## Executive Summary vii

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---

### Overview and Key Projections
- With significant progress in vaccination, Europe’s mobility and economy have turned more resilient to new virus waves.
- Growth forecasts:
  - Advanced European economies: 5.2 percent in 2021 and 4.4 percent in 2022.
  - Emerging European economies: 6 percent in 2021 and 3.6 percent in 2022.
- These 2021 forecasts are 0.3 and 1.1 percentage points higher than in the July 2021 World Economic Outlook Update for advanced and emerging European economies, respectively.
- Estimated medium-term output losses (scarring) have been revised down, consistent with the stronger recovery.
- Report reflects data and developments as of October 6, 2021.

### Recent Developments: Vaccination, Mobility, and Sectoral Recovery
- Vaccination:
  - Europe stands as the region with the highest share of fully vaccinated people in the world, but vaccination rates remain uneven across Europe, with most emerging European economies lagging advanced European economies by a large margin.
  - It is imperative to continue increasing vaccinations, notably in emerging European economies, and to strongly support international efforts to distribute vaccines.
- Recovery pattern:
  - Following a synchronized collapse, a multi-speed recovery resumed since the second quarter of 2021, buoyed by improved mobility.
  - Manufacturing has continued to expand strongly, though input shortages have started to hold back production in durable goods.
  - More adaptable service-sector activities have begun recovering, while hard-hit activities (for example, arts and recreation, wholesale and retail trade, and tourism) are still lagging.
- Policy support to date:
  - Highly accommodative macroeconomic policies and COVID-19 support schemes have helped preserve employment relationships and protect private sector balance sheets.
  - In the aggregate, policies are assessed to have saved 15 percent of employment and almost a quarter of value added in Europe (October 2020 Regional Economic Outlook: Europe, Chapter 3).
  - Financial policies supported strengthening bank capital and helped raise common equity tier 1 (CET1) by 60 basis points to 15.6 percent in the first quarter of 2021.

### Household, Credit, and Financial Conditions
- Labor and consumption:
  - Hours worked are inching toward pre-pandemic levels in both emerging and advanced economies.
  - Household saving rates, which jumped in 2020, are receding and consumption is growing in tandem with better income prospects.
- Credit and financial conditions:
  - Financial conditions have eased slightly since the spring, supported by accommodative monetary policy and a sustained risk appetite.
  - Real bank credit contracted in the first half of 2021 (with some exceptions, including Russia), driven by a decline in corporate credit; credit growth to households remained positive.
  - Banks’ underwriting standards remain tight, reflecting a cautious perception of risk and the restoration of insolvency filing duties following their temporary suspension.
- Housing:
  - Residential house prices grew strongly on high demand, fueled by low interest rates and supply constraints in the construction sector.

### Inflation Dynamics and Expectations
- Headline inflation:
  - Headline inflation in Europe picked up to 5 percent (year over year) by the end of August 2021.
  - In the aggregate, energy prices have been the primary driver of the recent inflation pick-up, with oil and gas prices hitting multi-year highs.
- Projections:
  - Advanced European economies: annual inflation peaking at 2.1 percent in 2021 and projected to moderate to 1.8 percent in 2022.
  - Emerging European economies: inflation at 8.5 percent in 2021 and projected to decrease to 7.2 percent in 2022.
  - Inflation rates are projected to be higher in countries where local currencies depreciated more (for example, Belarus and Turkey).
- Nature of pressures:
  - Recent increases in inflation are generally not broad based; there is no significant, broad-based increase in the price of services—which are normally associated with wage pressures—in most countries yet.
  - Pandemic-induced supply-demand mismatches, one-off factors (for example, expiration of a temporary VAT cut in Germany), and exchange rate pass-through in some emerging economies contributed to the rise.

### Risks and Near-Term Scenarios
- Downside risks:
  - Risk of new infection waves and virus variants remains elevated, especially for emerging European economies with lower vaccination rates.
  - A larger-than-warranted reduction of demand support across Europe presents a further downside risk.
  - Weaker balance sheets, potential real estate market corrections, and abrupt shifts in sentiment about sovereign risks could significantly deteriorate financial market conditions for several economies.
  - Prolonged supply disruptions and high energy prices could limit production, lead to more sustained price pressures, rising inflation expectations, and faster-than-anticipated monetary tightening.
- Upside consideration:
  - A faster-than-expected decline in savings rates, notably in advanced European economies, could accelerate the near-term recovery.
- Overall tilt:
  - Near-term risks are strongly dominated by virus developments and are tilted to the downside.

### Policy Adjustment: Timing, Pace, and Recommendations
- General guidance:
  - The exceptionally strong fiscal support deployed in 2020–21 can be reoriented toward building forward better and scaled back in 2022 to rebuild room for fiscal policy maneuver, while continuing to shore up the recovery.
  - The pace of withdrawal of fiscal support will need to be carefully tuned to country-specific developments and guard against the risk of undercutting the momentum of the recovery.
  - Monetary policy should generally remain highly accommodative as fiscal support is withdrawn, given that there are few signs of inflation translating into broad wage pressures.
  - In some emerging European economies where activity is strong and inflation expectations are rising, a gradual scaling-back of monetary accommodation is warranted.
- Implementation considerations:
  - A policy shift appears desirable but will need to proceed carefully and be well communicated so as not to compromise the recovery and undermine policy credibility.
  - The observed decline in corporate credit growth illustrates an outcome of rolling back policy support, underscoring the need for careful calibration.
- International priorities:
  - Continue to strongly support international efforts to speed up vaccine access globally.

### Medium-Term Structural Challenges and Policy Priorities (post-pandemic)
- Reallocation and labor market transformation:
  - The uneven impact of the crisis could require sizable reallocation of labor in Europe over the medium term.
  - Public policies will need to increasingly support structural transformations.
  - Temporary investment incentives and hiring subsidies can dovetail with structural policies (labor market and education policies) to enhance workforce skills and quickly bring people back to jobs.
  - Social safety nets and labor market institutions will need to be adapted to changes in the labor market, including through accelerating automation that could otherwise raise inequality and undermine social cohesion.
- Other long-run challenges:
  - Boosting productivity growth.
  - Tackling the problems posed by aging populations.
  - Filling gaps in green and digital infrastructure.

### Aggregated Indicators (selected)
- PPP GDP-weighted average primary balance:
  - October 2020: 3.7
  - October 2021: 0.3

*International Monetary Fund | October 2021*

---

### 1. Change in Household Savings and Government’s Primary Balance

### Fiscal policy: Tuned to the strength of the recovery
- The slight expansion in the 2021 fiscal deficit since the spring and the shift, in some countries, from lifelines to measures that facilitate resource reallocation (including investment incentives, hiring subsidies, and other active labor market policies) has been appropriate and broadly in line with recommendations in last April’s Regional Economic Outlook Update: Europe and Chapter 3 of this Regional Economic Outlook.
- On present policies, a major reduction in fiscal deficits is expected for 2022 but this needs to be kept under review.
- Where the pandemic situation continues to fundamentally improve, pandemic support programs should be narrowed to viable firms in affected sectors and the most vulnerable households; freed resources should partly build forward better and partly rebuild fiscal space.
- Considerations:
  - Fiscal space and external funding conditions are additional considerations, mainly for emerging European economies.
  - The recent special drawing rights allocation has created more room for several emerging European economies to support lives and livelihoods.
  - Less fiscal withdrawal may be desirable in economies with sufficient policy space that have been struggling to move up inflation durably to target.
- Next Generation EU Recovery and Resilience Facility transfers are expected to accelerate in the next few years and add resources for investing in digitalization and greener and more equitable growth; deployment should be supported with improved public investment management practices, particularly in emerging European economies.
- Credible medium-term fiscal consolidation plans are necessary to anchor market expectations around realistic public debt paths; unrealistically strong, uncoordinated, or poorly communicated plans could depress sentiment and slow or set back the recovery.
- Figure reference:
  - Figure 1.6. Fiscal Policy — note: debt stabilizing primary balance is calculated using 2026 projections.

### Monetary policy: Mostly staying highly accommodative
- Despite increases in headline inflation, inflation expectations in most European countries have remained at or below target (Figure 1.7).
- In the euro area, medium-term inflation expectations remain below the symmetric inflation target of 2 percent.
- With the Pandemic Emergency Purchase Program envelope set to be exhausted in early 2022, the European Central Bank will likely need to augment other asset purchase programs (APPs) to help achieve its inflation objective over the medium term.
- Country-specific guidance:
  - Some emerging European economies have little underlying inflation pressure and below-target inflation expectations.
  - A few economies exhibit stronger inflationary pressures and monetary policy should become less accommodative (for example, Ukraine and Turkey).
  - Others show signs of price pressures and some increases in inflation expectations (for example, Hungary, Poland, and Romania among emerging European economies; the Czech Republic, Norway, and the United Kingdom among advanced European economies). Among these, action appears most necessary where monetary conditions are loosening — signaling, if not initiating, gradual normalization of policy rates and winding down APPs where these are still running.
- Example: In Russia, the policy rate has already been increased several times in response to rising inflation.

### Financial and corporate sector policies: Safeguarding financial stability and ensuring the viability of solvent firms
- The pandemic has increased the share of risky loans, which could result in a deterioration of banking sector asset quality (Figure 1.8).
- The 2021 EU-wide stress test confirms the resilience of the EU banking system on average, but results show large dispersion across banks; the 485 basis-point reduction in CET1 in a stress scenario could reduce banks’ capacity to lend to the real economy.
- Supervisory and policy actions:
  - Strengthen credit risk monitoring to ensure provisioning reflects underlying increases in latent solvency risk.
  - Ensure banks are sufficiently capitalized to support the economic recovery.
  - Enhance resilience against potential asset price corrections by selectively tightening macroprudential policy, mindful of unintended consequences for weak credit market segments.
- Support for firms:
  - Corporate sector policies should support solvency of viable firms under financial strain and aim to strengthen their capital structure to promote investment and strengthen the recovery.
  - Governments can step in with direct recapitalizations, guarantee schemes, or tax programs to incentivize equity mobilization; instruments should balance administrative transparency, complexity, monitoring requirements, and burden sharing between government and private sector.
- Figure reference:
  - Figure 1.8. EU: Banks’ Asset Quality and Provisions — shows shares under IFRS9 classifications (“Stage 2”, “Stage 3”) and loan loss provisions.

### Structural policies: Facilitating economic transformation and higher and more equitable growth
- Primary objective: Minimize potential scarring from the pandemic and facilitate resource reallocation to new growth engines (digital and green economy), while addressing pre-pandemic structural challenges.
- Key policy directions and recommendations:
  - Vaccination:
    - Vaccination rates should increase to cover as high a share of the global population as possible.
    - Many European economies need to re-invigorate vaccination campaigns and overcome vaccine hesitancy.
    - Advanced European economies should redouble efforts to ensure vaccines flow to under-served populations domestically and internationally.
  - Labor market, education, and social policies:
    - Active and passive labor market and education policies could improve labor conditions, lower transition costs, help labor reallocation, enhance workforce skills, and alleviate the pandemic’s impact on inequality.
    - Improve bankruptcy and insolvency frameworks to strengthen business confidence, investment, and lower operation costs.
    - Improve social safety nets and labor market institutions to maintain social cohesion and address inequality given labor dislocation and acceleration of automation.
    - Address housing affordability pressures (Elfayoumi and others 2021), a preexisting problem.
  - Public investment and long-term resilience:
    - Boost potential growth and economic resilience by addressing low productivity growth, an aging population, and gaps in green and digital infrastructure.
    - Scale up public investment in human capital, digital connectivity, and green infrastructure (see Arregui and others [2020] and Chen and others [2020] for climate change mitigation policies in the EU).
    - Many emerging European economies would benefit from stronger institutional frameworks (e.g., fiscal and public investment management) and better economic governance to accelerate convergence and achieve higher, more inclusive, and resilient growth.

### Key numeric and projection highlights from the chapter
- Symmetric inflation target (euro area): 2 percent.
- Pandemic Emergency Purchase Program envelope exhaustion: early 2022.
- Debt stabilizing primary balance calculation uses 2026 projections (Figure 1.6).
- Stress-test CET1 reduction in a stress scenario: 485 basis-point reduction.
- Selected aggregated growth figures (from Table 1.1, year-over-year percent change; WEO current and April 2021 comparisons):
  - Europe (aggregated): 2020 25.0; 2021 5.5; 2022 4.1; 2023 2.3; Current WEO: 2021 4.5; 2022 3.9; 2023 2.4; Difference: 2021 1.0; 2022 0.2.
  - Advanced European Economies (aggregated): 2020 26.4; 2021 5.2; 2022 4.4; 2023 2.1.
  - Emerging European Economies (aggregated): 2020 22.0; 2021 6.0; 2022 3.6; 2023 2.9.
  - World (memorandum): 2020 23.1; 2021 5.9; 2022 4.9; 2023 3.6.
- Table 1.1 includes country-level year-over-year percent changes for 2019–2023 and WEO comparisons (aggregation based on GDP in purchasing power parity terms).

*International Monetary Fund | October 2021*

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### 1. PUshING bUT NO LONGER FLOORING ThE POLICy PEdAL

### Stylized facts on the pandemic’s economic impact in Europe
- Real GDP contracted by 2 percent, on average, in emerging market economies in Europe in 2020, compared with a 6.4 percent average decline in advanced European economies.
- The pandemic’s impact varied dramatically across sectors:
  - High contact intensity sectors (hospitality and trade) were the largest contributors to the recession in nearly all countries.
  - Industry and professional services were also major negative contributors.
  - Expansion in information and communications technologies (ICT) helped mitigate the recession in many countries.
- Cross-country correlates of worse growth outcomes in 2020 included:
  - Sharper rises in excess mortality (ratio of deaths in 2020 to 2015–19 average).
  - More stringent containment measures (Stringency Index, 0 least restrictive to 100 most restrictive).
  - Higher median age was associated with worse growth outcomes; lower median age associated with better outcomes.
- Policy responses varied:
  - Fiscal support measures (above-the-line, below-the-line, and liquidity measures) were substantially larger in advanced European economies.
  - Emerging market economies in Europe were able to cut policy rates further.
  - Advanced economies relied more on unconventional monetary policy instruments due to being at or near the effective lower bound.

### Decomposing 2020 GDP growth: methodology and adjustments
- Three complementary empirical steps:
  - Adjust 2020 growth for pre-pandemic growth projections to capture differences in underlying growth momentum.
  - Benchmark actual output losses against a counterfactual where the country’s sectoral composition equals the European PPP GDP-weighted average; the difference isolates the contribution of sectoral mix.
  - Use sectoral panel regressions to estimate contributions of mobility decline, policy support, and initial country conditions at the onset of the pandemic.
- Caveats on identification:
  - Empirical estimates may suffer from endogeneity, anticipation effects, and omitted variable bias.
  - Fiscal and monetary policy multiplier estimates likely biased downward (for example, larger policy packages were often implemented where the pandemic struck harder).

### Main findings from the growth decomposition
- Underlying growth momentum:
  - Positive contribution of underlying growth reduced observed GDP contraction; stronger underlying growth in emerging market economies in Europe materially contributed to their milder recessions.
- Mobility:
  - The single largest contributor to output losses in all countries is the decline in mobility.
  - Because mobility changes were broadly similar across Europe (Belarus an exception), mobility explains a limited portion of the differential between emerging and advanced European economies.
- Sectoral composition:
  - Sectoral composition has large negative contributions for tourism-dependent economies (for example, Spain and Greece).
  - Sectoral composition has positive contributions for economies with large ICT sectors (for example, Ireland).
  - Overall, sectoral composition played a limited role in explaining growth differentials across most European countries due to:
    - Relatively limited differences in sectoral composition within Europe.
    - Offsetting impacts across sectors (e.g., large contact-intensive sectors often correspond to smaller industry shares).
    - Aggregated sectoral breakdowns that may lack granularity (tourism is aggregated under “Wholesale and retail trade, transport, accommodation, and food service activities”).
- Initial conditions:
  - Initial health and demographic factors were quantitatively important:
    - Lower median age in emerging market economies in Europe likely limited population vulnerability and supported better growth outcomes.
    - Higher informality in some emerging economies likely reduced the economic impact of containment measures.
  - Higher pre-pandemic current account surpluses in advanced economies partially offset the advantage of emerging economies (reflecting lower reliance on domestic demand).
- Policy contributions:
  - Fiscal and quasi-fiscal measures deployed in advanced European economies helped bridge the performance gap relative to emerging market economies in Europe.
  - Estimated policy contributions in the decomposition should be interpreted as a lower bound due to identification challenges.
  - A calibration analysis (using multipliers from prior literature) suggests policy contributions could be substantially larger than the lower-bound estimates from the decomposition.

### Quantitative and empirical highlights referenced in the chapter
- Average 2020 real GDP contractions:
  - Emerging market economies in Europe: 2 percent (year-over-year percent change).
  - Advanced European economies: 6.4 percent (year-over-year percent change).
- Mobility decline: identified as the single largest contributor to output losses across countries (no single numeric multiplier reported in the text).
- Fiscal support measures: shown as percent of 2019 GDP in figures (total fiscal support includes above-the-line, below-the-line, and liquidity measures); advanced economies provided substantially larger fiscal support (no single aggregate percent cited in prose).
- Policy tool usage in 2020:
  - Change in policy rate (emerging vs advanced economies): emerging market economies cut policy rates further.
  - Central bank balance sheet expansion: advanced economies relied more on unconventional tools (figure-based evidence referenced).
- Decomposition components used in figures and regression analyses: Underlying growth; Sectoral composition; Mobility; Policy; Initial conditions; Residual including data discrepancies.
- Data sources cited: Haver Analytics; Eurostat; IMF, World Economic Outlook database; Karlinsky & Kobak, 2021; Blavatnik School of Government at the University of Oxford; IMF staff calculations.

*International Monetary Fund | October 2021*

---

### 1. Emerging European Economies

### Major findings on growth outcomes and policy support
- Variation in growth outcomes during the pandemic can be explained by differentials in underlying growth, a decline in mobility, pre-pandemic country fundamentals pertaining to health and macroeconomic factors, and policy support measures.
- The chapter finds that the shallower recessions experienced in emerging market economies in Europe are due to their higher underlying growth and younger populations, which are less at-risk of serious illness from COVID-19 infections, despite more substantial policy support in advanced economies in Europe.
- The composition of policy support and country characteristics yields significantly higher effects of announced measures: raising the potential contribution of policies by more than 70 percent in advanced economies in Europe and more than doubling it in emerging market economies in Europe.
- The decline in real GDP could have been twice as large without policy support.

### Sectoral impacts, reallocation dynamics, and projections
- The COVID-19 crisis has hit some sectors far harder than others; hospitality-related services (food and accommodation) and arts and entertainment experienced a surge in bankruptcies, declining firm entry rates, and employment losses, while ICT and finance and insurance have thrived and expanded.
- The widely used indicator of reallocation—proxied by sectoral stock return dispersion—more than doubled at the onset of the pandemic, reaching a level not seen since the global financial crisis; dispersion retreated after the initial spike but has hovered at levels significantly higher than before the pandemic.
- Earnings forecasts and sectoral GVA projections imply a multi-speed recovery: contact-intensive sectors are expected to remain subdued over the next five years, while high-skilled services (e.g., professional, technology, science) are projected to gain share.
- Using earnings projections to forecast sectoral GVA suggests the dispersion in sectoral GVA growth would remain significantly higher than in the pre-COVID-19 period throughout the medium term.

### Quantified reallocation needs and scenarios
- Baseline projection (medium term, 2026 relative to 2019):
  - The employment share of hospitality-related sectors would fall by nearly 1 percentage point.
  - The share of ICT, finance, and real estate workers would increase by about 0.4 percentage point, accelerating its pre-pandemic trend by a factor of two.
- Alternative scenarios:
  - Needed reallocation could be larger if consumer and worker preferences change more strongly and/or if the pandemic accelerates automation and digitalization; stronger demand shocks and accelerated automation imply larger reductions in employment share for contact-intensive and low-skill sectors.

### Labor-market frictions and transition costs
- Historical evidence from 22 European economies over the past two decades suggests reallocation is often accompanied by subdued employment and wage growth for years to come.
- Quantified effects of a reallocation shock of typical size:
  - Employment growth could fall by as much as 0.3 percentage point.
  - Real wage growth could fall by as much as 0.8 percentage point.
- Reallocation is hampered by information asymmetries, wage and other rigidities, and differences in labor characteristics between downsizing and expanding sectors.
- Low-skilled and young workers are especially vulnerable, facing low likelihood of job finding and on-the-job sectoral switching during recessions.

### Skills and knowledge gaps affecting reallocation
- Workers in contact-intensive sectors (e.g., accommodation and food service) are at the lower end of the distribution of skills and knowledge.
- The most notable knowledge gap is in technology, science, and engineering.
- There is a preexisting shortage of digital skills among workers in the most-affected sectors, amplifying reallocation challenges.

### Policy implications and recommendations
- Emphasize a gradual, careful, and well-communicated withdrawal of policy support as the recovery from the pandemic takes hold, especially in countries where macroeconomic and health fundamentals indicate greater vulnerability and where ample fiscal space remains.
- Policies should facilitate needed reallocation and minimize transition costs for adversely affected workers; reallocation-enhancing measures and active labor-market policies are important to support transitions into expanding sectors.
- Policy measures implemented or planned in Europe should be revisited with an eye on easing sectoral transitions, addressing skills and knowledge gaps (notably digital, technology, science, and engineering), and supporting low-skilled and young workers through targeted programs.

*REGIONAL ECONOMIC OUTLOOK: EUROPE — International Monetary Fund | October 2021*

---

### 2. Level of Digital Skills

### Key findings on digital skills and sectoral exposure
- The pandemic-induced acceleration in digitalization has increased the need for upskilling, particularly in sectors that were hard-hit (Figure 3.7, Panel 2).
- Digital skills and knowledge vary across occupations and sectors (visualized ranges from 0 to 100 percent share of individuals in chart).
- OECD min is indicated on the sectoral digital skills chart (numeric label: "OECD min").

### Labor market regulations: reallocation enhancing or dampening?
- Labor market regulations considered include occupational entry regulation, unemployment benefits, and employment protection.
- Indices and scales reported:
  - Occupational entry regulation and employment protection: index ranging from 0 (absence of regulations or no protection) to 6 (fully regulated market or most protection).
  - Unemployment benefit replacement rate: value for 6-month duration (reported as a share on a 0 to 1 scale).
  - Minimum wage relative to full-time workers wage: index (0 to 6).
  - Employment protection, right scale: Index (0 to 6).
  - Other labels on figure axes: 0.0, 0.6, 1.2, 1.8 (left axis); 0, 1, 2, 3, 4 (right axis).
- Empirical evidence summarized:
  - Studies tend to find that overly stringent regulations lower labor market fluidity and raise reallocation costs by discouraging both job destruction and creation.
  - However, these regulations are essential in protecting workers and customers; stringency should not be reduced automatically.
- Heterogeneity across Europe:
  - Large heterogeneity of such regulations across Europe (Figure 3.8) suggests that areas creating unnecessary rigidities—e.g., mobility restrictions and administrative burdens—may warrant review.

### Policy implications and recommendations
- Overall policy goal:
  - Facilitate the reallocation of labor, minimize adjustment costs for adversely affected workers, and enhance workforce skills to adapt to technological change.
- Active labor market policies (ALMPs) — well-calibrated to country-specific conditions and institutional capabilities:
  - Hiring subsidies
  - Wage-loss insurance
  - Training
  - Job search assistance
  - Activation strategies
  - Note: On a temporary basis while uncertainty remains high, targeted hiring subsidies can encourage firms to hire new workers and wage-loss insurance can incentivize workers to seek new jobs.
- Education and training policies:
  - Reskilling and upskilling, including curricula reforms in schools and vocational training, should focus on:
    - Enhancing digital skills, especially for low-skilled workers.
    - Addressing knowledge deficits in contact-intensive sectors.
    - Fostering pre-emptive acquisition of new skills (“life-long learning”).
  - Involving the private sector by providing training subsidies to firms and individuals can help align labor market supply with needs.
  - Training subsidies should be targeted at smaller firms (which invest proportionally less in training [OECD 2019]) and vulnerable groups, such as lower-skilled workers and those on temporary contracts.
- Complementary structural policies:
  - Rapid bankruptcy procedures and well-designed insolvency frameworks to free up resources.
  - Reduce rigidities (including excessive regulation) in product markets.
  - Improve access to credit for viable firms and workers in transition.
- Specific policy toolkit headings presented in Figure 3.9, Panel 1:
  - Coping with Reallocation Needs: A Toolkit
    - Enhance workforce skills to complement technology
    - Facilitate factor reallocation
    - Minimize transition costs
    - Labor market policies
    - Other structural policies
    - Other policies (e.g., labor and product market reforms, insolvency regimes etc.)
- Policies implemented/planned in response to COVID-19 (Figure 3.9, Panel 2 — Number of countries):
  - Reported numeric values associated with Euro area / Non Euro-area display: 15, 15, 17, 14, 13, 14, 20, 19, 15, 9, 8, 15
  - Policy categories listed in figure: Bankruptcy and insolvency frameworks; Product market regulations; Service market regulations; Housing policies; Credit policies; ALMP: job search; ALMP: education; ALMP: training; Incentives/subsidies to investment; Hiring subsidies/wage-loss insurance; Other policies.
- Distinction of policy actions:
  - Active:
    - Hiring subsidies and wage-loss insurance
    - Training (for reskilling and upskilling)
    - Job search assistance
    - Activation strategies
  - Passive:
    - Modernize employment protection
    - Minimum wage legislation
  - Education policies:
    - Enhance digital skills, especially for low-skilled workers
    - Address knowledge deficits in contact-intensive sectors
    - Pre-emptive acquisition of new skills (“life-long learning”)

### Conclusion
- The COVID-19 pandemic could result in a sizable reallocation of labor, especially among low-skilled and young workers employed disproportionately in the hardest-hit sectors.
- Policies that facilitate labor reallocation, reduce unnecessary regulatory rigidities, support reskilling and upskilling, and complement ALMPs with structural reforms can help minimize adjustment costs and support a productive structural transformation.

*Source: IMF staff; figures and notes as presented in the chapter "2. Level of Digital Skills" from the IMF Regional Economic Outlook: Europe (October 2021).*

### Executive Summary vii

### Executive Summary vii

### Overview and Key Projections
- With significant progress in vaccination, Europe’s mobility and economy have turned more resilient to new virus waves.
- Growth forecasts:
  - Advanced European economies: 5.2 percent in 2021 and 4.4 percent in 2022.
  - Emerging European economies: 6 percent in 2021 and 3.6 percent in 2022.
- These 2021 forecasts are 0.3 and 1.1 percentage points higher than in the July 2021 World Economic Outlook Update for advanced and emerging European economies, respectively.
- Estimated medium-term output losses (scarring) have been revised down, consistent with the stronger recovery.
- Report reflects data and developments as of October 6, 2021.

### Recent Developments: Vaccination, Mobility, and Sectoral Recovery
- Vaccination:
  - Europe stands as the region with the highest share of fully vaccinated people in the world, but vaccination rates remain uneven across Europe, with most emerging European economies lagging advanced European economies by a large margin.
  - It is imperative to continue increasing vaccinations, notably in emerging European economies, and to strongly support international efforts to distribute vaccines.
- Recovery pattern:
  - Following a synchronized collapse, a multi-speed recovery resumed since the second quarter of 2021, buoyed by improved mobility.
  - Manufacturing has continued to expand strongly, though input shortages have started to hold back production in durable goods.
  - More adaptable service-sector activities have begun recovering, while hard-hit activities (for example, arts and recreation, wholesale and retail trade, and tourism) are still lagging.
- Policy support to date:
  - Highly accommodative macroeconomic policies and COVID-19 support schemes have helped preserve employment relationships and protect private sector balance sheets.
  - In the aggregate, policies are assessed to have saved 15 percent of employment and almost a quarter of value added in Europe (October 2020 Regional Economic Outlook: Europe, Chapter 3).
  - Financial policies supported strengthening bank capital and helped raise common equity tier 1 (CET1) by 60 basis points to 15.6 percent in the first quarter of 2021.

### Household, Credit, and Financial Conditions
- Labor and consumption:
  - Hours worked are inching toward pre-pandemic levels in both emerging and advanced economies.
  - Household saving rates, which jumped in 2020, are receding and consumption is growing in tandem with better income prospects.
- Credit and financial conditions:
  - Financial conditions have eased slightly since the spring, supported by accommodative monetary policy and a sustained risk appetite.
  - Real bank credit contracted in the first half of 2021 (with some exceptions, including Russia), driven by a decline in corporate credit; credit growth to households remained positive.
  - Banks’ underwriting standards remain tight, reflecting a cautious perception of risk and the restoration of insolvency filing duties following their temporary suspension.
- Housing:
  - Residential house prices grew strongly on high demand, fueled by low interest rates and supply constraints in the construction sector.

### Inflation Dynamics and Expectations
- Headline inflation:
  - Headline inflation in Europe picked up to 5 percent (year over year) by the end of August 2021.
  - In the aggregate, energy prices have been the primary driver of the recent inflation pick-up, with oil and gas prices hitting multi-year highs.
- Projections:
  - Advanced European economies: annual inflation peaking at 2.1 percent in 2021 and projected to moderate to 1.8 percent in 2022.
  - Emerging European economies: inflation at 8.5 percent in 2021 and projected to decrease to 7.2 percent in 2022.
  - Inflation rates are projected to be higher in countries where local currencies depreciated more (for example, Belarus and Turkey).
- Nature of pressures:
  - Recent increases in inflation are generally not broad based; there is no significant, broad-based increase in the price of services—which are normally associated with wage pressures—in most countries yet.
  - Pandemic-induced supply-demand mismatches, one-off factors (for example, expiration of a temporary VAT cut in Germany), and exchange rate pass-through in some emerging economies contributed to the rise.

### Risks and Near-Term Scenarios
- Downside risks:
  - Risk of new infection waves and virus variants remains elevated, especially for emerging European economies with lower vaccination rates.
  - A larger-than-warranted reduction of demand support across Europe presents a further downside risk.
  - Weaker balance sheets, potential real estate market corrections, and abrupt shifts in sentiment about sovereign risks could significantly deteriorate financial market conditions for several economies.
  - Prolonged supply disruptions and high energy prices could limit production, lead to more sustained price pressures, rising inflation expectations, and faster-than-anticipated monetary tightening.
- Upside consideration:
  - A faster-than-expected decline in savings rates, notably in advanced European economies, could accelerate the near-term recovery.
- Overall tilt:
  - Near-term risks are strongly dominated by virus developments and are tilted to the downside.

### Policy Adjustment: Timing, Pace, and Recommendations
- General guidance:
  - The exceptionally strong fiscal support deployed in 2020–21 can be reoriented toward building forward better and scaled back in 2022 to rebuild room for fiscal policy maneuver, while continuing to shore up the recovery.
  - The pace of withdrawal of fiscal support will need to be carefully tuned to country-specific developments and guard against the risk of undercutting the momentum of the recovery.
  - Monetary policy should generally remain highly accommodative as fiscal support is withdrawn, given that there are few signs of inflation translating into broad wage pressures.
  - In some emerging European economies where activity is strong and inflation expectations are rising, a gradual scaling-back of monetary accommodation is warranted.
- Implementation considerations:
  - A policy shift appears desirable but will need to proceed carefully and be well communicated so as not to compromise the recovery and undermine policy credibility.
  - The observed decline in corporate credit growth illustrates an outcome of rolling back policy support, underscoring the need for careful calibration.
- International priorities:
  - Continue to strongly support international efforts to speed up vaccine access globally.

### Medium-Term Structural Challenges and Policy Priorities (post-pandemic)
- Reallocation and labor market transformation:
  - The uneven impact of the crisis could require sizable reallocation of labor in Europe over the medium term.
  - Public policies will need to increasingly support structural transformations.
  - Temporary investment incentives and hiring subsidies can dovetail with structural policies (labor market and education policies) to enhance workforce skills and quickly bring people back to jobs.
  - Social safety nets and labor market institutions will need to be adapted to changes in the labor market, including through accelerating automation that could otherwise raise inequality and undermine social cohesion.
- Other long-run challenges:
  - Boosting productivity growth.
  - Tackling the problems posed by aging populations.
  - Filling gaps in green and digital infrastructure.

### Aggregated Indicators (selected)
- PPP GDP-weighted average primary balance:
  - October 2020: 3.7
  - October 2021: 0.3

*International Monetary Fund | October 2021*

### 1. Change in Household Savings and Government’s Primary Balance

### 1. Change in Household Savings and Government’s Primary Balance

### Fiscal policy: Tuned to the strength of the recovery
- The slight expansion in the 2021 fiscal deficit since the spring and the shift, in some countries, from lifelines to measures that facilitate resource reallocation (including investment incentives, hiring subsidies, and other active labor market policies) has been appropriate and broadly in line with recommendations in last April’s Regional Economic Outlook Update: Europe and Chapter 3 of this Regional Economic Outlook.
- On present policies, a major reduction in fiscal deficits is expected for 2022 but this needs to be kept under review.
- Where the pandemic situation continues to fundamentally improve, pandemic support programs should be narrowed to viable firms in affected sectors and the most vulnerable households; freed resources should partly build forward better and partly rebuild fiscal space.
- Considerations:
  - Fiscal space and external funding conditions are additional considerations, mainly for emerging European economies.
  - The recent special drawing rights allocation has created more room for several emerging European economies to support lives and livelihoods.
  - Less fiscal withdrawal may be desirable in economies with sufficient policy space that have been struggling to move up inflation durably to target.
- Next Generation EU Recovery and Resilience Facility transfers are expected to accelerate in the next few years and add resources for investing in digitalization and greener and more equitable growth; deployment should be supported with improved public investment management practices, particularly in emerging European economies.
- Credible medium-term fiscal consolidation plans are necessary to anchor market expectations around realistic public debt paths; unrealistically strong, uncoordinated, or poorly communicated plans could depress sentiment and slow or set back the recovery.
- Figure reference:
  - Figure 1.6. Fiscal Policy — note: debt stabilizing primary balance is calculated using 2026 projections.

### Monetary policy: Mostly staying highly accommodative
- Despite increases in headline inflation, inflation expectations in most European countries have remained at or below target (Figure 1.7).
- In the euro area, medium-term inflation expectations remain below the symmetric inflation target of 2 percent.
- With the Pandemic Emergency Purchase Program envelope set to be exhausted in early 2022, the European Central Bank will likely need to augment other asset purchase programs (APPs) to help achieve its inflation objective over the medium term.
- Country-specific guidance:
  - Some emerging European economies have little underlying inflation pressure and below-target inflation expectations.
  - A few economies exhibit stronger inflationary pressures and monetary policy should become less accommodative (for example, Ukraine and Turkey).
  - Others show signs of price pressures and some increases in inflation expectations (for example, Hungary, Poland, and Romania among emerging European economies; the Czech Republic, Norway, and the United Kingdom among advanced European economies). Among these, action appears most necessary where monetary conditions are loosening — signaling, if not initiating, gradual normalization of policy rates and winding down APPs where these are still running.
- Example: In Russia, the policy rate has already been increased several times in response to rising inflation.

### Financial and corporate sector policies: Safeguarding financial stability and ensuring the viability of solvent firms
- The pandemic has increased the share of risky loans, which could result in a deterioration of banking sector asset quality (Figure 1.8).
- The 2021 EU-wide stress test confirms the resilience of the EU banking system on average, but results show large dispersion across banks; the 485 basis-point reduction in CET1 in a stress scenario could reduce banks’ capacity to lend to the real economy.
- Supervisory and policy actions:
  - Strengthen credit risk monitoring to ensure provisioning reflects underlying increases in latent solvency risk.
  - Ensure banks are sufficiently capitalized to support the economic recovery.
  - Enhance resilience against potential asset price corrections by selectively tightening macroprudential policy, mindful of unintended consequences for weak credit market segments.
- Support for firms:
  - Corporate sector policies should support solvency of viable firms under financial strain and aim to strengthen their capital structure to promote investment and strengthen the recovery.
  - Governments can step in with direct recapitalizations, guarantee schemes, or tax programs to incentivize equity mobilization; instruments should balance administrative transparency, complexity, monitoring requirements, and burden sharing between government and private sector.
- Figure reference:
  - Figure 1.8. EU: Banks’ Asset Quality and Provisions — shows shares under IFRS9 classifications (“Stage 2”, “Stage 3”) and loan loss provisions.

### Structural policies: Facilitating economic transformation and higher and more equitable growth
- Primary objective: Minimize potential scarring from the pandemic and facilitate resource reallocation to new growth engines (digital and green economy), while addressing pre-pandemic structural challenges.
- Key policy directions and recommendations:
  - Vaccination:
    - Vaccination rates should increase to cover as high a share of the global population as possible.
    - Many European economies need to re-invigorate vaccination campaigns and overcome vaccine hesitancy.
    - Advanced European economies should redouble efforts to ensure vaccines flow to under-served populations domestically and internationally.
  - Labor market, education, and social policies:
    - Active and passive labor market and education policies could improve labor conditions, lower transition costs, help labor reallocation, enhance workforce skills, and alleviate the pandemic’s impact on inequality.
    - Improve bankruptcy and insolvency frameworks to strengthen business confidence, investment, and lower operation costs.
    - Improve social safety nets and labor market institutions to maintain social cohesion and address inequality given labor dislocation and acceleration of automation.
    - Address housing affordability pressures (Elfayoumi and others 2021), a preexisting problem.
  - Public investment and long-term resilience:
    - Boost potential growth and economic resilience by addressing low productivity growth, an aging population, and gaps in green and digital infrastructure.
    - Scale up public investment in human capital, digital connectivity, and green infrastructure (see Arregui and others [2020] and Chen and others [2020] for climate change mitigation policies in the EU).
    - Many emerging European economies would benefit from stronger institutional frameworks (e.g., fiscal and public investment management) and better economic governance to accelerate convergence and achieve higher, more inclusive, and resilient growth.

### Key numeric and projection highlights from the chapter
- Symmetric inflation target (euro area): 2 percent.
- Pandemic Emergency Purchase Program envelope exhaustion: early 2022.
- Debt stabilizing primary balance calculation uses 2026 projections (Figure 1.6).
- Stress-test CET1 reduction in a stress scenario: 485 basis-point reduction.
- Selected aggregated growth figures (from Table 1.1, year-over-year percent change; WEO current and April 2021 comparisons):
  - Europe (aggregated): 2020 25.0; 2021 5.5; 2022 4.1; 2023 2.3; Current WEO: 2021 4.5; 2022 3.9; 2023 2.4; Difference: 2021 1.0; 2022 0.2.
  - Advanced European Economies (aggregated): 2020 26.4; 2021 5.2; 2022 4.4; 2023 2.1.
  - Emerging European Economies (aggregated): 2020 22.0; 2021 6.0; 2022 3.6; 2023 2.9.
  - World (memorandum): 2020 23.1; 2021 5.9; 2022 4.9; 2023 3.6.
- Table 1.1 includes country-level year-over-year percent changes for 2019–2023 and WEO comparisons (aggregation based on GDP in purchasing power parity terms).

*International Monetary Fund | October 2021*

### 1. PUshING bUT NO LONGER FLOORING ThE POLICy PEdAL

### 1. PUshING bUT NO LONGER FLOORING ThE POLICy PEdAL

### Stylized facts on the pandemic’s economic impact in Europe
- Real GDP contracted by 2 percent, on average, in emerging market economies in Europe in 2020, compared with a 6.4 percent average decline in advanced European economies.
- The pandemic’s impact varied dramatically across sectors:
  - High contact intensity sectors (hospitality and trade) were the largest contributors to the recession in nearly all countries.
  - Industry and professional services were also major negative contributors.
  - Expansion in information and communications technologies (ICT) helped mitigate the recession in many countries.
- Cross-country correlates of worse growth outcomes in 2020 included:
  - Sharper rises in excess mortality (ratio of deaths in 2020 to 2015–19 average).
  - More stringent containment measures (Stringency Index, 0 least restrictive to 100 most restrictive).
  - Higher median age was associated with worse growth outcomes; lower median age associated with better outcomes.
- Policy responses varied:
  - Fiscal support measures (above-the-line, below-the-line, and liquidity measures) were substantially larger in advanced European economies.
  - Emerging market economies in Europe were able to cut policy rates further.
  - Advanced economies relied more on unconventional monetary policy instruments due to being at or near the effective lower bound.

### Decomposing 2020 GDP growth: methodology and adjustments
- Three complementary empirical steps:
  - Adjust 2020 growth for pre-pandemic growth projections to capture differences in underlying growth momentum.
  - Benchmark actual output losses against a counterfactual where the country’s sectoral composition equals the European PPP GDP-weighted average; the difference isolates the contribution of sectoral mix.
  - Use sectoral panel regressions to estimate contributions of mobility decline, policy support, and initial country conditions at the onset of the pandemic.
- Caveats on identification:
  - Empirical estimates may suffer from endogeneity, anticipation effects, and omitted variable bias.
  - Fiscal and monetary policy multiplier estimates likely biased downward (for example, larger policy packages were often implemented where the pandemic struck harder).

### Main findings from the growth decomposition
- Underlying growth momentum:
  - Positive contribution of underlying growth reduced observed GDP contraction; stronger underlying growth in emerging market economies in Europe materially contributed to their milder recessions.
- Mobility:
  - The single largest contributor to output losses in all countries is the decline in mobility.
  - Because mobility changes were broadly similar across Europe (Belarus an exception), mobility explains a limited portion of the differential between emerging and advanced European economies.
- Sectoral composition:
  - Sectoral composition has large negative contributions for tourism-dependent economies (for example, Spain and Greece).
  - Sectoral composition has positive contributions for economies with large ICT sectors (for example, Ireland).
  - Overall, sectoral composition played a limited role in explaining growth differentials across most European countries due to:
    - Relatively limited differences in sectoral composition within Europe.
    - Offsetting impacts across sectors (e.g., large contact-intensive sectors often correspond to smaller industry shares).
    - Aggregated sectoral breakdowns that may lack granularity (tourism is aggregated under “Wholesale and retail trade, transport, accommodation, and food service activities”).
- Initial conditions:
  - Initial health and demographic factors were quantitatively important:
    - Lower median age in emerging market economies in Europe likely limited population vulnerability and supported better growth outcomes.
    - Higher informality in some emerging economies likely reduced the economic impact of containment measures.
  - Higher pre-pandemic current account surpluses in advanced economies partially offset the advantage of emerging economies (reflecting lower reliance on domestic demand).
- Policy contributions:
  - Fiscal and quasi-fiscal measures deployed in advanced European economies helped bridge the performance gap relative to emerging market economies in Europe.
  - Estimated policy contributions in the decomposition should be interpreted as a lower bound due to identification challenges.
  - A calibration analysis (using multipliers from prior literature) suggests policy contributions could be substantially larger than the lower-bound estimates from the decomposition.

### Quantitative and empirical highlights referenced in the chapter
- Average 2020 real GDP contractions:
  - Emerging market economies in Europe: 2 percent (year-over-year percent change).
  - Advanced European economies: 6.4 percent (year-over-year percent change).
- Mobility decline: identified as the single largest contributor to output losses across countries (no single numeric multiplier reported in the text).
- Fiscal support measures: shown as percent of 2019 GDP in figures (total fiscal support includes above-the-line, below-the-line, and liquidity measures); advanced economies provided substantially larger fiscal support (no single aggregate percent cited in prose).
- Policy tool usage in 2020:
  - Change in policy rate (emerging vs advanced economies): emerging market economies cut policy rates further.
  - Central bank balance sheet expansion: advanced economies relied more on unconventional tools (figure-based evidence referenced).
- Decomposition components used in figures and regression analyses: Underlying growth; Sectoral composition; Mobility; Policy; Initial conditions; Residual including data discrepancies.
- Data sources cited: Haver Analytics; Eurostat; IMF, World Economic Outlook database; Karlinsky & Kobak, 2021; Blavatnik School of Government at the University of Oxford; IMF staff calculations.

*International Monetary Fund | October 2021*

### 1. Emerging European Economies

### 1. Emerging European Economies

### Major findings on growth outcomes and policy support
- Variation in growth outcomes during the pandemic can be explained by differentials in underlying growth, a decline in mobility, pre-pandemic country fundamentals pertaining to health and macroeconomic factors, and policy support measures.
- The chapter finds that the shallower recessions experienced in emerging market economies in Europe are due to their higher underlying growth and younger populations, which are less at-risk of serious illness from COVID-19 infections, despite more substantial policy support in advanced economies in Europe.
- The composition of policy support and country characteristics yields significantly higher effects of announced measures: raising the potential contribution of policies by more than 70 percent in advanced economies in Europe and more than doubling it in emerging market economies in Europe.
- The decline in real GDP could have been twice as large without policy support.

### Sectoral impacts, reallocation dynamics, and projections
- The COVID-19 crisis has hit some sectors far harder than others; hospitality-related services (food and accommodation) and arts and entertainment experienced a surge in bankruptcies, declining firm entry rates, and employment losses, while ICT and finance and insurance have thrived and expanded.
- The widely used indicator of reallocation—proxied by sectoral stock return dispersion—more than doubled at the onset of the pandemic, reaching a level not seen since the global financial crisis; dispersion retreated after the initial spike but has hovered at levels significantly higher than before the pandemic.
- Earnings forecasts and sectoral GVA projections imply a multi-speed recovery: contact-intensive sectors are expected to remain subdued over the next five years, while high-skilled services (e.g., professional, technology, science) are projected to gain share.
- Using earnings projections to forecast sectoral GVA suggests the dispersion in sectoral GVA growth would remain significantly higher than in the pre-COVID-19 period throughout the medium term.

### Quantified reallocation needs and scenarios
- Baseline projection (medium term, 2026 relative to 2019):  
  - The employment share of hospitality-related sectors would fall by nearly 1 percentage point.  
  - The share of ICT, finance, and real estate workers would increase by about 0.4 percentage point, accelerating its pre-pandemic trend by a factor of two.
- Alternative scenarios: Needed reallocation could be larger if consumer and worker preferences change more strongly and/or if the pandemic accelerates automation and digitalization; stronger demand shocks and accelerated automation imply larger reductions in employment share for contact-intensive and low-skill sectors.

### Labor-market frictions and transition costs
- Historical evidence from 22 European economies over the past two decades suggests reallocation is often accompanied by subdued employment and wage growth for years to come.
- Quantified effects of a reallocation shock of typical size:  
  - Employment growth could fall by as much as 0.3 percentage point.  
  - Real wage growth could fall by as much as 0.8 percentage point.
- Reallocation is hampered by information asymmetries, wage and other rigidities, and differences in labor characteristics between downsizing and expanding sectors.
- Low-skilled and young workers are especially vulnerable, facing low likelihood of job finding and on-the-job sectoral switching during recessions.

### Skills and knowledge gaps affecting reallocation
- Workers in contact-intensive sectors (e.g., accommodation and food service) are at the lower end of the distribution of skills and knowledge.
- The most notable knowledge gap is in technology, science, and engineering.
- There is a preexisting shortage of digital skills among workers in the most-affected sectors, amplifying reallocation challenges.

### Policy implications and recommendations
- Emphasize a gradual, careful, and well-communicated withdrawal of policy support as the recovery from the pandemic takes hold, especially in countries where macroeconomic and health fundamentals indicate greater vulnerability and where ample fiscal space remains.
- Policies should facilitate needed reallocation and minimize transition costs for adversely affected workers; reallocation-enhancing measures and active labor-market policies are important to support transitions into expanding sectors.
- Policy measures implemented or planned in Europe should be revisited with an eye on easing sectoral transitions, addressing skills and knowledge gaps (notably digital, technology, science, and engineering), and supporting low-skilled and young workers through targeted programs.

*REGIONAL ECONOMIC OUTLOOK: EUROPE — International Monetary Fund | October 2021*

### 2. Level of Digital Skills

### 2. Level of Digital Skills

### Key findings on digital skills and sectoral exposure
- The pandemic-induced acceleration in digitalization has increased the need for upskilling, particularly in sectors that were hard-hit (Figure 3.7, Panel 2).
- Digital skills and knowledge vary across occupations and sectors (visualized ranges from 0 to 100 percent share of individuals in chart).
- OECD min is indicated on the sectoral digital skills chart (numeric label: "OECD min").

### Labor market regulations: reallocation enhancing or dampening?
- Labor market regulations considered include occupational entry regulation, unemployment benefits, and employment protection.
- Indices and scales reported:
  - Occupational entry regulation and employment protection: index ranging from 0 (absence of regulations or no protection) to 6 (fully regulated market or most protection).
  - Unemployment benefit replacement rate: value for 6-month duration (reported as a share on a 0 to 1 scale).
  - Minimum wage relative to full-time workers wage: index (0 to 6).
  - Employment protection, right scale: Index (0 to 6).
  - Other labels on figure axes: 0.0, 0.6, 1.2, 1.8 (left axis); 0, 1, 2, 3, 4 (right axis).
- Empirical evidence summarized:
  - Studies tend to find that overly stringent regulations lower labor market fluidity and raise reallocation costs by discouraging both job destruction and creation.
  - However, these regulations are essential in protecting workers and customers; stringency should not be reduced automatically.
- Heterogeneity across Europe:
  - Large heterogeneity of such regulations across Europe (Figure 3.8) suggests that areas creating unnecessary rigidities—e.g., mobility restrictions and administrative burdens—may warrant review.

### Policy implications and recommendations
- Overall policy goal:
  - Facilitate the reallocation of labor, minimize adjustment costs for adversely affected workers, and enhance workforce skills to adapt to technological change.
- Active labor market policies (ALMPs) — well-calibrated to country-specific conditions and institutional capabilities:
  - Hiring subsidies
  - Wage-loss insurance
  - Training
  - Job search assistance
  - Activation strategies
  - Note: On a temporary basis while uncertainty remains high, targeted hiring subsidies can encourage firms to hire new workers and wage-loss insurance can incentivize workers to seek new jobs.
- Education and training policies:
  - Reskilling and upskilling, including curricula reforms in schools and vocational training, should focus on:
    - Enhancing digital skills, especially for low-skilled workers.
    - Addressing knowledge deficits in contact-intensive sectors.
    - Fostering pre-emptive acquisition of new skills (“life-long learning”).
  - Involving the private sector by providing training subsidies to firms and individuals can help align labor market supply with needs.
  - Training subsidies should be targeted at smaller firms (which invest proportionally less in training [OECD 2019]) and vulnerable groups, such as lower-skilled workers and those on temporary contracts.
- Complementary structural policies:
  - Rapid bankruptcy procedures and well-designed insolvency frameworks to free up resources.
  - Reduce rigidities (including excessive regulation) in product markets.
  - Improve access to credit for viable firms and workers in transition.
- Specific policy toolkit headings presented in Figure 3.9, Panel 1:
  - Coping with Reallocation Needs: A Toolkit
    - Enhance workforce skills to complement technology
    - Facilitate factor reallocation
    - Minimize transition costs
    - Labor market policies
    - Other structural policies
    - Other policies (e.g., labor and product market reforms, insolvency regimes etc.)
- Policies implemented/planned in response to COVID-19 (Figure 3.9, Panel 2 — Number of countries):
  - Reported numeric values associated with Euro area / Non Euro-area display: 15, 15, 17, 14, 13, 14, 20, 19, 15, 9, 8, 15
  - Policy categories listed in figure: Bankruptcy and insolvency frameworks; Product market regulations; Service market regulations; Housing policies; Credit policies; ALMP: job search; ALMP: education; ALMP: training; Incentives/subsidies to investment; Hiring subsidies/wage-loss insurance; Other policies.
- Distinction of policy actions:
  - Active:
    - Hiring subsidies and wage-loss insurance
    - Training (for reskilling and upskilling)
    - Job search assistance
    - Activation strategies
  - Passive:
    - Modernize employment protection
    - Minimum wage legislation
  - Education policies:
    - Enhance digital skills, especially for low-skilled workers
    - Address knowledge deficits in contact-intensive sectors
    - Pre-emptive acquisition of new skills (“life-long learning”)

### Conclusion
- The COVID-19 pandemic could result in a sizable reallocation of labor, especially among low-skilled and young workers employed disproportionately in the hardest-hit sectors.
- Policies that facilitate labor reallocation, reduce unnecessary regulatory rigidities, support reskilling and upskilling, and complement ALMPs with structural reforms can help minimize adjustment costs and support a productive structural transformation.

*Source: IMF staff; figures and notes as presented in the chapter "2. Level of Digital Skills" from the IMF Regional Economic Outlook: Europe (October 2021).*

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_Source: https://www.imf.org/-/media/files/publications/reo/eur/2021/october/english/text.pdf_