Output Losses in Europe During COVID-19: What Role for Policies?

IMF Working Papers, July 1, 2022

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We use a decomposition methodology to analyze the factors underlying the differentiated output losses of European countries in 2020. Our findings are fourfold:
- First, 2020 growth outcomes can be explained by differences in mobility, underlying growth trends, and pre-pandemic country fundamentals.
- Second, fiscal and monetary policies helped alleviate output losses during the pandemic in all European countries but to a varying extent.
- Third, shallower recessions in emerging market economies in Europe can be attributed to higher underlying growth and younger populations.
- Fourth, fiscal multipliers were higher in countries where above-the-line measures accounted for a larger share of the total fiscal package, the size of the total fiscal package was smaller, and inequality and informality were greater, as well as in countries with IMF-supported program during the pandemic.

Approach: decomposition methodology to attribute differentiated 2020 output losses across European countries.
Key explanatory factors emphasized:
- mobility differences
- underlying growth trends
- pre-pandemic country fundamentals
- fiscal and monetary policy interventions
- demographic factors (younger populations in emerging market economies)
- structural factors (inequality and informality)

Fiscal and monetary policies had a mitigating effect on output losses across all European countries, though the extent varied by country.
Fiscal multiplier heterogeneity suggests policy design matters:
- Larger shares of above-the-line measures in fiscal packages associated with higher fiscal multipliers.
- Smaller total fiscal packages associated with higher fiscal multipliers.
- Greater inequality and informality associated with higher fiscal multipliers.
- Presence of an IMF-supported program during the pandemic associated with higher fiscal multipliers.
Emerging market economies’ shallower recessions point to the cushioning role of higher underlying growth and younger populations.