## Regional Economic Outlook—Europe, April 2024

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### Executive summary — key findings and projections
- Soft landing assessment:
  - A soft landing—bringing inflation back to target with a moderate economic cost in terms of growth—is "within reach, but crosswinds could make it difficult".
- Near-term dynamics:
  - Cooling yet still-strong labor markets are expected to support real income growth and consumption over the next few quarters.
  - Recovery of consumption will help offset the effects of the needed withdrawal of fiscal support and galvanize investment as monetary policy eases.
- Durable disinflation condition:
  - Requires a rebound in labor productivity, "with profit margins returning to precrises levels."
- Regional differentiation:
  - Advanced European economies: risks to the soft landing are balanced.
  - CESEE: risks are one-sided amid still-high wage growth, stickier core inflation, and persistently high inflation expectations.
- Medium-term structural challenges:
  - Europe’s per capita income levels are well behind the global frontier and are "not expected to close over the forecast horizon."
  - Productivity growth has slowed; aging is a major drag.
  - CESEE: private investment was already low before the pandemic and Russia’s invasion of Ukraine; relative wage levels are rising, pressuring competitiveness.
  - Geoeconomic fragmentation is affecting old growth models.
  - Rising long-term expenditure pressures due to aging, climate ambitions, and ramped-up defense spending increase urgency for structural fiscal reforms and raising growth sustainably.

*International Monetary Fund. Regional Economic Outlook—Europe, April 2024.*

### Disinflation dynamics and recent developments
- Inflation and supply:
  - "Inflation rates in Europe have fallen to approximately one-third of the multidecade peaks of the end of 2022."
  - Disinflation reflects unwinding of adverse supply shocks and effectiveness of monetary policy in restraining demand.
  - Decline in the import price index of mineral fuels has fallen by 38 percent between June 2022 and February 2024.
- Energy and terms of trade:
  - After a trough in September 2022, as of December 2023 the euro area’s goods terms of trade improved back to prepandemic levels.
  - The shift to liquified natural gas implies higher costs "in the order of about $6 per one million British thermal units."
  - As of March 19, natural gas prices were of EUR28.8 per megawatt hour, "8 percent higher than the 2021:Q1–22:Q3 average and (as a result of price volatility in 2021) 40 percent lower than the 2021 full-year average."
- Monetary and financial conditions:
  - High interest rates have contained demand; transmission to output and prices is "consistent with historical averages."
  - Financial conditions tightened significantly, peaking between late 2022 (advanced economies excluding CESEE) and mid-2023 (CESEE).
  - Recent signs of moderation: lending standards no longer tightening and credit demand bottoming out from very weak levels.

### Heterogeneity in disinflation and labor dynamics
- Core inflation and wages:
  - Core inflation (year-on-year) is "substantially higher and more persistent in CESEE."
  - Nominal wage growth is stronger in CESEE.
  - Wage drift defined as "the difference between growth in compensation received and growth in negotiated wages."
- Cross-country observations:
  - Services inflation remains strong in parts of CESEE (examples: Hungary and Romania).
  - Underlying pressures remain notably strong in some advanced European economies (examples: Iceland and Norway) and weak in others (example: Switzerland).
  - Overall wage growth remains robust across advanced European economies, even as wage drift is falling.

### Activity, confidence, and savings
- Growth and sentiment:
  - Recovery is tentative in most economies; growth outturns in H2 2023 were somewhat lower than projected in the October 2023 WEO.
  - Feeble recovery reflects weak consumer sentiment, lagged effects of higher energy prices, and weakness in interest-rate-sensitive manufacturing and business investment.
- Household finances:
  - Real incomes started to increase year over year in some economies, but low confidence led to weaker private consumption than expected.
  - Household saving rates—already high in 2022 compared to precrises—"increased further in 2023."
- Baseline outlook (IMF staff):
  - Advanced European economies: expected growth of 0.8 percent in 2024 and 1.6 percent in 2025.
  - Emerging European economies: expected growth of 2.9 percent in 2024 and 3.5 percent in 2025.
  - Inflation: expected to return to target in 2025 in most advanced European economies and in late 2026 in most emerging European economies.

### Nonenergy goods and services inflation — recent drivers and outlook
- Key recent developments:
  - Cumulative excess savings in the euro area are estimated at about 7½ percent of GDP as of 2023:Q3 (up from around 7 percent a year earlier).
  - Supply-chain normalization has led to inventory destocking in some countries (Czech Republic, Italy, Poland).
  - Countries more reliant on services continued to outperform (Italy and Spain benefited from tourism).
  - Nearshoring and subsidy-driven rises in domestic capacity among major trading partners are materializing structural shifts.
- Baseline conditionalities:
  - Labor markets neither too strong nor too weak.
  - Consumption picking up and investment following as financial conditions ease.
  - Normalization of supply conditions remaining intact.
  - Still-tight monetary policy and gradual fiscal consolidation keeping inflation within central banks’ comfort zones.
- Labor, wages, productivity:
  - Wage growth in CESEE: 12.1 percent in the fourth quarter of 2023.
  - Labor productivity rebound assumed to mitigate inflationary impact of rising wages.
- Risks:
  - Advanced Europe: soft landing could be undone if consumption and investment fail to pick up; alternatively, a swift recovery with persistently high wage growth could produce higher-than-expected inflation.
  - CESEE: persistently high inflation may require tighter monetary policy that lowers growth; weaker-than-expected investment would exacerbate downside.
  - Geopolitical escalation (Russia–Ukraine, broader Middle East) and structural risks (aging, AI-driven reskilling needs, nearshoring) add uncertainty.
- Policy implications:
  - Maintain monetary policy tightness combined with gradual fiscal consolidation.
  - Ensure labor markets remain flexible to allow easing in tightness without inducing scarring; support reskilling.
  - Encourage policies to revive private investment, particularly in CESEE.
  - Coordinate policies to limit harmful subsidy measures and manage nearshoring effects to preserve trade and FDI benefits.

### Combinations of wage growth and profit share consistent with inflation projections — medium-term challenges and policy mix
- Medium-term constraints:
  - Europe’s per capita income in purchasing-power-parity terms is around one-third lower than in the United States.
  - From 2010 to 2022, Europe’s per capita income grew at the same rate as the United States.
  - Productivity growth is falling; demographics barely contribute to medium-term growth as populations age; secular decline in hours worked in Europe.
  - Net migration has recently increased largely due to Ukrainian refugees, but integration challenges remain.
- Monetary policy guidance:
  - Policy stances remain appropriately tight in most of Europe.
  - Some central banks have started easing (Czech Republic, Hungary, Israel, Switzerland).
  - In many cases (for example, euro area and the United Kingdom), the easing cycle is expected to start in mid- to late 2024 and proceed through the end of 2025, bringing the ex ante real policy rate close to neutral levels toward the end of 2025 to early 2026.
  - Pace of easing should match evolution of underlying inflationary forces; core services inflation and wage growth reached higher peaks and remain significantly stronger in CESEE (for example, Bulgaria, Croatia, Poland, Romania).
  - Inflation expectations one to two years ahead are at or close to target in advanced European economies outside CESEE, but persistently above it in CESEE.
  - Advanced European economies: gradual, measured easing; decisions should be data dependent, meeting-by-meeting.
  - Many CESEE economies need a tight stance for longer.
  - In Türkiye, where inflation is expected to start declining only toward the middle of the year, the central bank’s tightening bias is appropriate.
- Financial sector policies:
  - NPLs through 2023:Q3 have in aggregate remained mostly flat in both the euro area and CESEE, but have risen in segments like commercial real estate.
  - Prudence in profit distribution by banks is encouraged to lock temporarily high bank profits into capital.
  - Where appropriate, raise countercyclical capital buffers, standing ready to release them if stresses materialize.
  - Ad hoc discretionary taxes on realized bank profits should be avoided.
  - Strengthen ability to mitigate risks from NBFIs: close key data gaps, incentivize risk management, set appropriate regulation, intensify supervision.
  - Central bank liquidity support should be subject to guardrails.

### Fiscal balances, debt dynamics, and inequality indicators
- Fiscal dynamics overview:
  - Fiscal consolidation expected to expand across Europe in 2024, albeit more slowly in CESEE.
  - Advanced European economies are consolidating faster, but probability that debt will not stabilize is projected to increase in the medium term in many countries.
  - High public debt and financing needs, combined with some of the highest bond market yields in about a decade, are adding to governments’ financing costs.
- Optimization model insights:
  - "Reforms that raise GDP levels by about 4 percent cumulatively through 2029 would lower the average annual adjustment by about 0.3 percentage point in the representative advanced economy and 0.2 percentage point in the representative emerging market economy in 2024–29."
  - Representative advanced economy at end-2023: positive output gap of 0.2 percent, public debt of 67 percent of GDP.
  - Representative emerging market economy at end-2023: negative output gap of 0.2 percent, public debt of 44 percent of GDP.
  - Model suggests higher adjustment relative to baseline is needed in the representative emerging market economy (about 1.5 percentage points by 2029) than in the advanced economy (about 1 percentage point).
- Policy recommendations for advanced economies:
  - For high-debt advanced economies (examples: Belgium, France, Italy): implement more significant and front-loaded fiscal consolidation; raise spending efficiency; revenue-enhancing tax reforms; cut tax expenditures; prioritize growth-enhancing reforms.
  - For low-debt advanced economies (examples: Germany, to an extent Sweden): recommend less consolidation than planned to allow support for growth-enhancing green public investment.
- CESEE and emerging Europe prescriptions:
  - Front-loaded consolidation while meeting elevated investment needs in infrastructure, labor skills, and the energy transition.
  - Realize expenditure efficiency gains and raise revenue (broadening tax base, eliminating exemptions); streamline VAT and personal income taxes where appropriate (example: Romania).
  - Withdraw remaining energy crisis support measures where significant (examples: Bosnia and Herzegovina, Croatia, Hungary, Malta, Slovakia).
  - Deeper fiscal reforms: shift obligations to private sector (carbon taxes, supplementary private pensions), improve spending efficiency.

### Structural policies, single-market deepening, and sectoral priorities
- Gaps relative to the United States:
  - EU capital stock: 88 percent of that in the United States.
  - EU labor input: 92 percent of that in the United States.
  - EU total factor productivity: 78 percent of that in the United States.
  - Differences in TFP explain about 70 percent of the total per capita gap.
- Potential gains from reform/deepening:
  - Gorodnichenko and others (2021) estimate productivity gains of 13.5 percent from better allocation via removing obstacles to investment.
  - Head and Mayer (2021): workers’ costs of migrating between EU countries about eight times higher than migration between US states.
  - Spornberger (2020) estimates real income gains of about 1.6 percent from moving to first-best border infrastructure.
  - Baba and others (2023) show long-term real income gains of 7 percent from a 10 percent reduction in internal barriers.
- Policy measures:
  - Create portable pension products; streamline cross-border withholding taxes; foster supervisory convergence; centralize oversight of systemic financial market infrastructures.
  - Build on Eurogroup’s March 2024 statement on the future of the Capital Markets Union and pursue comprehensive reforms.
  - Facilitate services trade liberalization; promote cross-border risk sharing and expand the role of risk capital.
- Trade and fragmentation:
  - National subsidy approaches akin to the US Inflation Reduction Act would, per simulation, lower real incomes by about 0.6 percent.
  - A deeper single market prioritized over fragmented national subsidy approaches.
  - Electricity market integration recommended to ease pressures from the energy transition.

### Labor supply, female participation, childcare, and innovation policy
- Labor supply measures:
  - Keep older workers in the labor force longer; reduce disincentives to work.
  - Significant scope to raise female labor force participation (examples: Italy and Spain) and extend working hours (examples: Austria and Germany).
  - Use immigration to raise labor supply, conditional on quick integration; improve immigrant integration (example: Poland).
  - Address skill shortages via apprenticeship transitions and education reforms (example: France).
- Childcare:
  - Higher childcare supply (children aged 0–4 per teacher) associated with higher female labor force participation.
  - Increase childcare supply to boost female participation (example: Romania).
- Innovation policy:
  - Frontier countries: combine R&D tax incentives, R&D grants for startups, public investment for basic research; strengthen university-business linkages; design fiscal incentives to minimize costs and market distortions.
  - Non-frontier countries: focus on adoption of existing technologies and investment in digital infrastructure.
  - Innovation for green transition should rely heavily on carbon pricing.

### Fiscal governance reform — reformed European economic governance framework
- Framework highlights (approved February 2024):
  - Countries facing long-term fiscal risks must submit adjustment plans to restore sustainability.
  - Member states with deficits or debt levels exceeding reference values—currently 17 of 27—are asked to agree with the Commission and Council a four- or seven-year fiscal-structural plan, using net primary expenditure as the single operational indicator.
  - Two phases: adjustment period (baseline four years; can extend to seven years with structural reforms/public investments) and a 10-year debt trajectory phase.
  - Debt criterion: debt above 60 percent of GDP should decline with a high probability; if below 60 percent, it should not exceed this threshold.
  - Deficit benchmark: by end of adjustment period, general government deficit must be below 3 percent of GDP and projected to remain below this level for the 10-year phase.
- Minimum safeguards:
  - Debt-to-GDP should fall on average by no less than 1 percentage point of GDP annually if debt is above 90 percent; by no less than 0.5 percentage point if debt is between 60 and 90 percent.
  - If structural balance < –1.5 percent of GDP, annual improvement of structural primary balance not less than 0.4 percentage point for four-year adjustment or 0.25 percentage point for seven-year adjustment.
- Excessive Deficit Procedure (EDP):
  - Violators can be placed in an EDP; while in EDP, required minimum annual improvement of structural fiscal balance is 0.5 percent of GDP to return to compliance.
  - Transition measure 2025–27 allows minimum adjustment to account for higher interest expenses.
  - A country in an EDP is excluded from the annual debt-reduction requirement under the debt sustainability safeguard while in the procedure.
- Institutional requirements:
  - Member states must ensure independent fiscal institutions with competence, autonomy, and resources for macroeconomic forecasting, fiscal rules monitoring, and budgetary framework evaluation.

### Medium- and long-term expenditure pressures and mitigation
- Estimated additional spending pressures by 2050:
  - Advanced European economies: around 5½ percent of GDP annually.
  - CESEE: around 8½ percent of GDP annually.
- Drivers: demographic aging (pensions, health care), climate-related investments, defense spending, and higher service costs such as long-term care.
- Reforms and examples:
  - Pension reforms: increase statutory retirement age and/or minimum contribution years (examples: Bulgaria, France, Greece, Spain, Sweden); index retirement age to life expectancy (examples: Estonia, Greece, Slovakia); reduce early retirement options (examples: Austria, Czech Republic, Romania, Spain); align retirement age of women with men (examples: Austria, Bulgaria, Romania).
  - Health care reforms: digitalization, governance and procurement reform, introduction of co-payments (examples: Croatia, Cyprus, Italy); broaden access to primary care (examples: France, Greece).
  - Green transition: higher taxes on pollution, especially carbon taxes (examples: Austria and Germany); use revenues to offset impacts on lower-income households and free funds for public investment.
  - Defense: common procurement and standardization of weapons systems to achieve savings.
- Planning gaps:
  - Few countries have comprehensive frameworks to account for all spending pressures; examples with such initiatives include Denmark, Finland, The Netherlands, Norway, Spain, Sweden.
  - Only six countries have comprehensive assessments of long-term fiscal impacts of climate change: Czech Republic, Denmark, Finland, France, The Netherlands, United Kingdom.

### Box 3 — Recovery and Resilience Facility (RRF) stock take
- Design and scale:
  - RRF is the core instrument (90 percent) of NextGenerationEU; launched in 2021 running until end-2026.
  - Aims to provide financing for investments and reforms of up to €800 billion to EU member states via grants and loans.
  - Disbursements are performance-based tied to RRP milestones and targets.
- Performance to date:
  - At end-2023, about 75 percent of reforms planned to be done by that point had been completed.
  - Mandatory allocation shares: at least 37 percent to climate objectives and at least 20 percent to digitalization in RRPs.
- Disbursement status and challenges:
  - At the halfway point, RRF has disbursed about one-third of its funds (€225 billion).
  - Swift prefinancing near €70 billion slowed; implementation challenges include political difficulties with reforms, high inflation, supply chain disruptions, administrative capacity constraints, and complexity of reporting and control systems.
- Green and digital absorption:
  - Although 37 percent of RRPs should be allocated to green transition (20 percent to digital), so far only 17 percent of the disbursed loans and grants excluding prefinancing have contributed to the green pillar; 11 percent to the digital pillar.
- Macroeconomic impact if fully absorbed:
  - European Commission (model-based) estimates NextGenerationEU could increase EU GDP by 1.4 percent in 2026.
  - For countries with large allocations, impacts up to 4.5 percent in Greece or 3.5 percent in Romania and Spain.
- Policy priorities:
  - Accelerate implementation of RRP milestones and targets to absorb available funds by end-2026.
  - Simplify and increase flexibility in implementation and reporting.
  - Strengthen administrative capacity in low-absorption countries.

*This box was prepared by Guillaume Claveres.*

### Box 6 — Russia: recent performance, outlook, and risks
- Recent performance:
  - GDP growth: 3.6 percent in 2023 following a contraction of 1.2 percent in 2022.
  - Oil export patterns: oil that used to go to Europe is now being absorbed elsewhere; Box Figure 6.1 indicates "India + China now 80%" versus "Prewar 31%".
  - Corporate investment: recovered and added 4.5 percentage points to GDP growth in 2023.
  - Private consumption: added 2.9 percentage points to GDP growth in 2023.
  - Government spending: fiscal impulse estimated at 1.2 percentage points of GDP in 2023.
- Contributions to GDP growth (selected series):
  - GDP: 2020 –2.7; 2021 6.0; 2022 –1.2; 2023 3.6
  - Private Consumption: 2020 –3.0; 2021 6.1; 2022 –0.6; 2023 2.9
  - Gross Capital Formation: 2020 –1.0; 2021 2.8; 2022 0.3; 2023 4.5
- Inflation, labor market, policy:
  - Unemployment: record low of just 3 percent.
  - Bank of Russia raised policy rate from 7.5 percent to 16 percent in the course of the second half of last year.
  - Inflation projections (Annex Table 1.2 regional aggregates, Russia row): Russia headline inflation: 2023 5.9; 2024 6.9; 2025 4.5; 2026 4.0
- Outlook and risks:
  - Near-term IMF staff projection: quarterly growth to decelerate to around 2.6 percent annualized throughout the year; annual growth rate 3.2 percent reflects carryover from strong second half of 2023.
  - Medium-term potential growth projected to fall to around 1¼ percent versus 1.7 percent before the war.
  - Major downside risks: tightening of sanctions since December, shrinking labor force from aging, loss in human capital, isolation from global financial markets, impaired access to advanced technology reducing productivity growth.
- Key takeaway:
  - Short-term resilience driven by steady oil export volumes and high export revenues, corporate investment recovery, strong private consumption, and positive fiscal impulse in 2023; growth expected to slow as monetary policy tightens and fiscal stimulus is withdrawn, with substantial uncertainty given sanctions dynamics.

*This box was prepared by Philipp Engler.*

*Source: Regional Economic Outlook—Europe, April 2024 • INTERNATIONAL MONETARY FUND*

### references.

### References

### Executive Summary — Key findings and projections
- A soft landing—bringing inflation back to target with a moderate economic cost in terms of growth—is "within reach, but crosswinds could make it difficult" to achieve price stability while securing a lasting recovery.
- Over the next few quarters:
  - Cooling yet still-strong labor markets are expected to support real income growth and consumption.
  - Recovery of consumption will help offset the effects of the needed withdrawal of fiscal support and galvanize investment as monetary policy eases.
- Durable disinflation requires a rebound in labor productivity, "with profit margins returning to precrises levels."
- Regional differentiation:
  - In advanced European economies, risks to the soft landing are balanced.
  - For many economies in the Central, Eastern, and Southeastern Europe (CESEE) region, risks are one-sided amid still-high wage growth, stickier core inflation, and persistently high inflation expectations.
- Structural and medium-term challenges:
  - Europe’s per capita income levels are well behind the global frontier and are "not expected to close over the forecast horizon."
  - Productivity growth has slowed; aging is a major drag.
  - CESEE: private investment was already low before the pandemic and Russia’s invasion of Ukraine; relative wage levels are rising, pressuring competitiveness.
  - Geoeconomic fragmentation is affecting old growth models.
  - Rising long-term expenditure pressures due to aging, climate ambitions, and ramped-up defense spending increase urgency for structural fiscal reforms and raising growth sustainably.

### Disinflation dynamics and recent developments
- Inflation status:
  - "Inflation rates in Europe have fallen to approximately one-third of the multidecade peaks of the end of 2022."
  - Disinflation reflects both unwinding of adverse supply shocks and effectiveness of monetary policy in restraining demand.
- Monetary and financial conditions:
  - High interest rates have contained demand; transmission to output and prices is "consistent with historical averages."
  - Financial conditions tightened significantly, peaking between late 2022 (advanced economies excluding CESEE) and mid-2023 (CESEE).
  - Recent signs of moderation: lending standards no longer tightening and credit demand is bottoming out from very weak levels.
- Supply shocks and energy:
  - Supply-chain pressures and energy prices are around prepandemic levels despite geopolitical risks.
  - After a trough in September 2022, as of December 2023 the euro area’s goods terms of trade improved back to prepandemic levels.
  - Decline in the import price index of mineral fuels has fallen by 38 percent between June 2022 and February 2024.
  - The shift to liquified natural gas implies higher costs "in the order of about $6 per one million British thermal units."
  - As of March 19, natural gas prices were of EUR28.8 per megawatt hour, "8 percent higher than the 2021:Q1–22:Q3 average and (as a result of price volatility in 2021) 40 percent lower than the 2021 full-year average."

### Heterogeneity in disinflation and labor dynamics
- Disinflation unevenness:
  - Core inflation (year-on-year) is "substantially higher and more persistent in CESEE."
  - Sequential deceleration in core inflation largely driven by core goods; services inflation remains strong in parts of CESEE (examples: Hungary and Romania).
  - Nominal wage growth is stronger in CESEE.
  - Underlying pressures remain notably strong in some advanced European economies (examples: Iceland and Norway) and weak in others (example: Switzerland).
  - Overall wage growth remains robust across advanced European economies, even as wage drift is falling.
- Definitions and scope:
  - Wage drift defined as "the difference between growth in compensation received and growth in negotiated wages."
  - CESEE composition and AE (advanced Europe) inclusions are specified in figure notes.

### Activity, confidence, and savings
- Economic activity:
  - Recovery is tentative in most economies; growth outturns in H2 2023 were somewhat lower than projected in the October 2023 WEO.
  - Feeble recovery reflects weak consumer sentiment, lagged effects of higher energy prices, and weakness in interest-rate-sensitive manufacturing and business investment.
  - Real incomes started to increase year over year in some economies, but low confidence led to weaker private consumption than expected in both advanced European economies (examples: Germany and the United Kingdom) and CESEE (examples: Czech Republic, Poland, and Romania).
  - Household saving rates—already high in 2022 compared to precrises—"increased further in 2023."

### Policy recommendations and priorities
- Monetary policy:
  - "The pace of monetary policy easing needs to match the evolution of underlying inflationary forces."
  - In advanced European economies, "a gradual, measured pace of easing is preferable" under the baseline.
  - Many CESEE economies will need to "maintain a tight stance for longer to fully rein in inflation."
- Fiscal policy:
  - Fiscal support from the crises "should be fully withdrawn in most of Europe" as shocks fade and economies recover, while "not undermining public investment and social protection systems."
  - Fiscal consolidation and reforms should strengthen sustainability, rebuild buffers against downside risks that would activate automatic stabilizers, and create space to address spending needs related to aging, climate, and defense.
  - In some countries, especially CESEE, "a less expansionary fiscal policy will help avoid further erosion of competitiveness."
- Financial sector policy:
  - Property sector stress and rising bankruptcies could lead to larger-than-expected increases in nonperforming loans.
  - Banks will need capital buffers strong enough to withstand an increase in nonperforming loans while leaving them able to support the projected increase in investment.
  - Where pockets of financial vulnerabilities warrant tightening, care should be taken to avoid migration of risks to less-regulated nonbank financial institutions.
- Structural policies to raise potential growth:
  - Raise labor force participation and prepare the workforce for looming structural shifts.
  - Set an enabling environment for private investment and promote innovation on a level European playing field—especially for the green transition, including through "a strong commitment to carbon pricing."
  - Greater European integration to amplify reform effects:
    - Complete the banking and capital markets unions.
    - Harmonize national rules on taxes and subsidies.
    - Improve insolvency regimes and reduce administrative burdens.
    - Lower effective barriers to labor mobility and to goods and services trade.
  - Formulating an ambitious set of growth-enhancing reforms should be a key priority of a new EU commission.

### Figures, boxes, and annexes referenced (select highlights)
- Key figures mentioned: Figure 1 through Figure 21 (topics include "A Soft Landing Is Within Reach", "Demand and Supply Conditions", "Inflation and Wage Developments", "Economic Activity", "Medium-Term Growth Projections", "Monetary Policy", "Financial Sector Policy", "Fiscal Policy", "Gini Index", "Higher Fiscal Adjustment Needs Suggested by an Optimization Model", "Energy Crisis Support Measures", "Gap with the Frontier and Untapped European Potential", "Scope for Further Domestic Structural Reforms").
- Boxes referenced: Box 1 through Box 6 (including topics such as "Reformed European Economic Governance Framework", "Expenditure Pressures", "Recovery and Resilience Facility Stock Take", "Artificial Intelligence and the Future of Work in Europe", "Ukraine’s Economic Outturns", and "Russia").
- Annex tables: Annex Table 1.1 Real GDP Growth; Annex Table 1.2 Headline Inflation.

*International Monetary Fund. Regional Economic Outlook—Europe, April 2024. text - references.*

### 1. Nonenergy Goods and Services Inflation

### 1. Nonenergy Goods and Services Inflation

### Key recent developments and drivers
- Cumulative excess savings in the euro area are estimated at about 7½ percent of GDP as of 2023:Q3 (up from around 7 percent a year earlier).
- Supply-chain normalization has led to inventory destocking in some countries (Czech Republic, Italy, Poland), and reflects, in part, weaker demand for goods including from China and the United States.
- Countries more reliant on services continued to outperform (Italy and Spain, which benefited from tourism).
- Nearshoring and subsidy-driven rises in domestic capacity among major trading partners are materializing structural shifts (evidence cited in Figure 5 panels 3 and 4).

### Outlook and baseline scenario
- IMF staff baseline: a slow, low-inflation recovery with gradual recovery of activity alongside disinflation toward targets, conditional on:
  - Labor markets being neither too strong nor too weak.
  - Consumption picking up and investment following as financial conditions ease.
  - Normalization of supply conditions remaining intact.
  - A combination of still-tight monetary policy and gradual fiscal consolidation keeping inflation within central banks’ comfort zones.
- Labor markets are forecast to ease but remain strong enough to support real income growth and consumption as inflation slows; number of vacancies falling while unemployment remains low.
- The resulting rebound in private consumption will support growth throughout 2024; contribution from net exports is expected to generally decrease in 2024 as domestic demand and imports pick up.
- Advanced economies: private investment expected to remain flat in 2024 and pick up in 2025 as monetary policy returns to neutral and financial conditions ease.
- CESEE: growth is expected to rely more on consumption for longer; investment is expected to take somewhat longer to recover.

### Projections (regional aggregates and timing)
- Advanced European economies: expected growth of 0.8 percent in 2024 and 1.6 percent in 2025.
- Emerging European economies: expected growth of 2.9 percent in 2024 and 3.5 percent in 2025.
- Inflation: expected to return to target in 2025 in most advanced European economies and in late 2026 in most emerging European economies.

### Labor, wages, and productivity
- Wage growth dynamics:
  - Wage growth in CESEE remains high—12.1 percent in the fourth quarter of 2023.
  - IMF staff models predict moderating wage pressures in CESEE, but persistently high wage growth could add to core inflation persistence.
- Labor productivity: a recovery in labor productivity after a years-long plateau is assumed to help mitigate the inflationary impact of rising wages.
- Real income and consumption:
  - Rising real incomes will help to balance wealth effects from falling housing prices.
  - Real income growth and private consumption are projected to support growth through 2024.

### Risks and downside scenarios
- Advanced Europe:
  - Soft landing could be undone if consumption and investment fail to pick up due to weak sentiment, potentially causing inflation to undershoot targets.
  - Alternatively, a swift recovery in consumer confidence amid persistently high wage growth and less profit compression could produce higher-than-expected inflation.
- CESEE:
  - Main risk is persistently high inflation requiring tighter monetary policy that leads to lower growth.
  - Tighter monetary policy, while warranted to prevent expectations de-anchoring, would lower growth.
  - Weaker-than-expected investment (e.g., slow consumption recovery or fiscal consolidation crowding out corporate credit) would exacerbate downside outcomes.
- Geopolitical and external risks:
  - Escalation of Russia’s war in Ukraine or broadening of the conflict in the Middle East could raise uncertainty and affect supply chains and commodity prices.
- Other structural risks:
  - Aging and technological changes (for example, from artificial intelligence) may require large workforce reskilling.
  - Nearshoring and trade fragmentation could lower aggregate European income and increase trade-distorting subsidies within the EU (number of such measures increased by well over 50 percent since the onset of the crises, per Figure 5 panel 4).

### Policy implications and conditionalities for the baseline
- Maintain monetary policy tightness combined with gradual fiscal consolidation to keep inflation expectations anchored.
- Ensure labor markets remain flexible enough to allow easing in tightness without inducing scarring; support policies that facilitate reskilling to adapt to technological change.
- Encourage policies to revive private investment, particularly in CESEE, to support medium-term potential growth.
- Coordinate policies to limit harmful subsidy measures and manage nearshoring effects to preserve benefits from trade and FDI.

*Source: Regional Economic Outlook—Europe, April 2024 • INTERNATIONAL MONETARY FUND*

### 2. Combinations of Wage Growth and Profit Share Consistent

### 2. Combinations of Wage Growth and Profit Share Consistent with Inflation Projections

### Medium-Term Challenges Await Beyond the Soft Landing
- Low potential growth remains Europe’s Achilles’ heel.
- Europe’s per capita income in purchasing-power-parity terms is around one-third lower than in the United States.
- From 2010 to 2022, Europe’s per capita income grew at the same rate as the United States.
- The income gap to the global frontier extends across the region; with the exception of Ireland and Luxembourg, per capita incomes in all of the EU advanced economies are now lower than in the United States.
- Even with a successful soft landing, the large distance to the global frontier is not expected to narrow over the forecast horizon.
- Productivity growth is falling and is increasingly critical for medium-term prospects, especially in CESEE where crises and their fallouts resulted in loss of price competitiveness, and investment rates are lower and recovering more gradually.
- Demographics barely contribute to medium-term growth prospects as populations age; there is a secular decline in hours worked in Europe.
- Net migration has recently increased in many economies (in large part because of the inflow of Ukrainian refugees), but challenges to improve integration of immigrants (including refugees) into labor markets remain.

### Policies to Secure the Soft Landing and Lift Medium-Term Growth
- Execute careful monetary policy calibration to secure the soft landing.
- Withdraw fiscal support from the crises in most of Europe as shocks fade to:
  - strengthen sustainability,
  - make room to accommodate longer-term budget pressures,
  - avoid crowding out private investment.
- Macroprudential policies should ensure banks have capital buffers robust to larger-than-expected increases in nonperforming loans (NPLs) while allowing credit to continue to flow as investment picks up.
- Raise potential growth through regional and domestic efforts, including:
  - tackling remaining barriers to the European Union’s single market,
  - domestic reforms to improve business dynamism,
  - ease demographic constraints,
  - prepare for looming and materializing structural shifts.

### Monetary Policy: Calibrate Carefully amid Two-Sided Risks
- Monetary policy stances are still appropriately tight in most of Europe.
- Central banks are expected to start or continue to ease rates; some have started easing (Czech Republic, Hungary, Israel, Switzerland).
- Policy rates remain generally above estimates of neutral rates.
- Interest rate gaps and Taylor rule estimates show substantial variation in monetary policy tightness.
- In many cases (for example, euro area and the United Kingdom), the easing cycle is expected to start in mid- to late 2024 and proceed through the end of 2025, bringing the ex ante real policy rate close to neutral levels toward the end of 2025 to early 2026.
- Pace of easing should match evolution of underlying inflationary forces; core services inflation and wage growth reached higher peaks and remain significantly stronger in CESEE (for example, Bulgaria, Croatia, Poland, Romania).
- Inflation expectations one to two years ahead are at or close to target in advanced European economies outside CESEE, but persistently above it in CESEE.
- Advanced European economies: a gradual pace of easing is desirable under the baseline; policy decisions should remain data dependent with a meeting-by-meeting approach.
- Eurosystem and Bank of England should continue to reduce bond holdings and shrink their footprint in financial markets gradually and predictably.
- Many CESEE economies need a tight monetary stance for longer where wage growth remains strong, core inflation sticky, and inflation expectations above target.
- Given the high cost of erring on the side of too-loose policy when inflation persistence remains high, policymakers should be cautious about premature loosening.
- A tightening bias—reacting more strongly to higher-than-expected inflation than to downside surprises—helps prevent inflation from becoming embedded in expectations.
- In Türkiye, where inflation is expected to start declining only toward the middle of the year, the central bank’s tightening bias is appropriate and should be maintained as long as expectations and inflation remain high.

### Financial Sector Policies: Maintain Stability Without Hampering the Recovery
- Macroprudential policies should ensure banks are robust to larger-than-expected increases in NPLs.
- NPLs through 2023:Q3 have in aggregate remained mostly flat in both the euro area and CESEE, but have risen in certain segments like commercial real estate.
- Property sector stress and rising corporate bankruptcies may increase NPLs further (examples cited: Germany and Luxembourg where nominal house prices have fallen significantly).
- In CESEE, despite recent improvements in credit quality, banks continue to expect an overall increase in NPLs in the near term across retail and firms due to weak growth and high interest rates.
- Prudence in profit distribution by banks should be encouraged to lock temporarily high bank profits into capital and preserve buffers without pushing banks to issue new equity or cut lending.
- Where appropriate, raise countercyclical capital buffers, standing ready to release them if stresses materialize.
- Ad hoc discretionary taxes on realized bank profits should be avoided.
- Supervisors should monitor credit quality of commercial real estate portfolios and deploy targeted measures where appropriate, taking care to minimize migration of risks to nonbank financial institutions (NBFIs).
- Strengthen ability to mitigate risks from NBFIs:
  - close key data gaps,
  - incentivize risk management by NBFIs,
  - set appropriate regulation,
  - intensify supervision.
- Central bank liquidity support should be subject to guardrails.

### Fiscal Policy: Time to Strengthen Sustainability
- Fiscal consolidation is expected to expand across Europe in 2024, albeit more slowly in CESEE.
- Advanced European economies are consolidating faster, but the probability that debt will not stabilize is projected to increase in the medium term in many countries.
- Insufficient primary balance adjustment and lower-than-expected growth are key risks to debt stabilization.
- Debt fanchart analyses point to high adverse risks for advanced economies and a wide dispersion of risks among emerging market economies.
- High public debt and financing needs, combined with some of the highest bond market yields in about a decade, are adding to governments’ financing costs.
- With unemployment expected to remain low and growth rebounding, it is a good time to rebuild buffers needed for the next crisis.
- As temporary components of crisis support fade and private demand rises, the rationale for temporary support wanes; consolidation will:
  - strengthen sustainability,
  - help rebuild buffers against downside risks that would activate automatic stabilizers,
  - make room for spending pressures from aging, climate, and defense,
  - mitigate risks to medium-term growth from crowding out private investment,
  - for most in CESEE, avoid further erosions to competitiveness,
  - aid monetary policy efforts toward price stability.
- Consolidation should be pursued without undermining necessary public investment and while continuing social protection for the vulnerable.
- A simple model of optimal fiscal policy (Fournier 2019) illustrates required adjustment:
  - Representative advanced economy at end-2023: positive output gap of 0.2 percent, public debt of 67 percent of GDP.
  - Representative emerging market economy at end-2023: negative output gap of 0.2 percent, public debt of 44 percent of GDP.
  - Model suggests higher adjustment relative to baseline is needed in the representative emerging market economy (about 1.5 percentage points by 2029) than in the advanced economy (about 1 percentage point).
  - The baseline medium-term debt path in the representative emerging market economy is steeper, suggesting higher debt sustainability risks that warrant faster consolidation.
- Growth-enhancing reforms are important to complement fiscal adjustment.

*International Monetary Fund, Regional Economic Outlook—Europe, April 2024*

### 1. Fiscal Balances

### 1. Fiscal Balances

### Fiscal balances, debt dynamics, and inequality indicators
- Panel summaries depicted in source figures:
  - Fiscal balances (Percentage of GDP) shown for Advanced Europe and Emerging Europe across years 2022–2028 (aggregate uses purchasing power parity weights).
  - Debt nonstabilization probabilities:
    - Current: Probability of debt nonstabilizing in the medium term (probability debt [2029] > debt [2028]).
    - Pre-COVID-19: Probability of debt nonstabilizing in the near term (probability debt [2024] > debt [2023]).
    - Comparative statement: "Higher probability of debt nonstabilizing now than pre-COVID-19."
  - Advanced Europe Debt-to-GDP (Percent) plotted for years 2019, 2021, 2023, 2025, 2027, 2029.
  - Emerging Europe Debt-to-GDP (Percent) plotted for years 2019, 2021, 2023, 2025, 2027, 2029.
  - Gini Index panels:
    - 2019 Gini (before social transfers, pension included)
    - 2019 Gini (after social transfers)
    - 2022 Gini (before social transfers, pension included)
    - 2022 Gini (after social transfers)
    - Regional series for AE excluding CESEE and CESEE for 2019 and 2022.

- Data sources and methodological notes (as presented):
  - Sources: IMF, World Economic Outlook database; and IMF staff calculations.
  - Note: Debt stabilizing primary balance calculated using 2026 projections.
  - Emerging Europe excludes Belarus, Moldova, Montenegro, Russia, Türkiye, and Ukraine.
  - In panel 2, the probability is calculated by the share of simulated stochastic debt trajectories that result in nonstabilizing debt ratios as in IMF (2022).
  - Advanced Europe and emerging Europe exclude Andorra, Belarus, Kosovo, Russia, and Ukraine.
  - Panel 3 excludes Andorra and Norway, and panel 4 excludes Belarus, Kosovo, Russia, and Ukraine.

### Key quantitative modeling insights and implications for fiscal adjustment
- Growth-reform interactions:
  - "Reforms that raise GDP levels by about 4 percent cumulatively through 2029 would lower the average annual adjustment by about 0.3 percentage point in the representative advanced economy and 0.2 percentage point in the representative emerging market economy in 2024–29."
  - Footnote clarifies: "The assumption of reforms raising GDP levels by about 4 percent through 2029 is consistent with phasing in gradually the result in Baba and others (2023) showing long-term real income gains of 7 percent from reducing internal EU barriers by 10 percent (see Structural Policies section for further details)."

- Optimization model results (Figure 18 context):
  - Model compares WEO baseline versus model results with higher potential growth for structural primary balances of representative advanced and emerging market economies (general government, percent of potential GDP) across years 2018–2029.

### Policy recommendations for Advanced Europe
- For advanced European economies with relatively high debt levels (examples cited: Belgium, France, and Italy):
  - Implement more significant and front-loaded fiscal consolidation than under current policies.
  - Recommended measures include:
    - Raising the efficiency of spending.
    - Implementing revenue-enhancing tax reforms.
    - Cutting tax expenditures.
    - Prioritizing growth-enhancing reforms.

- For advanced economies with relatively low debt levels (examples cited: Germany and, to an extent, Sweden):
  - Staff recommend less consolidation than planned by authorities.
  - Rationale: Allow more support for growth-enhancing green public investment.

- EU fiscal governance:
  - The reformed economic governance framework sets country-specific adjustment requirements based on long-term debt sustainability analysis, taking into account aging-related spending pressures.
  - Adjustment paths for net primary expenditure are set in medium-term fiscal-structural plans proposed by member states and approved by the European Commission and the Council.
  - Countries undertaking structural reforms or public investments that increase potential growth, strengthen macroeconomic resilience, or improve fiscal sustainability are granted longer adjustment periods.
  - The new framework contains enhanced requirements on medium-term budget frameworks and independent fiscal institutions.

### Policy recommendations for CESEE (Central, Eastern, and Southeastern Europe) and other emerging Europe
- General guidance:
  - Recommendation is for more front-loaded consolidation while meeting elevated needs for investment in infrastructure, labor skills, and the energy transition (examples: Bulgaria for infrastructure/skills; Poland for energy transition).
  - Helpful policies include realizing expenditure efficiency gains and raising revenue (for example, broadening the tax base, eliminating exemptions).
  - In some cases (example: Romania) streamline value-added taxes and personal income taxes.
  - Withdraw energy crisis support measures that remain significant in several economies (examples: Bosnia and Herzegovina, Croatia, Hungary, Malta, and Slovakia) — Figure 19 documents energy crisis support measures (Percent of GDP) with series for 2022–23 average and 2024 across AE excluding CESEE and CESEE.

- Deeper fiscal reforms needed to address:
  - Expenditure pressures associated with aging.
  - Defense needs.
  - Financing the green transition.
  - Role of fiscal measures alongside structural reforms, including shifting obligations to the private sector (for example, through carbon taxes or strengthening supplementary private pension plans) and improving spending efficiency.

- Country-specific CESEE measures highlighted:
  - Raise investment and improve capital allocation:
    - Develop domestic investor base (for example, voluntary pension schemes).
    - Improve governance and anticorruption efforts.
    - Strengthen bankruptcy frameworks.
    - Lower trade barriers (trade barriers are higher than the European average; Figure 21, panel 1).
    - Maximize implementation of NextGenerationEU-funded projects.
    - Attract private capital for green transition (examples: regulatory climate in Poland; tightening energy-efficiency regulations in Czech Republic).
    - Use carbon taxation and excise taxes to improve capital allocation for the green transition.
  - Increase labor supply and skills:
    - Improve immigrant integration into labor force (example: Poland).
    - Improve quality and completion rates of tertiary education (example: North Macedonia).
    - Increase childcare supply to boost female labor force participation (example: Romania; Figure 21, panel 2).
    - Pension reforms to ease aging pressures (see Box 2).
    - Active labor market policies (reskilling, vocational training).

### Structural policies and single-market deepening
- Growth and productivity gaps:
  - Capital stock of the European Union estimated at 88 percent of that in the United States.
  - Labor input of the European Union is 92 percent of that in the United States.
  - Total factor productivity in the European Union is only 78 percent of that in the United States.
  - Differences in TFP explain about 70 percent of the total per capita gap between the two economies (Figure 20, panel 1).

- Untapped gains from single-market deepening and factor-movement liberalization:
  - Gorodnichenko and others (2021) estimate productivity gains of 13.5 percent from better allocation of resources via removing obstacles to investment.
  - Head and Mayer (2021) find workers’ costs of migrating between EU countries are about eight times higher than for migration between US states.
  - Spornberger (2020) estimates real income gains of about 1.6 percent from moving to first-best border infrastructure.
  - Spornberger (2020) and Baba and others (2023) suggest untapped liberalization potential yielding 2.3 to 3.6 percent increases in real incomes; Baba and others (2023) show long-term real income gains of 7 percent from a 10 percent reduction in internal barriers (Figure 20, panel 3).

- Policy measures to deepen the single market and improve financing for innovation:
  - Create portable pension products.
  - Streamline cross-border withholding taxes.
  - Foster supervisory convergence and centralize oversight of systemic financial market infrastructures.
  - Build on Eurogroup’s March 2024 statement on the future of the Capital Markets Union and pursue comprehensive reforms.
  - Facilitate services trade liberalization; note limited recent progress in services trade (Figure 20, panel 5).
  - Promote cross-border risk sharing and expand the role of risk capital (Figure 20, panel 4 shows Venture Capital Investments as Percent of GDP).

- Trade, nearshoring, and fragmentation:
  - Trade integration in the EU is higher than in other regional agreements but well below the level among US states (Figure 20, panel 2).
  - National subsidies akin to current US policies under the Inflation Reduction Act would, per simulation, lower real incomes by about 0.6 percent (Figure 20, panel 3, middle bar).
  - A deeper single market can enhance resilience to fragmentation risks and should be prioritized over fragmented national subsidy approaches.
  - Electricity market integration can help ease pressures from the energy transition (Dolphin and others, forthcoming).

### Sectoral and domestic reform priorities (summary)
- For CESEE:
  - Raise investment, improve capital allocation, maximize EU funds implementation, attract private capital for green transition, lower trade barriers, and improve governance and bankruptcy frameworks.
  - Increase labor supply and skills via immigration integration, education quality improvements, childcare expansion, pension reforms, and active labor market policies.

- For advanced EU economies:
  - Progress on banking and capital markets union to deepen access to finance and enhance cross-border risk sharing.
  - Strengthen insolvency frameworks to shorten resolution times.

*International Monetary Fund, Regional Economic Outlook — Europe, April 2024.*

### 1. Measure of Aggregate Trade Restrictions

### 1. Measure of Aggregate Trade Restrictions (Index)

### Labor supply, female participation, and childcare
- Empirical relationship highlighted: higher childcare supply (children aged 0–4 per teacher) associated with higher female labor force participation (percent).
- Policy recommendations to increase labor supply and improve allocation:
  - Keep older workers in the labor force longer and reduce disincentives to work.
  - Significant scope to raise female labor force participation (for example, Italy and Spain) and extend working hours (for example, Austria and Germany).
  - Use immigration to raise labor supply, conditional on quick integration (for example, United Kingdom fine-tuning immigration).
  - Address skill shortages and mismatches via apprenticeship transitions into permanent work and addressing performance gaps and inefficiencies in education (France).

### Promoting innovation and productivity
- Policy guidance for innovation:
  - For countries close to or at the technology frontier:
    - Combine research and development tax incentives, research and development grants for startups (especially in high social return sectors like green technologies), and public investment for basic research.
    - Strengthen university-business linkages.
    - Carefully design fiscal incentives to minimize fiscal costs, avoid cementing market power, and prevent misallocation.
  - For countries behind the frontier:
    - Focus on facilitating adoption of existing technologies, including greater investment in digital infrastructure.
- Innovation for the green transition should rely heavily on carbon pricing, as it provides market participants with price signals that fully reflect externalities.

### Fiscal governance reform (Reformed European Economic Governance Framework)
- Overview:
  - In February 2024 the Council and Parliament approved a reformed economic governance framework for EU members to promote sustainable public finances while encouraging growth-supporting reforms and investments.
- Key procedural and numerical rules:
  - Countries considered to face long-term risks to public finances must submit adjustment plans likely to restore fiscal sustainability.
  - Member states with deficits or debt levels exceeding the framework’s reference values—currently 17 of the 27 EU member states—are asked to agree with the Commission and the Council a four- or seven-year fiscal-structural plan, relying on net primary expenditure as the single operational indicator.
  - Two phases: an adjustment period and a 10-year debt trajectory phase. Baseline adjustment period is four years; countries committing to structural reforms and public investments can be allowed to extend to seven years.
  - Debt criterion:
    - Debt above 60 percent of GDP should decline with a high probability.
    - If below 60 percent of GDP, it should not exceed this threshold.
    - Debt-sustainability analysis covers the 10-year debt trajectory with the primary fiscal balance assumed constant, adding costs related to an aging population.
  - Deficit benchmark:
    - By the end of the adjustment period, the general government deficit must be below 3 percent of GDP and projected to remain below this level for the entire 10-year debt trajectory phase.
- Minimum adjustment safeguards:
  - Debt sustainability safeguard (over the adjustment period):
    - Debt-to-GDP should fall on average by no less than 1 percentage point of GDP annually if debt is above 90 percent of GDP.
    - Debt-to-GDP should fall on average by no less than 0.5 percentage point of GDP annually if debt is between 60 and 90 percent of GDP.
  - Deficit resilience safeguard:
    - If the general government structural balance is less than –1.5 percent of GDP, the annual improvement of the structural primary balance should not be less than 0.4 percentage point of GDP for countries with a four-year adjustment period.
    - The annual improvement should not be less than 0.25 percentage point for those with a seven-year adjustment period.
- Excessive Deficit Procedure (EDP) provisions:
  - Member states violating fiscal requirements—either by having a general government deficit that exceeds 3 percent of GDP or by failing to implement the agreed net expenditure path—can be placed in an Excessive Deficit Procedure.
  - While in an EDP, the country is required to make a minimum annual improvement of the structural fiscal balance of 0.5 percent of GDP to bring it back to compliance.
  - As a transition measure, during 2025–27 the minimum adjustment—generally defined in terms of the structural balance—can be adjusted to take into account higher interest expenses.
  - A country in an EDP is excluded from the annual debt-reduction requirement under the debt sustainability safeguard for the time it is in the procedure.
- Budgetary frameworks and institutions:
  - The reform includes requirements on member states’ budgetary frameworks, including medium-term fiscal planning, analysis of macro-fiscal risks, and country-specific numerical fiscal rules.
  - Member states must ensure existence of independent fiscal institutions with sufficient competence, autonomy, and resources, tasked at minimum with macroeconomic forecasting, fiscal rules monitoring, and evaluation of budgetary frameworks.
  - Member states are required to comply with assessments of their independent fiscal institutions or provide a public explanation of noncompliance.

### Medium- and long-term expenditure pressures
- Scale of pressures:
  - In advanced European economies, additional spending pressures are estimated at around 5½ percent of GDP annually by 2050.
  - In Central, Eastern, and Southeastern Europe economies (CESEE), additional spending pressures are around 8½ percent of GDP annually by 2050.
- Drivers:
  - Demographic trends and aging populations increasing pension and health care costs.
  - Large investments required to reach climate goals.
  - Commitments to increasing defense spending.
  - Some service costs (for example, long-term care) expected to increase with rising income levels.
- Policy implications:
  - Higher economic growth cannot be the only solution; some pressures are endogenous to higher-income societies.
  - Fiscal consolidation to achieve sustainable finances will constrain scope for expenditure reprioritization and/or require revenue measures, increasing the need for deeper structural fiscal reforms that take time to yield results.
- Examples of reforms to mitigate pressures:
  - Pension systems:
    - Increase statutory retirement age and/or minimum contribution years (for example, Bulgaria, France, Greece, Spain, and Sweden).
    - Index retirement age to life expectancy (for example, Estonia, Greece, and Slovakia).
    - Reduce early retirement options (for example, Austria, Czech Republic, Romania, and Spain).
    - Align retirement age of women with men (for example, Austria, Bulgaria, and Romania).
  - Health care reforms:
    - Digitalization, governance and procurement reform, and introduction of co-payments to reduce costs directly (for example, Croatia, Cyprus, and Italy).
    - Reforms to broaden access to primary care to save costs or reduce reliance on old age homes (France, Greece).
  - Green transition:
    - Higher taxes on pollution, especially carbon taxes (for example, Austria and Germany), to alter private incentives and generate revenues; part of revenues should offset impacts on lower-income households and may free funds for public investment.
  - Defense:
    - Common procurement and standardization of weapons systems to achieve savings on large defense-related investments.
- Institutional and planning gaps:
  - Few European countries have comprehensive frameworks to account for and plan to meet all spending pressures at the national level. Countries with such initiatives include Denmark, Finland, The Netherlands, Norway, Spain, Sweden.
  - Few national plans to achieve EU climate targets are costed; only six countries have comprehensive assessments of long-term fiscal impacts of climate change, including adaptation and mitigation costs under different policy scenarios: Czech Republic, Denmark, Finland, France, The Netherlands, United Kingdom.

*Regional Economic Outlook—Europe, INTERNATIONAL MONETARY FUND • April 2024*

### Box 3. Recovery and Resilience Facility Stock Take

### Box 3. Recovery and Resilience Facility Stock Take

### RRF design and objectives
- The Recovery and Resilient Facility (RRF) is the core instrument (90 percent) of the NextGenerationEU pandemic recovery plan.
- Launched in 2021 and running until the end of 2026.
- Aims to provide financing for investments and reforms of up to €800 billion to EU member states through a mix of grants and loans.
- Financed through the issuance of common EU bonds.
- Allocation is determined by differences in GDP per capita prepandemic and how hard countries were hit economically by the pandemic.
- Disbursements are performance-based and tied to the completion of national Recovery and Resilience Plan (RRP) milestones and targets.

### Performance and achievements to date
- The performance-based approach has been relatively successful at incentivizing reforms to address long-standing structural issues.
  - Example reforms: Spain implemented a significant labor market reform; Italy has taken steps to address backlogs in the justice system.
- At the end of 2023, about 75 percent of reforms planned to be done by that point had been completed.
- The RRF has helped increase investments in EU priority areas, including the green and digital transitions.
  - Countries must allocate at least 37 percent of the expenditures in their RRPs to measures contributing to climate objectives and at least 20 percent to measures for digitalization.
  - Countries aim to overachieve these objectives in their RRPs.
- In the context of REPowerEU, member states introduced dedicated RRP chapters to obtain additional funding to diversify energy supplies and accelerate the green transition.

### Disbursements and implementation challenges
- At the halfway point, the RRF has only disbursed about one-third of its funds (€225 billion), pointing to implementation challenges.
  - Following a swift disbursement of close to €70 billion in prefinancing (prior to the completion of milestones and targets), the pace of disbursements slowed in 2023.
- Implementation challenges include:
  - Political difficulties related to reforms in some countries (for example, pension reform in Belgium and judicial reform in Poland).
  - High inflation and supply chain disruptions.
  - Administrative capacity constraints and complaints about the system’s complexity and burdensome processes, including overlapping EU reporting and control systems.
- Countries design their own plans, boosting ownership, but have called for more flexibility in implementation.

### Green and digital absorption statistics
- Mandatory share of expenditure to support green transition and digital transition are 37 percent and 20 percent, respectively.
- Although 37 percent of the RRPs are supposed to be allocated to the green transition (20 percent for the digital transition), so far only 17 percent of the disbursed loans and grants excluding prefinancing have contributed to the green transition pillar.
- For the digital transition pillar, so far only 11 percent of the disbursed loans and grants excluding prefinancing have contributed.

### Macroeconomic impact and absorption importance
- A significant share of public investment in the European Union is expected to be financed by the EU budget over 2019–25, particularly the RRF, according to the European Commission’s autumn forecast, which projects public investment to maintain over the period contrary to the experience of past crises.
- Accelerating progress on reforms and investments is critical to fully utilizing the available funds by the end of 2026, as unspent funds by that time will be lost.
- If the funds are fully absorbed, model-based estimates (European Commission 2024) suggest that NextGenerationEU has the potential to increase EU GDP by 1.4 percent in 2026, which includes significant spillovers as the RRF generates a coordinated fiscal impulse.
  - For countries with large allocations, the impact is higher—up to 4.5 percent in Greece or 3.5 percent in Romania and Spain.
- The RRF also has the potential to lift medium-term potential growth as it focuses on reforms and investments.

### Policy implications and priorities
- Faster and more effective implementation of reforms and investments will be key for the RRF to deliver its full macroeconomic impact.
- Success depends on:
  - Strong reform implementation.
  - A high additionality of spending.
  - Addressing administrative capacity constraints and other challenges, particularly in countries with a poor track record of absorbing EU funds and large RRF allocations relative to GDP.
- Priority actions implied by the assessment:
  - Accelerate implementation of RRP milestones and targets to absorb available funds by end-2026.
  - Simplify and increase flexibility in implementation and reporting to reduce administrative burdens.
  - Strengthen administrative capacity in low-absorption countries to improve utilization and ensure the RRF’s intended macroeconomic and structural effects are realized.

*This box was prepared by Guillaume Claveres.*

### Box 6. Russia

### Box 6. Russia

### Recent performance and context
- Over the past two years and amid large-scale sanctions imposed by a host of countries, the Russian economy has proven resilient.
- GDP growth: 3.6 percent in 2023 following a contraction of 1.2 percent in 2022.
- Oil export patterns shifted: oil that used to go to Europe is now being absorbed elsewhere, notably China and India. Box Figure 6.1 indicates "India + China now 80%" versus "Prewar 31%".
- Oil export revenues remain high because global oil prices are still elevated and the discount on Russian oil is lower than at the beginning of the war despite the price cap.

### Main drivers of resilience in 2023
- Oil exports:
  - Export volumes of oil have been very steady despite sanctions, supporting export revenues.
- Corporate investment:
  - Recovered from the drop in 2022, adding 4.5 percentage points to GDP growth in 2023.
  - Investment bolstered by increased resources flowing to the defense and manufacturing sectors and by import substitution leading to investments in new production facilities.
- Private consumption:
  - Strong recovery, adding 2.9 percentage points to GDP growth in 2023.
  - Driven by buoyant credit and a strong labor market: record low unemployment of just 3 percent and rising wages.
- Government spending:
  - Fiscal impulse estimated at 1.2 percentage points of GDP in 2023.
  - Despite a large increase in military spending, overall government spending has increased but not as much in real terms.

### Contributions to GDP growth (Box Table 6.1)
- GDP: 2020 –2.7; 2021 6.0; 2022 –1.2; 2023 3.6
- Private Consumption: 2020 –3.0; 2021 6.1; 2022 –0.6; 2023 2.9
- Public Consumption: 2020 0.4; 2021 0.4; 2022 0.5; 2023 0.6
- Gross Capital Formation: 2020 –1.0; 2021 2.8; 2022 0.3; 2023 4.5
- Net Exports: 2020 1.3; 2021 –3.1; 2022 –1.1; 2023 N/A

### Inflation, labor market, and policy response
- Labor market: unemployment at a record low of just 3 percent.
- Wages: rising rapidly (Box Figure 6.2 shows wage growth and inflation series).
- Monetary policy:
  - Bank of Russia raised its policy rate from 7.5 percent to 16 percent in the course of the second half of last year.
- Fiscal policy:
  - Projected withdrawal of fiscal stimulus (Box Figure 6.3 shows real general government expenditure indexed to 2021 = 100).
- Inflation (Annex Table 1.2 regional aggregates, Russia row):
  - Russia headline inflation: 2023 5.9; 2024 6.9; 2025 4.5; 2026 4.0

### Outlook and risks
- Near-term growth:
  - IMF staff projects quarterly growth to decelerate to around 2.6 percent annualized throughout the year.
  - A note: "The much higher annual growth rate of 3.2 percent reflects strong carryover effects related to fast growth in the second half of 2023."
- Medium-term prospects:
  - Potential growth is projected to fall to around 1¼ percent, versus 1.7 percent before the war.
  - Implications: Russia’s income per capita may no longer converge toward Western European levels in the medium to long term.
- Major downside risks and uncertainties:
  - Recent tightening of sanctions since December could have a material impact on growth, but it is too early to tell.
  - Shrinking labor force due to an aging population, loss in human capital, isolation from global financial markets, and impaired access to advanced technology related to Western sanctions that will harm productivity growth.
- WEO GDP projections for Russia (Annex Table 1.1):
  - 2023 3.6; 2024 3.2; 2025 1.8; 2026 1.2

### Key takeaways
- Short-term resilience driven by steady oil export volumes and high oil export revenues, corporate investment recovery, strong private consumption, and a positive fiscal impulse in 2023.
- Signs of overheating in 2023 (record-low unemployment, elevated inflation, fast wage growth) prompted substantial monetary tightening.
- Growth is expected to slow as monetary policy tightens and fiscal stimulus is withdrawn; medium-term growth will be challenged by demographic and structural constraints and by sanctions-related technology and market access restrictions.
- Substantial uncertainty surrounds projections, especially given recent sanction developments.

*This box was prepared by Philipp Engler.*

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_Source: https://www.imf.org/-/media/files/publications/reo/eur/2024/april/english/text.pdf_