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Country Reports: findings from in-depth-reviews by Member State

22 February 2017
by eub2 -- last modified 22 February 2017

The 27 Country Reports (for all EU Member States except Greece, which is under a dedicated stability support programme) provide an annual analysis by Commission staff of the situation in the Member States' economies, including where relevant an assessment of macroeconomic imbalances.


Bulgaria is experiencing excessive imbalances. Vulnerabilities in the financial sector are coupled with high corporate indebtedness in a context of incomplete labour market adjustment. Net foreign liabilities have fallen against the background of a current account surplus. The banking sector has stabilised, but the legacy issues linked to weak governance and supervision have not yet been fully dealt with. The authorities have completed the asset quality review and stress tests for the banking sector, as well as the balance sheet reviews of pension funds and insurance companies. Follow-up actions have been addressed to the concerned companies but remain to be implemented.Deleveraging in the corporate sector has been orderly but slow, leaving a large private sector debt stock as well as still high non-performing loans levels. Labour market conditions have improved, but employment levels are low, long term unemployment is high, and labour market mismatches persist. Some policy action has been undertaken to address the main sources of imbalance, but further progress is needed to address remaining pockets of vulnerabilities in the financial sector, including bank and non-bank financial supervision, as well as weaknesses hampering the insolvency framework.

Germany is experiencing imbalances.The persistently high current account surplus has cross-border relevance and reflects excess savings and subdued investment in both the private and the public sector.The current account surplus increased further in 2015 and 2016 and it is expected to remain at a high level. Addressing the surplus has implications on the rebalancing prospects of the rest of the euro area because more dynamic domestic demand in Germany helps overcoming low inflation and ease deleveraging needs in highly-indebted Member States.. Public investment has increased in recent years, but as a proportion of GDP still appears low compared with the euro area and in view of the fiscal space and investment backlog, in particular at municipal level. Despite low interest rates that create favourable financing conditions, business investment on GDP is still subdued.While recovery in private consumption has continued, household savings have reached record high levels in the euro area. Measures have been taken to strengthen public spending and improve the design of federal fiscal relations. Further policy action should aim at further strengthening investment, including by reforming the services sector and improving the efficiency of the tax system, as well as stimulating labour market activity of second earners, low-income earners and older workers to boost households' incomes and counter the effects of ageing.

Ireland is experiencing imbalances. Despite improvements in flow variables, large stocks of public and private debt and net external liabilities constitute vulnerabilities. Strong productivity growth in past years has contributed to improved competitiveness, and the recent worsening in the Net International Investment Position appears to be driven by factors disconnected with the domestic economy. On the back of a strong recovery, the ratios of private and government debt to GDP remain high but are falling. The share of non-performing loans has been declining over the last years, but remains elevated.Banks are well recapitalised and their profitability, albeit still low, is improving gradually.House prices are growing at a rapid pace, mainly driven by supply constraints, but from likely undervalued levels. Policy measures have been taken in recent years to strengthen the financial sector, restructure debt, increase housing supply and put public finances on a sustainable footing, and further measures are in the pipeline.

Spain is experiencing imbalances. A strong economic recovery continues supporting the rebalancing of the economy. However, large stock imbalances in the form of external and internal debt, both public and private, continue to constitute vulnerabilities in a context of high unemployment and have cross-border relevance. The rebalancing in the external sector is advancing, thanks to the current account surpluses recorded since 2013. However, net external liabilities remain very high and it will take time before they reach prudent levels. Private sector debt reduction is also progressing, supported by favourable growth conditions, while a healthier financial sector supports economic activity. However, deleveraging needs are still present, especially for households. Government debt as a share of GDP is not expected to be put on a declining path despite a quite robust recovery, on account of large though declining deficits.Despite a significant reduction over the past three years, unemployment remains very high.Measures have been taken to enhance competitiveness, but further policy action would help sustaining the external surplus, ensure a durable reduction of the general government deficit and support sustainable growth.

France is experiencing excessive imbalances.In a context of low productivity growth, high public debt and weak competitiveness may imply risks looking forward, with cross-border relevance. Competitiveness has started to improve, and export market shares have stabilised in recent years.However, subdued productivity growth prevents a faster recovery of cost competitiveness despite the measures to reduce the labour cost and a moderate evolution of wages. Profit margins of non-financial corporations have somewhat recovered since 2013, but continue to weigh on investment.Government debt is still growing, albeit at a decelerated pace, and sustainability risks in the medium term are high.Past policy commitments have been translated into action to improve the functioning of product and labour markets and the competitiveness of SMEs.While recent reforms constitute notable progress, some policy challenges remain to be addressed and further action would be needed, notably to increase the efficiency of public spending and taxation, to reform the minimum wage and the unemployment benefit system, and to improve the education system and the business environment.

Croatia is experiencing excessive imbalances.Vulnerabilities are linked to high levels of public, private and external debt, both largely denominated in foreign currency, in a context of low potential growth.The current account surpluses have begun to translate into a decrease of the gross external debt, which nevertheless remains elevated. The acceleration of the economic recovery is contributing to a further reduction in the private debt-to-GDP ratio, and as of this year public debt-to-GDP is also on a declining path. Despite recent losses, the financial sector remains relatively well-capitalised and profitability is recovering. The rate of non-performing loans has started to decrease, but remains high. A number of measures on insolvency frameworks and improving labour market flexibility have been adopted in previous years and public finances have improved markedly, but progress with structural reforms has been stalling since mid-2015. Policy gaps remains, notably on the front of the management of public finances, the modernisation of public administration, improving the business environment and addressing the low activity rates.

Italy is experiencing excessive imbalances. High government debt and protracted weak productivity dynamics imply risks with cross-border relevance looking forward, in a context of high non-performing loans and unemployment. The public debt ratio is set to stabilisebut has not yet on a downward path due to the worsening of the structural primary balance and subdued nominal growth.Competitiveness remains weak as productivity dynamics have remained subdued, also due to the slow investment recovery. The stock of non-performing loans has only started to stabilise and still weighs on banks' profits and lending policies while capitalisation needs may emerge in a context of difficult access to equity markets.Labour participation and employment are rising, but unemployment, particularly long-term, remains high, with negative consequences on future growth.After positive reforms of the budgetary process, labour market, banking sector, insolvency procedures, judiciary system and public administration, the reform momentum has weakened since mid-2016 and important policy gaps remain, in particular with regards to competition, taxation, fight against corruption and the reform of the framework for collective bargaining.

Cyprus is experiencing excessive imbalances. A very high share of non-performing loans burdens the financial sector and high stock of private, public, and external debt hangs on the economy, in the context of high unemployment and weak potential growth.The current account is still negative and is not adequate to guarantee a sustainable evolution of the net external liabilities stock.Government debt is expected to have peaked, but the current relaxation of fiscal policy is foreseen to slow down the needed adjustment.Despite a major restructuring of the banking sector and improved capital positions, the stock of non-performing loans is slowly declining but remains very high. Poor contract enforcement, inefficiencies in the judicial system and bottlenecks in the implementation of the foreclosure and insolvency legislation hamper private sector deleveraging and the reduction of non-performing loans. Reform momentum has weakened since 2016 and policy gaps persist in the areas of public administration, fiscal management, the justice system, the framework for title deeds, electricity and privatisation.

The Netherlands is experiencing imbalances.These imbalances are related to the high stock of private debt and the large current account surplus, with cross-border relevance.Private sector debt has only very gradually decreased in the last years. Nominal mortgage debt is increasing, against the background of resuming house price growth. The large current account surplus, which mainly reflects structural features of the economy and policy settings regarding non-financial corporations, is decreasing due to recovering domestic demand. Household deleveraging needs contribute to aggregate savings. Recent measures, aiming at reducing the tax and non-tax wedge on labour, can contribute to support domestic demand. However policy challenges remain on the front of pension reform and interest rate deductibility of mortgages, with a view to rebalance incentives to take up mortgage debt.

Portugal is experiencing excessive imbalances.The large stocks of net external liabilities, private and public debt and a high share of non-performing loans constitute vulnerabilities in a context of decreasing but still elevated unemployment and low productivity. Potential growth still lags behind its pre-crisis level, affected by persistent bottlenecks and rigidities in the product and labour markets together with major external imbalances. The current account balance is still below the level required for a significant adjustment of net external liabilities, and unit labour costs are increasing due to sluggish productivity growth and rising wages. Private debt is declining, and government debt has stabilised, in a context of remaining deleveraging needs. The large stock of non-performing loans is not yet stabilised and, together with low profitability and relatively thin capital buffers, they pose risks to banks' balance sheets. Labour market conditions have improved but youth and long-term unemployment, as well as market segmentation, are still high The reform momentum has weakened since 2014, and policy gaps persist in the areas of product and services markets, skills and innovation, fiscal sustainability, corporate debt restructuring, and labour market rigidities.

Slovenia is experiencing imbalances.Weaknesses in the banking sector, corporate indebtedness, and fiscal risks constitute vulnerabilities. Stock imbalances are gradually unwinding, including in light of resumed growth.The corporate sector has undergone a substantial deleveraging, and private investment, including in the form of foreign direct investment, has resumed, although stocks of inbound foreign direct investment remain low compared to regional peers. Public debt has peaked in 2015, and a downward adjustment is expected in the coming years. Progress on the front of banking sector restructuring has coincided with a rapidly falling share of non-performing loans, which is expected to continue to decline. Relevant measures have been taken by the government to consolidate and restructure the banking sector, and to improve the governance of state-owned enterprises. However, further policy action is needed to address corporate debt and remaining weaknesses in the financial sector, to ensure the long-term sustainability of public finances, and improve the business environment.

Finland is experiencing no imbalances. In the past years, Finland recorded competitiveness losses linked to the decline of key sectors and wage growth above productivity. Potential growth has fallen post-crisis and the growth of labour productivity is expected to remain subdued. The banking sector is well capitalised and fairly profitable, and the share of non-performing loans is low. Private debt as a share of GDP is rising but at a slower rate.Government debt has been growing fast in past years but remains at relatively prudent levels and the pace of increase has recently decelerated.Dynamic start-up activity supports structural change.Following a strong push from the government, social partners agreed on measures to improve cost competitiveness especially on the front of labour costs and to enhance the resilience of firms through more flexible wage setting practices.Measures have been taken also to contain the incentives for taking up excessive mortgage debt. Emerging policy challenges are linked to the continued increase in long-term unemployment, which highlights the need to better target active labour market policies and to continue to invest in life-long learning and vocational training.

Sweden is experiencing imbalances.Persistent house price growth from already overvalued levels coupled with a continued rise in household debt poses risks of a disorderly correction. The already high household indebtedness keeps growing, while housing prices, which appear to be overvalued, continue to rise at an elevated pace.Although banks appear adequately capitalised, a disorderly correction could also affect the financial sector as banks have a growing exposure to household mortgages. In such a case, there could be spill-overs to neighbouring countries since Swedish banking groups are of systemic importance in the Nordic-Baltic region. Awareness of mounting risks among the authorities is high, and in recent years measures have been taken to rein in mortgage debt growth and raise housing construction. However, policy steps implemented so far have not been sufficient to address overheating in the housing sector.Overall, policy gaps remain in the area of housing-related taxation, the macro-prudential framework, and in addressing bottlenecks for new housing supply as well as barriers to efficient usage of the existing housing stock.