IV interim mission to the euro area. Eurogroup The President. Brussels, 13 December To the members of the Eurogroup

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1 Eurogroup The President Brussels, 13 December 2018 ecfin.cef.cpe(2018) To the members of the Eurogroup Subject: Eurogroup meeting of 3 December 2018 Dear colleagues, I would like to share with you the main content and course of our discussions at the Eurogroup meeting held on 3 December 2018 in Brussels. The Commission was represented by Vice-President Dombrovskis and Commissioner Moscovici. Our meeting was attended by ECB President Mario Draghi, ECB Executive Board Member Benoît Coeuré and by ESM Managing Director Klaus Regling. We also welcomed Poul Thomsen, Director of the European Department of the International Monetary Fund (IMF), who presented the findings of the IMF Article IV interim mission and joined us in our discussions of the first Enhanced Surveillance Report on Greece and of the post-programme surveillance mission to Cyprus. 1. IMF Article IV interim mission to the euro area. We were informed by the IMF about the main findings of their Article IV interim mission to the euro area that took place in November. The IMF expects the economic growth of the euro area to slow down but remain above potential. The main risks highlighted by the IMF are related to an insufficient level of fiscal consolidation and structural reforms in highly-indebted countries, contagion and renewed market volatility, global trade tensions and possible negative effects of Brexit. The possibility that these risks materialise simultaneously is an additional concern. The IMF stressed the need for continuing the accommodative monetary policy stance until inflation has durably converged to the ECB's inflation objective. It also called for rebuilding fiscal buffers, re-energizing the structural reform drive, strengthening the resilience of the financial sector, including by reducing fragmentation and advancing on EMU reform. Rue de la Loi/Wetstraat Bruxelles/Brussel - Belgique/België 1/5

2 The analyses and policy recommendations of the IMF were shared by all the institutions. 2. Greece enhanced surveillance report We were informed by the institutions about the main findings of the first enhanced surveillance report for Greece. We welcomed that the budget for 2019 is set to deliver the primary surplus target of 3.5% of GDP and took note of the Commission's assessment on the economic and social impact of implementing the pre-legislated pension cuts. We called for more progress in the area of privatization, arrears clearance and some aspects of the insolvency legislation. The Greek Minister broadly agreed with the assessment of the institutions and detailed ongoing efforts. We stressed that any changes to previously agreed reforms need to be discussed in advance with the institutions. We look forward to the second enhanced surveillance report expected at the end of February Cyprus post programme surveillance We were debriefed by the Commission and the ECB on the main findings of the fifth post-programme surveillance (PPS) mission to Cyprus and by the ESM on its early warning system that was carried out between 24 and 28 September We praised the Cypriot authorities for the strong macroeconomic and fiscal performance, and welcomed the assessment by the ESM that the repayment risks remained very low. We also concurred with the institutions assessment that further efforts are needed in order to reduce the still very high levels of NPLs and public and private debt. The Cypriot representative thanked the institutions for the excellent cooperation and confirmed the government's commitment to tackle these vulnerabilities. 4. Spain post programme surveillance We were informed by the Commission and the ECB about the main findings of the tenth postprogramme surveillance mission to Spain, and by the ESM on its early warning system. The institutions welcomed the strengthening of the Spanish financial sector, but they also called on the authorities to implement some sector-specific reforms, especially those related to the financial reform agenda. We welcomed the commitment of the Spanish minister to reduce the still high levels of public and private debt. 2/5

3 5. Assessment of euro area Member States' Draft Budgetary Plans and of the euro area budgetary situation and prospects The Commission presented the main messages of its opinions on the nineteen draft budgetary plans and of its overall assessment of the budgetary situation and prospects for the euro area as a whole. The Commission highlighted the improvements in the fiscal performance in the euro area as a whole while emphasizing the need for further debt reduction. We agreed on the importance of considering in a timely manner the necessary additional measures to address the risks identified by the Commission and to ensure compliance with the SGP, notably for countries with draft budgetary plans assessed to be at risk of non-compliance. We discussed the Commission assessment of Italy s draft budgetary plan for We concluded that we support the Commission assessment and we invited Italy to take the necessary measures to ensure compliance with the SGP. We also expressed support for the ongoing dialogue between the Commission and the Italian authorities. We endorsed a Eurogroup statement to communicate the outcome of our discussions (see annex). 6. Draft Eurogroup Work Programme I We adopted the Eurogroup work programme for the first half of 2019 (link). 7. Miscellaneous Under miscellaneous, the European Commission informed us about its planned Communication on the international role of the euro, following 20 years since its introduction. The Portuguese member also informed us about the Portuguese government s intention to repay fully the outstanding loan to the IMF, following the approval of the EFSF and EFSM waivers of the respective mandatory proportionate early repayment requirements. Yours sincerely, Mário CENTENO 3/5

4 Annex: Eurogroup Statement on the Draft Budgetary Plans for 2019 Eurogroup Eurogroup Statement on the Draft Budgetary Plans for 2019 Brussels, 3 December 2018 The Eurogroup welcomes that all 19 Member States have submitted Draft Budgetary Plans (DBPs) for Greece is part of this exercise for the first time, following the end of the macro-economic adjustment programme. On 21 November, the Commission provided in-depth individual assessments and Opinions, together with an analysis of the budgetary situation in the euro area as a whole. We note that Luxembourg, Latvia and Slovenia submitted DBPs on a no-policy-change basis. We invite them to submit the updates of their DBPs as soon as possible and look forward to the Commission assessment of those updates. The euro area is entering its sixth year of growth, although growth has peaked and downside risks have increased. The strength of the domestic drivers is supportive of the continued activity growth and unemployment reduction. According to the Commission autumn forecast, the aggregate deficit in the euro area is expected to further decline from 1% in 2017 to 0.6% of GDP in 2018, although an increase to 0.8% of GDP is forecast in For the first time since the introduction of the euro, in 2019 no euro area Member State is expected to have a deficit above 3% of GDP. Aggregate debt in the euro area is set to be on a downward path, from 89% of GDP in 2017 to 87% of GDP in 2018 and 85% of GDP in Current economic conditions call for the urgent need to rebuild fiscal buffers, notably in Member States that have not reached their Medium-Term Budgetary Objectives (MTO). The Eurogroup reiterates that a slow pace of debt reduction from high levels in a number of Member States remains a matter for concern and should be decisively addressed. In this context, the fiscal expansion or limited structural fiscal adjustment expected in some Member States in 2019 is worrying, in particular when coupled with high medium term sustainability risks. The Eurogroup recalls in this context that the focus on sufficient debt reduction and the adjustment towards the MTO are an integral part of the Stability and Growth Pact (SGP). The Eurogroup also recalls that country-specific recommendations adopted by the Council on 13 July 2018 include detailed and quantified fiscal policy guidance, taking into account the need to strengthen the growth potential and sustainability concerns. 4/5

5 The Eurogroup underlines that Member States are in very different budgetary situations. The Eurogroup recalls that in its opinion issued on 23 October 2018 the Commission identified a particularly serious non-compliance with the recommendation addressed to Italy by the Council on 13 July 2018 and requested a revised DBP. Italy submitted a revised DBP on 13 November, on which the Commission issued another opinion on 21 November, confirming the existence of a particularly serious non-compliance with the Council recommendation. We support the Commission assessment and recommend Italy to take the necessary measures to be compliant with the SGP. We also support the ongoing dialogue between the Commission and the Italian authorities. The Eurogroup takes note that, according to the Commission assessment, five Member States' plans are deemed to be at risk of non- compliance with the SGP in 2019: Belgium, France, Portugal, Slovenia, under the preventive arm of the SGP and Spain, assessed under the assumption of a timely and durable correction of the excessive deficit. According to the Commission assessment, the DBPs of these Member States might result in a significant deviation from the adjustment path towards their respective MTOs. In addition, Belgium, France, Portugal and Spain are not expected to comply prima facie with the debt reduction benchmark in The Eurogroup invites all these Member States to consider in a timely manner the necessary additional measures to address the risks identified by the Commission and to ensure that their 2019 budget will be compliant with SGP provisions. Based on the Commission assessment, three Member States plans are deemed to be broadly compliant with the SGP in 2019: Estonia, Latvia and Slovakia, all under the preventive arm of the SGP. The Eurogroup invites these Member States to ensure compliance with SGP provisions within the national budgetary processes and welcomes their commitment to take any necessary measures. The Eurogroup welcomes that ten Member States' plans are deemed to be compliant with the SGP in 2019: Austria, Cyprus, Finland, Germany, Greece, Ireland, Lithuania, Luxembourg, Malta and Netherlands, all under the preventive arm of the SGP. The Eurogroup also welcomes that some of the Member States that have outperformed their medium term objectives have plans to partly use their favourable budgetary situation in 2019 to boost investment and growth, while preserving the long-term sustainability of public finances. We will continue to monitor euro area Member States' fiscal and economic policies, as well as the budgetary situation of the euro area as a whole. 5/5