## eur-booked3 ## Source details **Canonical URL:** [eur-booked3](https://www.imf.org/-/media/files/publications/reo/eur/2018/may/eur-booked3.pdf) ## Other formats - [Markdown version](/-/media/files/publications/reo/eur/2018/may/eur-booked3.pdf.md) - [Structured JSON version](/-/media/files/publications/reo/eur/2018/may/eur-booked3.pdf.json) --- ### Growth, outlook, and revisions - Europe growth (selected WEO entries, year‑over‑year percent change): - Europe: 2016 = 1.8; 2017 = 2.8; 2018 = 2.6; 2019 = 2.2; Difference from October 2017 WEO: 2017 = 0.4; 2018 = 0.4; 2019 = 0.3. - Advanced European Economies: 2016 = 1.9; 2017 = 2.4; 2018 = 2.3; 2019 = 2.0; Difference from October 2017 WEO: 2017 = 0.3; 2018 = 0.4; 2019 = 0.3. - Euro Area: 2016 = 1.8; 2017 = 2.3; 2018 = 2.4; 2019 = 2.0; Difference from October 2017 WEO: 2017 = 0.2; 2018 = 0.5; 2019 = 0.3. - Emerging European Economies (aggregate): 2016 = 1.6; 2017 = 3.7; 2018 = 3.1; 2019 = 2.7; Difference from October 2017 WEO: 2017 = 0.6; 2018 = 0.5; 2019 = 0.2. - Turkey: 2016 = 3.2; 2017 = 7.0; 2018 = 4.4; 2019 = 4.0; Difference from October 2017 WEO: 2017 = 1.9; 2018 = 0.9; 2019 = 0.5. - Russia: 2016 = 0.1; 2017 = 1.7; 2018 = 1.9; 2019 = 1.7; Difference from October 2017 WEO: 2017 = 0.1; 2018 = 0.2; 2019 = 0.0. - Drivers of upward revisions: - Stronger domestic demand and investment; investment accounts for almost half of the revision in both advanced and emerging Europe. - Global context: synchronized global expansion projected to edge up from 3.8 percent in 2017 to 3.9 percent in 2018 and 2019. - Oil price: increased to above $65 a barrel (about 30 percent above the October 2017 WEO projection). - Near‑term indicators: - Industrial output (January 2018): about 3.6 percent in advanced Europe and 4.6 percent in emerging Europe. - Manufacturing PMIs softened in March 2018; euro‑area composite index declined cumulatively by 4 points since end‑2017. - Citigroup Economic Surprise Index: upside surprises less frequent than last year, especially in the euro area. ### Inflation, prices, and pass‑through - Euro area headline inflation: 1.1 percent in February 2018; core inflation remains low. - Selected inflation readings: - Nordic inflation: 1.5 percent in February 2018. - United Kingdom inflation: 2.7 percent in February 2018. - Poland headline inflation: hit 2.5 percent in November 2017; core inflation about 0.8 percent in recent months. - Baltics: almost 4 percent in Q2 2017, then 2.8 percent in February 2018. - Central and Southeastern Europe (emerging Europe): headline inflation about 2 percent at end‑2017; core about 1 percent. - Russia: headline and core inflation about 2.2 and 2 percent in January–February 2018. - Turkey: core inflation picked up to about 12 percent in recent months, from about 10 percent in August 2017. - Inflation projections (selected, year‑over‑year percent change): - Europe: 2.0 2.9 2.8 2.8 (table format in source). - Euro area: 0.2 1.5 1.5 1.6 (table format in source). - Turkey: 7.8 11.1 11.4 10.5 (table format in source). - Russia: 7.1 3.7 2.8 3.7 (table format in source). - Wage‑to‑price pass‑through (panel VAR results): - EU15: a 1 percentage point wage shock → cumulative 3‑year price rise of 0.6 percent and cumulative 3‑year wage rise of 2.4 percent — pass‑through about 25 percent. - Newer members: a 1 percentage point wage shock → cumulative 3‑year price rise of 0.9 percent and cumulative 3‑year wage rise of 3.6 percent — pass‑through about 25 percent. ### Labor markets, wages, and slack - Employment and unemployment (headline statistics): - Employment increased by 12.7 million people since early 2013, exceeding precrisis peaks by 2.2 percent at end‑2017. - Unemployment fell from 11 percent in early 2013 to 7.3 percent in late 2017. - Newer EU members: unemployment fell by 5 percentage points on average; EU15 average rate declined by 3 percentage points. - Newer members average unemployment: 6 percent by end‑2017. - Wage dynamics: - EU15 nominal wage growth: average increases below 2 percent since 2012; nominal wage growth 1.8 percent in Q4 2017; average nominal wage growth around 1½ percent since 2011. - Newer members nominal wage growth: accelerated to 6¾ percent in Q4 2017 (from 3½ percent in 2014); real wage gains surged to 4.1 percent year‑over‑year in 2017. - Ratio of real wages to trend labor productivity in 2017: roughly 2½ percent higher than historical average in newer members. - Phillips‑curve and ECM findings: - EU15 wage Phillips curve: modest slope; wages respond slowly to changes in unemployment, more tied to inflation and inflation expectations. - Newer members: stronger wage responsiveness to slack (coefficient on unemployment gap about −1); wages respond faster and more to domestic and external slack. - Error correction dynamics: ECM error correction parameter about 0.36 (other euro area) and 0.40 (newer member states) — roughly 40 percent of deviation from long‑run equilibrium corrected each year. - Alternative slack measures and findings: - Nonemployment index (unemployment + marginal attachment + underemployment) provides additional information beyond unemployment gap. - Involuntary part‑time employment and hours per employee (intensive margin) matter; hours per employee has low correlations with other slack indicators but is relevant for wage dynamics (especially Germany). - Migration effects on wages: - A rise in net migration inflows by 1 percentage point (share of labor force) reduces wage growth next year by 0.4 percent in the other euro area and by 0.5 percent in newer EU members (temporary, modest effect). - Gross migrant outflows have a larger coefficient than inflows in some specifications. ### Financial sector, credit, and vulnerabilities - Credit and NPLs: - Credit growth has picked up since 2016 but still lags domestic demand; business credit growth uneven where NPLs are high. - Turkey: credit growth rebounded strongly to about 20 percent year over year in early 2018 after stimulus measures. - NPL levels: substantially reduced in the euro area since 2014 peak but remain high in some countries; NPLs remain higher than 10 percent in half of the emerging Europe countries. - Bank profitability: - Return on equity for a sizable part of the banking system persistently below cost of equity; further consolidation and restructuring needed. - Financial conditions and markets: - Real effective exchange rate of the euro appreciated by 7 percent since the beginning of 2017. - Euro area sovereign yields edged up in many economies; ECB net asset purchases expected to remain substantial at least through September 2018 relative to projected net issuance. - European equity volatility spiked in early February 2018 then receded to 2016–17 average; February 2018 correction mild relative to 2013 taper tantrum. ### External positions and competitiveness - Current accounts and external liabilities: - Most countries have current account balances stronger than pre‑global financial crisis; many former deficit countries now in surplus. - Germany and the Netherlands: persistent excess current account surpluses; Germany’s surplus stronger than implied by medium‑term fundamentals. - Emerging Europe: many economies adjusted from large deficits to small surpluses, but net external liability positions remain elevated. - Turkey: current account deficit around 5 percent of GDP. - Unit labor costs and REER: - Unit labor costs fell 10 percent or more relative to euro area average in Greece, Portugal, and Spain since the global crisis. - Germany’s unit‑labor‑cost coefficient on productivity in long‑run wage equations: 1.027***; other country examples provided in long‑term findings. - Multilateral ULC‑based REER correlates strongly with external balances; ULC‑based measures show different patterns than CPI‑ or GDP‑deflator‑based measures. ### Policy recommendations and priorities - Overall policy stance: - With closed output gaps in many countries and improving short‑term prospects, rebuild fiscal buffers and press ahead with reforms to boost potential growth. - Carefully calibrate monetary normalization to avoid abrupt tightening of global financial conditions. - Monetary policy guidance (region‑specific): - Euro area and most advanced Europe: remain strongly accommodative until inflation durably converges to targets; ECB’s downsizing of net asset purchases in January 2018 and forward guidance support favorable financing conditions. - United Kingdom: future rate moves should be driven by evolving inflation and Brexit uncertainties. - Czech Republic: steady, data‑driven normalization appropriate. - Romania: policy rate raised twice in 2018 by a cumulative 50 basis points. - Russia: room for further easing given declining inflation. - Turkey: monetary policy should tighten further beyond what would follow US Fed hikes to lower inflation, reanchor expectations, underpin the currency, and rebuild official reserves. - Fiscal policy guidance (region‑specific): - Countries with limited fiscal space: consolidate in a growth‑friendly way before monetary accommodation ends. - Countries with fiscal space: boost potential growth through public investment. - Nordic economies: mildly contractionary stance appropriate. - Emerging Europe: reduce structural fiscal deficits toward medium‑term “close‑to‑balance” targets and lower high debt levels. - Russia: planned deficit reduction in 2018–20 under new fiscal rule warranted; recommended measures include improving tax collection, increasing returns on state assets, means testing social assistance, pension parametric reform, and reducing subsidies and tax expenditures. - Turkey: front‑loaded fiscal consolidation above authorities’ medium‑term program targets, backed by well‑defined revenue and spending measures. - Financial policy and banking union steps: - Continue reducing NPLs, strengthen bank balance sheets, deploy macroprudential tools where vulnerabilities are high. - EU/ECB actions: reduce impediments to NPL resolution across 19 jurisdictions (minimum standards for collateral valuation, consistent NPL definitions, insolvency and creditor rights). - Institute a backstop from the European Stability Mechanism to the Single Resolution Fund; set up a European deposit insurance scheme with a fiscal backstop. - Advance Capital Markets Union to widen financing for SMEs, harmonize insolvency regimes, and protect cross‑border investor rights. - Consider a central fiscal capacity (CFC) for macro stabilization with conditional access and design elements such as a “usage premium” and caps on contributions/receipts. - Structural reform priorities: - Advanced Europe: labor and product market reforms, improve education and training, shift taxes away from labor, strengthen apprenticeships and active labor market policies. - Emerging Europe: institutional improvements, public sector efficiency, improve investment environment (especially SEE non‑EU and some CIS), raise female and older worker participation, reduce youth unemployment. - Turkey: increase labor market flexibility and improve business environment. - Newer EU members: address skill shortages, apprenticeship/training expansion, and measures to retain skilled workers given migration and demographic pressures. ### Quantitative highlights and model results (selected) - Employment increase since early 2013: 12.7 million people; unemployment fell from 11 percent to 7.3 percent by late 2017. - Error correction mechanics: ECM term ~0.36–0.40 → ~40 percent of deviation corrected each year (≈64 percent after two years; ≈78 percent after three years). - Long‑run productivity‑to‑real‑wage coefficients (examples): - Germany: 1.027*** (standard error 0.0328). - France: 0.932*** (0.0193). - Czech Republic: 1.074*** (0.0163). - Poland: 0.696*** (0.0314). - Long‑run policy reform effects (examples): - Hartz reforms (Germany): estimated long‑term lowering of equilibrium real wage by 5½ percent. - Spain unemployment benefit reform: estimated long‑term reduction in real wages by 4 percent. - Industrial output growth (January 2018): about 3.6 percent (advanced Europe); 4.6 percent (emerging Europe). - Turkey credit growth: about 20 percent year over year in early 2018. *International Monetary Fund | Regional Economic Outlook: Europe | May 2018 (excerpt).* ### Preface ### Preface ### Preparation and Leadership - The May 2018 Regional Economic Outlook: Europe was prepared by a staff of the IMF’s European Department under the general guidance of Jörg Decressin. - Chapter 1 team: Vizhdan Boranova, Raju Huidrom, Sylwia Nowak, Faezeh Raei, and Yan Sun; led by Emil Stavrev. - Chapter 2 team: Vizhdan Boranova, Jiaqian Chen, Dilyana Dimova, Christian Ebeke, Raju Huidrom, Nemanja Jovanovic, Li Lin, Aiko Mineshima, Jean-Marc Natal, Faezeh Raei, Tiberiu Scutaru, Jesse Siminitz, Yan Sun, Peichu Xie, and Sophia Zhang; led by Craig Beaumont and Emil Stavrev. - Chapter 1 (alternative contributor note): Phillip-Bastian Brutscher and Miroslav Kollar of the European Investment Bank contributed to Box 1.2 in Chapter 1. ### Contributions, Feedback, and Administrative Support - Laura Papi and the European Department country teams provided useful feedback on the report. - The chapter benefited from the exchange of views with the Central, Eastern, and Southeastern European authorities during the 2018 Spring Meetings of the International Monetary Fund and the World Bank in Washington, DC, and their subsequent comments. - Administrative support was provided by Lian Veluz. - Communications Department colleagues who provided support: Marjorie Henriquez, Wiktor Krzyzanowski, David Pedroza, and Rhoda Weeks. - Editing and production coordination: Linda Long; editing help from David Einhorn and Lucy Morales. - Layout services performed by Heidi Grauel. ### Approval and Document Timing - Approved by Poul M. Thomsen. - The chapter reflects data and developments as of April 19, 2018. *Preface — Regional Economic Outlook: Europe, May 2018 (IMF staff).* ### 3.1 percent in 2016, reflecting mainly ### eur-booked3 - 3.1 percent in 2016, reflecting mainly ### Growth revisions and potential growth - Growth revisions raised estimates of potential growth in 2018 by 0.2 percentage point in advanced Europe and by 0.1 percentage point in emerging Europe. - Output gaps appear largely closed in most of the region (Figure 1.3). - The 2016 figure cited: 3.1 percent in 2016, reflecting mainly a temporary slowdown in Serbia caused by a prolonged drought and electricity disruptions. ### Overheating indicators and labor markets - Many countries show buoyant activity and unemployment rates below historical averages, with exceptions including France, Italy, and Spain. - Output is above precrisis levels but still below precrisis trend in most countries. - Inflation remains below central bank targets almost everywhere, except in Turkey and the United Kingdom. - External indicators generally do not suggest overheating. - Financial stability indicators mostly benign, with exceptions: high credit growth in Turkey and a rapid increase in house prices in Romania. - Corporate profitability declined moderately in Eastern Europe but remains about 10 percentage points higher than in advanced Europe (Figure 1.8). ### High-frequency indicators and near-term outlook - Manufacturing PMIs remain in expansion territory but softened in March 2018. - Russia’s PMI came in barely above 50. - Euro-area composite index declined by a cumulative 4 points since end-2017—the largest three-month decrease since May 2012. - Industrial output continued to expand in January 2018 at about 3.6 percent in advanced Europe and 4.6 percent in emerging Europe, though recent growth rates are lower than in the second half of 2017. - In Germany, industrial orders fell almost 4 percent, and factory sales edged down 0.2 percent month over month in January 2018. - Citigroup’s Economic Surprise Index suggests upside surprises are now less frequent than last year, especially in the euro area. ### Inflation: subdued in advanced Europe, gathering pace in eastern Europe - Euro area headline inflation declined to 1.1 percent in February 2018, below the ECB’s target; core inflation remains low. - Nordic inflation: 1.5 percent in February 2018. - United Kingdom inflation: 2.7 percent in February 2018. - Czech Republic: inflation surpassed the 2 percent target starting in early 2017 before declining at the beginning of 2018. - Baltics: inflation reached almost 4 percent in Q2 2017, then dropped to 2.8 percent in February 2018. - Central and Southeastern Europe (emerging Europe): headline inflation increased to about 2 percent at end-2017; core inflation about 1 percent. - Poland: headline inflation hit 2.5 percent in November 2017 but has fallen since; core inflation around 0.8 percent in recent months. - Southeastern Europe (SEE): headline inflation increased steeply in Romania as effects of tax and administrative adjustments dissipate. In non-EU SEE economies, headline inflation picked up sharply to 2½ percent in mid-2017, then declined somewhat; Serbia’s inflation fell to 3 percent. - Russia: headline and core inflation reached record lows of 2.2 and 2 percent, respectively, during January–February 2018. - Turkey: inflation remains elevated; core inflation picked up to about 12 percent in recent months, from about 10 percent in August 2017. ### Wage dynamics and productivity - Wage growth is low in most advanced Europe but strong in newer EU member states (Czech Republic, Baltics, Central Europe, SEE economies), significantly outpacing inflation as unemployment dips below precrisis lows. - Wage Phillips curves show a modest slope in the EU15 and stronger wage responses to slack in newer EU member states. - In advanced Europe, wage growth has generally tracked labor productivity; in newer EU member states, wage growth has outpaced productivity, though the gap narrowed as labor productivity rose strongly in late 2017. - Low inflation expectations and external competition have muted wage responses in advanced Europe; corporate profitability broadly stable there. ### Credit, NPLs, and bank profitability - Credit growth has been picking up since 2016 in many European countries but still lags domestic demand and output. - Euro area and other advanced European countries: bank credit to the private sector is picking up, but growth in credit to businesses remains uneven and weak where NPLs are high. - Nordic economies: credit to businesses is robust; credit to households slowed somewhat after macroprudential measures. - Emerging Europe (outside CIS): credit growth to nonfinancial corporations and households is increasing, particularly in Central Europe and SEE-EU. - Russia: the decline in credit seems to have stabilized as the economy exited recession. - Rest of the CIS: credit continued to contract, albeit at a slower pace. - Turkey: credit growth rebounded strongly to about 20 percent year over year in early 2018 following stimulus measures including a credit guarantee program. - NPL levels have declined but remain a drag: - NPLs in the euro area substantially reduced since 2014 peak but remain high in some countries. - NPL levels remain higher than 10 percent in half of the emerging Europe countries. - Bank returns: for a sizable part of the banking system, return on equity persistently below cost of equity; further consolidation and restructuring needed to restore profitability. ### External positions and real exchange rates - Real effective exchange rate of the euro appreciated by 7 percent since the beginning of 2017. - Czech koruna appreciated about 10 percent following lifting of the koruna-euro floor in early 2017 and subsequent increases. - Stronger fundamentals have accompanied these appreciations. *Source: IMF Regional Economic Outlook: Europe (May 2018), excerpt provided in the content unit.* ### 1. MANAGING ThE UpswING IN UNCERTAIN TIMEs ### 1. MANAGING ThE UpswING IN UNCERTAIN TIMEs ### Exchange rates, current accounts, and external positions - Euro appreciation and local factors: Polish zloty and Hungarian forint experienced appreciation driven by policy rate moves and strong growth; Swiss franc depreciated since early 2017 due to the negative interest rate differential with the euro. - Currency episodes: - Turkish lira: depreciation in 2017 by about 6 percent, following a similar-sized depreciation after the 2016 coup; associated with above-target inflation and a widening current account. - Russian ruble: depreciated by 6 percent since February 2017, after the 2014–16 depreciation and partial recovery. - British pound: broadly sideways since the 2016 depreciation. - Current account developments: - Most countries show current account balances noticeably stronger than before the global financial crisis. - Advanced Europe: former deficit countries have achieved surpluses (Estonia, Portugal, Spain) or substantially reduced deficits (Greece, Latvia, Lithuania); negative net foreign asset positions remain elevated in many countries. - Excess current account surpluses have persisted in Germany and the Netherlands; Germany’s surplus remained stronger than implied by medium-term fundamentals and desirable policy settings. - Emerging Europe: many economies adjusted from large deficits to small surpluses, but net external liability positions remain elevated. - Turkey: current account deficit has stayed around 5 percent of GDP, with higher fuel prices and strong domestic demand widening the deficit despite solid export performance. ### Key forces shaping the outlook: favorable external conditions and macro policy stance - Global growth and trade: - Synchronized global expansion projected to edge up from 3.8 percent in 2017 to 3.9 percent in 2018 and 2019. - Recovery in global investment has spurred stronger manufacturing activity and an upturn in global trade; global PMIs for early 2018 indicate momentum will continue into H1 2018. - Commodity prices: - Oil prices increased to above $65 a barrel (about 30 percent above the projection in the October 2017 World Economic Outlook). - Futures markets point to some oil price declines over the next few years from current levels. - Monetary policy and real rates: - Almost all central banks in the region maintaining negative real policy rates. - Major moves: - United Kingdom: Bank of England raised the policy rate for the first time in 10 years, to 0.5 from 0.25 of a percent. - Czech Republic: raised rates three times since August 2017 and is expected to continue gradual normalization. - Romania: policy rate raised twice in 2018 by a cumulative 50 basis points. - Turkey: increase of the effective interest rate by almost 5 percentage points in 2017; markets expect further tightening in 2018. - Russia: central bank cut policy rates by a cumulative 275 basis points since March 2017 as inflation stabilized below its 4 percent target. - Russia and Turkey noted as the only large European economies with positive real policy rates at the time of the report. - Fiscal policy: - Fiscal stance projected to be neutral or expansionary in the region in 2018, except in Iceland, Italy, Russia, the Slovak Republic, and the United Kingdom. - Aggregate euro area fiscal stance forecast to remain broadly neutral in 2018–19 and tighten only gradually in 2020. - Procyclical loosening projected in Southeastern Europe and Turkey. ### Financial conditions and market developments - Financial stress and yields: - Financial stress indices tightened modestly in late 2017. - Sovereign bond yields edged up in many euro area economies amid better growth and expectations of earlier monetary policy normalization; yields declined in about a quarter of European economies (notably Greece, Portugal, Ukraine). - ECB net asset purchases expected to remain substantial at least through September 2018 relative to projected net issuance of government debt. - Market volatility and portfolio flows: - European equity volatility rose substantially in early February 2018 but declined thereafter to the average level observed in 2016–17. - Portfolio flows to emerging Europe remained robust through January 2018, especially bond flows; flows reversed slightly during the February equity correction but recovered thereafter. - The February 2018 correction was mild compared with the “taper tantrum” of 2013. - Near-term financial conditions remain supportive of growth, though signs of tightening are gradually appearing in some markets and volatility remains a concern given ongoing trade tensions. ### Outlook, revisions, and inflation projections - Short- and medium-term growth outlook: - Europe’s growth forecasts for 2018 and 2019 were revised up relative to the November 2017 Regional Economic Outlook. - Upward revisions largely reflect stronger domestic demand; investment accounts for almost half of the revision in both advanced and emerging Europe. - Much of the growth revision attributed to cyclical factors, though potential GDP was also revised up in places due to more dynamic investment. - Specific growth forecasts and revisions (selected highlights): - Euro area growth forecast: 2.3 percent in 2018 and 2.0 percent in 2019; revisions up by 0.4 and 0.3 percentage point for 2018 and 2019, respectively. - Germany: revision for 2018 about ¾ percentage point. - Central Europe: growth revised up by 0.7 and 0.5 percentage point for 2018 and 2019, respectively. - SEE-EU: growth revised up by about 0.6 percentage point for 2018. - Russia: 2018 growth revised slightly upward on account of higher oil prices. - Turkey: growth revised up by 0.9 and 0.5 percentage point for 2018 and 2019, respectively. - Inflation projections and notable revisions: - Euro area inflation revised up by 0.1 percentage point to 1.5 percent in 2018 and down 0.1 percentage point to 1.6 percent in 2019; remains below the ECB target. - Poland: inflation revised up by 0.3 percentage point to 2.5 percent in 2018 due largely to higher energy prices. - Romania: inflation revised up by 1.3 percentage points to 4.7 percent in 2018 (above the upper end of the central bank target) reflecting strong wage growth and demand pressure. - Russia: inflation revised significantly downward to below 3 percent in 2018 and to about 3¾ percent in 2019. - Turkey: inflation revised significantly upward reflecting pass-through from exchange rate depreciation and higher energy prices. - United Kingdom: inflation expected to decline gradually toward target over the next two years as import price pressures dissipate, offset by some recovery in wage growth. - Table 1.2 (selected entries from WEO April 2018 projections; year-over-year percent change): - Europe: 2016 = 1.8; 2017 = 2.8; 2018 = 2.6; 2019 = 2.2; Difference from October 2017 WEO: 2017 = 0.4; 2018 = 0.4; 2019 = 0.3. - Advanced European Economies: 2016 = 1.9; 2017 = 2.4; 2018 = 2.3; 2019 = 2.0; Difference from October 2017 WEO: 2017 = 0.3; 2018 = 0.4; 2019 = 0.3. - Euro Area: 2016 = 1.8; 2017 = 2.3; 2018 = 2.4; 2019 = 2.0; Difference from October 2017 WEO: 2017 = 0.2; 2018 = 0.5; 2019 = 0.3. - France: 2016 = 1.2; 2017 = 1.8; 2018 = 2.1; 2019 = 2.0; Difference from October 2017 WEO: 2017 = 0.3; 2018 = 0.3; 2019 = 0.1. - Germany: 2016 = 1.9; 2017 = 2.5; 2018 = 2.5; 2019 = 2.0; Difference from October 2017 WEO: 2017 = 0.5; 2018 = 0.7; 2019 = 0.6. - Spain: 2016 = 3.3; 2017 = 3.1; 2018 = 2.8; 2019 = 2.2; Difference from October 2017 WEO: 2017 = 0.0; 2018 = 0.2; 2019 = 0.2. - Emerging European Economies (aggregate): 2016 = 1.6; 2017 = 3.7; 2018 = 3.1; 2019 = 2.7; Difference from October 2017 WEO: 2017 = 0.6; 2018 = 0.5; 2019 = 0.2. - Central Europe: 2016 = 2.7; 2017 = 4.4; 2018 = 4.0; 2019 = 3.4; Difference from October 2017 WEO: 2017 = 0.7; 2018 = 0.7; 2019 = 0.5. - Poland: 2016 = 2.9; 2017 = 4.6; 2018 = 4.1; 2019 = 3.5; Difference from October 2017 WEO: 2017 = 0.7; 2018 = 0.7; 2019 = 0.5. - Southeastern European EU Member States: 2016 = 4.4; 2017 = 5.7; 2018 = 4.5; 2019 = 3.3; Difference from October 2017 WEO: 2017 = 1.0; 2018 = 0.6; 2019 = 0.1. - Turkey: 2016 = 3.2; 2017 = 7.0; 2018 = 4.4; 2019 = 4.0; Difference from October 2017 WEO: 2017 = 1.9; 2018 = 0.9; 2019 = 0.5. - Russia (CIS example): 2016 = 0.1; 2017 = 1.7; 2018 = 1.9; 2019 = 1.7; Difference from October 2017 WEO: 2017 = 0.1; 2018 = 0.2; 2019 = 0.0. - Memorandum — European Union: 2016 = 2.0; 2017 = 2.7; 2018 = 2.5; 2019 = 2.1; Difference from October 2017 WEO: 2017 = 0.3; 2018 = 0.4; 2019 = 0.3. ### Risks and policy considerations - Near-term risks: - Broadly balanced: upside from potential growth surprises, robust business and consumer confidence, and buoyant market sentiment; downside from market volatility and trade tensions. - Upside: stronger-than-expected persistence of the cyclical upswing if potential growth is stronger or slack larger than assessed. - Medium-term risks: - Tilted to the downside: tightening financial conditions, reversal of portfolio flows, and renewed exchange rate pressures could challenge the cyclical expansion. - Monitoring priorities: - Competitiveness and wage dynamics where real effective exchange rates and rapid wage growth have outpaced productivity (Baltics, Central Europe, SEE-EU). - External positions: elevated net foreign liability positions in many countries despite current account improvements. - Inflation pass-through from energy and exchange rate developments, especially in Romania, Poland, Russia, and Turkey. - Policy stance implications: - Continue careful calibration of monetary normalization in advanced economies to avoid abrupt tightening of global financial conditions. - Fiscal policies in countries running expansionary stances should consider medium-term risks given closed output gaps in many economies. *Italic: Source — International Monetary Fund, Regional Economic Outlook: Europe, May 2018 (chapter: 1. MANAGING ThE UpswING IN UNCERTAIN TIMEs).* ### 1. MANAGING ThE UpswING IN UNCERTAIN TIMEs ### 1. MANAGING ThE UpswING IN UNCERTAIN TIMEs ### Downside risks and external environment - Increasingly overstretched asset valuations and compressed term premiums globally raise the possibility of a financial market correction and a rapid tightening of global financial conditions; a faster-than-expected increase in inflation in advanced economies is a possible trigger. - Worsening trade tensions and imposition of trade barriers could weaken confidence and take a toll on economic activity. - Beyond the near term, risks are clearly tilted to the downside, stemming from financial vulnerabilities, possible inward-looking policies globally, and a range of noneconomic factors (for quantification, see Box 1.3 referenced in the source). - Inward-looking policies and rising protectionism could affect European countries and the rest of the world through trade, financial, and investment channels; recent renegotiations (e.g., NAFTA) and proposed US tariffs are cited as examples. - Other risks: a significant slowdown in China, geopolitical tensions, and cyberattacks could cause financial instability and disrupt growth. ### Domestic vulnerabilities and banking sector risks - With monetary accommodation being reduced, highly indebted euro area countries could face challenges in coping with higher financing costs in the absence of fiscal adjustments and structural reforms. - Remaining vulnerabilities in parts of the euro area banking system could reignite financial distress; a tail of weaker internationally active banks with lower capital and provisions could face funding challenges in sudden market turmoil or an unexpected downturn (see April 2018 Global Financial Stability Report). ### Political and policy uncertainties - Dissatisfaction with the slow pace of convergence after the crisis and high unemployment in parts of the euro area could challenge the cohesion of the Economic and Monetary Union and affect reform efforts. - Protracted policy and economic uncertainty—including uncertainties surrounding post-Brexit negotiations—could weigh on growth. The United Kingdom’s large and complex financial system exposes it and the global economy to transition risks. - Policy uncertainties are also noted related to newly elected governments in major European countries. ### Inflation projections (Year-over-year percent change) — selected entries from Table 1.3 - Europe: 2.0 2.9 2.8 2.8 0.0 0.1 0.1 - Advanced European Economies: 0.4 1.7 1.7 1.7 0.1 0.1 0.1 - Euro Area: 0.2 1.5 1.5 1.6 0.1 0.1 0.1 - Emerging European Economies: 5.6 5.5 5.3 5.3 0.1 0.1 0.4 - Commonwealth of Independent States: 7.8 4.6 3.6 4.2 0.4 1.0 0.2 - Russia: 7.1 3.7 2.8 3.7 0.6 1.2 0.2 - Turkey: 7.8 11.1 11.4 10.5 0.3 2.0 1.7 - Memorandum — European Union: 0.2 1.7 1.9 1.8 0.1 0.1 0.2 - Note: table shading indicates downward revisions; sources: IMF, World Economic Outlook (WEO); and IMF staff calculations. ### Policy priorities — overview - With short-term prospects improving but medium-term downside risks persisting, policymakers should rebuild fiscal policy room and press ahead with reforms to boost growth potential. - Monetary policy: in countries with still-subdued inflation, monetary policy should remain supportive; where inflation is hitting targets, gradual normalization is appropriate. - Fiscal policy: the trade-off is now tilted more favorably toward consolidation to rebuild buffers; countries with limited fiscal space should consolidate in a growth-friendly way before monetary accommodation ends; countries with ample fiscal space can boost potential growth through public investment. - Financial policy: continue to reduce NPLs, strengthen bank balance sheets, and deploy macroprudential tools where vulnerabilities are high. - Structural policy: press forward with labor and product market reforms, improve education and training, shift taxes away from labor, and use targeted EU incentives tied to reforms. ### Monetary policy — region-specific guidance - Euro area and most of advanced Europe: remain strongly accommodative until inflation durably converges to central bank targets; ECB’s downsizing of net asset purchases in January 2018 and forward guidance on policy rates support favorable financing conditions. - United Kingdom: following the November 2017 rate increase, future rate moves should be driven by evolving inflation conditions and Brexit-related uncertainties. - Czech Republic: steady, data-driven normalization is appropriate. - Central European emerging economies: monitor inflation pressure closely given strong wage growth; stand ready to adjust policy if inflation reaches or exceeds targets. - Hungary: monetary policy can remain supportive in the immediate term but should remove stimulus if underlying inflation pressure picks up. - Poland: data-dependent decisions, accounting for fiscal stance and monetary transmission lags to avoid inflation overshooting. - Russia: room for further policy easing given declining inflation. - Turkey: monetary policy should tighten further beyond what would be needed to follow US Fed hikes to lower inflation meaningfully, reanchor expectations, underpin the currency, and rebuild official reserves. ### Fiscal policy — region-specific guidance - Most countries saw headline fiscal balances improve due to the expansion, but only about one-third saw improvement in cyclically adjusted balances; more progress is needed. - Euro area: limited-fiscal-space countries should consolidate in a growth-friendly way before monetary accommodation ends; countries with ample fiscal space should invest to raise potential growth and aid external rebalancing. - Nordic economies: a mildly contractionary fiscal stance is appropriate given cyclical positions. - United Kingdom: fiscal framework should balance flexibility to respond to shocks with fiscal discipline and rebuilding buffers. - Emerging Europe: priority is to reduce structural fiscal deficits toward medium-term “close-to-balance” targets and lower high debt levels. - Russia: planned deficit reduction in 2018–20 under the new fiscal rule is warranted; additional measures include improving tax collection, increasing returns on state assets (including dividend payouts), means testing of social assistance, parametric pension reform, and reductions in subsidies and tax expenditures. - Turkey: front-loaded fiscal consolidation—above authorities’ medium-term program targets and backed by well-defined revenue and spending measures—would support internal and external rebalancing and investor sentiment. ### Financial policy — measures and priorities - Progress has been made on cleaning up bank balance sheets, but more remains to be done. - EU and ECB proposals targeting NPLs are positive steps; euro area authorities should reduce impediments to NPL resolution caused by fragmentation across 19 jurisdictions (minimum standards for valuation of loan collateral, consistent definitions of NPLs, minimum standards for insolvency and creditor rights). - Single Supervisory Mechanism should follow up on NPL guidance, including evaluating and monitoring bank-specific NPL reduction targets backed by Pillar 2 powers. - European Banking Authority should advance its NPL sales platform. - Nordic economies: macroprudential policy can help reduce housing-sector vulnerabilities; Czech central bank should be given binding powers over loan-to-value, debt-to-income, and debt-servicing-to-income ratios. - Some Eastern European economies: continued reduction of NPLs is a priority given improved prospects for asset sales. - Turkey: policies should strengthen oversight and governance of the banking sector and implement FSAP recommendations; revisit macroprudential policies where vulnerabilities are highest, particularly the highly leveraged corporate sector. ### Structural reform priorities - Advanced Europe: pursue ambitious labor and product market reforms to close competitiveness gaps; improve quality education and training tailored to labor market needs; shift taxes away from labor; strengthen apprenticeship and active labor market programs to reduce youth unemployment; combine targeted EU structural funds and outcome-based benchmarks with stricter enforcement of the Macroeconomic Imbalance Procedure. - Emerging Europe: enhance institutions, improve public sector efficiency, improve the investment environment for SEE non-EU and some CIS countries, boost labor participation of women and older workers, and reduce youth unemployment; Western Balkans: institutional strengthening to support EU engagement. - Russia: institutional improvements are prerequisites to reap dividends from investment in innovation and other reforms. - Turkey: reforms should focus on increasing labor market flexibility and improving the business environment. ### EMU architecture — recommended steps - Use the recovery opportunity to deepen the Economic and Monetary Union: - Complete the banking union: institute a backstop from the European Stability Mechanism to the Single Resolution Fund and set up a European deposit insurance scheme with a fiscal backstop. - Upgrade supervisory capacity to oversee migrating financial intermediation associated with Brexit and increased market-based activities; advance the Capital Markets Union (CMU) to widen financing choices for small and medium-size enterprises, harmonize insolvency regimes, and protect cross-border investor rights. - Establish a central fiscal capacity (CFC) for macroeconomic stabilization; build support over time and condition access on compliance with fiscal rules and mechanisms to prevent permanent transfers. Possible CFC design elements: - Employ a “usage premium” so a country pays a premium in good times based on transfers received in bad times. - Place a cap on contributions to prevent some countries becoming large net contributors. - Limit how much a country can receive so transfers do not substitute for necessary policy adjustment. ### Box 1.1 — The Capital Expenditure Recovery Cycle: Insights from the European Investment Bank Survey - The 2017 EIB Investment Survey (EIBIS) of EU firms finds replacement investment still dominates: about half of firms’ investment in 2017 was for replacement purposes; capacity expansion accounted for slightly more than a quarter; 17 percent was for innovation purposes. - Looking ahead, firms expect investment in capacity expansion and new products to account for more than half of future investment, which bodes well for productivity and employment. - Investment for expanding capacity and innovation tends to support more employment compared with replacement investment. - Main obstacles to investment: lack of staff with the right skills and uncertainty about the future; skill constraints are particularly acute in newer member states where skilled labor emigration has been long-standing. - Investment in intangible assets (R&D, training, ICT capital, organizational improvements) is weaker in Central, Eastern, and Southeastern Europe than in the rest of the EU; lack of skilled staff and Europe’s largely bank-based financial sector (difficulties using intangibles as collateral) may constrain such investment. - The box was prepared by Phillip-Bastian Brutscher and Miroslav Kollar (European Investment Bank) and Raju Huidrom and Faezeh Raei (IMF). *International Monetary Fund | May 2018* ### 1. MANAGING ThE UpswING IN UNCERTAIN TIMEs ### 1. MANAGING ThE UpswING IN UNCERTAIN TIMEs ### Investment patterns and firm-level barriers (Box 1.1) - Investment purposes and types of assets: Figures show current and future investment by purpose (New products; Capacity expansion; Replacement) and share of intangible investment as percent of total investment; specific plotted values are in the source figures. - Employment effects by investment type: Share of firms stating a positive versus negative employment effect for New products, Capacity expansion, Replacement (CESEE versus Non-CESEE) — detailed percentiles and net balances are reported in the source figures. - Barriers to investment (percent of respondents): Access to digital infrastructure; Adequate transport infrastructure; Availability of finance; Demand for products and services; Energy costs; Labor market regulations; Business regulations; Uncertainty about the future; Availability of skilled staff; Others — exact percent responses are shown in the source figures. ### How different is the current recovery compared with previous ones? (Box 1.2) - Overview: - Europe’s recovery from the Great Recession was long and uneven; "it took about 10 years after the crisis for all countries in Europe to grow again in 2017." - Post-crisis years characterized by weak investment, lackluster credit growth, large output gaps, and stubbornly low inflation. - Comparison framework: - Recoveries compared with the 1991 global recession (chosen among 1975, 1982, 1991, and 2009) based on data availability and similarities. - Similarities: both recoveries preceded by boom and bust in credit and stock markets in advanced economies; initial years complicated by major policy/financial events (1992–93 Exchange Rate Mechanism crisis; euro area debt crisis in 2011–13). - Main difference: the monetary union. - Real GDP: - In advanced Europe, growth gained momentum only five years after the global financial crisis as opposed to three years after 1991. - Emerging Europe excluding the CIS and Turkey: recovery stronger than advanced Europe and on average similar to post-1991. - Investment: - Sustained weakness in investment in both advanced and emerging Europe after the global financial crisis, linked to housing and credit market weaknesses and possible housing market corrections. - Unemployment: - Both episodes marked by higher unemployment rates. - Despite a much sharper contraction of output in 2009, the rise in unemployment was broadly similar in the first three years in advanced Europe, possibly reflecting more flexible labor markets and labor hoarding. - After the double dip of 2011–13, unemployment remains somewhat more elevated than in the previous crisis and has not yet returned to precrisis levels. - Emerging Europe has experienced a more favorable unemployment trajectory than after 1991, reflecting stronger macroeconomic frameworks and the absence of transition-related structural rises in unemployment. - Inflation: - Both recoveries saw declines in inflation; the initial drop after the global financial crisis was sharper. - After seven years, average inflation has been lower by about 3 percentage points compared with the precrisis year. - Initial inflation levels differed: in advanced Europe, average inflation hovered around 5 percent in 1991 and 3 percent in 2009; the post-2009 episode entailed below-target inflation rates for an extended period. - Equity prices: - In advanced Europe, equity prices have been weaker in the current episode compared with 1991, consistent with weaker real GDP and the weight of banks in indices. - Credit growth: - The current recovery in both advanced and emerging Europe has been creditless compared with 1991. - For advanced Europe, credit has remained flat even a decade after the initial shock, versus recovery five years after 1991. - For emerging Europe, the current creditless recovery contrasts sharply with the strong credit deepening after 1991. - Implications for potential growth: - Few compelling reasons to expect the emerging economies of Eastern Europe recovery to last longer than post-1991; investment weakness may increasingly constrain potential growth. - In advanced economies the outlook is less clear, but weak investment similarly does not bode well for future growth. - These developments are consistent with large markdowns in projected growth rates for potential output after the global financial crisis. ### Economic effects of large stock price declines (Box 1.3) - Scope: Sample covers G7 countries, Spain, and Sweden from 1980 to 2017; sharp asset price corrections defined as asset price drops within the fifth percentile of the distribution of quarterly changes. - Real GDP growth: - GDP growth on average declines by 0.5 percentage point (quarter over quarter) in the first quarter after a large stock price decline. - Growth remains lower by 0.1 percentage point after eight quarters. - Inflation: - Annual inflation tends to be lower by 0.3 percentage point in the quarter after a sharp asset price drop and by 1.2 percentage points after eight quarters. - The decline in inflation appears more pronounced in the recent crisis than in the early 2000s. - Given low starting inflation, further declines can be problematic for inflation-targeting central banks. - Unemployment: - After eight quarters of sharp asset price drops, unemployment is higher by 1 percentage point on average. - Monetary policy response: - Short-term interest rates are generally reduced by –0.5 percentage point in the first quarter following a sharp asset price drop. - Larger policy responses follow over the medium term (eight quarters later), but the scope for large responses is much more limited today. - Timing and dynamics: Growth recovers somewhat over subsequent quarters but remains below pre-shock levels at the eight-quarter horizon; changes in inflation and unemployment are slower-moving. ### Policies to increase labor force participation: European experience (Box 1.4) - Challenge: - Emerging European countries face adverse demographic trends: declining working-age population due to aging, outward migration, and relatively low life expectancy. - Labor force participation among women and older workers is low compared with advanced Europe. - Recent trends: - Overall labor force participation has fallen in many advanced European economies in the last decade. - Male participation declined in most countries; female participation rose in about three-quarters of advanced European economies. - Participation increased markedly among older workers and declined slightly among youth. - Policy levers and country examples: - Prime-age women: - Work flexibility, childcare and preschool availability and affordability, parental leave policies, and tax policy matter. - Sweden: parental leave, subsidized childcare, shorter working hours for parents; individual taxation that does not discourage second earners. - Germany: "Hartz reforms" (2003–05) increased part-time work opportunities; 2007 maternity leave reform sped return to work. - Spain: 2012 labor market reforms promoted part-time work. - Israel: 2003 reform of untargeted child allowances reduced benefits and progressivity, encouraging work. - Older workers: - Influenced by statutory retirement age, pension generosity, and disability insurance. - Germany: 2007 pension reform gradually increases statutory retirement age to 67 from 65 by 2030 and reduced replacement rates; more recent incentives to work past mandatory retirement age and more flexible schedules, while lowering retirement age for certain workers. - Sweden: 2007 earned income tax credit reform encouraged labor supply for workers older than 65; payroll tax rate more than halved for these workers; reforms combined with stricter eligibility for disability insurance. - The young: - High labor costs (tax wedge and minimum wages) affect entry-level employment. - Germany: about 50 percent of all high school graduates receive dual vocational training (company-based apprenticeships + vocational college); apprentices exempted from minimum wage regulations and receive a "training allowance" of about 50 percent of the national minimum wage. - Immigrants: - Policies encouraging labor market integration raise participation of prime-age workers. - Sweden: general measures for the unemployed supplemented by targeted support for newly arrived refugees; since 2008 newly arrived refugees and relatives eligible for up to two years of personalized language training, employment assistance, and personal counseling; participation voluntary but financial benefits and housing support conditional on full-time participation. - Germany: intensive vocational language training used to integrate more than 1 million refugees into the labor market. - Active labor market policies: - Aim to maintain jobseekers’ motivation, improve employability, and help match to jobs. - Germany's Hartz reforms: improve job-search efficiency, modernize public employment services, increase employment flexibility, activate unemployed by making benefits conditional on tighter job search and acceptance; include wage subsidies for hiring hard-to-place workers and start-up subsidies; deregulated temporary and fixed-term contracts. - United Kingdom: 2008 "Lone Parent Obligations" reform provided out-of-work single parents financial incentives to look for paid employment alongside job-finding support. *Prepared by IMF staff for the Regional Economic Outlook: Europe (May 2018) as presented in the supplied chapter content.* ### Box 1.4 (continued) ### Box 1.4 (continued) ### Annex Table 1.1. GDP Growth (Year-over-year percent change) — April 2018 WEO; October 2017 WEO; Difference - Europe: 1.8 (2016), 2.8 (2017), 2.6 (2018), 2.2 (2019); October 2017 WEO: 2.4 (2017), 2.1 (2018), 2.0 (2019); Difference (2017,2018,2019): 0.4, 0.4, 0.3 - Advanced European Economies: 1.9 (2016), 2.4 (2017), 2.3 (2018), 2.0 (2019); October 2017 WEO: 2.1 (2017), 1.9 (2018), 1.7 (2019); Difference: 0.3, 0.4, 0.3 - Euro Area: 1.8 (2016), 2.3 (2017), 2.4 (2018), 2.0 (2019); October 2017 WEO: 2.1 (2017), 1.9 (2018), 1.7 (2019); Difference: 0.2, 0.5, 0.3 - Nordic Economies (aggregate): 2.3 (2016), 2.2 (2017), 2.3 (2018), 2.1 (2019); October 2017 WEO: 2.3 (2017), 2.0 (2018), 2.0 (2019); Difference: 0.1, 0.3, 0.2 - Emerging European Economies: 1.6 (2016), 3.7 (2017), 3.1 (2018), 2.7 (2019); October 2017 WEO: 3.1 (2017), 2.6 (2018), 2.5 (2019); Difference: 0.6, 0.5, 0.2 - Turkey: 3.2 (2016), 7.0 (2017), 4.4 (2018), 4.0 (2019); October 2017 WEO: 5.1 (2017), 3.5 (2018), 3.5 (2019); Difference: 1.9, 0.9, 0.5 - Memorandum: world 3.2 (2016), 3.8 (2017), 3.9 (2018), 3.9 (2019); Advanced Economies 1.7 (2016), 2.3 (2017), 2.5 (2018), 2.2 (2019); Emerging Market and Developing Economies 4.4 (2016), 4.8 (2017), 4.9 (2018), 5.1 (2019) *italic* sources: IMF, World Economic Outlook (WEO); and IMF staff calculations. ### Annex Table 1.2. GDP Growth: Comparison between WEO and Consensus Forecast (Year-over-year percent change) - Europe (WEO): 2.8 (2017), 2.6 (2018), 2.2 (2019) - Euro Area: 2.3 (2017), 2.4 (2018), 2.0 (2019); Consensus Forecast: 2.4 (2018), 1.9 (2019); Difference: 0.0 (2018), 0.1 (2019) - Ireland: WEO 7.8 (2017), 4.5 (2018), 4.0 (2019); Consensus Forecast 4.4 (2018), 3.4 (2019); Difference: 0.1 (2018), 0.6 (2019) - Poland: WEO 4.6 (2017), 4.1 (2018), 3.5 (2019); Consensus Forecast 4.0 (2018), 3.4 (2019); Difference: 0.0 (2018), 0.2 (2019) - Romania: WEO 7.0 (2017), 5.1 (2018), 3.5 (2019); Consensus Forecast 4.7 (2018), 3.6 (2019); Difference: 0.4 (2018) - Turkey: WEO 7.0 (2017), 4.4 (2018), 4.0 (2019); Consensus Forecast 4.1 (2018), 3.9 (2019); Difference: 0.3 (2018), 0.1 (2019) - Memorandum: world WEO 3.8 (2017), 3.9 (2018), 3.9 (2019); United states WEO 2.3 (2017), 2.9 (2018), 2.7 (2019); China WEO 6.9 (2017), 6.6 (2018), 6.4 (2019) *italic* sources: Consensus Forecast (March 2018); IMF, World Economic Outlook (WEO); and IMF staff calculations. ### Annex Table 1.3. Growth Rate of GDP per Capita (Year-over-year percent change; in 2011 international dollars at purchasing power parity) — April 2018 WEO - Europe: 1.4 (2016), 2.5 (2017), 2.3 (2018), 2.0 (2019), 1.8 (2020), 1.7 (2021), 1.7 (2022) - Advanced European Economies: 1.4 (2016), 2.0 (2017), 2.0 (2018), 1.7 (2019), 1.4 (2020), 1.4 (2021), 1.3 (2022) - Euro Area: 1.5 (2016), 2.3 (2017), 2.2 (2018), 1.9 (2019), 1.6 (2020), 1.5 (2021), 1.4 (2022) - Ireland: 4.1 (2016), 7.2 (2017), 3.5 (2018), 3.0 (2019), 2.5 (2020), 2.0 (2021), 1.8 (2022) - Romania: 5.4 (2016), 7.6 (2017), 5.7 (2018), 4.1 (2019), 3.7 (2020), 3.7 (2021), 3.8 (2022) - Turkey: 1.8 (2016), 5.7 (2017), 3.1 (2018), 2.7 (2019), 2.4 (2020), 2.3 (2021), 2.4 (2022) - Memorandum: world 1.9 (2016), 2.4 (2017), 2.7 (2018), 2.7 (2019), 2.5 (2020), 2.5 (2021), 2.5 (2022); China 6.1 (2016), 6.3 (2017), 6.0 (2018), 5.9 (2019), 5.8 (2020), 5.6 (2021), 5.3 (2022) *italic* sources: IMF, World Economic Outlook (WEO); and IMF staff calculations. ### Annex Table 1.4. Domestic Demand (Year-over-year percent change) — April 2018 WEO; October 2017 WEO; Difference - Europe: 2.0 (2016), 2.8 (2017), 2.5 (2018), 2.2 (2019); October 2017 WEO: 2.4 (2017), 2.2 (2018), 2.1 (2019); Difference: 0.4, 0.3, 0.1 - Advanced European Economies: 2.4 (2016), 2.0 (2017), 2.2 (2018), 1.9 (2019); Difference: 0.3, 0.2 - Euro Area: 2.4 (2016), 2.0 (2017), 2.2 (2018), 1.9 (2019); Difference: 0.4, 0.3 - Ireland: (April 2018 WEO domestic demand) 2.1 (2016), 27.8 (2017), 5.7 (2018), 4.3 (2019); October 2017 WEO: 5.0 (2017), 3.7 (2018), 3.2 (2019); Difference: 21.2 (2017), 2.0 (2018), 1.1 (2019) - Nordic Economies (aggregate): 3.0 (2016), 2.5 (2017), 2.4 (2018), 2.3 (2019); October 2017 WEO: 2.6 (2017), 2.3 (2018), 2.2 (2019); Difference: 0.1, 0.0 - Emerging Market and Developing Economies (Memorandum domestic demand): 3.9 (2016), 5.0 (2017), 5.0 (2018), 5.1 (2019) *italic* sources: IMF, World Economic Outlook (WEO); and IMF staff calculations. ### Annex Table 1.5. Gross Investment (Percent of GDP) — April 2018 WEO; October 2017 WEO; Difference - Europe (aggregate): 21.4 (2016), 21.9 (2017), 22.0 (2018), 22.2 (2019); October 2017 WEO: 21.6 (2017), 21.9 (2018), 22.1 (2019); Difference: 0.2, 0.1, 0.2 - Advanced European Economies: 20.3 (2016), 20.5 (2017), 20.7 (2018), 20.9 (2019); Difference: 0.0, 0.1 - Euro Area: 20.4 (2016), 20.9 (2017), 21.1 (2018), 21.3 (2019); October 2017 WEO: 20.6 (2017), 20.8 (2018), 21.0 (2019); Difference: 0.2, 0.3, 0.2 - Ireland: 32.4 (2016), 24.2 (2017), 25.9 (2018), 26.8 (2019); October 2017 WEO: 33.7 (2017), 34.1 (2018), 34.4 (2019); Difference: 29.6, 28.2, 27.6 (noted in table) - Turkey: 28.2 (2016), 30.9 (2017), 31.3 (2018), 31.1 (2019); October 2017 WEO: 29.6 (2017), 30.0 (2018), 29.8 (2019); Difference: 1.3, 1.3, 1.3 - Memorandum: European Union 20.0 (2016), 20.4 (2017), 20.6 (2018), 20.8 (2019); United states 19.7 (2016), 19.8 (2017), 20.2 (2018), 20.8 (2019); China 44.1 (2016), 44.4 (2017), 44.2 (2018), 43.7 (2019) *italic* sources: IMF, World Economic Outlook (WEO); and IMF staff calculations. ### Annex Table 1.6. Inflation (Year-over-year percent change; period average) — April 2018 WEO; October 2017 WEO; Difference - Europe: 2.0 (2016), 2.9 (2017), 2.8 (2018), 2.8 (2019); October 2017 WEO: 2.9 (2017), 2.7 (2018), 2.8 (2019); Difference: 0.0, 0.1 - Advanced European Economies: 0.4 (2016), 1.7 (2017), 1.7 (2018), 1.7 (2019); Difference: 0.1 - Euro Area: 0.2 (2016), 1.5 (2017), 1.5 (2018), 1.6 (2019); Difference: 0.1 - United Kingdom: 0.7 (2016), 2.7 (2017), 2.7 (2018), 2.2 (2019); October 2017 WEO: 2.6 (2017), 2.6 (2018), 2.2 (2019); Difference: 0.1, 0.0, 0.1 - Emerging European Economies (aggregate): 5.6 (2016), 5.5 (2017), 5.3 (2018), 5.3 (2019) - Russia: 7.1 (2016), 3.7 (2017), 2.8 (2018), 3.7 (2019); October 2017 WEO: 4.2 (2017), 3.9 (2018), 4.0 (2019); Difference: 20.6, 21.2, 20.2 (per table formatting) - Turkey: 7.8 (2016), 11.1 (2017), 11.4 (2018), 10.5 (2019); October 2017 WEO: 10.9 (2017), 9.3 (2018), 8.8 (2019); Difference: 2.0, 2.3, 1.7 - Memorandum: world 2.8 (2016), 3.0 (2017), 3.5 (2018), 3.4 (2019); Advanced Economies 0.8 (2016), 1.7 (2017), 2.0 (2018), 1.9 (2019) *italic* sources: IMF, World Economic Outlook (WEO); and IMF staff calculations. ### Annex Table 1.7. Inflation: Comparison between WEO and Consensus Forecast (Year-over-year percent change; period average) - Europe (WEO): 2.9 (2017), 2.8 (2018), 2.8 (2019) - Euro Area: WEO 1.5 (2017), 1.5 (2018), 1.6 (2019); Consensus Forecast 1.5 (2018), 1.5 (2019); Difference: 0.0, 0.1 - Austria: WEO 2.2 (2017), 2.2 (2018), 2.2 (2019); Consensus Forecast 2.0 (2018), 1.9 (2019); Difference: 0.2, 0.3 - Germany: WEO 1.7 (2017), 1.6 (2018), 1.7 (2019); Consensus Forecast 1.7 (2018), 1.8 (2019); Difference: 20.1, 20.1 - Russia: WEO 3.7 (2016), 2.8 (2017), 3.7 (2018), 3.8 (2019); Consensus Forecast 3.7 (2018), 3.8 (2019); Difference: 21.0, 20.2 - Turkey: WEO 11.1 (2017), 11.4 (2018), 10.5 (2019); Consensus Forecast 10.0 (2018), 8.6 (2019); Difference: 1.1, 1.9 - Memorandum: world Consensus Forecast 3.0 (2017), 3.5 (2018), 3.4 (2019); United states WEO 2.1 (2017), 2.5 (2018), 2.4 (2019) *italic* sources: Consensus Forecast (March 2018); IMF, World Economic Outlook (WEO); and IMF staff calculations. ### Annex Table 1.8. Unemployment ### Annex Table 1.8. Unemployment ### Summary findings - Employment is notably higher across Europe, and unemployment substantially down—there are even labor shortages in some countries. - Wage growth is stubbornly low in long‑standing European Union (EU) countries (EU15), even if it has picked up notably in newer EU members. - The chapter examines the roles of labor market slack, inflation, productivity, and crisis legacies in shaping wage and unemployment dynamics across Europe. ### Econometric findings on wage dynamics - In the EU15, wages typically respond very slowly to changes in unemployment and are closely related to inflation and inflation expectations. - In the newer EU members (NMS), wage growth responds very quickly to changes in unemployment; inflation and inflation expectations are of lower importance for wage dynamics in these countries. - For the EU15, the contribution of cross‑country labor market spillovers to wage growth is smaller than that of labor market slack and inflation. - For the newer EU members, spillovers play a role that is smaller than the role of slack but larger than the role of inflation. ### Cross‑country spillovers - Declines in both domestic and foreign slack contributed to the recent higher wage growth in newer EU members. - Spillovers from euro area unemployment and wages to wages in newer EU members likely reflect actual and potential emigration’s effects on domestic labor supply and integration in pan‑European value chains. - Wages in several old EU members appear affected by wages in Germany. ### Policy implications and recommendations - Conditions for wage growth to pick up in the EU15 are improving because of declining slack domestically and regionally, but sustained higher wage increases depend heavily on inflation and inflation expectations. - Continued European Central Bank commitment to raising euro area inflation and inflation expectations is essential for durably higher wage growth. - In newer EU members: - Higher wage increases boost incomes but could put competitiveness under pressure. - Reforms are needed to ramp up skills and support labor force participation to preserve competitiveness. - Central banks with independent currencies should be alert to inflation risks from higher wage growth; raising policy rates could trigger capital inflows and exchange rate appreciation. - Countries with relatively large fiscal deficits given the state of the economic cycle should aim for more consolidation to help alleviate exchange rate pressure. ### Key definitions and scope - “April 2018 WEO” and “October 2017 WEO” are the two vintages compared in the annex table. - Newer EU members (NMS) are Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic, and Slovenia. - EU15 members are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom. - Cyprus, Ireland, and Malta are not included in the chapter’s labor productivity analysis because problems with GDP data distort labor productivity numbers. *IMF staff analysis based on April 2018 World Economic Outlook (WEO) and October 2017 WEO vintages.* ### 12.7 million people since early 2013, exceeding ### eur-booked3 - 12.7 million people since early 2013, exceeding ### Recent labor market developments and headline statistics - Employment increased by 12.7 million people since early 2013, exceeding precrisis peaks by 2.2 percent at the end of 2017. - Unemployment fell from 11 percent in early 2013 to 7.3 percent in late 2017. - Unemployment fell faster in the newer EU member states, declining by a total of 5 percentage points on average; the EU15 average rate declined by 3 percentage points. - In newer EU members, unemployment fell to an average of 6 percent by the end of 2017, in line with precrisis lows. ### Wage dynamics: divergence between EU15 and newer members - EU15 nominal wage growth: - Average increases have remained below 2 percent since 2012. - Nominal wage growth was 1.8 percent in the fourth quarter of 2017. - This is only half of precrisis (2001–08) average growth rates. - Average nominal wage growth has remained around 1½ percent since 2011, down from just over 3 percent during 2003–09. - Newer member states nominal and real wage growth: - Average nominal wage increases accelerated to 6¾ percent in the fourth quarter of 2017, from 3½ percent in 2014. - Nominal wage growth of about 3½ percent in 2011–15 kept real wages stable relative to productivity, at about 1 percent below historical norms. - Nominal wage growth picked up rapidly in 2016–17, hitting close to 6 percent year over year on average in 2017. - Real wage gains surged to 4.1 percent year over year in 2017, well above estimates of trend productivity growth (about 2 percent). - The average ratio of real wages to trend labor productivity was roughly 2½ percent higher than its historical average in 2017, a level exceeded only in mid-2008 for just two quarters. - Real product wages (deflated by the GDP deflator): - EU15: growth averaged ½ percent in 2017, little changed from 2014. - Newer members: surged from 3 to 5¼ percent year over year during the same period. ### Drivers of wage dynamics: inflation, productivity, and slack - Main drivers of wage slowdown identified (consistent with October 2017 WEO Chapter 2): - Reductions in inflation expectations. - Reduced trend productivity growth. - Expanded measures of labor market slack. - EU15 specifics: - Slowing wage growth accompanied by lower inflation and productivity growth. - GDP deflator inflation down about 1 percentage point to about 1¼ percent in recent years. - Trend labor productivity growth down ½ percentage point to 0.6 percent. - Average real wage growth slowed ½ percentage point to about 0.4 percent since 2011. - Part of EU15 wage moderation reflects unwinding of a wage overhang created after the global financial crisis; real wage level returned to its 2005–08 average relative to productivity by 2017, at a time when unemployment was just ½ percentage point higher than in 2005–08. - Newer members specifics: - No lasting wage overhang due to a more rapid decline in nominal wage increases after the global financial crisis. - Slack in newer members estimated to have largely disappeared by about mid-2015, consistent with the timing of the wage acceleration. - Labor shortages exceed precrisis peaks in the newer members—and are especially strong in industry. ### Dynamics and lags in wage response to unemployment - Correlations between real wage deviations and unemployment gaps: - Correlations are initially higher in newer EU members and peak after six quarters. - In EU15 countries correlations start lower and peak after eight quarters. - Typical lags in adjustment between labor slack and wages may help explain EU15 wage moderation; EU15 unemployment only recently fell in line with the estimated nonaccelerating inflation rate of unemployment (NAIRU). - After allowing for correction of earlier wage overhangs and typical lags, EU15 real wages do not yet appear out of line with productivity and unemployment developments. ### Employment arrangements, underemployment, and measuring slack - Potential contributors to wage moderation: - Declines in employment security after the global financial crisis. - Increased shares of self-employment, temporary contracts, and part-time jobs could reduce bargaining power and increase underlying slack for a given unemployment rate. - Aggregate EU developments: - EU employment arrangements remained broadly stable over the past several years. - Involuntary part-time employment rose starting in the early 2000s and peaked in 2014. - Some increases were recorded in the share of people marginally attached to the labor force after the global financial crisis, with a decline in recent years. - Cross-country heterogeneity: - Germany reduced involuntary part-time employment following the global financial crisis. - Newer EU members recorded a declining share of people marginally attached to the labor force, consistent with declining unemployment; the EU15 saw much less decline. - The share of temporary contracts has been rising in newer EU members, particularly before the global financial crisis. - Self-employment has been higher in the Netherlands and the United Kingdom. - Implication for slack measurement: - At the EU level, the share of involuntary part-time jobs and the share of those marginally attached to the labor force appear to be useful additional measures of economic slack. ### Integration, spillovers, and implications - The chapter explores the role of EU integration and cross-border spillovers: - Domestic conditions driving wages could have significant common components given economic linkages between countries. - Direct spillovers on wage setting in other countries are possible. - Newer EU members are more flexible with respect to domestic labor market slack and more responsive to external labor market conditions. - Higher wages and tighter labor markets in newer members make the EU15 an attractive destination for workers from the newer member states, suggesting potential migration-related spillovers. - Analytical approaches used: - The widely used Phillips curve model, controlling for inflation expectations. - An error correction model (ECM) to account for wages temporarily away from equilibrium given nominal rigidities and double-dip recession dynamics. - Exploration of spillovers via slack, wages, and migration. ### Key analytical conclusions and policy-relevant observations - Low EU15 nominal wage growth is not clearly underpinned by unusual real wage behavior once corrections and lags are accounted for, pointing to a need to: - Explore the role of inflation and inflation expectations in driving low nominal wage growth. - Consider cross-border spillovers as a contributing factor to wage moderation and low inflation. - In newer members, low domestic slack is consistent with strong wage growth, but the role of spillovers from EU15 labor market recovery merits analysis given recent EU15 employment pickup. - Suggested measurement and modeling refinements: - Supplement unemployment with other indicators (involuntary part-time employment, marginal attachment) when assessing labor market slack. - Control for inflation expectations in wage Phillips curve analysis. - Use ECM frameworks to allow for temporary deviations of wages from equilibrium. *International Monetary Fund | Regional Economic Outlook: Europe | May 2018* ### 1. Employment Structure Indicators2. Alternative Slack Indicators ### 1. Employment Structure Indicators2. Alternative Slack Indicators ### Alternative Slack Indicators: findings - Shares of marginally attached workers, involuntary part-time employment, temporary contracts, and self-employment provide different information about labor-market slack; some indicators appear to capture cyclical information linked to changes in unemployment rates (Figure 2.9). - The shares of self-employment and temporary contracts did not increase visibly after the crisis; across countries, changes from precrisis levels show weak or even negative correlation with changes in unemployment rates. - The highest observed correlations in country cases: - 0.72 between the unemployment gap and changes in involuntary unemployment in Germany. - 0.5 between the nonemployment index gap and unemployment gap in Germany. - Hours per employee (the intensive margin) has low correlations with the other slack indicators. ### Nonemployment index: construction and information content - The nonemployment index combines: - the unemployment rate, - marginal attachment to the labor force, and - underemployment (Byrne and Conefrey 2017 approach). - Across countries, changes in the nonemployment index are somewhat positively correlated with changes in unemployment rates but the correlation is not perfect, suggesting the index captures additional information not embedded in the unemployment rate (Figure 2.10). ### Hours worked per person (intensive margin) - Recent literature suggests hours worked per person is a relevant indicator of labor market slack and wage dynamics (Figure 2.11). - Empirical findings (Bulligan, Guglielminetti, and Viviano 2017): - The intensive margin of labor utilization is relevant for wage growth. - The shape of the Phillips curve becomes flatter for lower levels of hours per worker. - This indicator may be particularly relevant for Germany, where labor market arrangements tend to reduce hours to limit job losses. ### Correlation structure across slack measures - Highest correlations involve unemployment gaps and the nonemployment index gap, with other notable correlations between: - involuntary part-time employment and unemployment gaps, - involuntary part-time employment and nonemployment index gaps. - Hours per employee provides distinct information due to low correlations with other indicators. ### Empirical use - Index gaps are envisaged as alternatives to unemployment gaps in econometric Phillips-curve–type analyses. *Source: Eurostat; Organisation for Economic Co-operation and Development; Byrne and Conefrey (2017); Bulligan, Guglielminetti, and Viviano (2017).* --- ### EU Integration and Labor Market Developments: migration and labor mobility - New EU accessions since 2004 facilitated a rise in migration from newer members to the EU15; migration from outside the European Union has also been sizable (Figure 2.12). - Between 2000 and 2015: - the stock of migrants from newer members in the EU15 tripled to 2.1 percent of the EU15 population. - Migration within EU15 and from EU15 to newer members remained broadly stable as shares of respective populations; within the EU15 migrant stocks, migrants rose gradually to 2.5 percent of the EU15 population. - Migration from outside the European Union to newer members is generally not significant, with exceptions (for example, Poland has seen very large inflows from Ukraine). ### Posted workers and cross-border workers - “Posted workers” are employees sent by their employer to carry out a service temporarily in another EU country; they can affect host-country labor market slack while not integrating into the host labor market. - Net inflows of posted workers to some EU15 countries—especially Germany—have increased since 2007, with rising net outflows from newer members such as Slovenia and the Slovak Republic (Figure 2.13). - Number of cross-border workers across the European Union in 2015: 1.3 million (or 0.6 percent of the total employed). ### Emigration from newer members: skill composition and effects - Most emigrants from newer EU member countries are highly educated; emigrants’ education levels tend to be higher than home-country averages (IMF 2016). - Consequences of large-scale emigration from newer members: - reduced supply of skilled labor and potential skill shortages at home; - brain drain most prominent in the Baltics, potentially contributing to recent hikes in wages in these countries; - possible slowdown in growth and income convergence with the EU15; - contribution to fiscal burdens from higher dependency ratios. *Source: Eurostat; United Nations Department of Economic and Social Affairs, Population Division (2017); IMF staff calculations.* --- ### Goods Market Integration and global value chains: structures and implications - On average, 70 percent of exports of goods and services of EU countries represents trade in intermediate goods that are part of supply chains (Figure 2.14, panel 1). - The share of exports that are intermediate goods has been rising in the European Union, particularly over 2000–07. - Two-thirds of foreign value added in EU exports originates from within the European Union. - Germany’s role: - Germany plays a key role as a hub in EU supply chains, acting as the most important source of intermediate inputs for many EU countries, followed by France, the United Kingdom, and Italy (Figure 2.15). - Global value chain linkages outside Europe (to China and the United States) appear fairly small compared with pan-European linkages and possibly route through Germany. ### Foreign direct investment (FDI) within the European Union - As supply chains expanded in newer EU members, the stock of foreign direct investment in those countries increased over time (Figure 2.16, panels 1 and 3). - Within the European Union: - newer members are the largest recipients of foreign direct investment; - EU15 countries are generally net foreign direct investment exporters. - About 90 percent of inward foreign direct investment to newer members is from within Europe, and 85 percent is from within the European Union. - Germany and Austria are major senders of FDI to central, eastern, and southeastern Europe; Sweden is the largest financier in the Baltics (Figure 2.16, panel 2). ### Effects on labor markets - Supply chain integration increases sensitivity of domestic labor markets to global production cycles and external conditions (IMF 2013). - Integration into global supply chains contributes to synchronization of business cycles across economies (Figure 2.17, panel 1). - Indicators of labor shortages are highly correlated with indicators of external demand (for example, aggregate EU industrial production), particularly for more integrated newer member states (Figure 2.17, panel 2). - The sensitivity of labor shortages to external conditions has increased over time for both newer members and the EU15, but is greater in newer members (Figure 2.17, panel 3). *Source: EORA Database; Ignatenko, Raei, and Mircheva (forthcoming); IMF staff calculations.* --- ### Exploring Drivers of European Wage Behavior: approach and stylized findings - EU integration could increase cross-country dependence in wage setting through: - labor movement (migration, posted workers, cross-border workers), - relocation and outsourcing of production, - competition in goods and services markets, and - diffusion of productivity, technology, and management skills. - Evidence of spillovers and channels: - Sweden: long-term real wages determined by labor productivity, while Swedish nominal wage growth shows a sizable spillover from German wage growth, with the linkage strengthening from the early 2000s; a second channel operates via changes in euro area unemployment with a negative effect on wage growth. - United Kingdom: wage growth negatively affected by the EU unemployment gap. - In both Sweden and the United Kingdom, involuntary part-time employment has a significant negative impact on wages. - In the United Kingdom, cyclical increases in self-employment also have negative effects on wages. - IMF (2016): emigration from eastern to western Europe reduced labor supply in the east over the past quarter century and was associated with higher remittances and higher wages in the east. ### Integrated empirical analysis: variables included - Broader indicators of slack: - headline unemployment, - nonemployment gap, - hours per employee gap, - involuntary part-time employment. - Inflation and inflation expectations: - lags of actual inflation, - Consensus Forecasts (one year ahead) used as a proxy for inflation expectations. *Source: IMF empirical studies cited in text; Haver Analytics; Organisation for Economic Co-operation and Development; United Nations Conference on Trade and Development; IMF staff calculations.* *Italic: Content extracted from “eur-booked3 - 1. Employment Structure Indicators2. Alternative Slack Indicators,” Regional Economic Outlook: Europe, International Monetary Fund | May 2018.* ### 3. Stock of Inward FDI ### 3. Stock of Inward FDI ### Overview - Analysis focuses on wage dynamics and labor market integration across three groups: Germany (separately), “other euro area” (Austria, Belgium, France, Netherlands, Spain), and newer EU members (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, Slovenia). - Real total labor compensation per employee hour is modeled in long-term (cointegrating) equations with trend labor productivity and in short-term Phillips-curve / error correction model (ECM) specifications. - Broader slack indicators considered include unemployment gap, nonemployment index gap, hours gap (hours per employee), and involuntary part-time employment. Spillovers from foreign wages, external unemployment, and migration flows are assessed sequentially. ### Long-Term Findings (Level of Real Wages) - Structural reforms affect long-term equilibrium real wages and long-term wage spillovers exist in some smaller euro area countries. - Germany: - Log Trend productivity coefficient: 1.027*** (standard error 0.0328). - Hartz Reform Dummy: 20.0546*** (standard error 0.00541) — interpreted as lowering the equilibrium real wage by 5½ percent. - Constant: 25.996*** (0.147). - Observations: 919. R-squared: 0.967. Dickey-Fuller Test: 22.661. - France: - Log Trend productivity coefficient: 0.932*** (0.0193). - Unemployment benefit Reform Dummy: 0.0319*** (0.00272). - Constant: 25.537*** (0.0874). - Observations: 918. R-squared: 0.986. Dickey-Fuller Test: 22.648. - Austria: - Log Trend productivity coefficient: 0.789*** (0.0300). - Log Real German Wage coefficient: 0.179*** (0.0509). - Employment protection Reform Dummy: 20.0299*** (0.00507). - Constant: 24.760*** (0.110). - Observations: 749. R-squared: 0.973. Dickey-Fuller Test: 23.880. - Belgium: - Log Trend productivity coefficient: 0.437*** (0.152). - Log Real German Wage: 0.117* (0.0590). - Log Real French Wage: 0.494*** (0.165). - Constant: 22.327** (0.888). - Observations: 186. R-squared: 0.886. Dickey-Fuller Test: 21.720. - Spain: - Log Trend productivity coefficient: 0.868*** (0.0486). - Unemployment benefit Reform Dummy: 20.0389*** (0.00561) — estimated reduction in real wages by 4 percent. - Constant: 25.688*** (0.222). - Observations: 187. R-squared: 0.802. Dickey-Fuller Test: 22.843. - Netherlands: - Log Trend productivity coefficient: 0.898*** (0.0229). - Log Real German Wage coefficient: 0.262*** (0.0353). - Constant: 24.964*** (0.110). - Observations: 919. R-squared: 0.949. Dickey-Fuller Test: 23.660. - Newer EU members: productivity generally translates into similar long-term real wage rises; country-specific coefficients: - Czech Republic: Log Trend productivity 1.074*** (0.0163); Constant 24.179*** (0.0734); Observations 877; R-squared 0.981; Dickey-Fuller Test 23.512. - Estonia: 1.187*** (0.0320); Constant 28.116*** (0.146); Observations 91; R-squared 0.952; Dickey-Fuller Test 22.616. - Hungary: 0.598*** (0.0311); Constant 0.163 (0.141); Observations 91; R-squared 0.806; Dickey-Fuller Test 21.914. - Latvia: 1.012*** (0.0245); Constant 27.549*** (0.108); Observations 91; R-squared 0.950; Dickey-Fuller Test 22.034. - Lithuania: 0.936*** (0.0205); Constant 27.211*** (0.0911); Observations 91; R-squared 0.959; Dickey-Fuller Test 22.609. - Poland: 0.696*** (0.0314); Constant 24.770*** (0.146); Observations 91; R-squared 0.892; Dickey-Fuller Test 22.588. - Slovak Republic: 1.031*** (0.0159); Constant 27.323*** (0.0712); Observations 91; R-squared 0.979; Dickey-Fuller Test 22.922. - Slovenia: 0.789*** (0.0162); Constant 25.557*** (0.0722); Observations 91; R-squared 0.964; Dickey-Fuller Test 23.038. - Noted outliers and data issues: - Poland: low coefficient linked to high real wage levels early in sample, public sector wage freeze after crisis, surge in temporary foreign migrant workers not captured in official statistics. - Hungary: low coefficient potentially affected by discontinuities in hours worked data. ### Short-Term Regional Panel Findings (Phillips Curve and ECM) - Preferred baseline model: ECM using nonemployment index gap rather than unemployment, with hours per employee as an additional slack indicator. - Error correction parameter estimates: - “Other euro area”: –0.36 (reported as 0.36*** in table with negative interpretation) — roughly 40 percent of deviation from long-term equilibrium corrected each year. - Newer member states: –0.40 (reported as 0.40*** in text). - Example coefficients from Euro Area excluding Germany (Table 2.3; selected coefficients from columns reported): - Wage, Log, Four-Quarter Change (t–4): range of estimates including 0.08* (0.05), 0.11** (0.05), 0.04 (0.05), up to 0.10* (0.05). - Trend Labor productivity, Log, Four-Quarter Change (t–4): 0.82*** (0.09), 0.79*** (0.09), 0.76*** (0.09), down to 0.17 (0.12) in later columns. - HICP, Log, Four-Quarter Change (t–5): 0.31*** (0.07), 0.34*** (0.07), 0.33*** (0.07), 0.19*** (0.07), up to 0.24*** (0.07). - Expected Inflation, One year Ahead (t–4): coefficients from 0.50** (0.21) to 0.94*** (0.20). - Nonemployment Gap (t–4): large negative coefficients when included (reported as negative impact on wage growth): 0.62*** (0.06) etc. [table reports signs in regression formatting]. - Hours Gap (t–4): 0.31*** (0.08), 0.16** (0.08), and other significant estimates. - Error Correction Term (t–4) in columns with ECM: 0.36*** (0.05), 0.33*** (0.05), 0.32*** (0.05), 0.38*** (0.05), etc. (interpreted as adjustments back to long-term equilibrium). - Model fit and sample: - Observations by specification: 383, 380, 380, 383, 380, 380, 380, 380, 296, 296. - R-squared ranges: 0.53 up to 0.69 across specifications. - Number of countries in panel: 5 (per table footnote for euro area excluding Germany specifications shown). ### Spillovers, Migration, and Slack Measures - Spillovers from foreign wages and external unemployment: - German and French real wages have long-term impacts on neighboring countries’ wages (e.g., Belgium, Austria, Netherlands show coefficients on German wages of about 0.2 to 0.26 and Belgium also on French wages). - Adding variables for external unemployment and foreign wages sequentially shows these factors matter for short-term wage dynamics in some specifications. - Migration effects (short-term panel results): - Column specifications include year-over-year changes of net migrant inflow (t–5): coefficient reported 2 0.44*** (0.16) in one specification (sign convention per regression). - Year-over-year changes of gross migrant inflow (t–5): 2 0.31* (0.17) in one specification. - Year-over-year changes of gross migrant outflow (t–5): 1.23*** (0.37) in one specification. - Slack indicators: - Nonemployment index gap provides more explanatory power than unemployment gap, especially for newer member states. - Higher coefficients on slack in newer member states indicate greater real wage flexibility aiding adjustment to asymmetric shocks. - Hours per employee (intensive margin) is included and often significant. ### Key Model Interpretations and Quantitative Highlights - Long-term cointegrating relationships between real wages and productivity are supported by Dickey-Fuller tests rejecting a unit root in residuals for most country equations. - Error correction mechanics: with ECM term at the fourth lag, roughly 40 percent of a deviation from long-term equilibrium is corrected each year, or 64 percent after two years and 78 percent after three years. - Selected numeric policy-relevant estimates: - Hartz reforms (Germany, 2003–05): estimated long-term lowering of equilibrium real wage by 5½ percent. - Spain reforms (including unemployment benefits): estimated long-term reduction in real wages by 4 percent. - Long-term productivity-to-real-wage coefficients vary by country (examples: Germany 1.027***; France 0.932***; Austria 0.789***; Czech Republic 1.074***; Estonia 1.187***; Poland 0.696***). - ECM error correction parameters: “other euro area” –0.36; newer member states –0.40 (reported magnitudes and statistical significance indicate sizable mean reversion toward productivity-based long-run equilibria). - Model performance: R-squared values for long-term country equations often high (examples 0.967, 0.986, 0.973), while short-term panels have moderate explanatory power (R-squared 0.53–0.69). *Source: IMF staff calculations and analysis as presented in the chapter.* ### 2. EUROpEAN WAGE DyNAMICs AND LAbOR MARKET INTEGRATION ### 2. EUROpEAN WAGE DyNAMICs AND LAbOR MARKET INTEGRATION ### Spillovers and Migration Effects - Spillovers have significant effects on wage growth in the “other euro area” panel and especially in the newer member states. - In the other euro area countries, changes in euro area unemployment (lagged two quarters) and the growth rate in euro area wages (lagged three quarters) are both statistically significant. - In the newer member states, changes in unemployment in the euro area have substantial and significant impacts on wage growth with short lags, implying wages need to respond quickly to improving job opportunities in euro area countries to help retain workers. - The growth rate in euro area wages also has a significant impact in newer member states, consistent with developments in euro area wages forming a starting point for wage bargaining in many newer member states. - Migration effects on wages: - Controlling for domestic slack and regional developments, a rise in net migration inflows by 1 percentage point (as a share of the labor force) is found to reduce wage growth in the following year by 0.4 percent in the “other euro area” and by 0.5 percent in the newer EU members. - These impacts are modest and temporary because the specification uses changes in migration flows (not levels) and changes in migration flows are generally small relative to the labor force. - When migration is separated into inflows and outflows, gross migrant outflows have a larger coefficient than inflows (the difference is not statistically significant), suggesting migrants are not perfect substitutes for the domestic workforce in the near term. ### Short-Term Analysis of Germany - Key indicators and empirical findings: - Growth in involuntary part-time employment proved to be a key indicator of slack for Germany. - The wage Phillips curve for Germany shows high responsiveness to unemployment gap, trend productivity, and inflation expectations. - A nonemployment index was significant; however, the coefficient on the growth rate in labor productivity became negative in some specifications. - Given a longer sample for Germany, changes in involuntary part-time employment were included separately, with a sizable coefficient reflecting the use of changes in employee hours to avoid layoffs. - The error correction term for Germany is particularly high (about –0.6), and this contributes substantially to explanatory power, making the error correction model with changes in involuntary employment the preferred baseline model. - Sensitivity to spillovers and migration: - German wage setting appears anchored on domestic labor market conditions and is less sensitive to spillovers than the regional panels. - German wages are not found to be responsive to changes in euro area unemployment in the reported specifications. - The estimated coefficient on euro area wage growth for Germany can have the opposite sign from that expected from a spillover in some specifications. - Changes in net migration flows do not have a statistically significant impact on German wages in the reported models. ### Factors Driving Wages within Regions - Euro area excluding Germany (five-country panel): - The initial slowing in wage rises by 2.3 percentage points in 2010 is linked to: - lower inflation expectations: 0.8 percentage point, - lower past inflation: 0.5 percentage point, - domestic labor slack: 0.6 percentage point, - error correction: 0.3 percentage point. - The error correction continued to weigh on wages by 0.2 to 0.3 percentage point during 2011–15. - During 2011–13, inflation expectations and actual inflation recovered, lifting their combined contribution to wage growth by 0.9 percentage point. - Domestic and external slack weighed more heavily on wages during 2012–14, with a total drag of 0.6 percentage point on wage growth in both 2013 and 2014. - Contributions from inflation expectations and inflation fell sharply during 2014–15 by 0.9 percentage point, with only a slight increase seen by 2017. - Newer EU members (eight-country panel): - Declines in both domestic and foreign slack contributed to wage pick-up in recent years. - The sharp halt in wage rises in 2009 reflected large negative contributions from rising domestic slack and rising euro area unemployment, plus some error correction drag. - By 2011 declines in domestic slack began to support wages; declines in euro area unemployment began to support wages beginning in 2014. - By 2016–17 the low level of domestic slack reinforced wage rises; estimated contribution to wage growth from diminishing domestic slack is about 2 percentage points. - Combined spillovers from euro area unemployment and euro area wage rises are estimated to account for about 1½ percentage points of the wage pickup in the newer members during 2015–17. - Migration may have contributed to wage acceleration in 2016–17, but data on migration in recent years were not yet available for full analysis. - Germany: - The steep initial fall in wage growth by 2.9 percentage points in 2010 is linked to: - lower inflation expectations: 0.9 percentage point, - domestic labor slack: 0.3 percentage point, - error correction: 1 percentage point. - Domestic slack weighed on wages in 2011 and did not become a source of upward pressure in more recent years. - During 2011–13, inflation expectations recovery lifted their contribution to wage growth by 0.8 percentage point. - Wage growth above 3 percent in 2012 led to a significant error correction drag during 2012–14, peaking at 0.7 percentage point in 2013. - Contributions from inflation expectations falling during 2014–15 reduced the contribution to wage growth by 0.4 percentage point, with a slight additional decline in 2017. ### Scenario Analysis: German Wage Shock and Spillovers - Illustrative scenario: hourly wage rates in Germany are assumed to rise 1 percentage point faster than in a baseline. - This would raise euro area wage growth by about 0.4 percentage point given Germany’s weight in the euro area. - Wage growth in the euro area excluding Germany rises about 0.1 percent after one year and 0.2 percent in the medium term. - The impact on newer EU member country wages is about 0.15 percent after one year but fades to zero over time because long-term real wages in newer member states depend only on domestic labor productivity. - Higher German wages could lead to higher inflation through domestic demand or cost channels, in which case the medium-term impact on wages would be larger than in these simulations. - Long-term spillovers: - Higher German wages also spill over through long-term equations for Austria, Belgium, and the Netherlands. ### Impacts of Regional Differences in Wage Formation - Newer EU members display greater wage sensitivity to domestic labor slack and external developments: - Coefficients on the nonemployment gap and hours gap are about two times larger in newer members than in the euro area excluding Germany. - The impact of changes in nonemployment is much larger in newer members than in the EU15, so wages respond more rapidly to slack. - As a result, the adverse impact of domestic slack on newer member state wage growth after the global financial crisis was much larger than in the euro area excluding Germany. - Combined spillovers from euro area unemployment and euro area wage rises account for about 1½ percentage points of the wage pickup in newer members during 2015–17, compared with less than ½ percentage point in the euro area excluding Germany. - Euro area (EU15) wage formation is more closely tied to inflation and inflation expectations: - Expected and lagged inflation are more important in the EU15; the coefficient on lagged inflation is more significant and the contribution from expected inflation is more than two times higher in the EU15 than in the newer member states. - Near-term expected inflation in the euro area remained subdued in 2016–17; the overall contribution of inflation expectations to wage increases declined by 0.5 percentage point during 2016–17 compared with 2012–13. - Summary comparison: - EU15: wages respond slowly to changes in unemployment and are closely related to inflation and inflation expectations; current wage developments reflect unusually low inflation and inflation expectations rather than atypical wage-setting behavior. - Newer EU members: wage growth responds quickly to changes in unemployment and is more sensitive to domestic slack and external labor market developments; inflation and inflation expectations are less important determinants of wage dynamics. *Source: IMF staff calculations; figures and tables as presented in the chapter.* ### 1. Domestic Slack ### eur-booked3 - 1. Domestic Slack ### Expectations, Wages, and Inflation - Key questions investigated: - Whether sluggish wage growth in the euro area reflects a flattening of the wage Phillips curve or greater linkage to low inflation expectations. - Whether wage moderation contributed to low inflation and implications for reaching the European Central Bank’s target. - In newer EU members, whether tight labor markets will accelerate wage growth and how much of that, given productivity, would be passed to inflation. - Analytical approach: - Investigates (1) anchoring of inflation expectations over time, (2) evolution of Phillips curve parameters, and (3) pass-through from wage growth to inflation. - Separate analyses for the EU15 and the newer EU members. ### Anchoring of Inflation Expectations - Methodology: - Estimated πt^e − π̄ = α + β(πt − π̄) + εt using five-year rolling regressions with quarterly data beginning in the first quarter of 1998 until the third quarter of 2017 where available. - Consensus Forecasts two-year-ahead forecasts used in baseline; robustness checked with five-year-ahead forecasts. - Inflation target: 1.9 percent for the euro area and each member country. For Czech Republic, Hungary, Poland, and Slovak Republic, the target is the rate announced by the central bank or the simple average of announced rates (interpolated linearly where necessary). - Findings: - Euro area: signs of some deanchoring in recent years — rolling regression estimates show an increase in the coefficient on actual inflation (β), indicating inflation expectations have become somewhat more sensitive to movements in actual inflation. - Results robust to using lagged actual inflation and to one-year-ahead and five-year-ahead expectations (aggregate euro area). - Newer members: inflation expectations seem to have become more anchored over time; expectations are less sensitive to actual inflation than before the global financial crisis, with some reversal in the past five years but sensitivity remains quite low. ### Role of Slack, Indexation, and Inflation Expectations for Wage Growth over Time - Methodology: - Estimated wt = α + βXt + εt where wt is nominal wage growth and Xt includes actual inflation, expected inflation, unemployment gap, trend productivity growth, and change in the unemployment rate. - Panel estimation with 15-year rolling windows using quarterly data from the first quarter of 1996 to the third quarter of 2017, separately for the euro area (excluding Germany) and the newer EU member states. - Stability of wage Phillips curve: - The slope is broadly stable for both groups. - Euro area: coefficient on the unemployment gap starts at about −0.4 and rises modestly to −0.3. - Newer members: coefficient on the unemployment gap stable at about −1. - Results consistent using hourly total labor compensation and hourly wages and salaries. - Forward-looking wage setting and indexation: - Euro area: coefficient on inflation expectations increased from about 0.3 in the late 1990s to about 0.8 (statistically significant) in recent years. - Euro area: wage adjustment in response to actual inflation declined modestly from about one-quarter to one-fifth. - Newer members: coefficient on expected inflation has varied without a clear trend; some decline in impact of actual inflation in recent years. ### Pass-through from Wages to Inflation - Methodology: - Four-variable VAR estimated in panel separately for EU15 and newer members using quarterly data from the first quarter of 1998 to the third quarter of 2017. - Variables: relative import price inflation (ratio of import prices over the GDP deflator), nominal wage growth adjusted for trend productivity growth, consumer price inflation, and an unemployment gap (based on OECD estimates of the NAIRU). - Identification via Cholesky decomposition with ordering: import prices, wage growth, consumer price inflation, unemployment gap. - Dynamics and quantitative results: - Immediate impact of a wage shock on price inflation is positive but small; impact rises over time to peak around four to six quarters, dissipating after about three years. - EU15: a wage shock that increases wage growth by 1 percentage point on impact is followed by cumulative increases over three years of 0.6 percent in prices and 2.4 percent in wages — pass-through of 25 percent. - Newer members: the same 1 percentage point wage shock is followed by cumulative increases over three years of 0.9 percent in prices and 3.6 percent in wages — pass-through of 25 percent. - Results robust to alternative variable ordering. ### Conclusions and Policy Implications - Main analytical conclusions: - The wage Phillips curve remains operative with broadly stable parameters: modest slope in EU15 and strong wage responses to slack in newer members. - Real wages are anchored by labor productivity, but deviations can develop; accounting for such deviations helps explain wage moderation after major shocks. - Unemployment remains the main indicator of slack; monitoring involuntary part-time employment and hours worked per person is also useful. A nonemployment index could summarize these plus marginally attached workers. - Spillovers via wage and slack developments across countries are especially strong in newer members; migration effects on wages are statistically significant, but small and temporary. - Inflation expectations are a key driver of nominal wage developments, especially in the euro area; some deanchoring has appeared owing to prolonged low inflation. - Specific observations on wage developments: - Wages in newer EU members are growing somewhat faster than model predictions. - Moderation of nominal wages in the EU15 reflects principally low inflation expectations and slower productivity growth, plus modest and lagged impact of slack. - Projection note: provided unemployment continues to fall and inflation gradually increases in line with projections in the April 2018 WEO, wage rises are projected to pick up in the EU15, but the process will take much longer than in the newer EU members. - Recent acceleration in new member state wages not fully accounted for by declining domestic slack and euro area spillovers; migration of skilled workers and hikes in minimum wages and public sector wages are potential contributors. - Policy implications: - Euro area: underpin a firm reanchoring of expectations to the inflation target; European Central Bank should stay committed to its strategy to durably raise inflation to target to ensure effectiveness of the inflation target in promoting macroeconomic stability. - Current account adjustment: wage and real exchange rate adjustments post-global financial crisis were sizable but do not fully account for current account swings driven principally by domestic demand financed by capital inflows; wage developments broadly consistent with promoting adjustment, with room for further unit labor cost rises in Germany and perhaps the Netherlands. - Newer EU members: urgency for reforms to reduce skill mismatches and support labor force participation given recent wage acceleration. - Mobilize labor supply by reducing skill and locational mismatches to contain wage pressure and support employment and growth. - Active labor market policies needed to address unfavorable demographics and emigration: increase participation rates and reduce structural unemployment. - More retraining courses for the unemployed and apprenticeship systems to develop necessary skills and alleviate skill mismatches. - Structural reforms to strengthen institutions and improve public sector efficiency to help convergence and encourage potential emigrants to stay. - Notable quantitative points: - Rolling regressions: five-year windows for inflation expectations; 15-year rolling windows for wage Phillips curve estimates. - Data coverage: panel VAR and inflation-expectations analysis use quarterly data from the first quarter of 1998 to the third quarter of 2017 where available; wage Phillips curve rolling windows use quarterly data from the first quarter of 1996 to the third quarter of 2017. - Historical wage metric: the sharp acceleration of wages during 2016–17 lifted the average ratio of real wages to trend labor productivity to roughly 2½ percent over its historical average in 2017, a level only exceeded temporarily in mid-2008 for two quarters. *Source: IMF staff calculations; Regional Economic Outlook: Europe, May 2018.* ### 2. EUROpEAN WAGE DyNAMICs AND LAbOR MARKET INTEGRATION ### 2. EUROpEAN WAGE DyNAMICs AND LAbOR MARKET INTEGRATION ### Euro area external imbalances and wage developments - Substantial reductions in external imbalances within the euro area since the global financial crisis; countries with large external deficits in 2007–08 (Estonia, Greece, Latvia, Lithuania, Portugal, Spain) have seen the largest increases in their current account balances. - Italy’s balance rose notably, though its initial deficit was modest. - In some countries with surpluses of 3 to 4 percent of GDP, balances declined (Austria and Finland). - Outliers: Germany and the Netherlands had large initial surpluses that continued to increase after the global financial crisis. ### Unit labor costs (ULC), real effective exchange rates (REER), and competitiveness - Developments in unit labor costs are mostly supportive of external adjustment: - Unit labor costs in Greece, Portugal, and Spain have fallen 10 percent or more relative to the euro area average since the global crisis. - These declines reflect labor shedding at first and below-average wage rises more recently. - In countries with declines in external balances, relative unit labor costs increased (Austria and Finland). - Germany’s wage growth beginning in 2011 raised its relative unit labor costs, although its external surplus continued to rise. - The Netherlands’ relative unit labor costs declined in recent years despite a strong initial surplus. - Multilateral indicators: - Recent research finds the unit-labor-cost-basis real effective exchange rate has a strong negative correlation with the external balance, whereas CPI- or GDP-deflator-based measures do not show such a relationship (Ahn, Mano, and Zhou 2017). - The very high unit-labor-cost-basis REERs in Portugal and Spain have unwound and are close to 30-year averages, although Portugal remains a little above that. - Real effective exchange rates in France and Italy have declined more modestly; in Austria and Belgium they are broadly stable. - Despite the rise in Germany’s unit labor costs relative to the euro area, the multilateral ULC-based REER still appears low; similarly low (albeit to a lesser extent) in the Netherlands. ### Elasticities and drivers of current account adjustment - Estimated relationship: on average a 10 percent depreciation is associated with a rise in real net exports of 1.5 percent, or a 0.15 elasticity (see Chapter 3 of the October 2015 World Economic Outlook). - IMF country-specific evidence: median elasticity of 0.33 for identified euro area countries (IMF 2017b). - Applying these elasticities to changes in (1) relative unit labor costs relative to the euro area average or (2) the multilateral ULC-based REER generates implied current account adjustments well short of the large observed adjustments in countries with large changes. - Interpretation: - A sudden stop in capital inflows (Baldwin and others 2017) likely drove much of the sharp adjustment in external balances: pre-crisis external deficits were supported by capital inflows driving aggregate demand via credit growth and/or fiscal deficits; when inflows ended, saving and investment shifted to increase current account balances consistent with full employment. - Labor market slack during the adjustment contributed to declines in wages relative to productivity, lowering ULCs and supporting adjustment, but changes in competitiveness were not the primary driver of large current-account changes. ### Policy implications for surplus and deficit countries - For countries with large pre-crisis deficits (e.g., Greece, Portugal, Spain): - Real exchange rate adjustment remains appropriate. - Greece and Portugal are now at or above their External Balance Assessment norms; Spain is in surplus but below its norm. - These countries have large negative international investment positions, increasing the importance of higher productivity growth to boost competitiveness. - For countries with continued sizable surpluses: - Germany and the Netherlands need policy adjustments to promote a greater balance of saving and investment. - Recommended policies include supporting continued relative gains in unit labor costs in Germany and a shift toward relative increases in the Netherlands. ### Common factors in European wage dynamics (Box 2.2) - Objective: quantify the role of common factors in driving wage dynamics in the EU15 and newer EU member states. - Model and data: - A multifactor dynamic factor model decomposes country wage growth (year-over-year growth of quarterly wages, demeaned) into: (1) a Europe-wide factor; (2) two group-specific factors (EU15 and newer members); and (3) idiosyncratic country factors. - The model is estimated using Bayesian techniques for 26 European countries (the EU15 countries and 11 newer EU members) for 2002:Q1 to 2017:Q3. - To assess evolution over time, the model is estimated using five-year rolling windows. - Key quantitative findings: - The Europe-wide and group-specific factors combined explain more than a quarter of the variance of wage growth during 2002–17. - The Europe-wide factor has a larger role for the newer members (consistent with them being more open economies). - The group-specific factor has a somewhat larger role for the EU15 (consistent with more synchronous business cycles in a monetary union). - Country-specific factors remain the most significant driver, explaining about three-quarters of the variance of wage growth. - Results are robust to using Principal Components Analysis. - Evolution over time: - Rolling estimates show wage co-movement increased during crisis periods (consistent with downward pressure on wage demands due to synchronized recessions and elevated concerns about job losses after 2008–09 and the sovereign debt crisis). - Wage co-movement in recent years was somewhat smaller than during peak crisis episodes but remained sizable. - Interpretation: - Common factors (slack, inflation, integration-mediated spillovers) play an important role in European wage dynamics; strong economic integration and spillovers from wage setting in one country to others explain a significant portion of recent wage co-movement. ### Labor mobility and institutional context (Box 2.3) - Freedom of movement for workers is enshrined in Article 45 of the Treaty on the Functioning of the European Union. - Under the Treaty, EU citizens are entitled to: - look for a job in another EU country; - work there without needing a work permit; - reside there for that purpose; - stay there even after employment has finished; and - enjoy equal treatment with nationals in access to employment, working conditions, and all other social and tax advantages. - Additional mobility provisions and protections: - EU nationals may have certain types of health and social security coverage transferred to the country in which they go to seek work. - Some occupations allow recognition of professional qualifications abroad. - Free movement of workers generally applies to the European Economic Area (Iceland, Liechtenstein, Norway). - EU social security coordination provides rules to protect rights of people moving within the EU, Iceland, Liechtenstein, Norway, and Switzerland. - Categorization of mobility in the EU context (illustrative): - People mobility includes regular mobility, cross-border workers, free movement of workers, free provision of services (posted workers, mobile self-employed), and other mobility (students, pensioners, job seekers, family members). *Source: 2. EUROpEAN WAGE DyNAMICs AND LAbOR MARKET INTEGRATION, Regional Economic Outlook: Europe, International Monetary Fund, May 2018.* --- _Source: https://www.imf.org/-/media/files/publications/reo/eur/2018/may/eur-booked3.pdf_