## Executive Summary — Europe’s National-Level Structural Reform Priorities (WP/2025/104)

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### I. Europe’s economic performance and structural policy gaps
- Europe exhibits a large and persistent per capita income gap with the United States and sizeable intra-European differences in living standards.
- As of 2024, the per capita income gap with the United States was close to 30 percent for many advanced European economies and larger for others.
- Deficiencies contributing to these gaps: total factor productivity (TFP), labor utilization, and capital intensity.
- Structural policy weaknesses span: capital, product and labor market regulations, human capital formation, and governance.
- Data and measurement:
  - A comprehensive database of structural policy indicators was assembled and normalized to a 0-100 range (100 = frontier, defined as the average of the top-2 countries with the most growth-friendly settings).
  - Indicators aggregated into broad areas: labor market and human capital; business regulation; innovation policies; credit and capital markets; external sector; and governance.
  - Note: when the two frontier countries differ, the single top performing country may feature a normalized value above 100.

### II. Key domestic reform priorities identified by IMF staff
- Cross-cutting top priorities (most frequent/urgent across Europe):
  - Building human capital and improving labor market functioning.
  - Growth-friendly fiscal-structural reforms (tax policy and pension reforms in advanced Europe; fiscal and public investment management, and SOE reforms in some CESEE economies).
  - Boosting innovation in advanced economies via product market deregulation, deeper domestic credit and capital markets, and stronger innovation and digitalization policies.
  - Strengthening rule of law and governance in some CESEE and Western Balkan countries.
- Distribution of priorities (220 total identified priorities):
  - Labor market and human capital: about 30 percent of all identified priorities (66 reforms); appears in almost every country’s top-5 (43 out of 44 countries have at least one).
  - Fiscal-structural reforms: about 20 percent of priorities; top-5 in 16 AEs and 15 CESEE economies.
  - Business deregulation: among top-5 in 27 countries (13 percent of all reform priorities).
  - Innovation, R&D, digitalization: prioritized in about half of European economies (10 percent of all reform priorities).
  - Credit and capital market reforms: represent 10 percent of priorities; higher in EU economies; focused on access to finance for innovative young firms.
  - Governance reforms: especially critical in many CESEE and non-EU CESEE countries (control of corruption, rule of law, judiciary reforms).

### III. Typical reform content and country examples
- Labor market and human capital:
  - Improve education systems and scale up training; incentivize participation of females, youth, and seniors; attract skilled foreign workers; ease strict employment protection legislation (EPL) in selected cases; reduce labor tax wedges.
  - Country examples: ease EPL (Belgium, Spain, Türkiye); active labor market policies (Czech Republic, Estonia, Lithuania); lower labor tax wedge (Denmark, Finland, Slovenia).
- Fiscal-structural reforms:
  - AEs: tax and pension system reforms to reduce work disincentives and create business-friendlier tax settings (Belgium, France, Germany, Ireland, Netherlands, Luxembourg, Portugal).
  - CESEE/Western Balkans: public investment management and SOE governance reforms (Albania, Bosnia and Herzegovina, Moldova, North Macedonia, Belarus, Serbia, Romania, Croatia, Bulgaria).
- Business regulation and innovation:
  - Cut red tape, reduce entry/exit barriers, streamline land use and spatial planning (Cyprus, France, Germany, Hungary, Slovenia, Austria, Czech Republic, United Kingdom).
  - Better-targeted R&D tax incentives, direct R&D funding, digitalization of public administration, strengthen AI where relevant (Denmark, France, Czech Republic, Iceland, Luxembourg, Sweden, Poland, Netherlands, Hungary, Latvia, Slovak Republic, Slovenia, Malta).

### IV. Political economy and technical implementation challenges
- Political obstacles often primary barriers, especially in CESEE countries where priorities more frequently touch hard-to-reform areas (governance, fiscal reforms).
- IMF staff assessment:
  - Political effort required is higher in CESEE than in non-CESEE across most reform areas.
  - Over half of governance and fiscal reforms in CESEE are assessed to require high political effort versus about 15 percent in non-CESEE.
- Technical capacity constraints notable in areas such as deepening domestic capital markets and CMU-related items; capacity development needed for reform design, prioritization, and monitoring.
- Implementation tactics:
  - Package reforms to yield broader net gains and build supportive constituencies (example: pair take-home pay increases with adjustments to job protection rules).
  - Use sequencing, transparent stakeholder engagement, and independent technical/advisory bodies (especially in CESEE).

### V. Interactions with EU-level reforms and complementarities
- Domestic and EU-level reforms can be complementary, substitutable, or additive; complementarity predominates.
- Specific complementarities:
  - Completing the Capital Markets Union (CMU) complements domestic measures to deepen venture capital and access to risky capital.
  - Streamlining domestic business regulation amplifies single market completion benefits.
  - EU-level improvements in digital and energy infrastructure, intra-EU labor mobility (pension portability, recognition of qualifications), and removal of intra-EU trade barriers magnify domestic reform gains.
- Some EU-level measures may substitute for domestic action in product market deregulation, but domestic reforms remain essential to avoid “gold plating” or incomplete transposition.
- Completing the single EU energy market would amplify domestic measures to scale up grids and storage and help diversify energy sources.

### VI. Quantified medium-term gains: methodology and caveats
- Stylized quantification framework:
  - Scenario: countries close 50 percent of their prioritized policy gaps vis-à-vis the frontier.
  - Apply medium-term (five-years-ahead) output elasticities from IMF and OECD studies (governance, business regulation, capital and credit markets, labor market regulation, fiscal structural reforms).
  - Innovation-related reforms not quantified for the medium-term horizon (impacts materialize beyond five years or are not readily mapped to indicators).
  - Budget-neutral fiscal reform elasticities used where applicable (e.g., one percentage point of GDP personal income tax cut offset by VAT increase of similar size).
- Caveats:
  - Underestimation sources: about one-third of the 220 country-level priorities could not be directly mapped to indicators; de jure indicators may understate de facto gaps; interactions and general equilibrium effects not fully captured.
  - Overestimation sources: 50 percent gap-closure is ambitious; mapped indicator changes may overstate policy scope; average historical elasticities may not account for weak institutions or technical capacity.

### VII. Illustrative quantified medium-term impacts (5-year horizon)
- Regional illustrative results (indicator-based analysis and stylized quantification):
  - Western Balkans: around 9 percent (figure values: 9.3 shown in source).
  - CESEE region: around 7 percent (figure values: 6.7 shown in source).
  - Advanced economies excluding CESEE: around 5 percent (figure values: 4.9 shown in source).
- Sectoral/area medium-term contributions:
  - Labor market and human capital reforms:
    - Could add over 2.5 percent to GDP in the Western Balkans and Advanced EU economies, and over 3 percent in CESEE economies.
  - Business regulation reforms:
    - Could add over 1 percent to GDP over the medium term across Western Balkans and CESEE economies, and up to 0.7 percent in EU AEs.
  - Fiscal structural reforms:
    - Could add up to 0.7 percent to GDP in the Western Balkans and AEs, and 0.5 percent in the CESEE region (text reports "0.5 percent in the CESEE region. Gains would stem from strengthening pension system").
  - Credit and capital markets deepening:
    - Could add up to 0.3 percent in AEs and up to 0.6 percent in CESEE countries.
  - Governance reforms:
    - Direct medium-term output gains could range from 1 percent of GDP in CESEE to 5 percent in the Western Balkans.
- Aggregate illustrative medium-term output uplift reported:
  - 5 percent in advanced economies excluding CESEE,
  - 7 percent in CESEE economies,
  - 9 percent in the Western Balkans.
- Regional chart values explicitly present in source: 9.3, 6.7, 4.9.

### VIII. Major reform areas with illustrative country examples
- Pension system sustainability: France, Luxembourg, Poland.
- Public infrastructure efficiency: Israel, North Macedonia.
- SOE governance and management: Croatia, Serbia.
- Credit and capital markets deepening:
  - Risk-capital financing for innovation and startups: Netherlands, Portugal, Poland, Slovenia.
  - Strengthen domestic capital markets: Ireland.
  - Advance EU capital market and banking union reforms: Belgium.
- Governance and judicial reforms:
  - Control of corruption: Moldova, Serbia.
  - Judiciary reforms: Montenegro, Cyprus, Belarus.
  - Judicial system efficiency highlighted in some AEs (example: Greece).

### IX. Implementation, sequencing, and policy recommendations
- Sequencing and political economy:
  - Governance reforms that build capacity and create an enabling environment are often politically popular and amplify subsequent reforms.
  - Tailor reform timing to country-specific conditions (economic cycle, political timing such as pre-election vs. normal times).
  - CESEE countries often lack consensus-building institutional setups; recommended actions include building independent technical and advisory bodies.
  - Early, transparent stakeholder engagement and combining reforms to ensure net gains across stakeholders can improve acceptability.
- Capacity development:
  - Necessary in some cases, especially in non-EU CESEE economies and areas requiring technical skills (capital markets, CMU implementation).

### X. Annex I — Calculating policy gaps (data, normalization, and limits)
- Data sources: IMF, OECD, World Bank, Fraser Institute, Eurostat, European Commission, World Economic Forum, WTO, Global Trade Alert, IHS Markit.
- Indicators normalized to 0-100 where 100 denotes the frontier; policy gaps computed relative to that frontier and aggregated by broad area.
- Caveats and limitations:
  - Absence of indicators for some areas/countries; some indicators mix outcomes and policies; many indicators are de jure rather than de facto.
  - Heatmap mostly based on 2022; thus recent developments may not be captured.
  - Regional numbers are simple averages.
- Aggregated heatmap excerpt values in source (Percent relative to frontier):
  - Governance 73 61 85 80 (presented across columns in source table).
  - External sector 87 89 90 85.
  - Business regulation 67 63 70 89.
  - Innovation 65 58 70 84.
  - Labor and human capital 78 75 80 86.
  - Credit and capital markets 58 47 67 101.
  - Fiscal structural 74 67 81 88.

### XI. Annex II–IV highlights (evolution, national priorities, and quantification inputs)
- Evolution (Annex II): progress uneven over two decades; governance gaps have persisted (especially in CESEE); business regulation improvements plateaued after early gains; slow human capital improvements since mid-2010s; limited recent progress in credit and capital markets since pre-Global Financial Crisis deepening.
- National priorities (Annex III): ranking methodology uses 5 (highest) to 1 (lowest); regional averages (broad areas) include EUR: Labor and human capital 3.5, Fiscal structural 2.5, Business regulation 1.9, Governance 1.5, Innovation 1.3, Credit & capital markets 1.1.
- Quantification inputs (Annex IV): sample elasticities and indicators used include (as presented in source):
  - Innovation: Business sector R&D as % of GDP — OECDAE, EM0.008.
  - EPL — Duval and Furceri, 2018 AE, EM0.003.
  - ALMP spending — IMF April 2016 WEO CH3 AE, EM0.003.
  - Tax wedge — IMF April 2016 WEO CH3 AE, EM0.004.
  - Human capital index — UNDP; OECDAE, EM0.094.
  - Financial Markets Depth Index — IMF; MF 2019 WEO CH3 AE, EM0.035.
  - Legal retirement age — OECD Economic Outlook; OECDAE, EM0.006.
  - Infrastructure spending — IMF Apr. 2020 Fiscal Monitor CH2 AE, EM0.600.
- Coverage of prioritized reforms in quantification exercise:
  - Western Balkans: 43-67 percent covered (depending on scenario).
  - CESEE: 54-70 percent covered.
  - AEs: 52-72 percent covered.
- Baseline simulation assumptions:
  - Scenario: close 50 percent of policy gaps in top-5 priorities.
  - Approaches: Baseline combines prior IMF work (Assumption B) with OECD results (Assumption C); alternatives use only IMF (B) or only OECD (C).

*Source: wpiea2025104-print-pdf — IMF Working Paper content provided.*

### Executive Summary ......................................................................................................

### Executive Summary

### I. Europe’s economic performance and its structural policy gaps
- Section appears on page 6.

### II. Europe’s domestic structural reform priorities
- Section appears on page 9.

### III. Factors impacting reform take-up and implementation
- Section appears on page 15.

### IV. Interactions with EU-level reforms
- Section appears on page 16.

### V. Gains from Implementing Reform Priorities
- Section appears on page 19.

### Concluding Remarks
- Section appears on page 24.

### References
- Section appears on page 26.

### Annexes
- Annex I. Calculating Policy Gaps — page 29
- Annex II: Evolution of Structural Policy Gaps — page 35
- Annex III: National-Level Reform Priorities in Europe: Stylized Facts — page 37
- Annex IV. Quantifying the Output Gains from Reforms — page 43

### Figures (listed)
- Figure 1. Decomposition of GDP per capita difference with the US — (location not specified)
- Figure 2. Europe: Distance to Frontier in Selected Structural Policy Areas 2022 — (location not specified)
- Figure 3. Assessed Top 5 Reform Priorities across Europe — (location not specified)
- Figure 4. Reform Priorities Across Board Structural Areas — (location not specified)
- Figure 5. Alignement with Policy Gaps and Other Instituitions’ Priorities — (location not specified)
- Figure 6. IMF Staff Assesment of the Political Effort Required for Identified Reform Priorities, by Region and Area — (location not specified)
- Figure 7. IMF Staff Assesment of the Technical Capacity of Implementing Identified Reform Pirorities, by Region and Area — (location not specified)
- Figure 8. Europe: Medium-term GDP Impact of Closing 50 Percent of Prioritized Policy Gaps — (location not specified)
- Figure 9. Reform Prioritization and Sequencing — (location not specified)

### Tables (listed)
- Table 1. Macrostructural Reforms heatmap by Country Groups — (location not specified)

*IMF WORKING PAPERS Europe’s National-Level Structural Reform Priorities — INTERNATIONAL MONETARY FUND*

### Executive Summary

### Executive Summary

### Europe’s economic performance and structural policy gaps
- Europe exhibits a large and persistent per capita income gap with the United States and sizeable intra-European differences in living standards.
- As of 2024, the per capita income gap with the United States was close to 30 percent for many advanced European economies and larger for others.
- Deficiencies contributing to these gaps: total factor productivity (TFP), labor utilization, and capital intensity.
- Structural policy weaknesses across capital, product and labor market regulations, human capital formation, and governance impede convergence toward the frontier.
- A comprehensive database of structural policy indicators was assembled and normalized to a 0-100 range (100 = frontier, defined as the average of the top-2 countries with the most growth-friendly settings), aggregated into broad areas: labor market and human capital; business regulation; innovation policies; credit and capital markets; external sector; and governance.

### Key domestic reform priorities identified by IMF staff
- Top cross-cutting priorities:
  - Building human capital and improving labor market functioning (most frequent and urgent across Europe).
  - Growth-friendly fiscal-structural reforms (tax policy and pension reforms in advanced Europe; fiscal and public investment management, and SOE reforms in some CESEE economies).
  - Boosting innovation in advanced economies through product market deregulation, deeper domestic credit and capital markets, and stronger innovation and digitalization policies.
  - Strengthening rule of law and governance in some CESEE and Western Balkan countries.
- Distribution of priorities:
  - Labor market and human capital reforms account for about 30 percent of all identified priorities and appear in almost every European country’s top-5.
  - Fiscal-structural reforms account for about 20 percent of priorities; top-5 in 16 AEs and 15 CESEE economies.
  - Business deregulation reforms are among top-5 in 27 countries (13 percent of all reform priorities).
  - Innovation, R&D, and digitalization-enhancing reforms are prioritized in about half of European economies (10 percent of all reform priorities).
  - Credit and capital market reforms represent 10 percent of priorities, higher in EU economies and focused on access to finance for innovative young firms.
  - Governance reforms are especially critical in many CESEE and non-EU CESEE countries (control of corruption, strengthening rule of law, judiciary reforms).

### Typical reform content and country examples
- Labor market and human capital:
  - Improve education systems and scale up training programs.
  - Incentivize labor force participation of females, youth, and seniors; attract and integrate skilled foreign workers.
  - Ease strict employment protection legislation (EPL) in selected cases; reduce labor tax wedges to raise labor supply.
  - Country examples: easing EPL (Belgium, Spain, Türkiye); active labor market policies for skill mismatch (Czech Republic, Estonia, Lithuania); lowering labor tax wedge (Denmark, Finland, Slovenia).
- Fiscal-structural:
  - Tax and pension system reforms in AEs to reduce work disincentives and create a business-friendlier tax environment (Belgium, France, Germany, Ireland, Netherlands, Luxembourg, Portugal).
  - Public investment management and SOE governance reforms in CESEE and Western Balkans (Albania, Bosnia and Herzegovina, Moldova, North Macedonia, Belarus, Serbia, Romania, Croatia, Bulgaria).
- Business regulation and innovation:
  - Cut red tape, reduce barriers to firm entry and exit, streamline land use and spatial planning (e.g., Cyprus, France, Germany, Hungary, Slovenia, Austria, Czech Republic, United Kingdom).
  - Better-targeted R&D tax incentives and direct R&D public funding; digitalization of public administration; strengthen AI use where relevant (Denmark, France, Czech Republic, Iceland, Luxembourg, Sweden, Poland, Netherlands, Hungary, Latvia, Slovak Republic, Slovenia, Malta).

### Political economy and technical implementation challenges
- Political obstacles are often the primary barrier to reform, especially in CESEE countries where reforms more frequently touch harder-to-reform areas (governance, fiscal reforms).
- IMF staff assess political effort required as higher in CESEE than in non-CESEE countries across most reform areas; over half of governance and fiscal reforms in CESEE are assessed to require high political effort compared to about 15 percent in non-CESEE.
- Technical capacity challenges are significant in some areas (notably deepening domestic capital markets and CMU-related items), requiring capacity development for reform design, prioritization, and monitoring.
- Combining reforms into packages that generate broader net gains or build supportive constituencies can improve acceptability (example: pairing reforms that raise take-home pay with changes to job protection legislation).

### Interactions with EU-level reforms and complementarities
- Domestic and EU-level reforms can be complementary, substitutable, or additive:
  - Complementarity predominates: failure to implement at one level can blunt impact at the other.
  - Completing the Capital Markets Union (CMU) at the EU level greatly complements domestic efforts to deepen venture capital markets and access to risky capital.
  - Streamlining domestic business regulations amplifies the effectiveness of EU-level single market completion.
  - EU-level action to improve digital and energy infrastructure, intra-EU labor mobility (pension portability, recognition of qualifications), and removal of remaining intra-EU trade barriers can magnify domestic reform gains.
- Some EU-level measures may substitute for domestic action in product market deregulation, but domestic reforms remain essential to maximize the single market’s benefits and to avoid “gold plating” or incomplete transposition.
- Completing the single EU energy market would amplify domestic measures to scale up grids and storage and help diversify energy sources, particularly in countries hit by large price spikes.

### Quantified medium-term gains: methodology and caveats
- Stylized quantification framework: simulate an ambitious scenario where countries close 50 percent of their prioritized policy gaps vis-à-vis the frontier and apply medium-term (five-years-ahead) output elasticities from IMF and OECD studies (examples: governance, business regulations, capital and credit markets, labor market regulation, fiscal structural reforms).
- Where applicable, budget-neutral fiscal reform elasticities are used (e.g., a one percentage point of GDP cut in personal income taxation offset by a VAT increase of similar size).
- Innovation-related reforms are not quantified for the medium-term horizon because impacts are likely to materialize beyond five years or are not readily mapped to available indicators.
- Sources of underestimation:
  - Around one-third of the 220 country-level reform priorities could not be directly mapped to indicators; de jure indicators may understate de facto gaps; interactions between reforms and general equilibrium effects are not fully captured.
- Sources of overestimation:
  - A 50 percent gap-closure is ambitious for many countries; mapped indicator changes may overstate the scope of a specific policy action; average historical elasticities may not account for weak institutions or technical capacity.

### Illustrative quantified medium-term gains (5-year horizon)
- Aggregate regional illustrative results:
  - Implementing the identified prioritized reforms could raise GDP by around 9 percent in the Western Balkans, 7 percent in the CESEE region, and 5 percent in advanced economies excluding CESEE.
  - Using the stylized quantification suggests implementing all prioritized reforms could lift the level of GDP in the medium term by over 9 percent to GDP in the Western Balkans, close to 7 percent in the CESEE region, and nearly 5 percent in advanced economies excluding CESEE.
- Sectoral/area contributions (medium-term estimates):
  - Labor market and human capital reforms:
    - Could add over 2.5 percent to GDP in the WB and Advanced EU economies, and over 3 percent in CESEE economies.
  - Business regulation reforms:
    - Could add over 1 percent to GDP over the medium term across WB and CESEE economies, and up to 0.7 percent in EU AEs.
  - Fiscal structural reforms:
    - Could add up to 0.7 percent to GDP in the WB and AEs, and up to

*wpiea2025104-print-pdf - Executive Summary*

### 0.5 percent in the CESEE region. Gains would stem from strengthening pension system

### wpiea2025104-print-pdf - 0.5 percent in the CESEE region. Gains would stem from strengthening pension system

### Key quantified medium-term impacts
- Strengthening pension system sustainability could yield a 0.5 percent gain in the CESEE region.
- Credit and capital markets deepening reforms could add up to 0.3 and 0.6 percent to GDP over the medium term in AEs and CESEE countries, respectively.
- Direct medium-term output gains from prioritized governance reforms could range from 1 percent of GDP in CESEE to 5 percent in the Western Balkans.
- Indicator-based analysis suggests implementing IMF staff–identified reform priorities could raise output in the medium term by:
  - 5 percent in advanced economies excluding CESEE,
  - 7 percent in CESEE economies,
  - 9 percent in the Western Balkans.
- Regional chart values (Figure 8) shown in the source include: 9.3, 6.7, 4.9 (associated with Western Balkans, CESEE, AE exc. CESEE in the figure).

### Major reform areas and illustrative country examples
- Pension system sustainability
  - Examples: France, Luxembourg, Poland.
- Public infrastructure efficiency
  - Examples: Israel, North Macedonia.
- State-owned enterprise (SOE) governance and management
  - Examples: Croatia, Serbia.
- Credit and capital markets deepening priorities
  - Enhancing availability of risk-capital financing for innovation and startups: Netherlands, Portugal, Poland, Slovenia.
  - Strengthening domestic capital markets to better channel savings into investment: Ireland.
  - Advancing EU capital market and banking union reforms to enhance cross-border financing: Belgium.
- Governance and judicial reforms
  - Control of corruption: Moldova, Serbia.
  - Judiciary reforms: Montenegro, Cyprus, Belarus.
  - Judicial system efficiency improvements noted as particularly impactful in some AEs (example: Greece).

### Economic mechanisms and complementarities
- Governance reforms raise output directly by increasing expected returns on investment and indirectly by amplifying other reforms’ effects.
- Product market deregulation gains tend to be larger where governance quality is stronger (see Figure 9).
- Complementarities between domestic reforms and EU-level reforms (e.g., completing the Capital Markets Union) can magnify reform impacts.
- Exploiting synergies between product and labor market reforms helped past reform successes in AEs (examples: Australia, Ireland, the Netherlands).

### Implementation, sequencing, and political economy
- Careful sequencing can maximize gains and facilitate implementation; governance reforms that build capacity and create an enabling environment are often politically popular and amplify subsequent reforms.
- Country-specific conditions (economic cycle, political timing such as pre-election vs. normal times) shape reform success.
- CESEE countries face greater needs in hard-to-reform areas (notably governance) and often lack consensus-building institutional setups found in many AEs; building independent technical and advisory bodies is recommended.
- Early, transparent stakeholder engagement and combining reforms to ensure net gains across stakeholders can improve acceptability.
- Capacity development efforts will be necessary in some cases, especially in non-EU CESEE economies.

### Concluding assessment
- Unlocking Europe’s growth potential requires decisive actions to remove structural obstacles at regional and national levels.
- Domestic reform priorities span human capital and labor market reforms, fiscal structural reforms, business (de)regulation, innovation-supporting policies, and capital market deepening, with governance reforms being vital for non-EU countries.
- Potential output gains are sizeable but subject to wide uncertainty from multiple sources of over- and under-estimation.
- A coordinated push at national and EU levels can exploit complementarities (for example, between domestic capital market deepening and EU-level CMU completion) and increase the likelihood of successful reform outcomes.

*Source: wpiea2025104-print-pdf - 0.5 percent in the CESEE region. Gains would stem from strengthening pension system*

### Annex I. Calculating Policy Gaps

### Annex I. Calculating Policy Gaps

### Data sources and indicator construction
- Comprehensive database of structural indicators constructed from available data from the IMF, OECD, World Bank, Fraser Institute, Eurostat, European Commission, World Economic Forum, WTO, Global Trade Alert, and IHS Markit.
- All indicators are consistent with the IMF's Third-Party Indicators (TPI) Guidelines.
- The Worldwide Governance Index used is perception-based.

### Frontier definition, normalization, and aggregation
- The frontier is defined as the average of the top-2 most growth-friendly policy settings within the group of European countries and the United States, abstracting from other key (social, environmental) objectives of structural policies.
- Policy gaps for each country are computed by comparing their performance on each indicator with the respective frontier.
- Indicators are normalized to a 0-100 scale where 100 denotes the frontier.
- After rescaling each indicator, the distance to the frontier is calculated and aggregated for each broad structural policy area.
- Given that the frontier is constructed as the average of the two top performers, when they have different values, the single top performing country will feature a normalized value above 100.

### Caveats and limitations
- Absence of indicators for some structural policy areas and specific countries.
- Indicators sometimes focus on a mix of outcomes and actual policies in certain areas (e.g., on education or innovation).
- Incomplete information captured by available indicators (e.g., de jure rather than de facto stances).
- Heatmap is mostly based on 2022, with some exceptions depending on the variable and the source; therefore it does not capture most recent developments in the various policy areas, such as trade policy.
- Some surveys are only available in certain years.
- In Fraser data sample, Europe excludes KOS, and SMR. In WGI data sample, Europe excludes BIH, KOS, MKD, MNE, SMR, and SVK.
- Regional numbers are simple averages.

### Structural policy areas (classification)
- Governance
  - Using the Worldwide Governance Indicators (WGIs) to assess quality and effectiveness of governance systems.
- External sector
  - Measures economic freedom in trade and finance: tariff and non-tariff barriers, data on FDI restrictions, measure of aggregate trade restrictions (MATR), number of newly implemented trade or FDI measures (net harmful-liberalizing), mean tariff rate.
- Business regulation
  - Assesses regulatory burden (reporting, permits, licenses), nepotism and discrimination in public administration, barriers to entry in services and network sectors, firm entry and exit rates.
- Innovation and R&D
  - Measures R&D tax incentives, digital economy and society index, innovation activities, investment in ICT, AI preparedness for adoption, percent of firms using advanced digital technologies, percent of firms introducing new products and processes.
- Labor market and human capital
  - Growth-friendliness of selected labor market regulations and quantity/quality of human capital: employment protection legislation (EPL), strictness of employment protection, hiring and firing regulations, centralized collective bargaining, labor tax wedge, skill mismatches, easing of hiring foreign labor, occupational entry regulation and subcomponents, labor force participation (total, 15+; female, 15+), human capital index, years of schooling, PISA score.
- Credit and capital markets
  - Indicators on robustness, accessibility, and health of financial systems: central bank independence, measures of non-performing loans, bank deposits in privately owned banks, percent of firms financially constrained, VC investments (% of GDP), financial markets index, financial markets depth index, stock market capitalization (% of GDP).
- Fiscal structural
  - Growth-friendliness of fiscal policies, effective retirement age, quality of infrastructure supporting economic activities, focus on effects of budget-neutral fiscal structural reforms on medium-term (potential) output.

### Quantitative summaries and heatmap excerpts
- Panel AI.1 title: "Closeness to Most Growth-Friendly Settings in Macrostructural Areas by Region and Sector — Distance to Frontier in Selected Structural Policy Areas, 2022 (Percent relative to frontier)". (Chart depiction included in source.)
- Structural Reform Gaps: Heatmap by Country Groups (Percent relative to frontier) — EUR includes 43 European countries. AE ex. CESEE comprises AUT, BEL, CHE, CYP, DEU, DNK, ESP, FIN, FRA, GRB, GRC, IRL, ESL, ISR, ITA, LUX, MLT, NLD, NOR, PRT, and SWE. CESEE comprises ALB, BGR, BIH, BLR, CZE, EST, HRV, HUN, LTU, LVA, MKD, MDA, MLD, MNE, POL, ROU, RUS, SRB, SVK, SVN, and TUR.
- Aggregated alignment figures (as presented in the heatmap table):
  - Governance73618580
  - External sector87849085
  - Business regulation67637089
  - Innovation65587084
  - Labor and human capital78758086
  - Credit and capital markets584767101
  - Fiscal structural74678188

- Table AI.1 provides granular indicator-normalized values and top performers (Frontier 1, Frontier 2) across structural areas; select entries as presented:
  - Governance section aggregates: 73 80 81 61 85 80
  - Example Governance subcomponents (I_1 to I_6) with values and top countries/dates/sources, e.g.: I_1Political Stability758483688366ISLSMR2022WGI; I_2Corruption667273528075DNKFIN2022WGI; I_3Voice and Accountability788587659180NORCHE2022WGI.
  - External sector aggregate: 87 91 91 84 90 85; subcomponents include measures such as Means tariff rate9696969597100ISLUSA2022 (WTO - World Tariff Profiles) and others.
  - Business regulation aggregate: 67 68 68 63 70 89; subcomponents include entry and exit rates and various survey-based indicators.
  - Innovation aggregate: 65 65 65 58 70 84; subcomponents include Digital Economy and Society Index7676786682FINDNK2022Eurostat and AI preparedness for adoption8285867688982023IMF with further subcomponents (IV_5a to IV_5d).
  - Labor and human capital aggregate: 78 78 78 75 80 86; subcomponents include strictness of employment protection7978787979103USACHE2022OECD and human capital measures such as Human capital index878889829189ISLFIN2024UNDP and PISA score919393889396ESTIRL2023OECD.
  - Credit and capital markets aggregate: 58 60 62 47 67 101; examples include VC investments (% of GDP)141414917153USAEST2022OECD and Financial Markets Index424650146999CHEUSA2023IMF.
  - Fiscal structural aggregate: 74 75 75 67 81 88; subcomponents include Average labour market exit age747272687788ISLISR2022OECD; EC and Direct taxes (% of GDP)484848366282DNKNOR2024IMF.

### Annex II — Evolution of structural policy gaps (method and key patterns)
- Method for evolution analysis:
  - Use indicators with roughly 20 (annual) observations.
  - Frontiers considered time invariant for simplicity.
  - Aggregation of normalized indicators for each broad structural policy area.
  - Due to data availability limitations, the final set of indicators in the time-series exercise is smaller than the cross-section dataset.
  - Governance: all six indices of WGIs used.
  - Business regulations: regulatory burden and impartial public administration sub-components used.
  - Labor market and human capital: indicators grouped into labor market regulation and human capital buildup; labor force trends included (total participation, female participation, hiring of foreign labor).
  - Credit and capital markets: focus on financial market development via the financial markets index and the financial markets depth index.

- Stylized findings on progress over the past two decades (Figure AII.1 referenced in source):
  - Progress has been uneven across areas.
  - Governance gaps have persisted with little improvement, particularly in CESEE countries.
  - Advanced economies achieved early improvements in business regulation during the 2000s (and earlier in the 1990s) with digitalizing business registration (e.g., Germany, Ireland, Luxembourg) and one-stop shop initiatives (e.g., Germany, United Kingdom) during the 2010s, but progress has plateaued since then.
  - On labor market regulations, EPL has been eased in advanced economies (e.g., France, Italy, Portugal, Spain) and female labor force participation rates trended up across all country groups, partly due to reforms and changing norms.
  - Human capital indicators show only slow improvement since the mid-2010s, with progress on the human capital index and years of schooling but greater skill mismatch.
  - Credit and capital markets show limited overall progress following extensive deregulation and deepening in the two decades prior to the Global Financial Crisis.

*Source: Annex I. Calculating Policy Gaps, wpiea2025104-print-pdf — IMF Working Paper content provided.*

### Annex III: National-Level Reform Priorities in

### Annex III: National-Level Reform Priorities in Europe — Stylized Facts

### Overview: Scope and Methodology
- Country-level priorities are ranked from 5 (highest priority) to 1 (lowest priority); a value of 0 is used if the reform area is not mentioned. In cases of multiple reforms in the same area, the highest-ranked priority is used.
- AE ex.CESEE comprises AND, AUT, BEL, CHE, CYP, DEU, DNK, ESP, FIN, FRA, GRB, GRC, IRL, ESL, ISR, ITA, LUX, MLT, NLD, NOR, PRT, SMR, and SWE.
- CESEE comprises 11 new member states (BGR, BIH, CZE, EST, HRV, HUN, LTU, LVA, POL, ROU, SVK, and SVN), and 10 non-EU countries (ALB, BIH, MKD, MNE, KOS, and SRB, MDA, BLR, RUS, and TUR).
- Source: IMF staff’s assessment.

### Broad priority rankings (heat map averages)
- Numeric averages from Table AIII.1 (broad reform areas by country groupings):
  - EUR: Labor and human capital 3.5, Fiscal structural 2.5, Business regulation 1.9, Governance 1.5, Innovation 1.3, Credit & capital markets 1.1, Other areas 1.1 (presented as "EUR3.52.51.91.51.31.11.1" in source).
  - AE ex.CESEE: 3.7, 2.7, 2.0, 0.5, 1.2, 1.2, 1.5 (presented as "AE ex.CESEE 3.72.72.00.51.21.21.5").
  - CESEE: 3.2, 2.2, 1.8, 2.6, 1.5, 1.0, 0.7 (presented as "CESEE        3.22.21.82.61.51.00.7").
  - CESEE_NMS: 3.7, 1.6, 1.6, 1.5, 2.4, 1.1, 0.4 (presented as "CESEE_NMS3.71.61.61.52.41.10.4").
  - CESEE_Non-EU: 2.7, 2.9, 1.9, 3.7, 0.6, 0.8, 1.1 (presented as "CESEE_Non-EU 2.72.91.93.70.60.81.1").

### Labor and human capital — Highest overall priority
- Labor market and human capital reforms comprise 30 percent (66 reforms) of all reforms (220).
- Broad country coverage: 43 out of 44 countries have at least one labor/human capital reform among their priorities.
- Regional emphasis and examples:
  - Advanced economies (AEs) and NMS: focus on enhancing education and training (Belgium, France, Italy), addressing skill mismatch (Austria, Greece, Norway, Sweden), and mitigating shrinking labor force (Germany, Switzerland, Netherland).
  - AEs: improving labor market flexibility appears more prominently (Belgium, San Marino, Spain).
  - NMS: focus on labor shortages (Bulgaria, Croatia, Poland), skill mismatches (Lithuania, Estonia, Slovak Republic), and easing EPL to a lesser extent (Latvia, Türkiye).
  - Western Balkans: labor reforms rank lower, focusing on increasing labor force participation (Moldova, Montenegro) and addressing skill mismatches (Albania, North Macedonia).

### Fiscal structural reforms — Second-ranked priority in many groups
- Fiscal structural reforms rank second among priorities in both AE economies and non-EU CESEE countries.
- AEs: recommendations prioritize tax policy (e.g., reducing labor tax wedges in Belgium, Germany, Ireland, Netherland, Norway), less progressive corporate taxation (Portugal), pension sustainability (raise early retirement age in Denmark, Norway; raise effective retirement age in Belgium, Luxembourg, Switzerland), and improving infrastructure (Andorra, Germany, Ireland, Iceland, Israel).
- Non-EU CESEE: greater focus on SOE reforms (Belarus, Serbia, Russia) and improving public investment quantity and quality (Albania, Bosnia and Herzegovina, Moldova, North Macedonia, Russia, Serbia).
- CESEE NMS: mix of pension reforms (Czech Republic, Poland), public investment management improvements (Bulgaria, Croatia), and SOE reforms (Romania, Croatia).

### Business regulation (de)regulation — Third overall
- Business (de)regulation appears in the top-5 reform priorities in 65 percent of AE countries and 57 percent of CESEE countries.
  - Western Balkans: 5 out of 6 countries list it in top-5.
  - NMS: 5 out of 11.
  - Other non-EU CESEE: 2 out of 4.
- Common reform topics:
  - Reduce administrative and regulatory burdens (Germany, Portugal, Slovenia).
  - Digitalization of government services (Cyprus, Kosovo, North Macedonia).
  - Ease product market regulation and enhance competition (Austria, Finland, Türkiye; Croatia, Hungary, Luxembourg).
  - In some AEs, reduce stringency of spatial planning to incentivize construction (United Kingdom).

### Governance — Particularly important in CESEE non-EU
- Governance is ranked fourth on average across Europe but is the highest-ranking area in non-EU CESEE countries.
- Most widespread priorities in CESEE: tackling corruption (Bulgaria, Hungary, Moldova) and strengthening the judicial system and rule of law (Albania, Bosnia and Herzegovina, Kosovo).
- Judiciary reforms also important in several AEs (Cyprus, Israel, Italy).

### Innovation, R&D, and digitalization — Relatively higher in AEs and NMS
- NMS priorities: adoption of digital technologies in public sector (Czech Republic, Hungary, Slovak Republic, Slovenia), support innovation via tax incentives or direct funding (Croatia, Czech Republic, Estonia, Slovak Republic), invest in digital infrastructure (Czech Republic, Poland).
- AEs priorities: enhance effectiveness of R&D support (Denmark, Iceland, Luxemburg, Malta, Sweden), invest in ICT infrastructure, strengthen AI use, deepen SME digitalization, and enhance cybersecurity (Luxembourg, Malta, the Netherlands).

### Credit and capital market reforms — Lower average priority
- Rank sixth on average; featured among priorities in 23 countries with relatively lower rankings.
- More pronounced importance in AEs, and comparatively higher priority across the euro area (linked to steps toward completing the CMU at the EU level).
- Common reforms: financing for innovation and improving access to finance for SMEs.
  - AEs: develop risk capital financing and venture capital (Austria, Belgium, Germany, Finland).
  - CESEE: focus on SME finance, risk capital financing (Latvia, Czech Republic, Poland), and easing financial conditions (Lithuania, Romania, Slovenia).

### Other areas — Energy and housing
- 18 other priorities identified in energy sector and housing market areas; most (13 reforms) apply to AEs.
- Examples: energy sector reforms (Malta, Norway, Cyprus); green transition policies (Netherlands, Estonia, Switzerland, Iceland); easing constraints in housing supply and ownership (Ireland, San Marino).

### Quantifying output gains from reforms — Annex IV framework
- Stylized quantification framework assesses medium-term (5-year) output gains of prioritized reforms.
- For quantifiable reforms: output effect = size of structural policy gap closed (relative to frontier) × medium-term output (5-year ahead) elasticity.
- Simulation scenario: countries aim to close 50 percent of their policy gaps with respect to the frontier in each of their top-5 reform priority areas.
- Output elasticities sourced from prior IMF studies on governance, business regulations, labor markets, innovation, and fiscal reforms; where unavailable, growth accounting is used.
- Quantification approaches:
  - Baseline: combine prior IMF work (Assumption B) with OECD results (Assumption C); IMF estimate used when available, otherwise OECD estimate applied.
  - Assumption B: only prior IMF work.
  - Assumption C: only prior OECD work.
- Coverage of prioritized reforms in the quantification exercise:
  - Western Balkans: 43-67 percent of prioritized reforms covered (depending on scenario).
  - CESEE: 54-70 percent covered.
  - AEs: 52-72 percent covered.

### Estimated regional medium-term GDP gains (closing 50 percent of prioritized policy gaps)
- Implementing all prioritized reforms could lift the level of GDP in the medium term (5 years) by:
  - about 8-10 percent of GDP in the Western Balkans,
  - 5-8 percent in the CESEE region,
  - 5-6 percent in AEs excluding advanced CESEE economies.
- These regional estimates are GDP-weighted averages and are affected by the share of prioritized reforms that could be quantified.
- Important caveats:
  - Estimates assume common output elasticities across countries and do not capture country-specific characteristics.
  - Potential sources of under- and over-estimation exist beyond limitations and uncertainty in underlying empirical studies.

### Representative empirical inputs and examples (Table AIV.1 highlights)
- Sample indicators and elasticities used (as presented in source table):
  - Innovation: Business sector R&D as a % of GDP — OECDAE, EM0.008; example numbers in table: AE0.026, EM0.036.
  - EPL — OECD Indicators of Employment Protection, Duval and Furceri, 2018 AE, EM0.003.
  - ALMP spending — IMF April 2016 WEO CH3 AE, EM0.003.
  - Tax wedge: couple, single earner, 2 children — OECD Tax Statistics; IMF April 2016 WEO CH3 AE, EM0.004.
  - Labor force participation, total, 15+ — World Bank; example effect illustrated: 8.057 +1.55 (in table).
  - Labor force participation, female, 15+ — World Bank; example: 10.253 +0.294.
  - Pisa score — OECD; OECDAE, EM0.011; example: 20.950 +0.06.
  - Human capital index — UNDP; OECDAE, EM0.094; example: 0.057 +0.09.
  - Financial Markets Depth Index — IMF; MF 2019 WEO CH3 AE, EM0.035; example baseline values: 0.288 and 0.35.
  - Legal retirement age — OECD Economic Outlook; OECDAE, EM0.006; example: 1.607 +0.159.
  - Infrastructure spending — IMF, Haver; IMF Apr. 2020 Fiscal Monitor CH2 AE, EM0.600; example: 0.950 +0.197.
  - Direct taxes — IMF; PIT, CIT and social security contributions, % of GDP; Acosta-Ormaechea and Yoo, 2012 AE, EM0.065; example effect: -5.846 +0.284.
  - ETCR indicator — OECD Product Market Regulation Indicator; OECDAE, EM0.010; example: -1.017 -0.033.
- Aggregate example totals reported in table: Total5.37   1504.85    1126.31   131 (as presented in source table).
- Notes from table:
  - 1/ The estimated GDP impact of each reform in a region is the regional weighted average. The baseline scenario estimates combine prior IMF work (Assumptions B) with OECD results (Assumption C).
  - 2/ Typical policy change is computed as average change over a 2-year window when the policy indicator moves in a direction favourable to potential output in both years.

*Source: IMF staff assessment and calculations as presented in Annex III and Annex IV of Europe’s National-Level Structural Reform Priorities (Working Paper No. WP/2025/104).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025104-print-pdf.pdf_