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MIL OSI Translation. Government of the Republic of France statements from French to English –

Source: IMF in French

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Europe must continue to vigorously support the recovery

Alfred Kammer

October 21, 2020

The pandemic is hitting Europe hard. Over 240,000 people lost their lives. Millions more have been affected by illness, the loss of loved ones or a total upheaval in their jobs, businesses and daily lives.

The economic consequences of the pandemic are enormous. According to the forecasts of the last report on Regional economic outlook for Europe, Europe’s GDP will decline by 7% in 2020. The recovery will be uneven and partial. While real GDP is expected to rebound by 4.7% in 2021, it will remain 6.3% below the projections established before the pandemic, which represents a loss of GDP of nearly 3 trillion euros, which will not be largely recovered in the medium term.

The unprecedented measures, both in their speed and scale, that the authorities have taken have avoided even more dramatic repercussions. To take just one example, we believe that at least 54 million jobs have at one time or another been supported by job retention schemes in Europe. These have helped keep many families and businesses afloat during this difficult time. The measures taken at European level have also played a major role. The risks remain significant and increase with the intensification of a second wave of contamination. In view of these many uncertainties, it is important to continue to resolutely support the recovery.

The European response

Decisive government action has protected the economy’s income and productive capacity.

Most of these measures fall under fiscal policy. We estimate that the average amount of discretionary fiscal measures announced for 2020 represents 6.2% of GDP for advanced European countries and 3.1% of GDP for emerging countries. This discretionary support has added to the strong automatic stabilizers that Europe has. A large part of these measures have been used to finance job retention programs and to provide liquidity to businesses. These programs have played a major role in limiting job destruction and preventing a cascade of bankruptcies and bank closures.

Monetary policies and macroprudential measures have played an important role in providing favorable financing conditions for all sectors of the economy. Rate cuts, asset buybacks, easing the conditions under which banks can obtain liquidity, and reducing banks’ capital and liquidity buffers have helped to secure the flow of credit, especially for small businesses. and medium-sized enterprises.

The extremely accommodating monetary policies pursued by the European Central Bank and other countries holding reserve currencies have had significant repercussions internationally, with easing monetary conditions including for emerging European countries. The IMF has provided emergency financing to six European countries.

These interventions have helped to avert an even deeper recession and long-term economic scars in Europe. Without the measures that have been taken and the strong support from the EU, an additional 3 to 4 percentage points of GDP might have been lost in 2020.

Lessons and challenges

Leaders must do whatever it takes to stem the pandemic and its economic damage, and not withdraw support measures prematurely so as not to repeat the mistake of the global financial crisis. Over time, aid should become more targeted and flexible, in order to facilitate the reallocation of resources and the transformation of the economy. It is imperative to continue to protect the health of populations, in particular through international cooperation.

Income support and job retention programs should remain in place. As the pandemic evolves and the economy recovers, they will need to be adapted, shifting from job protection mechanisms to worker supports, especially through programs. of reconversion.

For businesses, it is now necessary to go beyond providing cash to ensure that insolvent but viable businesses can continue to operate. Our report shows that in advanced countries, nearly a third of insolvency cases due to the pandemic could be resolved through the announced measures, such as wage subsidies, donations or tax breaks. In emerging European countries, this figure is only about a quarter. There is therefore a need to facilitate rapid debt restructurings, whether or not they are bankrupt, or, in some cases, to make capital available to viable enterprises.

Long-term inflation, usually anchored at or below a target rate, and the considerable level of slack production capacity suggest that central banks should continue their very accommodative monetary policy. Macroprudential easing should only be gradually reversed.

At the start of the pandemic, European banks had strong capital and liquidity buffers and weathered this unprecedented shock. Their resilience, combined with the strong policy response, helped avert a credit crisis. According to our work, in the absence of new shocks, the average capital ratio of major European banks should remain well above the capital requirements. Nonperforming loans will nonetheless increase, and managers will need to facilitate an efficient transfer. For their part, banks will have to define, in collaboration with their shareholders, a credible medium-term capital raising strategy.

Transform the economy

Now is also the time to design reforms that boost productivity growth and policies that help transform the economy, reap the benefits of the digital switchover and mitigate climate change. Social systems can be improved and strengthened so that they better cover layoffs and training needs resulting from automation and technological change. The measures, including those intended to better target budget support, will also have to respond to the pernicious effects of the crisis and the likely sharp rise in inequalities, in particular because young people, women and the least educated categories of the population are disproportionately affected.

Without this exceptionally strong and multidimensional response, the recession in Europe would have been much worse. Government support must remain strong as the pandemic strengthens and the recovery, which is still in its infancy, remains fragile. Once budgetary resources are no longer used to temporarily help individuals and businesses, they should be reallocated to public investments that will build a more resilient, smarter, greener and more inclusive economy. The Next Generation EU stimulus tool can play an important role in this regard for EU countries, which must start preparing to rebuild room for maneuver once the recovery is in full swing. All of these measures will help limit the after-effects of this crisis and build capacity to shoulder the burden of public and private debt.


Alfred Kammer has been Director of the Europe Department of the International Monetary Fund since August 2020. In this capacity, he directs the IMF’s activities in relation to Europe. Kammer was previously the Chief of Staff to the CEO, advising on strategic and operational matters, while overseeing the operations of the executive team. He also served as deputy director of the strategy, policy and review department, and led the IMF’s strategy and surveillance activities. As Deputy Director of the Middle East and Central Asia department, he was responsible for monitoring regional economic developments and financial sector issues. As Director of the Technical Assistance Management Office, he advised management on technical assistance operations and orchestrated fundraising and international partnerships for capacity building. He also served as advisor to the Deputy Director General. Mr. Kammer also served as the IMF’s resident representative in Russia. Since joining the IMF, Mr. Kammer has worked alongside countries in Africa, Asia, Europe and the Middle East on a wide range of general and policy issues.

EDITOR’S NOTE: This article is a translation. Apologies should the grammar and / or sentence structure not be perfect.

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