## Toward a More Resilient Europe

_IMF Blog, July 13, 2020_

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## Bibliographic details
- Authors: Poul M Thomsen
- Published: July 13, 2020

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### Macroeconomic outlook and projections
- Based on updated IMF projections released last month, real GDP in the European Union is expected to:
  - contract by 9.3 percent in 2020
  - grow by 5.7 percent in 2021
  - return to its 2019 level only in 2022
- Recovery speed conditional:
  - If an effective treatment or vaccine for COVID-19 is found, the recovery could be faster.
  - The opposite would hold true if there are large new waves of infection.

### Divergent initial conditions and social impacts
- Several countries entered the crisis with entrenched product and labor market rigidities, holding back growth potential.
- Economies dependent on industries tightly integrated into cross-border supply chains are deeply vulnerable to supply disruptions.
- In several large euro area countries, slow growth has coexisted with high public debt and limited fiscal space, constraining shock absorption.
- Europe’s high-debt countries will bear the brunt of the social impact:
  - Public debt burdens have historically ratcheted up in bad times and stabilized—but not fallen—in good times.
  - Outcomes include high unemployment and emigration, especially among the youth, and a trend toward less-progressive taxation, while pensions have largely been protected.
  - COVID-19 “calls for protection of the elderly but leaves the young shouldering much of the cost,” complicating demographic challenges.

### Fiscal policies for a transforming Europe — findings and recommendations
- Immediate and continued fiscal support remains vital to preserve economic capacity and allow prompt bounce-back from short, extreme disruptions.
- As dislocations persist and resources become stretched, policymakers should:
  - Reposition national fiscal policies for a longer crisis.
  - Think ahead and reassess how best to use limited fiscal space without unduly burdening future taxpayers.
  - Carefully target support for firms and households in the high-debt countries; “the longer the slump, the greater will be the need to carefully target fiscal support in the high-debt countries.”
- Recognize that the post-crisis economy may look very different from 2019 and that permanent change and investment in resilience are required.
- Public investment priorities:
  - Greening
  - Digitalization
  - Other aspects of resilience

### Reallocation, labor and corporate policies
- Public funds must steer needed resource reallocation while protecting the most vulnerable.
- Labor and product market guidance:
  - Focus on flexibility.
  - Ensure short-time work schemes that tie workers to employers are kept temporary.
- Corporate sector guidance:
  - Support programs must embed incentives that encourage uptake by firms with strong business plans and discourage uptake by firms on a path to failure.
  - As liquidity needs become solvency needs, state aid may need to include equity injections; various European initiatives are already moving this way.
- Policy clarity:
  - Clarity on carbon pricing is important to set the stage for a climate-friendly recovery of private investment.

### Role of joint EU fiscal action
- Strong case for joint EU fiscal action given divergent national conditions.
- The “Next Generation EU” package can improve outcomes for the single market by focusing funds on countries:
  - hardest hit by the pandemic
  - with less fiscal space
  - with lower income levels
  - with greater environmental damage
- Conditions and limits:
  - EU funds should act as a catalyst, not a substitute for structural reforms and prudent fiscal policies.
  - With fundamental limits to the size of any joint EU assistance, responsibility for ensuring sustainable debt burdens remains at the national level.
  - All countries will need to pair upfront stimulus provision with credible medium-term policy plans, even with low borrowing costs.

### Preserving financial stability and ensuring credit supply
- Monetary policy stance:
  - Through the acute crisis phase and beyond, monetary policy must remain strongly accommodative.
  - Policy rates must remain at extraordinarily low levels for now, supported by net asset purchases that implicitly look to bond spreads and issuance volumes.
  - The European Central Bank’s strategic review remains essential to reflect on missed inflation objectives, demarcation from fiscal policy, the global decline in equilibrium real interest rates, monetary instruments, and more.
- Banking and credit supply:
  - For now, most European banks have the capital and liquidity needed to expand credit.
  - As the crisis wears on, many defaults could erode bank buffers and lending capacity.
  - Risks: the longer the pandemic, the greater the credit disruption, and the slower the post-pandemic recovery.
  - Supervisory priorities:
    - Prepare banks for the coming test.
    - Uphold robust lending standards.
    - Provision for losses fully and transparently.
    - Pursue restructurings of bad assets actively to preserve value.
    - Bank recapitalization may prove necessary in some cases.

### A calibrated policy mix — overarching goals
- Transition from broad emergency measures to an increasingly calibrated approach that balances immediate imperatives with longer-term burdens on young taxpayers and new generations.
- Continue responsible policymaking while pursuing difficult reforms with renewed determination.
- Overarching policy goals (twofold):
  - to save lives now
  - to ensure that Europe emerges with a greener and safer economy for the long run, where future generations can thrive equitably

*Source: Toward a More Resilient Europe — Poul M. Thomsen, July 13, 2020*

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## References

- [عربي](https://www.imf.org/ar/News/Articles/2020/07/13/blog-toward-a-more-resilient-europe)
- [, 中文](https://www.imf.org/zh/News/Articles/2020/07/13/blog-toward-a-more-resilient-europe)
- [日本語](https://www.imf.org/ja/News/Articles/2020/07/13/blog-toward-a-more-resilient-europe)
- [Português](https://www.imf.org/pt/News/Articles/2020/07/13/blog-toward-a-more-resilient-europe)
- [updated IMF projections](https://blogs.imf.org/2020/06/24/reopening-from-the-great-lockdown-uneven-and-uncertain-recovery/)
- [Digitalization](https://blogs.imf.org/2020/07/01/digital-financial-inclusion-in-the-times-of-covid-19/)

_Source: https://www.imf.org/en/blogs/articles/2020/07/13/blog-toward-a-more-resilient-europe_