Monetary conditions in the euro area remain very accommodative. The relatively low cost of borrowing and fast rising incomes keep housing market activity at record highs and growth of house prices strong, though developments differ significantly across regions. Housing loans increased by around 9% in the first half of the year. As the private credit-to-GDP ratio and real house prices are still low by historical standards, risks to financial stability seem contained. The authorities need to continue using prudential measures pro‑actively to prevent imbalances from emerging.
The 2020 budget entails further increases in social spending, notably child benefits, and pay rises for public sector employees in areas such as education and health. The increased expenditures of these poverty‑reducing initiatives are partially compensated by an improvement in tax administration, including through the development of a continuous taxpayer control system to prevent tax fraud, and increases in some taxes, such as excise duties on fuel, strong alcohol and tobacco products. After easing in 2019, the fiscal stance is assumed to become broadly neutral in 2020-21. A healthy fiscal position is vital to address social needs and support further structural reforms in key areas, such as education and innovation, and for safeguarding low debt levels.
Strengthening skills and reducing skill mismatches are key to higher productivity and inclusiveness. Many workers are over-qualified for the jobs they do. Measures that improve teaching quality and make the education system more responsive to labour market needs are vital. Moreover, vocational education should be strengthened through more work‑based training and made more attractive for young people. Fostering strong and relevant skills also hinges upon effective up‑skilling and re‑skilling programmes that promote life-long learning and enhance employment opportunities and labour market inclusiveness.
