In its Country Report on ‘Euro Area Policies' prepared as part of annual Article IV consultation process, IMF staff suggests: “All countries should pursue growth-friendly fiscal rebalancing that lowers marginal taxes on labor and capital, financed by cuts to unproductive spending or base-broadening measures.”

While discussing initiatives to strengthen the resilience of the banking system, the report says: “banks, particularly in stressed economies, hold large amounts of deferred tax assets (DTAs) and goodwill, which are of doubtful loss-absorbing capacity. Regulatory treatment of DTAs should be harmonized in a way that does not encourage excessive de-risking. Also, further work is required to close gaps between the CRR and Basel III rules regarding the treatment of leverage and liquidity risk in the banking sector.”

DTAs are instruments that may be used to reduce future tax obligations contingent on future profitability; these can currently count as part of regulatory capital. Because DTAs are not loss-absorbing, their use as capital will be phased out over a 10-year transition to Basel III. However, some economies have introduced legislative changes enabling DTAs to be transformed into Deferred Tax Credits, which are not contingent on future profits and can be counted as capital regardless of whether the bank is profitable.

The Report has visualized an ‘Upside Scenario of Demand Support and Comprehensive Reforms'. The proposed policy package combines monetary easing, fiscal support and comprehensive structural reforms. It believes the growth dividend of a balanced policy mix can be large.

The Report explains: “The EUROMOD module of the IMF's Flexible System of Global Models (FSGM) points to a substantial growth dividend, particularly from fiscal policies and the improvement of the credit channel. Real growth for the euro area would increase by 1.3 and 1.4 percentage points to 2.7 and 3.0 percent for 2015 and 2016, and HICP (Harmonized Index of Consumer Prices) inflation rate in these two years would rise to 0.6 and 2.1 percent. The output gap would close by the end of 2016, about four years faster than in the baseline, and unemployment would be 0.8 percentage point lower than in the baseline by 2016.”