From Vaccines to V-Shaped Recovery in Europe
IMF Blog, April 14, 2021
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Bibliographic details
- Authors: Alfred Kammer
- Published: April 14, 2021
Overview
- One year into the pandemic, Europe faces new waves of infection and new lockdowns, but "safe and effective vaccines are now available."
- "While the pace of vaccination is still slow, an end to the pandemic is in sight."
- Recovery is "halting and uneven": industrial production has returned to pre-pandemic levels, but the service sector is still contracting.
Economic projections
- "We project that Europe’s economic growth will rebound by 4.5 percent this year."
- "Assuming that vaccines become widely available this year and throughout next, as still expected, growth is projected at 3.9 percent in 2022."
- This path "will bring Europe’s output back to its pre-pandemic level but not to the path expected before the pandemic."
Risks and economic scarring
- Prime near-term concerns: "Virus mutations and vaccination delays."
- Biggest medium-term worry: economic scarring—"output that never recovers because people who lost jobs during the pandemic cannot find new ones."
- Channels for scarring identified: unrecovered gaps in education and worker training; deferred productive investment remaining shelved; resources remaining in declining sectors rather than shifting to expanding ones.
Policy priorities
- "Number one priority is to boost vaccine production." Rationale: Europe is a hub for vaccine production and exports; investing in increased vaccine production "will pay off."
- Faster vaccine production must be coupled with national efforts to "quickly distribute these vaccines, getting them out of factories and to people."
- Fiscal policy should play an increasing role where monetary policy—with interest rates at their lowest—becomes less effective in boosting output.
- Support should shift in nature as recovery progresses:
- Labor market policies: job retention policies "supported 68 million jobs" at their peak; should remain while activity is soft but "should gradually shift toward helping workers find new opportunities in emerging sectors."
- Examples: policies that promote job search, enhance training and reskilling programs, and provide well-targeted hiring subsidies.
- Corporate sector support: "should become more targeted toward viable firms and focus on strengthening firms’ solvency instead of simply providing liquidity."
- Based on data through fall of 2020, estimate that "viable firms will require an increase in equity equivalent to 2-3 percent of GDP to remain solvent, with 15 million jobs at risk."
- Financial policies: continue to enable banks to keep credit flowing; nonperforming loans need to be adequately provisioned; banks should be given time to replenish capital buffers as crisis measures expire.
Fiscal booster shot — findings from the Regional Economic Outlook Update for Europe
- Suggested additional measures: transfers targeted at households in need; hiring subsidies to reintegrate the unemployed faster; temporary investment tax credits to bring forward private investment; equity support schemes for viable firms in need of capital.
- Emphasis: "This is not a call for a package that boosts spending indiscriminately and permanently, but for a well-targeted and temporary shot in the arm of both demand and supply."
- Quantitative findings:
- Additional support "set at a level of 3 percent of GDP over 2021−22—could lift GDP by about 2 percent by the end of 2022."
- "Over the medium term, the robust supply side effects of these measures would cut the impact of scarring by more than half."
- Additional benefits noted:
- Costs "would pale in comparison to the benefits."
- The package would "offer greater help for low-income households and would entail fewer side effects than additional monetary stimulus."
- It "would bring inflation closer to target in many countries and help rebuild monetary policy space."
- Recommendation to redeploy fiscal support toward accelerating economic transformation through infrastructure investment, "especially in green and digital technologies."
- Note on EU policy: "The European Union has broken new ground with the creation of the Next Generation EU plan, which will provide centralized support to member states—over half in the form of grants." Potential: this program "will accelerate growth and increase productivity, especially if coupled with growth-enhancing structural reforms."
Conclusion
- With expanded vaccine production and distribution, continued support for lives and livelihoods, and targeted policies to combat scarring, Europe can achieve a "V-shaped recovery" that is "fairer, greener, smarter, and more resilient."
Source: From Vaccines to V-Shaped Recovery in Europe (IMF Blog, April 14, 2021).