## Executive Summary vii

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### Overview
- The coronavirus disease (COVID-19) pandemic is exacting a severe social and economic toll on Europe.
- By mid-October 2020, more than 240,000 people have lost their lives in Europe, while nearly 7 million people are estimated to have been infected with the virus.
- The pandemic’s toll on Europe could have been much larger without the unprecedentedly strong and multifaceted response to the crisis.

### Recent Developments: Mobility, Infections, and Activity
- Real GDP fell by about 40 percent in the second quarter of 2020 (annualized quarter-over-quarter), with deeper contraction in advanced Europe relative to emerging Europe.
- Mobility and infections
  - Strict social distancing measures and shutdowns from March to May lowered infections and intensive care occupancy rates; after restrictions were relaxed, infections resurged to varying degrees.
  - In some countries (France, Spain) daily new cases jumped back to levels not seen since April; in the Western Balkans the second wave hit much harder than the first.
  - Hospitalization and death rates have generally stayed much lower than during the first wave.
  - Mobility bounced back quickly with relaxation of lockdowns; grocery and retail trade mobility rebounded to pre-pandemic levels, while transit and workplace recovery has been more muted.
- Economic activity
  - European retail sales increased by 15 and 6 percent (month-over-month) in May and June, respectively, reaching 95 percent of the (pre-pandemic) level of February by the end of June.
  - Industrial production is estimated to have reached 91 percent of the pre-pandemic level by the end of June.
  - Purchasing managers’ index levels indicate the recovery appears to have lost steam after a sharp bounce-back in May–June.
  - In the euro area, employment in the second quarter of 2020 was 2.9 percent lower than in the second quarter of 2019, while hours worked dropped by more than 16 percent.
  - Contact-intensive sectors (hospitality, travel, and tourism) and sectors with complex value chains (electronics and automobiles) suffered most:
    - Hotel occupancy rates lowered to 40 percent through August.
    - European auto production declined 27 percent (year-over-year) in the first half of 2020 and affected nearly one half of the workers directly employed.

### The Policy Response: Unprecedented and Multifaceted
- Scope and objectives
  - Governments deployed large fiscal packages to support households and firms.
  - Job retention programs are estimated to have preserved at least 54 million jobs.
  - Central banks engaged in substantial monetary easing through conventional and unconventional measures to support credit flows and prevent financial market disruptions.
  - Macroprudential measures were eased to cushion the impact on banks and borrowers.
  - The European Union relaxed existing rules and mobilized supranational resources to finance anti-pandemic facilities and complement national fiscal policies.
- Monetary policy measures and effects
  - Policy rates were cut significantly in many economies (e.g. Iceland, Norway, Poland, Romania, Russia, Serbia, United Kingdom); deposit rates moved into negative territory where policy rates were near the effective lower bound.
  - In the euro area, the European Central Bank (ECB) expanded its balance sheet by about 16 percent of euro area GDP between March and August, and provided liquidity through targeted and untargeted long-term financing operations.
  - The new Pandemic Emergency Purchase Program (PEPP) has helped contain sovereign spreads and reduced financial market stress.
  - Staff expect ECB’s sovereign bonds purchases over 2020−21 to represent about 85 percent of the euro area’s projected fiscal deficit of about €1.7 trillion.
  - The ECB strengthened support to central banks of non-euro area countries with new bilateral swap lines (Bulgaria, Croatia) and repo lines (Albania, Hungary, North Macedonia, Romania, Serbia).
  - Central banks in emerging Europe engaged in policy rate cuts and secondary market asset purchases of government (or government guaranteed) securities, with significant asset purchases in Croatia and Poland.
- Fiscal and macroprudential policy
  - Large fiscal packages supported vulnerable households and firms across Europe.
  - Macroprudential flexibility and banking supervision concessions were implemented to avoid jeopardizing the flow of credit.

### Outlook and Risks
- Growth and inflation projections
  - The European economy is projected to contract by 7 percent in 2020 and rebound by 4.7 percent in 2021.
  - Headline inflation is projected to soften to 2 percent in 2020—1 percentage point below its 2019 level—before edging up to 2.4 percent in 2021.
- Key risks
  - The ongoing resurgence of infections across Europe presents perhaps the greatest downside risk.
  - A no-deal Brexit would imply an additional and potentially sizable shock to activity amid the pandemic.
  - The outlook is exceptionally uncertain and depends crucially on the course of the pandemic, people’s behavior, and the degree of continued economic policy support.

### Near-Term Policy Requirements and Recommendations
- Calibrate containment measures to minimize immediate social and economic damage.
- Maintain policy support until the recovery is fully entrenched; premature scaling back of supportive policies could drag countries back into recession.
- Continue support to viable jobs and businesses, including through job retention programs.
- Continuation of accommodative monetary policies is warranted by the muted inflation outlook and considerable economic slack.
- Banking supervision authorities should continue to exercise prudential flexibility to preserve the flow of credit.

### Corporate Sector and Policy Effectiveness (Chapter 3 summary)
- The combination of job-retention programs, debt moratoria, grants, and loan guarantees can be effective in addressing corporate liquidity needs, especially in advanced European economies.
- The ability of announced policy measures to curb the increase in solvency risks appears more limited.
- Careful policy calibration will be needed to better support companies deemed viable in the longer term and to facilitate the orderly exit of firms unlikely to succeed post-pandemic.

### Reopening Strategies and Epidemiological Trade-offs (Chapter 2 summary)
- Countries that started reopening earlier on the infection curve or that opened all sectors at a fast pace in a relatively short time saw reopening associated with a higher wave of infections.
- The recent increase in infections has been associated with lower fatality rates than the first wave.

### Medium-Term Challenges and Policy Priorities
- The crisis compounded pre-existing challenges and created new ones:
  - Pre-existing challenges include low productivity growth, climate change, the digital transition, ageing, and increasing inequality.
  - The crisis also caused damage to supply potential, a buildup of debt, and a setback to human capital accumulation.
- Policy priorities to sustain recovery and reduce medium-term scars:
  - Address long-lasting challenges to facilitate recovery and help Europe transform into a more resilient, green, and smart economy in the post-pandemic future.
  - Over time, shift support increasingly to people and public goods to foster structural transformation and resource reallocation away from contact-intensive activities.

*This chapter reflects data and developments as of September 28, 2020; chapter prepared by Kamil Dybczak, Carlos Mulas Granados, and Ezgi Ozturk with inputs from Vizhdan Boranova, Karim Foda, Keiko Honjo, Raju Huidrom, Nemanja Jovanovic and Svitlana Maslova, under the supervision of Jörg Decressin and the guidance of Gabriel Di Bella.*

### Executive Summary vii

### Executive Summary vii

### Overview
- The coronavirus disease (COVID-19) pandemic is exacting a severe social and economic toll on Europe.
- By mid-October 2020, more than 240,000 people have lost their lives in Europe, while nearly 7 million people are estimated to have been infected with the virus.
- The pandemic’s toll on Europe could have been much larger without the unprecedentedly strong and multifaceted response to the crisis.

### Recent Developments: Mobility, Infections, and Activity
- Real GDP fell by about 40 percent in the second quarter of 2020 (annualized quarter-over-quarter), with deeper contraction in advanced Europe relative to emerging Europe.
- Mobility and infections
  - Strict social distancing measures and shutdowns from March to May lowered infections and intensive care occupancy rates; after restrictions were relaxed, infections resurged to varying degrees.
  - In some countries (France, Spain) daily new cases jumped back to levels not seen since April; in the Western Balkans the second wave hit much harder than the first.
  - Hospitalization and death rates have generally stayed much lower than during the first wave.
  - Mobility bounced back quickly with relaxation of lockdowns; grocery and retail trade mobility rebounded to pre-pandemic levels, while transit and workplace recovery has been more muted.
- Economic activity
  - European retail sales increased by 15 and 6 percent (month-over-month) in May and June, respectively, reaching 95 percent of the (pre-pandemic) level of February by the end of June.
  - Industrial production is estimated to have reached 91 percent of the pre-pandemic level by the end of June.
  - Purchasing managers’ index levels indicate the recovery appears to have lost steam after a sharp bounce-back in May–June.
  - In the euro area, employment in the second quarter of 2020 was 2.9 percent lower than in the second quarter of 2019, while hours worked dropped by more than 16 percent.
  - Contact-intensive sectors (hospitality, travel, and tourism) and sectors with complex value chains (electronics and automobiles) suffered most:
    - Hotel occupancy rates lowered to 40 percent through August.
    - European auto production declined 27 percent (year-over-year) in the first half of 2020 and affected nearly one half of the workers directly employed.

### The Policy Response: Unprecedented and Multifaceted
- Scope and objectives
  - Governments deployed large fiscal packages to support households and firms.
  - Job retention programs are estimated to have preserved at least 54 million jobs.
  - Central banks engaged in substantial monetary easing through conventional and unconventional measures to support credit flows and prevent financial market disruptions.
  - Macroprudential measures were eased to cushion the impact on banks and borrowers.
  - The European Union relaxed existing rules and mobilized supranational resources to finance anti-pandemic facilities and complement national fiscal policies.
- Monetary policy measures and effects
  - Policy rates were cut significantly in many economies (e.g. Iceland, Norway, Poland, Romania, Russia, Serbia, United Kingdom); deposit rates moved into negative territory where policy rates were near the effective lower bound.
  - In the euro area, the European Central Bank (ECB) expanded its balance sheet by about 16 percent of euro area GDP between March and August, and provided liquidity through targeted and untargeted long-term financing operations.
  - The new Pandemic Emergency Purchase Program (PEPP) has helped contain sovereign spreads and reduced financial market stress.
  - Staff expect ECB’s sovereign bonds purchases over 2020−21 to represent about 85 percent of the euro area’s projected fiscal deficit of about €1.7 trillion.
  - The ECB strengthened support to central banks of non-euro area countries with new bilateral swap lines (Bulgaria, Croatia) and repo lines (Albania, Hungary, North Macedonia, Romania, Serbia).
  - Central banks in emerging Europe engaged in policy rate cuts and secondary market asset purchases of government (or government guaranteed) securities, with significant asset purchases in Croatia and Poland.
- Fiscal and macroprudential policy
  - Large fiscal packages supported vulnerable households and firms across Europe.
  - Macroprudential flexibility and banking supervision concessions were implemented to avoid jeopardizing the flow of credit.

### Outlook and Risks
- Growth and inflation projections
  - The European economy is projected to contract by 7 percent in 2020 and rebound by 4.7 percent in 2021.
  - Headline inflation is projected to soften to 2 percent in 2020—1 percentage point below its 2019 level—before edging up to 2.4 percent in 2021.
- Key risks
  - The ongoing resurgence of infections across Europe presents perhaps the greatest downside risk.
  - A no-deal Brexit would imply an additional and potentially sizable shock to activity amid the pandemic.
  - The outlook is exceptionally uncertain and depends crucially on the course of the pandemic, people’s behavior, and the degree of continued economic policy support.

### Near-Term Policy Requirements and Recommendations
- Calibrate containment measures to minimize immediate social and economic damage.
- Maintain policy support until the recovery is fully entrenched; premature scaling back of supportive policies could drag countries back into recession.
- Continue support to viable jobs and businesses, including through job retention programs.
- Continuation of accommodative monetary policies is warranted by the muted inflation outlook and considerable economic slack.
- Banking supervision authorities should continue to exercise prudential flexibility to preserve the flow of credit.

### Corporate Sector and Policy Effectiveness (Chapter 3 summary)
- The combination of job-retention programs, debt moratoria, grants, and loan guarantees can be effective in addressing corporate liquidity needs, especially in advanced European economies.
- The ability of announced policy measures to curb the increase in solvency risks appears more limited.
- Careful policy calibration will be needed to better support companies deemed viable in the longer term and to facilitate the orderly exit of firms unlikely to succeed post-pandemic.

### Reopening Strategies and Epidemiological Trade-offs (Chapter 2 summary)
- Countries that started reopening earlier on the infection curve or that opened all sectors at a fast pace in a relatively short time saw reopening associated with a higher wave of infections.
- The recent increase in infections has been associated with lower fatality rates than the first wave.

### Medium-Term Challenges and Policy Priorities
- The crisis compounded pre-existing challenges and created new ones:
  - Pre-existing challenges include low productivity growth, climate change, the digital transition, ageing, and increasing inequality.
  - The crisis also caused damage to supply potential, a buildup of debt, and a setback to human capital accumulation.
- Policy priorities to sustain recovery and reduce medium-term scars:
  - Address long-lasting challenges to facilitate recovery and help Europe transform into a more resilient, green, and smart economy in the post-pandemic future.
  - Over time, shift support increasingly to people and public goods to foster structural transformation and resource reallocation away from contact-intensive activities.

*This chapter reflects data and developments as of September 28, 2020; chapter prepared by Kamil Dybczak, Carlos Mulas Granados, and Ezgi Ozturk with inputs from Vizhdan Boranova, Karim Foda, Keiko Honjo, Raju Huidrom, Nemanja Jovanovic and Svitlana Maslova, under the supervision of Jörg Decressin and the guidance of Gabriel Di Bella.*

### 2. Balance Sheet Expansion by Central Banks

### 2. Balance Sheet Expansion by Central Banks

### Central bank balance sheet expansions and monetary policy actions
- Total expansion is calculated as the difference between central banks’ assets value in latest available month and February 2020. The data include valuation changes.
- Central banks’ balance sheets did not always expand in proportion to asset purchases because:
  - They were sterilized (example: Croatia).
  - They were dwarfed by liquidity assistance to banks.
- Unconventional monetary policy (UMP) has not led to significant currency pressures so far.
- Globally easy financial conditions and some use of foreign currency reserves limited currency depreciation in Croatia, Romania and Turkey.
- Exchange rates have broadly returned to pre-crisis levels, except in Russia and Turkey.

### Macroprudential easing and regulatory forbearance
- Swift implementation of macroprudential policies provided capital and liquidity relief for banks to absorb losses and maintain credit flows.
- Euro area specific measures:
  - ECB Banking Supervision allowed banks to operate temporarily below both the level and quality of capital required under “Pillar 2.”
  - ECB allowed flexibility in classification and provisioning of loans backed by public support measures.
- National authorities relaxed macroprudential requirements by releasing countercyclical capital buffers or revoking previously announced increases.
- Restrictions on dividend distribution and share buybacks complemented the measures and helped cushion banks and support lending.
- Governments introduced borrower relief measures in many countries (Albania, Bulgaria, Germany, Hungary, Italy, Kosovo, Montenegro, Serbia, Slovenia, and Spain), including temporary moratoria allowing suspension or postponement of bank payments (for example, for 3–18 months).
- Regulatory forbearance allowed banks to postpone provisioning of reprogrammed loans.
- Banks were encouraged to provide relief case-by-case: debt rescheduling and restructuring, reduced payments, or temporary switch to interest-only payments.

### Fiscal policy: size, composition, and implementation
- National authorities deployed unprecedented fiscal support; discretionary fiscal packages plus automatic stabilizers each accounted for about half of the average decline in fiscal balances in 2020.
- Average size of discretionary fiscal measures:
  - AE: 6.2 percent of GDP
  - EE: 3.1 percent of GDP
- To protect jobs and support workers:
  - Job-retention programs paid up to 70–80 percent of gross wages for hours not worked in several economies.
  - Planned fiscal spending in 2020 averages 1 percent of GDP on job retention programs and about 0.4 percent of GDP on additional unemployment benefits.
- To support businesses:
  - Tax deferrals, loan guarantees (with coverage ratios of 70–100 percent), and direct equity injections were approved.
  - Announced guarantee programs vary greatly (1–25 percent of GDP); take-up through August is estimated at about half of the maximum envelope, with considerable cross-country variation.
  - Staff analysis: support programs could be effective in addressing a large part of corporate liquidity needs, especially in AE, but much less so for equity needs.
- Implementation and execution:
  - Execution rate of spending programs through August varied from 50 to 80 percent of planned envelopes.
  - Job-retention programs execution exceeded 70 percent of announced support, reaching an estimated 54 million workers.
  - Staff estimate that much of announced tax relief will become foregone revenue.
- Fiscal cost and deficits:
  - Staff estimate that in 2020, primary balances will decline by 9.9 percentage points of GDP in AE and by 6 percentage points of GDP in EE.

### European Union-wide responses and supranational support
- EU relaxed rules to accommodate increased fiscal deficits; the general escape clause in the EU fiscal rule was activated.
- European Commission relaxed EU State Aid rules resulting in approval of €2 trillion of budgeted state aid, with Germany accounting for more than half.
- EU mobilized supranational resources:
  - April assistance package: €540 billion comprising:
    - €100 billion in loans to help protect jobs (Support to mitigate Unemployment Risks in an Emergency program).
    - €200 billion pan-European guarantee fund for the European Investment Bank to increase support to firms.
    - €240 billion European Stability Mechanism precautionary credit line, to cover COVID-19-related healthcare costs (for up to 2 percent of GDP per state).
  - July “Next Generation EU” package: €750 billion, including €390 billion to be distributed as grants via joint EU bond issuance during 2021–23.
- The “Next Generation EU” grants are intended to support national recovery plans for 2021–23 targeting reform and investment, including the green and digital transition.
- Staff analysis (Flexible System of Global Models):
  - Output losses in 2020 could have been about 4 percentage points larger without fiscal support.
  - Grants from “Next Generation EU” can have a sizable positive impact on recovery and ease public debt accumulation pressures, especially in new member states and highly indebted countries.
  - Growth impact depends on quality of spending and speed of implementation.

### Outlook: recovery projections and inflation
- Europe’s projected economic contraction in 2020: 7 percent (largest since World War II), revised down from an expected 8.5 percent contraction in the June WEO Update.
- Economic activity rebound forecast for 2021: 4.7 percent (strength depends on pandemic course in second half of 2020).
- AE and EE projections:
  - AE average: projected to contract by 8.1 percent in 2020; growth in AE is forecast to reach 5.2 percent in 2021 and to hover around 3 percent over the medium-term.
  - Selected AE hardest hit (France, Italy, Portugal, San Marino, Spain, United Kingdom): activity forecast to plunge by about 10 percent.
  - AE less affected (Finland, Ireland, Lithuania, Norway): GDP declining by 4 percent at most.
  - EE: forecast to shrink by 4.6 in 2020, with growth returning to 3.9 percent in 2021; Croatia and Montenegro face about 10 percent output losses in 2020; Belarus and Serbia projected to drop by about 3 percent.
- Inflation:
  - Headline inflation decline to 2 percent in 2020, 1 percentage point below 2019.
  - Inflation projected to pick up to 2.4 percent in 2021.
  - Inflation expected to weaken in both AE and EE, though in some EE where exchange rates depreciated inflation may hold.

### Long-term scars and inequality
- Recession likely to leave lasting scars: lower investment and trade, erosion of job skills, disruptions to global value chains → negative implications for potential growth and labor productivity; permanent output losses.
- Inequality likely to rise as workers in contact-intensive sectors tend to be poorer and more vulnerable.

### Risks to the outlook
- Forecast subject to elevated uncertainty; ongoing resurgence of infections is the greatest downside risk.
- Baseline projection assumes no pervasive lockdowns in Europe, even without widespread availability of safe and effective vaccines during the forecast horizon.
- Downside scenarios include:
  - More voluntary social distancing or reinstated lockdowns → greater scarring and weaker recovery.
  - Spillovers from soft global demand and tourism hitting export-oriented economies.
  - Sudden unwind of buoyant financial markets causing abrupt fall in risk appetite, affecting EE reliant on Eurobond market.
  - High risk of no-deal Brexit with only two months left until end of Brexit transition period (as of text) and no significant progress in negotiations.
- Upside scenarios:
  - Faster-than-expected vaccine availability and/or improved therapeutics could accelerate reopening and strengthen activity; policy measures might be more effective than projected.

### Policy requirements and short-term macroeconomic mix
- Reopening must be calibrated, balancing economic reopening with containment to avoid overwhelming health systems.
- Countries that lifted restrictions more gradually achieved similar economic improvement at a lower infection cost than those that reopened faster and earlier.
- With losses to activity broadly “linear” and infections “exponential” in time, there may be a premium on early action against surges.
- Policy guidance by country stage:
  - Where infections are rising: foremost priority is to contain the pandemic and prevent a deeper downturn.
  - Where peak infections have passed: prioritize supporting recovery and facilitating resource reallocation by gradually shifting spending from economic support to investment in social and economic infrastructure.
  - For all countries: adjust policy strategy and efficiently use remaining policy space depending on the pandemic’s evolution and impact on activity.
- Fiscal policy stance:
  - Fiscal policy support should remain largely in place as a backstop for the recovery.
  - October WEO projects reduction in deficits by about 5 percentage points of GDP in AE and 3 percentage points of GDP in EE on present policies, but forecasts are uncertain.
  - Avoid large consolidation of fiscal policy prematurely; risk of subsidizing zombie firms is acknowledged but continued support is warranted while vaccine prospects improve.
  - Support should be fine-tuned and targeted toward firms expected to be viable in the longer term to mitigate moral hazard.

*Source: International Monetary Fund, Regional Economic Outlook: Europe, October 2020 (chapter: 1. The Crucial Role of Policies in Cushioning the Pandemic’s Impact; section: 2. Balance Sheet Expansion by Central Banks).*

### 1. Europe: General Government Net Lending and Borrowing, 2021–20

### 1. Europe: General Government Net Lending and Borrowing, 2021–20

### Pandemic impact and the scale of fiscal response
- The region is expected to contract by about 7 percent in 2020.
- National fiscal measures amount to about 5 percent of GDP on average.
- Announced size of fiscal packages in Austria, Germany, and the United Kingdom is in the 8–11 percent of GDP range.
- Staff analysis using the “Flexible System of Global Models” shows that short-term output losses would have been significantly larger—by about 4 percent of GDP—without the swift fiscal support.
- The analysis suggests that without fiscal stimulus, economic activity would have dropped by 3–4 percentage points more than in the baseline for 2020 (that is, a contraction larger than 10 percent).

### Next Generation EU and medium-term fiscal support
- The recently approved €750 billion “Next Generation EU” recovery package, especially its €390 billion grant component, is central to the medium-term outlook.
- On average, EU members are projected to receive 0.6 percent of GDP per year in grants over 2021–23.
- In the case of Bulgaria, Croatia, Greece, and Portugal, disbursements are forecast to reach at least 2 percent of GDP.
- The funds are projected to be spent during 2021–24, with the peak usage in 2022–23.
- The analysis assumes that about one half of these funds will boost public investment projects under national recovery and reform plans, about one-fourth will finance current spending, and the remaining one-fourth will be used to fund already existing projects.
- Impact channels noted:
  - Grants financing public investment have a larger growth dividend due to a higher public investment multiplier and productivity effects.
  - One-fourth financing already existing projects contributes to stabilization of deficits and a faster decline in public debt ratios from 2022 onwards.
- While public debt ratios reach a comparable level in both scenarios by 2025, income losses are significantly lower in the scenario with national fiscal packages and Next Generation EU.

### Public debt and fiscal sustainability
- Public debt ratios in 2021 are forecast to reach 96 and 39 percent of GDP in AE and EE respectively, almost 20 and 10 percentage points above their 2019 level.
- Guarantee programs pose additional risks that, if materialized, could push debt ratios up further.
- The extraordinary policy support needs to be anchored by credible consolidation plans to be implemented once the recovery has taken hold.
- For many economies, notably in EE, this will mean mobilizing more revenue, by either tax rate increases or tax base broadening; because measures take time to prepare, the analysis of these issues should begin now.

### Monetary policy guidance
- Anchored inflation expectations and wide output gaps suggest that central banks should keep accommodative monetary policies in place to support the recovery.
- In the short term, key policy rates should remain at their current levels to keep borrowing costs low and credit conditions supportive.
- Asset purchase programs should continue to reinforce the accommodative impact of low policy rates, but their size and composition will need to be tailored to protect the credibility of monetary policy frameworks and anchor inflation expectations.
- Specifically, for the euro area, further monetary policy accommodation may be needed to counteract the pandemic’s disinflationary impact, including via PEPP expansion and adjustment of TLTRO terms.
- To support the near-term recovery, national fiscal policies are assumed to be complemented by accommodative monetary policy through the end of 2025.

### Macroprudential and banking-sector measures
- Banking supervision authorities should continue applying regulatory flexibility in order not to jeopardize the flow of credit.
- Although a weakening of capital and provisioning standards needs to be avoided and the true state of banks closely monitored, existing gaps between required and actual provisions should be tolerated and their subsequent closure pursued at a suitably gradual pace.
- If rising private sector debt levels and corporate insolvencies impact banks as policy support is gradually withdrawn, authorities will need to address increasing fragility of bank balance sheets and adjust the pace of unwinding banks’ capital relief measures.
- Supervision authorities may need to adapt plans as data arrives, taking into consideration that the crisis may affect different banks (including some of systemic importance) differently.

### Medium-term policy priorities and recommendations
- Fiscal support must continue to focus on healthcare provision, vulnerable households, viable but liquidity-constrained firms, and public investment, including on green and digital projects.
- Countries with fiscal space can continue providing broad-based stimulus, but those that are more constrained will face difficult choices that, in some cases, external support could alleviate.
- The “Next Generation EU” initiative should help EU states (especially its newer members) expand their policy space for securing the recovery and boosting investment in areas that would place these economies on a path of higher productivity and faster emission reduction.
- The extraordinary policy support needs to be anchored by credible consolidation plans to be implemented once the recovery has taken hold.
- For many economies, notably in EE, mobilize more revenue through tax rate increases or tax base broadening; begin analysis and preparation now.
- Active labor market policies to facilitate retraining and prevent loss of firm-specific human capital.
- Where needed, temporary credit guarantees and loan restructuring can help solvent-but-illiquid firms remain afloat and preserve employment relationships.
- Once fiscal resources are freed from temporary support, redeploy them to public investment that will support the recovery and tackle long-term challenges like climate change, infrastructure gaps, and the digital transition.
- Accelerate completion of structural reforms to raise potential output, boost resilience, and strengthen inclusive growth (for example, improving human capital, implementing effective bankruptcy procedures and out-of-court restructuring mechanisms, diminishing barriers to firm entry and exit, and measures to incentivize investment in new areas).
- Strengthen mechanisms to prepare for, prevent, and respond to a new pandemic.

### Infrastructure investment in Central, Eastern, and Southeastern Europe (CESEE)
- CESEE has significant infrastructure gaps relative to the EU15 in traditional and digital infrastructure.
- Closing just 50 percent of the infrastructure gap with the EU15 by 2030 would cost between 3 and 8 percent of GDP per year and even more to make the infrastructure stock climate resilient and green.
- Empirical estimates: For each percent of GDP spent on infrastructure,
  - output can increase by 0.5 to 0.75 percent in the short run; and
  - output can increase by 2 to 2.5 percent in the long term.
- With considerable slack in the economy, the stimulus effect of investment in infrastructure could be even larger.
- Strong governance of infrastructure projects improves public investment efficiency, helps mobilize private sector involvement (including public private Partnerships), and attract greater private financing.
- Pandemic-related challenges to scaling up infrastructure include implementation delays, cost overruns, stretched public sector balance sheets, and highly uncertain future demand—making value for money and strengthened infrastructure governance critical.

### Model-based scenario notes
- The analysis considers only above-the-line revenue and expenditure measures and does not reflect below-the-line measures (such as loans and equity injections) and government guarantees.
- Public debt in the October 2020 WEO scenario has been quantified as a weighted average of debt ratios of EU27 countries plus the size of expected debt accumulation by the EU27 in order to finance Next Generation EU grants.
- The no policy response scenario represents a hypothetical situation assuming that no policy measures from the National Programs and EU recovery funds are implemented.

*Prepared by IMF staff; October 2020.*

### Annex Table 1.1.2. Headline Inflation

### Annex Table 1.1.2. Headline Inflation

### Headline inflation: selected regional and country values (Year-over-year percent change)
- Europe
  - October 2020 WEO: 2019 3.0 2020 2.0 2021 2.4 2022 2.5
  - June 2020 WEO: 2020 1.9 2021 2.3 2022 2.6
  - Difference: 2020 0.1 2021 20.1
- Advanced European Economies
  - October 2020 WEO: 2019 1.3 2020 0.5 2021 1.0 2022 1.3
  - June 2020 WEO: 2020 0.3 2021 1.0 2022 1.4
  - Difference: 2020 0.2 2021 0.0 20.1
- Euro Area
  - October 2020 WEO: 2019 1.2 2020 0.4 2021 0.9 2022 1.2
  - June 2020 WEO: 2020 0.2 2021 0.9 2022 1.3
  - Difference: 2020 0.2 2021 0.0 20.1
- Austria
  - October 2020 WEO: 2019 1.5 2020 1.2 2021 1.8 2022 1.8
  - June 2020 WEO: 2020 0.8 2021 1.6 2022 1.8
  - Difference: 2020 0.4 2021 0.2 0.0
- Belgium
  - October 2020 WEO: 2019 1.2 2020 0.6 2021 1.2 2022 1.4
  - June 2020 WEO: 2020 0.2 2021 1.1 2022 1.4
  - Difference: 2020 0.4 2021 0.1 0.0
- Cyprus
  - October 2020 WEO: 2019 0.6 2020 20.6 2021 1.0 2022 1.0
  - June 2020 WEO: 2020 0.1 2021 0.4 2022 0.8
  - Difference: 2020 20.7 2021 0.6 0.2
- Estonia
  - October 2020 WEO: 2019 2.3 2020 0.2 2021 1.4 2022 2.2
  - June 2020 WEO: 2020 0.5 2021 2.0 2022 2.1
  - Difference: 2020 20.3 2021 20.6 0.1
- Finland
  - October 2020 WEO: 2019 1.1 2020 0.7 2021 1.3 2022 1.5
  - June 2020 WEO: 2020 0.6 2021 1.1 2022 1.5
  - Difference: 2020 0.1 2021 0.2 0.0
- France
  - October 2020 WEO: 2019 1.3 2020 0.5 2021 0.6 2022 1.0
  - June 2020 WEO: 2020 0.2 2021 0.7 2022 1.0
  - Difference: 2020 0.3 2021 20.1 0.0
- Germany
  - October 2020 WEO: 2019 1.3 2020 0.5 2021 1.1 2022 1.3
  - June 2020 WEO: 2020 0.4 2021 1.4 2022 1.5
  - Difference: 2020 0.1 2021 20.3 20.2
- Greece
  - October 2020 WEO: 2019 0.5 2020 20.6 2021 0.7 2022 0.9
  - June 2020 WEO: 2020 20.7 2021 0.0 2022 0.8
  - Difference: 2020 0.1 2021 0.7 0.1
- Ireland
  - October 2020 WEO: 2019 0.9 2020 20.2 2021 0.6 2022 1.9
  - June 2020 WEO: 2020 0.0 2021 0.4 2022 1.9
  - Difference: 2020 20.2 2021 0.2 0.0
- Italy
  - October 2020 WEO: 2019 0.6 2020 0.1 2021 0.6 2022 0.9
  - June 2020 WEO: 2020 0.1 2021 0.6 2022 1.0
  - Difference: 2020 0.0 2021 0.0 20.1
- Latvia
  - October 2020 WEO: 2019 2.7 2020 0.6 2021 1.8 2022 2.2
  - June 2020 WEO: 2020 20.3 2021 2.5 2022 2.3
  - Difference: 2020 0.9 2021 20.7 20.1
- Lithuania
  - October 2020 WEO: 2019 2.2 2020 1.3 2021 1.7 2022 1.9
  - June 2020 WEO: 2020 0.5 2021 1.8 2022 2.1
  - Difference: 2020 0.8 2021 20.1 20.2
- Luxembourg
  - October 2020 WEO: 2019 1.7 2020 0.4 2021 1.4 2022 1.8
  - June 2020 WEO: 2020 0.3 2021 1.4 2022 1.8
  - Difference: 2020 0.1 2021 0.0 0.0
- Malta
  - October 2020 WEO: 2019 1.5 2020 0.8 2021 1.1 2022 1.4
  - June 2020 WEO: 2020 0.7 2021 1.1 2022 1.4
  - Difference: 2020 0.1 2021 0.0 0.0
- Netherlands
  - October 2020 WEO: 2019 2.7 2020 1.2 2021 1.5 2022 1.5
  - June 2020 WEO: 2020 0.5 2021 1.2 2022 1.4
  - Difference: 2020 0.7 2021 0.3 0.1
- Portugal
  - October 2020 WEO: 2019 0.3 2020 0.0 2021 1.1 2022 1.2
  - June 2020 WEO: 2020 20.1 2021 1.2 2022 1.5
  - Difference: 2020 0.1 2021 20.1 20.3
- Slovak Republic
  - October 2020 WEO: 2019 2.8 2020 1.5 2021 1.5 2022 1.9
  - June 2020 WEO: 2020 1.5 2021 1.4 2022 1.7
  - Difference: 2020 0.0 2021 0.1 0.2
- Slovenia
  - October 2020 WEO: 2019 1.6 2020 0.5 2021 1.8 2022 1.7
  - June 2020 WEO: 2020 0.4 2021 1.6 2022 1.6
  - Difference: 2020 0.1 2021 0.2 0.1
- Spain
  - October 2020 WEO: 2019 0.7 2020 20.2 2021 0.8 2022 1.4
  - June 2020 WEO: 2020 20.5 2021 0.5 2022 1.2
  - Difference: 2020 0.5 2021 1.2 0.3 0.2
- Nordic Economies
  - October 2020 WEO: 2019 1.6 2020 0.9 2021 1.8 2022 1.5
  - June 2020 WEO: 2020 0.8 2021 1.8 2022 1.7
  - Difference: 2020 0.1 2021 0.0 20.2
- Denmark
  - October 2020 WEO: 2019 0.7 2020 0.4 2021 0.9 2022 1.2
  - June 2020 WEO: 2020 0.6 2021 0.9 2022 1.2
  - Difference: 2020 0.2 0.0 0.0
- Iceland
  - October 2020 WEO: 2019 3.0 2020 2.7 2021 2.8 2022 2.5
  - June 2020 WEO: 2020 2.3 2021 2.5 2022 2.5
  - Difference: 2020 0.4 0.3 0.0
- Norway
  - October 2020 WEO: 2019 2.2 2020 1.4 2021 3.3 2022 1.8
  - June 2020 WEO: 2020 1.2 2021 2.8 2022 2.3
  - Difference: 2020 0.2 0.5 20.5 20.5
- Sweden
  - October 2020 WEO: 2019 1.6 2020 0.8 2021 1.4 2022 1.5
  - June 2020 WEO: 2020 0.6 2021 1.5 2022 1.5
  - Difference: 2020 0.2 20.1 0.0
- Other European Advanced Economies
  - October 2020 WEO: 2019 1.6 2020 0.7 2021 1.1 2022 1.5
  - June 2020 WEO: 2020 0.5 2021 0.7 2022 1.5
  - Difference: 2020 0.2 0.4 0.0
- Czech Republic
  - October 2020 WEO: 2019 2.9 2020 3.3 2021 2.4 2022 2.2
  - June 2020 WEO: 2020 2.7 2021 2.4 2022 2.0
  - Difference: 2020 0.6 0.0 0.2
- Israel
  - October 2020 WEO: 2019 0.8 2020 20.5 2021 0.2 2022 0.5
  - June 2020 WEO: 2020 20.5 2021 0.3 2022 1.0
  - Difference: 2020 0.0 20.1 20.5
- San Marino
  - October 2020 WEO: 2019 1.0 2020 0.5 2021 0.8 2022 0.9
  - June 2020 WEO: 2020 0.1 2021 1.2 2022 1.3
  - Difference: 2020 0.4 20.4 20.4
- Switzerland
  - October 2020 WEO: 2019 0.4 2020 20.8 2021 0.0 2022 0.3
  - June 2020 WEO: 2020 21.0 2021 20.1 2022 0.3
  - Difference: 2020 0.3 0.2 0.1 0.0
- United Kingdom
  - October 2020 WEO: 2019 1.8 2020 0.8 2021 1.2 2022 1.7
  - June 2020 WEO: 2020 0.7 2021 0.7 2022 1.8
  - Difference: 2020 0.1 0.5 20.1
- Emerging European Economies (aggregate)
  - October 2020 WEO: 2019 6.8 2020 5.2 2021 5.3 2022 5.1
  - June 2020 WEO: 2020 5.2 2021 5.0 2022 5.0
  - Difference: 2020 0.0 0.3 0.1
- Central Europe (aggregate)
  - October 2020 WEO: 2019 2.5 2020 3.4 2021 2.5 2022 2.1
  - June 2020 WEO: 2020 3.3 2021 2.5 2022 2.6
  - Difference: 2020 0.1 0.0 20.5
- Hungary
  - October 2020 WEO: 2019 3.4 2020 3.6 2021 3.4 2022 3.0
  - June 2020 WEO: 2020 3.3 2021 3.2 2022 3.0
  - Difference: 2020 0.3 0.2 0.0
- Poland
  - October 2020 WEO: 2019 2.3 2020 3.3 2021 2.3 2022 1.9
  - June 2020 WEO: 2020 3.3 2021 2.4 2022 2.5
  - Difference: 2020 0.0 20.1 20.6
- Eastern Europe (aggregate)
  - October 2020 WEO: 2019 4.9 2020 3.3 2021 3.6 2022 3.6
  - June 2020 WEO: 2020 3.4 2021 3.2 2022 3.4
  - Difference: 2020 0.3 0.4 0.2
- Belarus
  - October 2020 WEO: 2019 5.6 2020 5.1 2021 5.1 2022 5.0
  - June 2020 WEO: 2020 5.6 2021 5.1 2022 5.0
  - Difference: 2020 0.0 0.0 0.0
- Moldova
  - October 2020 WEO: 2019 4.8 2020 2.8 2021 2.3 2022 5.5
  - June 2020 WEO: 2020 2.8 2021 2.3 2022 5.5
  - Difference: 2020 0.0 0.0 0.0
- Russia
  - October 2020 WEO: 2019 4.5 2020 3.2 2021 3.2 2022 3.2
  - June 2020 WEO: 2020 3.2 2021 2.8 2022 3.1
  - Difference: 2020 0.0 0.4 0.1
- Ukraine
  - October 2020 WEO: 2019 7.9 2020 3.2 2021 6.0 2022 5.7
  - June 2020 WEO: 2020 4.5 2021 7.2 2022 5.6
  - Difference: 2020 1.3 21.2 0.1
- Southeastern European EU Member States (aggregate)
  - October 2020 WEO: 2019 3.2 2020 2.2 2021 2.1 2022 2.4
  - June 2020 WEO: 2020 1.7 2021 1.5 2022 2.1
  - Difference: 2020 0.5 0.6 0.3
- Bulgaria
  - October 2020 WEO: 2019 2.5 2020 1.2 2021 1.7 2022 2.1
  - June 2020 WEO: 2020 1.0 2021 1.9 2022 2.1
  - Difference: 2020 0.2 0.0 0.0
- Croatia
  - October 2020 WEO: 2019 0.8 2020 0.3 2021 0.8 2022 1.1
  - June 2020 WEO: 2020 0.3 2021 0.9 2022 1.2
  - Difference: 2020 0.0 20.1 20.1
- Romania
  - October 2020 WEO: 2019 3.8 2020 2.9 2021 2.5 2022 2.7
  - June 2020 WEO: 2020 2.2 2021 1.5 2022 2.3
  - Difference: 2020 0.7 1.0 0.4
- Southeastern European Non-EU Member States (aggregate)
  - October 2020 WEO: 2019 1.4 2020 0.9 2021 1.5 2022 1.9
  - June 2020 WEO: 2020 0.7 2021 1.6 2022 2.0
  - Difference: 2020 0.2 0.1 20.1
- Albania
  - October 2020 WEO: 2019 1.4 2020 1.4 2021 1.7 2022 2.3
  - June 2020 WEO: 2020 1.3 2021 1.7 2022 2.2
  - Difference: 2020 0.1 0.0 0.1
- Bosnia and Herzegovina
  - October 2020 WEO: 2019 0.6 2020 20.8 2021 0.4 2022 1.2
  - June 2020 WEO: 2020 1.1 2021 1.3 2022 1.6
  - Difference: 2020 1.3 1.6 0.3 20.9 20.4
- Kosovo
  - October 2020 WEO: 2019 2.7 2020 0.8 2021 1.2 2022 1.7
  - June 2020 WEO: 2020 1.1 2021 1.5 2022 1.7
  - Difference: 2020 20.3 0.3 0.0
- North Macedonia
  - October 2020 WEO: 2019 0.8 2020 0.9 2021 1.3 2022 1.6
  - June 2020 WEO: 2020 20.5 2021 1.0 2022 1.4
  - Difference: 2020 1.4 1.4 0.3 0.2
- Montenegro
  - October 2020 WEO: 2019 0.4 2020 20.1 2021 0.7 2022 1.1
  - June 2020 WEO: 2020 0.7 2021 0.9 2022 0.9
  - Difference: 2020 1.4 20.8 20.2 20.3
- Serbia
  - October 2020 WEO: 2019 1.9 2020 1.5 2021 1.9 2022 2.3
  - June 2020 WEO: 2020 1.4 2021 1.9 2022 2.3
  - Difference: 2020 0.1 0.0 0.0
- Turkey
  - October 2020 WEO: 2019 15.2 2020 11.9 2021 11.9 2022 11.4
  - June 2020 WEO: 2020 12.0 2021 12.0 2022 11.4
  - Difference: 2020 20.1 20.1 0.0

### Memorandum items (selected)
- World
  - October 2020 WEO: 2019 3.5 2020 3.2 2021 3.4 2022 3.2
  - June 2020 WEO: 2020 2.8 2021 3.2 2022 3.2
  - Difference: 2020 0.4 0.2 0.0
- Advanced Economies
  - October 2020 WEO: 2019 1.4 2020 0.8 2021 1.6 2022 1.6
  - June 2020 WEO: 2020 0.3 2021 1.1 2022 1.6
  - Difference: 2020 0.5 0.5 0.0
- Emerging Market and Developing Economies
  - October 2020 WEO: 2019 5.1 2020 5.0 2021 4.7 2022 4.3
  - June 2020 WEO: 2020 4.4 2021 4.5 2022 4.3
  - Difference: 2020 0.6 0.2 0.0
- Emerging and Developing Europe
  - October 2020 WEO: 2019 6.6 2020 5.2 2021 5.2 2022 5.0
  - June 2020 WEO: 2020 5.1 2021 4.9 2022 5.0
  - Difference: 2020 0.1 0.3 0.0
- Emerging Europe Excl. Russia and Turkey
  - October 2020 WEO: 2019 3.6 2020 2.9 2021 3.0 2022 2.9
  - June 2020 WEO: 2020 2.9 2021 2.9 2022 2.9
  - Difference: 2020 0.0 0.1 0.0
- European Union
  - October 2020 WEO: 2019 1.4 2020 0.8 2021 1.2 2022 1.4
  - June 2020 WEO: 2020 0.6 2021 1.2 2022 1.5
  - Difference: 2020 0.2 0.0 20.1
- United States
  - October 2020 WEO: 2019 1.8 2020 1.5 2021 2.8 2022 2.1
  - June 2020 WEO: 2020 0.5 2021 1.5 2022 2.2
  - Difference: 2020 1.0 1.0 20.1
- China
  - October 2020 WEO: 2019 2.9 2020 2.9 2021 2.7 2022 2.6
  - June 2020 WEO: 2020 2.8 2021 3.0 2022 2.6
  - Difference: 2020 0.1 20.3 0.0
- Japan
  - October 2020 WEO: 2019 0.5 2020 20.1 2021 0.3 2022 0.7
  - June 2020 WEO: 2020 20.1 2021 0.3 2022 0.7
  - Difference: 2020 0.0 0.0 0.0

### Context and key analytical findings from the chapter text adjacent to the table
- Europe faced severe COVID-19 impacts in early 2020; countries implemented stringent lockdowns and later heterogeneous reopening strategies differing in timing, pace, and sectoral sequencing.
- Main questions addressed:
  - How reopening strategies compare across countries in timing, pace, sectoral sequencing.
  - How official reopening measures translated into mobility (proxy for activity) and influenced subsequent COVID-19 infections.
  - What early lessons on reinfection risks and activity trade-offs can be drawn.
- Database and measurement:
  - Novel daily database tracks sector, timing, intensity of reopening for countries listed in the database (including Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Israel, Italy, Netherlands, Norway, Poland, Portugal, Romania, Russia, Spain, Switzerland, Turkey, Ukraine, United Kingdom).
  - Intensity of sector reopening coded as: fully closed; partially open; open with restrictions; open.
- Heterogeneity in reopening:
  - Timing: Some countries reopened after daily deaths had declined substantially (e.g., Belgium, France); others reopened when fatalities were declining (e.g., Austria, Germany); others reopened while fatalities still rising (e.g., Poland, Russia).
  - Speed: Ratio of effective days open to actual days open (adjusting for extent of easing) varied—about 30 percent in Italy and Spain (gradual) to above 50 percent in France (later but faster reopening) as of mid-July.
  - Sector sequencing: Retail often reopened early (median phase 2); schools’ sequencing varied widely (early in Austria, Denmark; late in Italy, Spain).
- Accompanying health measures:
  - Reopening often combined with recommendations/mandates on face masks, contact-tracing apps, expanded testing. Survey evidence indicates mask use increased after reopening.
- Reopening and activity:
  - Mobility (Google mobility indices) used as proxy for economic activity; these correlate with GDP growth (estimated correlation coefficient ~0.5 in Q2 explaining over 80 percent of GDP variability).
  - Regression analysis (local projection methods) uses aggregate reopening index (cumulated easing actions) with controls: country and time fixed effects, lagged mobility, lagged infection incidence, dummy for time since first reopening, and country-specific infection time trends.
  - Estimated effect: a marginal change in the reopening index (e.g., moving a sector from fully closed to partially open) is associated on average with an initial increase in mobility of 1 to 1.5 percentage points; effect declines gradually but remains statistically significant for almost two weeks.
- Voluntary social distancing:
  - A unit increase in per capita daily deaths is associated with a statistically significant and persistent decline in mobility (lagged daily deaths used to assess voluntary distancing).

*Sources: IMF, World Economic Outlook; IMF staff calculations; and chapter text (Regional Economic Outlook: Europe, International Monetary Fund | October 2020).*

### 0.5 percentage point (Figure 2.4, blue line).

### text - 0.5 percentage point (Figure 2.4, blue line).

### Effect of Reopening on Mobility
- Reopening measures have a measurable positive effect on mobility (Figure 2.4, blue line): "0.5 percentage point (Figure 2.4, blue line)."
- Reopening policies explain a larger fraction of the increase in mobility than voluntary social distancing, although voluntary social distancing is more persistent.
- Quantitative findings:
  - An increase in the reopening index of one standard deviation leads to a rise in mobility of 0.2 standard deviation.
  - A decline in daily deaths of one standard deviation is associated with an increase in mobility of only 0.05 standard deviation.
  - About 40 percent of the variability in mobility explained by the model (60 percent in total) is attributed to the reopening policies.
  - Lagged infections or voluntary social distancing explains about 14 percent of the variability.

### Reopening and Infections
- Regression analysis replacing mobility with the log of daily COVID-19 cases or fatalities per million explores the epidemic response to movements in the overall reopening index (Figure 2.5).
- Main estimated effects (per unit easing in the reopening index):
  - Daily cases increase by about 4 percent after two weeks.
  - Daily cases increase by close to 8 percent after one month.
  - Daily deaths increase by about 2 percent one month after each unit of easing.
- The effect on fatalities during reopening is statistically significant but quantitatively smaller than effects estimated for lockdown periods.
- Possible explanations for smaller fatality response:
  - Shift in demographics of the infected population toward lower-risk groups (such as the young).
  - Weakening of the virus, seasonal factors, or better medical therapies.
  - Expansion in testing may have increased detection of asymptomatic or mild cases, but additional analysis suggests this is not the key driving factor of the lower fatality rate.

### Timing and Pace of Reopening Plans
- Countries differed in timing (opening early vs late relative to their daily fatality curve) and speed (fast vs slow sectoral reopening).
- Extended regression allowing differential effects by timing and speed finds:
  - For any given reopening step, opening at an earlier stage is associated with larger reinfection risk.
  - Early reopeners: about 4 percent higher daily cases per unit of easing at a 14-day horizon and about 7 percent after one month.
  - Fast reopeners versus slow reopeners: response of daily cases per unit of easing is about 8 percent higher at a 14-day horizon and about 12 percent higher after one month.
- Robustness notes:
  - Results remain similar when controlling for daily tests per capita and self-reported compliance with other non-pharmaceutical interventions (using a smaller sample).
- Mobility outcomes:
  - No statistically significant difference in the recovery in mobility across strategies (early vs late, fast vs slow). The benefit in terms of increased mobility per unit of easing is not statistically different across strategies.
- Implication from model predictions (Figure 2.7):
  - Alternative reopening strategies produce marked differences in the trajectory of infections but only minor differences in mobility.
  - Easing restrictions by one unit delivers similar economic effects (proxied by mobility) regardless of how and when a country exits, but generates a much smaller increase in new infections if reopening is late and slow.

### Conclusions and Policy Implications
- Reopening measures have led to recovery in economic activity but, on average, to an uptick in infections observed by end-August.
- Novel dimensions of the trade-off during reopening:
  - The post-reopening increase in cases appears less severe regarding fatalities than earlier findings for lockdowns would have suggested.
  - Reinfection risk increases disproportionately if reopening starts when virus circulation is still pervasive (early) or if measures are removed too quickly (fast).
- Policy-relevant takeaway:
  - Gradual reopening and beginning at a late stage in the infection cycle have merit: they lower reinfection risk without producing a disproportionately larger economic cost from delayed full reopening.
- Behavioral caveat:
  - Success also depends on population collective behavior (e.g., social distancing, face-mask use) as activity resumes.

### Methodology and Data (summary)
- Empirical approach:
  - Local projections methods (Jordà, 2005) on panel daily data for 22 countries; outcomes include a mobility index and log seven-day moving averages of daily cases and deaths per million.
  - Reopening index is the cumulative easing of restrictions aggregated across sectors.
  - Controls include country and time fixed effects, lagged mobility, lagged infection incidence, a dummy indicating the period since the first reopening action, country-specific infection time trends, and day-of-week effects.
  - Standard errors adjusted for heteroskedasticity and serial correlation (bandwidth of 7 days).
  - Variance decompositions use the Shapley value method.
- Data sources cited in analysis and figures:
  - Google; Our World in Data; European Centre for Disease Prevention and Control; and IMF staff calculations.

*International Monetary Fund | October 2020*

### 2. EUROpE’s ExIT fROM LOCKdOwNs: EARLy LEssONs fROM ThE fIRsT wAvE

### 2. EUROpE’s ExIT fROM LOCKdOwNs: EARLy LEssONs fROM ThE fIRsT wAvE

### Overview
- European firms faced an unprecedented shock from COVID-19 in 2020; policy response was also unprecedented.
- The chapter quantifies corporate liquidity and solvency risks in Europe in 2020 and examines the extent to which announced policy measures could dampen these risks.
- Data and sample coverage:
  - Balance sheet and income statement data for more than 4 million companies in 17 advanced and 9 emerging market European economies as of 2017/18.
  - The turnover of firms covered amounted to about 80 percent of aggregate national turnover.
  - SMEs comprise 99 percent of firms and one-quarter of the turnover.
- Definitions used:
  - A company is illiquid if liquid assets are insufficient to cover operational net cash outflows and debt repayments.
  - A company is insolvent if book value of debt exceeds the value of assets (negative equity).

### Simulation approach
- Structural simulations use Orbis-based firm-level data (2017/18) and sectoral shocks to turnover across 70 sectors calibrated to country-level growth forecasts in the October 2020 World Economic Outlook.
- Cash-flow assumptions:
  - Firms can adjust material costs in proportion to the reduction in sales.
  - Firms continue to pay wages, fixed costs, interest expenses, and debt repayments.
  - Inventories are assumed illiquid.
- Scenarios for credit market access:
  - “Benign” scenario: firms are able to roll over maturing bank debt (and can roll over trade payables).
  - “Adverse” scenario: firms are unable to roll over maturing bank debt because of a freeze in credit markets (firms assumed able to roll over trade payables).
- Analysis first simulates liquidity and solvency shortfalls without direct effect of targeted corporate measures; then assesses adequacy of announced policy packages in directly fending off pressures.

### Liquidity and solvency gaps (simulated outcomes)
- Aggregate and distributional outcomes:
  - Under the “adverse” scenario, the share of illiquid firms and the magnitude of liquidity gaps as a share of GDP could almost triple relative to pre-pandemic levels (when firms had full access to credit markets).
  - The share of value added generated by illiquid firms would quadruple.
  - Suggestive estimates indicate the share of jobs at risk would rise fivefold.
  - For the median emerging market economy in the sample, liquidity shortfalls as a share of GDP could almost quadruple relative to pre-COVID-19 levels.
  - If banks refinance outstanding loans (the “benign” scenario), liquidity gaps would be two thirds as large.
- Insolvency and equity impacts:
  - The share of insolvent firms could rise by 11 percentage points to 20 percent in the median advanced economy.
  - The share of insolvent firms could rise by 14 percentage points to 30 percent in the median emerging market economy.
  - The average value added at risk (from firms that may turn insolvent) rises fourfold.
- Firm-type heterogeneity:
  - SMEs account for a larger share of the widening liquidity gaps.
  - At the 75th percentile, SMEs’ liquidity and equity gaps could rise by 6 percentage points and 2.5 percentage points of GDP, respectively.
  - For large firms at the 75th percentile, corresponding increases are about 4 percentage points and less than 1 percentage point of GDP, respectively.
- Sectoral heterogeneity:
  - Contact-intensive sectors (such as accommodation and food services, trade) and sectors embedded in complex production networks (such as motor vehicles) would suffer more than less contact-intensive sectors (such as information and communication).

### Role and limits of the policy response
- Policy actions undertaken:
  - Central banks cut policy rates and engaged in asset purchases.
  - Prudential measures enhanced banks’ lending capacity; corporate lending programs and bank and market funding facilities were deployed.
  - Job-retention programs, debt moratoria, grants, loan guarantees, tax deferrals, and temporary insolvency-law changes were implemented in many countries.
  - EU-level initiatives included full flexibility in the EU fiscal rules, a temporary state aid framework, and prospects of an EU recovery fund.
- Effects attributable to policies:
  - Exceptional policy response has likely limited the rise in bankruptcy rates observed so far by supporting firms’ liquidity, reducing wage and other costs, providing grants, and mitigating liquidity pressures through debt moratoria and tax deferrals.
  - Corporate financing remained resilient as firms tapped bank credit and issued corporate bonds; in several countries the flow of new credit to nonfinancial corporations registered double-digit growth since March, and debt issuance rose sharply since March–April.
- Limitations and concerns:
  - The ability of announced policy measures to curb increases in solvency risks appears more limited, especially for SMEs, amid a projected rise in corporate indebtedness.
  - When exceptional policy support is unwound, the relatively sanguine period may not last.
  - Careful policy calibration will be needed to better support firms deemed viable in the longer term and to facilitate the orderly exit of firms unlikely to succeed post-pandemic.

### Key findings and policy implications (summary bullets)
- Liquidity risks:
  - Liquidity shortfalls can increase dramatically absent credit-market functioning: liquidity gaps could almost triple and share of value added by illiquid firms could quadruple under an adverse credit scenario.
  - Continued access to bank credit substantially reduces liquidity gaps (to two thirds of adverse size in the benign scenario).
- Solvency risks:
  - Insolvency rises substantially: +11 percentage points to 20 percent (median advanced economy) and +14 percentage points to 30 percent (median emerging market economy).
  - The equity shortfall and value added at risk could rise multiple times relative to pre-COVID levels.
- Distributional considerations:
  - SMEs are disproportionately affected: larger increases in liquidity and equity gaps versus large firms.
  - Contact-intensive and complex-network sectors face greater risks.
- Policy recommendations and priorities:
  - Maintain measures that preserve firms’ near-term liquidity (job-retention programs, debt moratoria, grants, loan guarantees) to avoid a wave of bankruptcies while distinguishing viable from nonviable firms.
  - Calibrate policy to better support firms deemed viable in the longer term and to facilitate orderly exit of nonviable firms when the economy transitions beyond exceptional support.
  - Monitor corporate indebtedness and solvency indicators closely to time withdrawal of support and minimize long-term scarring to productive capacity and employment.

*International Monetary Fund | October 2020*

### 1. Liquidity Gap

### 1. Liquidity Gap

### Overview
- Policy responses to COVID-19 in Europe (announced up to end of August 2020) included wage subsidies, tax deferrals/reduced tax rates, debt moratoria, grants, credit guarantee programs, and solvency support such as equity injections.
- The announced policy responses are estimated to amount to about 23 percent of EU GDP based on information available up to June 2020.
- The study covers 26 countries and models the country-specific measures announced as of the end of August 2020.

### Policy Intensity and Cross-country Differences
- Intensity of announced measures is computed as the principal component of: budgetary envelope (as share of GDP), duration, and sectoral coverage.
- Findings on cross-country differences:
  - Advanced economies responded more forcefully than emerging markets in Europe.
  - Advanced economies relied more on measures with direct or indirect fiscal costs (wage subsidies, grants, loan guarantees).
  - Emerging markets leaned more on debt moratoria.
- Take-up rates of programs vary substantially across countries and from headline announcements due to timing, implementation lags, firms’ demand, program conditionality, pricing, administrative capacity, and program envelope size.

### Simulation Methodology (key assumptions and scope)
- Simulations assume firms take maximum advantage of measures for which they are eligible; they quantify potential effectiveness of policy packages as designed (not as implemented).
- Eligibility and amounts are modeled using legal basis conditions: firm size, financial position, corporate type, economic sector, and turnover loss.
- When simulated demand exceeds announced budget envelopes, firm-level amounts are recalibrated to satisfy aggregate cost constraints.
- External finance assumptions:
  - Firms not in financial difficulty pre-pandemic can receive guaranteed working capital loans, subject to program conditionalities.
  - Firms with a pre-COVID-19 solvent position can refinance 80 percent of maturing loans, access new loans for an amount linked to turnover, and issue corporate bonds consistent with observed volumes in H1 2020.
  - Credit supply is limited by aggregate credit forecast in the World Economic Outlook. Banks prioritize working capital over investment loans. Firms finance liquidity deficits through guaranteed loans first, then non-guaranteed credit subject to underwriting and aggregate credit projections.
- Simulations do not include firms’ optimization behavior across multiple funding options and ignore operational risk in implementation of corporate programs.

### Simulation Results — Liquidity
- Aggregate effects (as simulated, if policies are implemented as designed):
  - In advanced economies, the announced policy packages could reduce the pandemic-induced liquidity gap by four-fifths to about 5 percent of GDP.
  - Pre-COVID-19 liquidity gap was 3.6 percent of GDP.
  - In emerging market economies in Europe, policies reduce liquidity gaps by two-fifths to 13 percent of GDP (almost double the pre-COVID-19 level).
- Employment and output effects:
  - Policies could save 15 percent of employment and almost a quarter of value added in Europe among firms that would have become illiquid but did not due to policy support.
- Contributions of specific measures to lowering the liquidity gap:
  - Guaranteed loans, job-retention programs, and debt moratoria contribute the most due to large size and broad coverage.
- By firm type:
  - Policies would help reduce the number of firms with a liquidity deficit by around two-thirds (both for large firms and SMEs).
  - Policies could mitigate only half of the rise in liquidity shortfalls attributed to SMEs but about three quarters of the rise in large firms.
- By sector:
  - Even after policy support, liquidity shortfalls are concentrated in wholesale and retail trade and manufacturing.

### Simulation Results — Solvency (Equity/Gaps)
- Policies are less effective in addressing solvency risks than liquidity risks:
  - In advanced economies, one-third of the increase in the solvency gap is estimated to be covered by policies (versus four-fifths for liquidity gaps).
  - In emerging market economies in Europe, about a quarter of solvency gaps are estimated to be covered by policies (versus two-fifths for liquidity gaps).
- Consequences for insolvent firms:
  - Even with policies implemented as designed, the share of insolvent firms would increase by 5 percentage points to 17 percent in advanced economies.
  - In emerging economies, the share of insolvent firms would increase by 5 percentage points to 24 percent.
- Equity-gap mitigation by firm type and sector:
  - Policies could offset over two-fifths of the increase in the equity shortfall of large firms.
  - Policies could absorb only one quarter of the rise in equity shortfalls of SMEs.
  - Equity gaps are concentrated in wholesale and retail trade and manufacturing.
- Aggregate equity injection needed:
  - The equity injection needed to bring firms’ equity to the minimum threshold above which the firm is not considered “in difficulty” is estimated at about 2 percent of GDP.

### Firm-level Heterogeneity and Leverage
- Simulations suggest leverage ratios in the corporate sector could rise substantially, especially in advanced economies and for already highly levered firms.
- After policies, the share of liquid but insolvent firms could increase in advanced economies because of financial costs of newly-taken credit.
- Pockets of liquidity-constrained firms could remain among firms that were financially sound pre-COVID-19:
  - About one-quarter of such firms in emerging markets and over one-tenth of such firms in advanced economies could continue to face liquidity shortfalls even though they remain solvent and even if they avail themselves of all policy measures.
  - The pandemic would turn 7 percent of firms in advanced economies and 8 percent of firms in emerging market economies in Europe insolvent despite being solvent pre-COVID-19.

### Limitations and Interpretation
- Results reflect potential effectiveness of policy packages as designed; actual effectiveness may be lower if take-up rates are constrained by implementation, administrative capacity, or program conditionality.
- Simulations do not capture firms’ optimization across multiple funding options nor operational implementation risks.
- The definition of firms “in difficulty” follows Article 2(18) of the Commission Regulation (EU) No 651/2014; for each solvent firm pre-COVID-19 which turns to be “in difficulty,” equity injection ensures (i) cumulative losses projected in the end of 2020 balance sheet do not exceed half of subscribed share capital, and (ii) end of 2020 book debt to equity ratio is not greater than 7.5.

### Key numeric findings (preserved exactly)
- Announced policy responses estimated to amount to about 23 percent of EU GDP (information up to June 2020).
- Study models measures in 26 countries (announced as of the end of August 2020).
- Advanced economies: pandemic-induced liquidity gap reduced by four-fifths to about 5 percent of GDP.
- Pre-COVID-19 liquidity gap: 3.6 percent of GDP.
- Emerging markets: liquidity gaps reduced by two-fifths to 13 percent of GDP.
- Policies could save 15 percent of employment and almost a quarter of value added in Europe (for firms that would have become illiquid but did not due to policy support).
- Policies reduce number of firms with liquidity deficit by around two-thirds (both for large firms and SMEs); mitigate only half of the rise in liquidity shortfalls attributed to SMEs but about three quarters of the rise in large firms.
- Even with policies, share of insolvent firms increases by 5 percentage points to 17 percent in advanced economies and by 5 percentage points to 24 percent in emerging economies.
- Equity injection needed to restore firms above “in difficulty” threshold: about 2 percent of GDP.
- Firms with pre-COVID-19 solvent position can refinance 80 percent of maturing loans (assumption).
- SMEs defined as firms with annual turnover below 50 million euro (European Commission definition).

*International Monetary Fund | October 2020*

### 3. CORpORATE LIQUIdITy ANd sOLvENCy IN EUROpE dURING ThE CORONAvIRUs dIsEAsE pANdEMIC

### 3. CORpORATE LIQUIdITy ANd sOLvENCy IN EUROpE dURING ThE CORONAvIRUs dIsEAsE pANdEMIC

### Key findings from the simulations
- The COVID-19 shock could result in sizable liquidity and equity shortfalls in Europe’s corporate sector by the end of 2020.
- The extent of damage depends crucially on firms’ ability to access policy programs and to tap credit markets.
- Resilience of corporate financing so far, supported by strong policy actions, has provided an important cushion for firms in most European countries.
- Announced policy measures, if fully implemented as designed, could significantly lower liquidity risks:
  - In advanced economies, announced policy measures could potentially reduce COVID-19-induced liquidity shortfalls by four-fifths on average.
  - In emerging market economies, the simulations reveal sizable remaining liquidity shortfalls.
- Policy measures implemented so far are less effective at curbing solvency risks:
  - In advanced economies, policy effectiveness to reduce solvency risk is, on average, less than half of that to mitigate liquidity risk.
  - Solvency gaps are even larger for emerging market economies.
- The COVID-19 outbreak could put at risk the jobs of workers in insolvent firms amounting to more than 8 percent of the workforce in the region.
- 8 percent of companies (or almost 3 million firms) that were solvent pre-COVID would become insolvent in 2020 even if all available policy measures were implemented.
  - Under the crude assumption that these are viable firms in the post-pandemic future, an estimated equity injection of about 2 percent of GDP would be required in addition to all the policy support already provided just to bring firms’ equity to the threshold above which they would not be considered “in difficulty” in the current year.
- Liquidity and solvency gaps could be particularly prominent in certain sectors:
  - Shortfalls in SMEs could remain quite large.
  - Shortfalls could also be large in sectors characterized by contact-intensive business models and complex value chains, namely wholesale and retail trade and manufacturing.

### Policy implications and recommended focus
- Without greater visibility of the structural transformations needed post-COVID-19, assessing implications is not straightforward; results suggest recalibrating budget, duration, and conditionality of measures to account for both pre-shock financial soundness and a forward-looking assessment of firms’ position.
- Public support should be extended to viable but currently vulnerable firms; viability should be assessed (definition adopted from Blanchard, Philippon and Pisani-Ferry (2020): a firm is viable if the present value of its profits exceeds its recovery value).
- Governments will find it difficult to undertake viability assessments for a large number of firms; private creditors and financial intermediaries may need a primary role.
- More support will likely be needed to address solvency risks that have risen significantly.
  - Where fiscal space is available, support for systemic firms could take the form of direct but temporary equity injections (or junior claims), with appropriate conditionality and safeguards to limit moral hazard.
  - For SMEs, government equity stakes are more challenging because of the large numbers and governance issues; consider strengthening SMEs’ capital structure with hybrid capital (i.e. preferred capital, subordinated loans) and debt restructuring (including conversion of an amount of guaranteed loans).
  - Other proposals include grants to SMEs matched by higher future taxes (Blanchard, Philippon, and Pisani-Ferry 2020), which would require a strong tax culture.
- Policymakers will need to balance delivering support to minimize unwarranted bankruptcies, containing fiscal costs, and encouraging resource reallocation.
  - Continued policy support will be needed during the highly uncertain and possibly incomplete recovery to limit mass bankruptcies and associated economic scarring, and to avoid cliff effects from sudden withdrawal of measures.
  - A delayed economic recovery will complicate these trade-offs and argues for a more targeted approach focusing on firms that are viable in the longer term.
- Rely on a forward-looking approach, foster agreements with private creditors to restructure the debt of firms that can be saved, and facilitate orderly exit of firms unlikely to succeed in the post-pandemic economy.

### Implementation, accountability, and restructuring
- Targeting policy support in practice will be challenging given the sheer number of firms and political economy constraints.
  - Strong incentives are needed to encourage take-up by firms with solid pandemic-proofed business plans and to discourage uptake by firms structurally headed for failure or able to manage without support—especially where fiscal room is thin.
  - Financial intermediaries could play an important role in delivery of targeted support.
- Targeted support must be delivered in a transparent and accountable manner:
  - Systems and procedures should monitor implementation and assess effectiveness.
  - A data-driven approach would enable prompt strategy adaptation.
  - Transparency and clear communication could help maintain political support for interventions that will have clear winners and losers.
  - Understanding reasons behind relatively low take-up of certain measures to date can inform better design.
- Orderly and timely debt restructurings would facilitate capital injections in viable firms.
  - Liquidation of unviable firms will be important to redeploy resources to expanding sectors.
  - Enhanced bankruptcy procedures and out-of-court restructurings will facilitate the process.

### Limitations and caveats
- Results should be interpreted with caution due to data limitations on coverage of firms and the assumption that all firms will rely fully on available programs.
- Liquidity and solvency risks do not necessarily imply opening of insolvency proceedings, though they increase the likelihood of bankruptcy.
- Analysis is limited to 2020, given sizable uncertainty surrounding the economic forecast for 2021 and the policy outlook upon expiration of current measures.

*International Monetary Fund | October 2020*

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_Source: https://www.imf.org/-/media/files/publications/reo/eur/2020/october/english/text.pdf_