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Let me turn to the challenges. They differ from country to country obviously but there are a number of common themes.
1. Structural reforms support sustained growth and job creation, which in turn reduces pressures on public finances. But often this takes time. Debt levels are still high in many countries. Reducing debt can become harder for vulnerable countries in the context of a protracted period of low inflation, as we discussed at length in Strasbourg last week. Of course high debt levels must in any case be addressed first and foremost through responsible fiscal policies and growth-enhancing structural reforms.
2. Weak competitiveness remains a crucial concern in a number of countries. Cost competitiveness especially in terms of labour costs remains a challenge in several member states, such as Italy and France. Non cost competitiveness issues concern for example the allocation of investment or the size of investment, the condition of public infrastructure, the education system, the efficiency of public administration and the openness of the services sector.
3. Current account deficits have been significantly reduced, but an important challenge remains the large amount of external liabilities for the countries which ran large current account deficits over the last decade. At the same time, persistent large current account surpluses in other countries can reflect subdued domestic demand and weak domestic investment.
4. In contrast to last year, which is also an important finding in this report, the housing market adjustment appears now to be bottoming out in a number of countries, which obviously is good news.
Overall, macroeconomic imbalances, which built up over many years, are gradually receding, but at the same time new concerns have arisen, which require closer attention. This is reflected in the Commission's conclusions on the 17 Member States under scrutiny.
In line with the agreed rules, the Commission assessed whether a country has imbalances and whether these are excessive imbalances. To begin with the good news: No imbalances have been identified in three countries, Denmark, Luxembourg and Malta. However, 14 countries are found to have imbalances. And in three of these 14, Croatia, Italy and Slovenia, the imbalances are considered excessive.
Let me take you through our conclusions for the euro area's four largest economies, which because of their size could make the largest contribution to growth in Europe.
In Italy, the persistent high public debt puts a heavy burden on the economy and is also a serious concern for negative spillovers to the rest of the euro area. Italy will need to maintain high primary surpluses for many years, as well as lifting its growth rate, to reverse this trend. There is a risk that the adjustment of the structural balance in 2014 is insufficient given the need to reduce the very large public debt ratio at an adequate pace.
These challenges in Italy are compounded by competitiveness losses which are deeply rooted in long-standing inefficiencies in many areas of the economy and public administration. The crisis has weakened the initial resilience of the Italian banking sector and weakened its role to support the recovery of the economy, as seen in the persistent difficulty faced by SMEs to access affordable credit. The losses of competitiveness are rooted in a continued misalignment between wages and productivity, too high labour taxes, rigidities in wage setting, an unfavourable export product structure and a high share of small firms which find it difficult to compete internationally.
To address these challenges requires decisive and urgent policy action and a strong commitment to reform, for the sake of Italian citizens today and in future generations and we encourage new government to take swift action to encourage job creation in Italy.
Concerning France, decisive policy action is required in order to fight the country's imbalances. The growing trade deficit reflects the long-term fall in export market shares. Despite measures taken to foster competitiveness, so far there is limited evidence of rebalancing. While wages have developed in line with productivity recently, the labour cost remains high and weighs on firms' profit margins and weakens capacity to invest. The low and decreasing profitability of private companies, in particular in the manufacturing sector, may have hampered their ability to invest grow and thus improve their export performance.
To address the competitiveness challenges, France would need in particular to improve its business environment and boost competition in services.
Another source of serious concern is the high level of public debt. In this regard, we today draw the attention of France to the risk of not complying with its fiscal targets for this year, to which it committed last June.
In Germany, the persistently high current account surplus is a sign of strong external economic competitiveness, which is positive but also implies that a large share of Germany's income is being invested abroad. In turn, domestically, both private and public investment has been low for a long time. This poses a risk to the economy's long-term growth potential. Therefore higher investment in physical and human capital and opening up the economy to more competition, particularly in the services sector, would support future growth in Germany, and to some extent also elsewhere in Europe.
Spain has taken strong policy action over the last year. This has supported a return of confidence and adjustment away from excessive imbalances. Spain has returned to growth, but key challenges remain, notably the very high level of unemployment and the still large stock of debt. Thus, still existing imbalances continue to require decisive policy action in Spain.
Regarding the two other countries where we have concluded that excessive imbalances exist: in Slovenia, while decisive progress in repairing the banking sector has been made, other challenges still require strong policy action. We also draw Slovenia's close attention to the risk of not complying with the budgetary targets.
Excessive imbalances were also identified in Croatia. Croatia is now experiencing a prolonged bust, in which a range of external and internal risks have come to the fore. State-owned enterprises, which in some sectors still play a dominant role and which are often un-restructured, are overall highly indebted and weakly profitable. Moreover, Croatia has the lowest activity and employment rates in the EU. On a range of standard indicators, Croatia's business environment ranks significantly below the average for central and eastern European Member States. There is also a need for significant additional fiscal consolidation efforts in order to meet the deadline for effective action to address the excessive deficit by 30 April 2014.
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The Commission intends to carry out more detailed monitoring of the economic policies recommended by the Council to the Member States with excessive imbalances (i.e. Croatia, Italy and Slovenia), as well as for countries where imbalances require decisive policy action (i.e. Ireland, Spain and France). In the case of Ireland and Spain this monitoring will rely on post-programme surveillance.
To conclude, with our reinforced economic governance, Europe is now well equipped to address the still significant challenges ahead and to emerge from the crisis stronger than before. Our policy strategy has helped to make an economic turnaround in Europe, and we expect to see stronger growth and improving employment in the course of this year and especially next year.
In this context, the contribution of the largest euro area Member States to growth in Europe is particularly important, the policy priorities being the following: it is essential to continue to work on and intensify structural reforms and fiscal consolidation in Italy and France and to continue the orderly deleveraging and structural transformation of the economy that will contribute to sustainable growth, and addressing social issues in Spain.
It is also important to strengthen further domestic demand and especially domestic investment for medium-term growth in Germany in order to address bottlenecks of sustainable growth. With this supplementary economic policy strategy, the largest Member States, Italy, France Germany and Spain would indeed do the best service for sustainable growth and job creation in Europe.