Mission Concluding Statement
Euro Area: IMF Staff Concluding Statement of the 2026 Mission on Common Policies for Member Countries
June 11, 2026
The productivity growth. The near-term goals for macroeconomic policies are to keep euro area economy confronts new headwinds from the war in the Middle East and the resulting energy price increase. Against a more fragmented global backdrop, these challenges are layered on top of Europe’s long‑standing structural headwinds—population aging and persistently subdnflation expectations at target and cushion the hit to activity in a fiscally prudent manner. At the same time, moving ahead on the structural agenda to strengthen Europe’s energy security, economic resilience, and potential growth has become even more urgent
Following a period of growth at potential and inflation on target, the euro area outlook has weakened. The war in the Middle East is expected to represent a large but temporary adverse supply shock that weakens confidence and tightens financial conditions, with temporary impacts on inflation. Staff’s latest projections, updated since the April World Economic Outlook to reflect more persistent disruptions to energy supply, point to growth of 0.9 percent in 2026 and 1.2 percent in 2027, below pre-war estimates by 0.5 and 0.2 percentage point, while headline inflation is projected to rise to 2.8 and 2.3 percent, above pre-war estimates by 0.8 and 0.4 percentage point, respectively.
Risks are skewed toward weaker growth and higher inflation. An even more persistent energy shock could raise inflation and inflation expectations further, even as a drop in confidence or financial stress could weaken demand. A resurgence of the conflict in the Middle East or delays in repairing energy infrastructure, intensified hostilities in Ukraine, and further trade policy adjustments pose additional downside risks. Financial stability risks have risen with the weaker outlook and could increase further if a sharp global risk-off episode were to amplify negative wealth effects, or if balance sheet stress in leveraged nonbank financial institutions (NBFIs) arose and propagated to banks and core funding markets.
Policymakers must manage the macroeconomic consequences of the current shock while advancing structural reforms to boost medium-term growth and resilience. The immediate priority is to keep inflation expectations anchored and cushion the impact of the shock within the available fiscal space. These efforts should remain consistent with the important, long-standing structural policy agenda to increase resilience and strengthen growth. Recent experiences have highlighted the urgency to address external energy dependence and exposure to external supply disruptions, as well as Europe’s limited capacity to manage shocks jointly.
Macroeconomic Stabilization
The policy rate will need to rise to keep the impact of the shock on inflation contained. In the baseline (which, in line with market pricing as of May 26, assumes a cumulative increase of 50 basis points over 2026 relative to the pre-war level), headline and core inflation remain above 2 percent into 2028. If incoming data are consistent with the baseline projection, a slightly more restrictive policy stance than assumed in the baseline might be needed to keep medium-term inflation expectations well anchored, prevent the energy cost shock from leading to generalized price increases, and ensure a more timely return of inflation to target. If energy prices and inflation expectations rise further than would be consistent with the inflation path envisaged under the baseline forecast, faster and/or larger tightening might be appropriate. However, if the increase in inflation expectations is paired with substantial deterioration in financial conditions and lower demand, a more negative output gap would limit inflation pressures and reduce tightening needs. Forward‑looking communication and continued use of scenario analysis, as well as clear explanations of the reaction function, will be essential to navigate uncertainty, contain financial volatility, and preserve price stability.
Broad-based fiscal support is not warranted. Under the baseline, the response should rely primarily on automatic stabilizers, including through the existing social safety net, while offsetting their fiscal impact where space is constrained. If adverse impacts intensify, any discretionary support should be temporary, well-targeted, and preserve price signals. Many member states have already introduced temporary, but untargeted energy support measures, averaging around 0.1 percent of GDP across the EU on GDP-weighted basis as of May 2026. Despite their limited scale so far, these measures likely blunt incentives for energy conservation and create adverse spillovers to other fuel importers. Any continuation of such measures or any new ones should be better targeted to protect vulnerable households while preserving price signals. Some member states have demonstrated that this is feasible, and the fiscal cost would be modest. Moreover, broad-based fiscal support, in addition to further straining public finances, could also add to the need for more monetary policy action to maintain price stability.
The fiscal policy response needs to be designed to support the transformation needed in the EU’s energy mix. The temporary relaxation of state-aid rules to support firms facing higher energy costs (Middle East Crisis Temporary State Aid Framework) must be monitored closely to ensure that it does not slow the energy transition. Member states should ensure that recipients make adjustments to their energy mix. Any further support should be limited and narrowly targeted to otherwise viable, energy-intensive firms, conditional on energy-efficiency improvements, and coordinated at the EU level to safeguard the level playing field. Targeting would help preserve room for productive investment in renewables, energy security, and energy efficiency. Recurrent recourse to windfall taxes after energy prices surge—deployed during the 2022 crisis and now being introduced in some countries to fund energy support measures—should be avoided as it risks discouraging needed investment.
Structural fiscal adjustment over the medium term remains imperative. At the euro area level, excluding Germany (where a ramp in infrastructure spending is underway), staff recommends improving the structural primary balance by about 3 percentage points of GDP between 2025 and 2031—an additional 1.3 percentage points on top of the baseline, largely for countries with high debt levels. All countries face considerable long-term spending needs, and further adjustment will be needed beyond the medium term. Fiscal adjustment will require a comprehensive and credible strategy that combines expenditure reprioritization, improved spending efficiency, and structural measures such as entitlement reform, together with growth-enhancing reforms to boost revenue.
Strong implementation of the EU fiscal framework is critical for credibly anchoring these efforts. Close monitoring of emerging risks using draft budgetary plans and annual progress reports will enable early identification of potential deviations from the goal of putting debt on a downward sloping path by the medium term and timely course correction. Systematic tracking of the long-term debt implications of cumulative deviations from medium-term plans—particularly those linked to the use of national escape clauses—is critical to identify cases where early action would avoid a materially larger adjustment in the next planning period. Further relaxation of fiscal rules risks undermining the credibility of the framework and placing debt on an even higher path. High-debt countries in particular should adhere to pre-war adjustment plans to preserve fiscal credibility.
Enhancing Resilience and Medium-term Growth
EU-level and complementary national reforms are essential for strengthening resilience and growth including efforts to curb vulnerabilities from global energy markets and deepen the single market.
A comprehensive EU-level energy strategy and predictable, consistent policies are vital for boosting long-term investment in renewables and reducing dependence on fossil fuels. Recent increases in renewable energy sources and improved energy efficiency have helped mitigate the economic impact of the current shock. A comprehensive strategy with stronger EU-wide coordination covering the entire system, including planning, investment, and market design, would help to further increase the share of renewables in energy production—thereby lowering costs of generation and weakening passthrough from global fossil fuel prices to EU electricity prices. The proposed Grids Package and plans to expand grid investment in the next EU budget can help strengthen interconnectivity, manage intermittency in a system with greater reliance on renewables, and reduce energy price dispersion. Decisively shifting to a renewables-based energy mix will require a stable and credible policy framework to guide investment. A stable and predictable ETS and launching ETS2 in 2028 are essential; weakening the ETS would dilute carbon-pricing signals and set back the transition.
Addressing supply chain vulnerabilities calls for a targeted and disciplined approach. As private firms minimize costs, their concentrated external sourcing of hard‑to‑substitute inputs can generate economy-wide negative externalities when supply is interrupted. Policies to build supply chain resilience should target such clearly identified market failures, rely on the least distortionary instruments, minimize spillovers, and be deployed only where the expected macroeconomic costs of disruption credibly outweigh fiscal and efficiency costs—which tend to rise quickly as the scope of intervention broadens. Against this benchmark, the proposed Industrial Accelerator Act (IAA) raises concerns, because of its broad push to expand the manufacturing base. Its local content requirements in procurement and support schemes, as well as FDI conditions tied to local value creation, could distort sourcing and investment decisions, while not being well targeted at the vulnerabilities where resilience gains outweigh the efficiency and fiscal costs.
Efforts to strengthen resilience should be anchored in a more integrated EU single market that enables firms to scale up, lifting productivity growth. The recent EU institutions’ agreement on the Single Market Roadmap signals commitment to this objective. The proposals put forward by the Commission in key areas should be adopted and built upon. First, a voluntary 28th enterprise regime via an EU regulation could materially lower legal fragmentation and support cross‑border scale up. The Commission’s proposal for an optional EU‑wide company form is closely aligned with this objective. Realizing its full impact, however, will require a more predictable, rescue-oriented insolvency framework as well. Second, as part of the savings and investments union (SIU), the Market Integration and Supervision Package will help build scale in trading venues and financial market infrastructure, supported by enhanced centralized supervision. Completing key elements of the SIU—improving retail investment vehicles, expanding long‑term risk capital, and strengthening public‑market exit options for early-stage venture capital—could lift EU GDP by around 3 percent in the long run.[1] Completing the SIU also requires continued progress on the banking union and financial safety net.
Supportive policies for secure and innovative financial market infrastructures will help advance financial market integration in Europe. The digital euro could support seamless retail payments across the euro area, lower transaction costs, and deepen competition and integration of financial services. Ongoing work on wholesale CBDC would help preserve interoperability and the role of central bank money as the main settlement asset—while transactions shift to distributed ledgers and tokenization grows. Over time, a more integrated capital market—together with progress on safe EU-level assets, including greater issuance at the EU level—would strengthen risk sharing in the euro area. In this regard, the ECB’s recent enhancement of the Eurosystem repo facility (EUREP) could increase external demand for euro-denominated securities, while strengthening the global financial safety net.
Strong competition enforcement critically complements the effort to foster dynamism and cross‑border scale‑up. Challenges to scale-up largely reflect remaining single market frictions, not competition enforcement. Deepening the single market including through reducing regulatory fragmentation can facilitate scale up. Loosening merger rules to create “European champions” risks entrenching market power and undermining innovation, especially in still segmented national markets. The review of merger guidelines must balance the potential benefits of greater innovation and investment that could come with scale against the costs of higher concentration and diminished market contestability. Clarity on underlying principles and consistent application of guidelines can help provide legal certainty.
A stronger EU‑level fiscal capacity can enhance resilience and support deeper integration. A larger EU budget focused on European Public Goods (EPG) with performance-based disbursements and guarantees to catalyze private funding could incentivize national reforms and investments, while enhancing the EU’s ability to manage major shocks. Expanding own resources through measures closely aligned with EU‑level policies and sound tax principles will support larger borrowing and debt service capacity for the budget. In this regard, the proposed turnover‑based corporate contribution (CORE) risks cascading distortions and disproportionately burdening low-margin, longer-value chain firms—with potentially adverse effects on cross-border production within the single market. Instead, further expanding the EU’s share in robust bases such as harmonized VAT and ETS revenues should be considered. Adopting a harmonized EU corporate tax base—such as Business in Europe: Framework for Income Taxation (BEFIT)—and incorporating it into own resources would deliver single market efficiency gains and sustainable EU-level revenue.
Trade policy should continue to diversify trade relations, reduce policy uncertainty, and support an open and stable trading system. The EU should seek broad-based and mutually advantageous agreements in ongoing trade negotiations. Staff analysis suggests that preferential trade agreements with deep mutual commitments, such as with Mercosur and India, can expand bilateral trade and support diversification. The EU should continue to focus on regional, plurilateral, and multilateral agreements and maintain a leading role in supporting WTO reforms.
Safeguarding Financial Stability
Financial stability has been preserved, supported by strong regulation and supervision, but maintaining it will require continued adaptation to evolving risks and financial innovation. Close monitoring of vulnerabilities in the NBFI sector—including offshore hedge funds and private credit—and its links to banks, as well as closing relevant data gaps, is essential—as emphasized in the 2025 FSAP recommendations. Stress tests should be extended to cover banks’ off-balance-sheet exposures to nonbanks and additional risk-transmission channels. Proposed reforms to ESMA’s governance and funding would strengthen centralized oversight of cross-border market activities, improve supervisory convergence, and enhance data collection, risk monitoring, and stress testing. Moreover, preventing regulatory arbitrage will also require empowering ESMA to top up national measures for significantly leveraged funds and to enforce cross-border reciprocation. The Commission’s response to the consultation on the adequacy of NBFI macroprudential policies provides an important opportunity to strengthen systemwide oversight. Building on the ECB’s recent decision to reinstate access to monetary policy operations for banks in resolution, completing the financial safety net will require stronger resolution and liquidity backstops (including with the ratification of the ESM Treaty to enable the ESM to act as a backstop for the Single Resolution Fund), harmonized emergency liquidity arrangements, and implementing a European Deposit Insurance Scheme. Progress is needed on other key FSAP recommendations, including reforms to money market funds regulation, strengthening TARGET Services oversight, and expanding the counterparty framework.
Preserving core prudential safeguards is essential amid regulatory simplification. Reducing complexity in EU financial regulation, supervision and reporting should not be at the expense of prudential standards. Full and timely Basel III implementation remains essential.
Although not an imminent risk, stablecoins warrant attention. As the scale of activity grows from current low levels, multi-issuance stablecoin structures and EU MiCAR reserve requirements (to maintain 30-60 percent of reserves in bank deposits) could transmit liquidity stress to EU banks during large redemption episodes. Strong cross‑jurisdictional supervisory cooperation is essential to mitigate the risk and—if this proves elusive—MiCAR’s rules may need to be clarified to ensure orderly cross-border mobility and transfer of reserves during periods of stress.
The operationalization of the EU Anti-Money Laundering Authority and adoption of a regional approach is welcome. Member states and EU institutions should work closely with AMLA, including through the sharing of data and information, to ensure that AMLA is well-positioned to commence direct supervision in 2028.
[1] Luis Brandao-Marques and others, forthcoming, “Deeper Financial Integration to Foster Growth and Resilience in Europe”, IMF Staff Discussion Note. International Monetary Fund.
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