Regional Economic Outlook: Europe

October 2020

Full report

Full Text

Back to Top

Executive Summary

Download the full report


The coronavirus disease (COVID-19) pandemic is exacting a severe social and economic toll on Europe. By mid-October 2020, more than 240,000 people have lost their lives in Europe, while nearly 7 million people are estimated to have been infected with the virus. Early spring lockdowns, voluntary social distancing, and associated disruptions in supply chains and lower demand led to a record collapse in economic activity. Real GDP fell by about 40 percent in the second quarter of 2020 (annualized quarter-over-quarter), with deeper contraction in advanced Europe, where the virus spread first, relative to emerging Europe.


The pandemic’s toll on Europe could have been much larger without the unprecedentedly strong and multifaceted response to the crisis. Across Europe, governments deployed large fiscal packages to support households and firms, with job retention programs preserving at least 54 million jobs. Central banks embarked on substantial monetary easing through both conventional and unconventional means, to support the flow of credit and prevent financial market disruptions. Macroprudential measures were also eased to cushion the impact of the crisis on both banks and borrowers. The European Union relaxed existing rules to accommodate increasing fiscal deficits and support to households and firms. In a strong display of solidarity, it is also mobilizing supranational resources to finance new anti-pandemic facilities and complement national fiscal policies.

Back to Top

Chapter 1

The coronavirus disease (COVID-19) pandemic has caused dramatic loss of life and major damage to the European economy, but thanks to an exceptionally strong policy response, more devastating outcomes have been avoided. European real GDP is now projected to contract by 7 percent in 2020, its biggest decline since World War II, followed by a rebound of 4.7 percent in 2021. But the recovery’s strength will depend crucially on the course of the pandemic, people’s behavior, and the degree of continued economic policy support. While the lifting of lockdowns led to a major rebound of the European economy, it also led to a new surge in infections, posing the risk of a virulent second wave that could dampen the recovery. As long as the recovery is not entrenched and prospects for a vaccine continue to improve, there is a good case for continuing with the various policies that subsidize jobs. These programs are estimated to have reached at least 54 million jobs and scaling them back prematurely could lead to a wave of bankruptcies and widespread social hardship. But over time, support will need to shift increasingly to people and public goods, to foster structural transformation and the required reallocation of resources away from contact-intensive activities. To sustain the recovery from the pandemic, policies should try to address long-lasting challenges, such as low productivity growth, transition to a low-carbon economy, and increasing inequality.

Back to Top

Chapter 2

Europe was among the regions most severely affected by corona virus (COVID-19) in the early months of 2020. Countries responded with stringent lockdown measures designed to reduce transmission and flatten the infection curve in the face of overburdened care facilities. As the first wave of disease ebbed and the outbreak appeared controlled, most European countries started to reopen their economies. This chapter documents the different exit strategies followed across Europe and explores how reopening policies affected economic activity and subsequent infections. It finds that reopening measures led to a recovery in mobility but at the cost of some uptick in infections—an uncomfortable trade-off already documented in studies of lockdowns. However, the experience with reopening points to some novel dimensions of this trade-off. First, the increase in COVID-19 infections after reopening appears less severe in fatality rates. Second, a given reopening step is associated with a worse reinfection outcome in countries that started reopening earlier on the infection curve or that opened all sectors at a fast pace in a relatively short time.

Back to Top

Chapter 3

European firms are facing an unprecedented shock, but the policy response has also been unprecedented. This chapter seeks to quantify the potential impact of the coronavirus disease (COVID-19) crisis on corporate liquidity and solvency risks in Europe and examine the extent to which policy measures—as designed—could dampen these risks in 2020. Using detailed balance sheet and income statement data for millions of European companies, the chapter finds that job-retention programs, debt moratoria, grants, and loan guarantees could be effective in addressing corporate liquidity needs, especially in advanced European economies. At the same time, the ability of the announced policy measures to curb the increase in solvency risks appears more limited, especially for small and medium enterprises (SMEs), amid a projected rise in corporate indebtedness. Careful policy calibration will be needed to better support companies that are deemed viable in the longer term and to facilitate the orderly exit of firms that are unlikely to succeed in the post-pandemic economy.