BRUSSELS – Since 2020, European Union Member States have been confronted by a series of overlapping global crises from the COVID-19 pandemic to persistent cost-of-living increases, which have lowered disposable income, dampened confidence, triggered banking sector and financial market volatility and tightened financing conditions, says a new World Bank report published today. In addition, high inflation has led to one of the most pronounced and synchronous monetary policy tightening cycles in recent years. To confront these challenges, EU countries will need to pursue a carefully calibrated macroeconomic policy mix that continues to rein in inflation while avoiding additional financial market volatility and protecting the poorest people.
The World Bank’s latest European Union Regular Economic Report (EU RER): “Energizing Europe – Part 1: Inclusive Growth – Inflation Chipping Away Income Gains,” analyzes economic developments and prospects among EU Member States with a focus on inclusion. It highlights that growth in the EU is expected to sharply decelerate in 2023, as high inflation and the accumulating effects of tight monetary policy dampen economic activity. While inflation has been showing recent signs of easing across many EU countries, it nevertheless remains high, especially in some of the poorer EU economies amid particularly high food inflation. Despite ongoing fiscal support, the adverse impact of high inflation on real disposable income has disproportionately affected the region’s poorest.
“The outlook for the EU economy remains challenging,” said Gallina A. Vincelette, World Bank Regional Director for the EU countries. “While rising prices affect everyone, low-income households are impacted the most as they spend cardinal share of their incomes on food and energy. Targeted policy interventions and social safety nets are important in shielding the poor and vulnerable from economic shocks such as the current cost-of-living crisis.”
Although the labor market remains strong, with unemployment rates near record-lows in the EU, the recovery in employment continues to be uneven, leaving some groups of the population behind. Employment remains below pre-pandemic levels for part-time workers and youth, as well as for those with less education or for those in more physically demanding jobs.
Survey data from Romania, Croatia, and Bulgaria find that households are struggling to cope with the higher cost of living despite fiscal support and social safety nets. Across the countries surveyed, the spring and summer of 2022 was marked by an increasing proportion of households reporting that it was harder to make ends meet than before the pandemic. In Romania, the number of reporting households nearly doubled between spring 2021 and summer 2022, rising from 37 percent to 63 percent. This increasing trend was repeated in Croatia (33 percent to 58 percent) and Bulgaria (33 percent to 46 percent). These trends have likely continued into 2023 alongside persistent inflationary pressures.
Governments have continued to step in to shield their economies and people from the cost-of-living crisis, but support measures have varied considerably, depending on exposure to spillovers from Russia’s invasion of Ukraine and the availability of policy buffers. Most measures have been in the form of untargeted price support, such as price controls and subsidies, which are suboptimal as they distort price signals for consumers and producers. Social safety nets are vital in protecting households from various risks; yet these programs are still not sufficient to support the poorest and most vulnerable.
Well-targeted fiscal support can also bolster efforts to realign spending with revenues, especially as policy makers embark on much needed and delayed fiscal consolidation. The challenge, however, is to ensure that the economic slowdown is not exacerbated by fiscal consolidation efforts—as was the case following the global financial crisis. Countries can balance these priorities by reducing untargeted tax cuts, strengthening tax administration, broadening the tax base, and cutting subsidies on fossil fuels. These subsidies are costly and support demand for environmentally damaging and carbon-intensive energy sources, which erodes the incentive for energy conservation and creates tension with longer-term climate goals. EU countries will need to restore their macroeconomic policy buffers, while protecting the vulnerable from future shocks.
The World Bank’s Regional Action in Europe and Central Asia (ECA)
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