Eu Regular Economic Report

102089 E U Public Disclosure Authorized REGULAR ECONOMIC REPORT 2 SUSTAINING RECOVERY, IMPROVING LIVING STANDARDS Public Disclosure Authorized FALL 2015 Public Disclosure Authorized Public Disclosure Authorized The EU Regular Economic Report (RER), is a semi- Anil Onal, Barbara Cunha, Tu Chi Nguyen, Natalia Millan, annual publication of the World Bank Group and Paul Andres Corral Rodas, Leszek Kasek, Raquel Letelier, covers economic developments, prospects, and Alena Kantarovich, Natalie Nicolaou, Tulu Balkir, Sanja economic policies in the European Union. The report Madzarevic-Sujster, Stella Ilieva, Jose Luis Sanchez, Marc uses four sub-groups that share broadly similar develop- Schiffbauer, Sonia Plaza, Andrei Silviu Dospinescu, Ekaterine ment patterns EU (see map): Central Europe comprises T. Vashakmadze, Emilia Skrok, Catalin Pauna, Pilar Salgado ACKNOWLEDGMENTS Bulgaria, Croatia, Czech Republic, Hungary, Poland, Otonel, Suzana Petrovic, and Magali Pinat. Tito Cordella AND Romania, Slovak Republic and Slovenia; Northern Europe provided excellent advice throughout the preparation of comprises Denmark, Estonia, Finland, Latvia, Lithuania this report. The dissemination of the report and media and Sweden; Southern Europe comprises Cyprus, Greece, relations are managed by an External Communication NOTES Italy, Portugal and Spain; Western Europe comprises team comprising Andrew Kircher and Anna Kowalczyk. Austria, Belgium, France, Germany, Ireland, Luxembourg, The team is grateful to Christian Bodewig and Jean- the Netherlands and the United Kingdom. While the Francois Marteau (Acting Country Directors, Central report covers the European Union, it provides additional Europe and the Baltic States), Satu Kähkönen (Director, information on European countries which had historically Macroeconomics and Fiscal Global Management), Ivailo a stronger operational engagement with the World Bank Izvorski (Practice Manager, Macroeconomics and Fiscal Group, in particular, Bulgaria, Croatia, Poland and Romania. Global Management), Andrew Mason (Practice Manager, The focus note of this RER covers “Welfare States and the Social Protection and Labor Global Management), Carolina Protection of the Poor in the European Union”. Sanchez (Practice Manager, Poverty and Equity), the peer This report is prepared by World Bank staff economists reviewers Hans Timmer, Tatiana Didier and Margaret working on EU countries. The team of authors comprises Grosh and the Country Management Team for their guid- Doerte Doemeland (Task Team Leader), Enrique Aldaz- ance. The team would also like to thank the Central Banks Carroll, Theo Thomas (Task Team Leader), Matija Laco, and Ministries of Finances of Bulgaria, Croatia, Romania Gabriel Inchauste (lead author - poverty), Ramya Sunda- and Poland for their comments. This and previous EU RERs ram (lead author –focus note), Aylin Isik-Dikmelik (lead can be found at: www.worldbank.org/eurer. author –focus note). The team benefited from inputs from Finland Sweden Northern Europe Estonia Latvia Denmark Ireland United Lithuania Netherlands Kingdom Poland Belgium Germany Luxembourg Central Europe Czech Rep. Western Europe Slovak Rep. Austria France Hungary Slovenia Croatia Romania Portugal Spain Bulgaria Italy Southern Europe Greece Malta Cyprus T TABLE OF CONTENTS R O P E R C I 01 ECONOM R EXECUTIVE SUMMARY LA 05 U EG RECENT ECONOMIC DEVELOPMENTS R U 06 E After A prolonged crisis that led to an increase in povertY… 10 …THE RECOVERY IS GAINING STRENGTH, FUELED BY PRIVATE CONSUMPTION AND SUPPORTED BY LOWER OIL PRICES, A WEAKER EURO AND THE ECB’S QE 13 LABOR MARKETS ARE IMPROVING 17 FISCAL CONSOLIDATION IS SLOWING 19 COUNTRIES CONTINUE TO IMPROVE BUSINESS REGULATIONS IN AN EFFORT TO BOLSTER GROWTH 25 OUTLOOK 26 THE EU NEEDS TO TURN TAILWINDS INTO SUSTAINED GROWTH 28 MEDIUM-TERM RISKS ARE SUBSTANTIAL 31 SPOTLIGHT ON CENTRAL EUROPE 35 FOCUS NOTE: WELFARE STATES AND PROTECTION OF THE POOR IN THE EUROPEAN UNION 36 EU MEMBER STATES ARE AMONG THE BIGGEST SPENDERS ON SOCIAL PROTECTION IN THE WORLD… 40 …NOT ALL COUNTRIES PROVIDE EFFECTIVE PROTECTION FOR THE POOR 44 MOST WELFARE STATES CUT SOCIAL ASSISTANCE SPENDING DURING THE CRISIS… 46 …WITH DIFFERING OUTCOMES FOR THE POOR 49 EU MEMBER STATES WOULD NEED TO PROVIDE ADEQUATE PROTECTION AND SOCIAL INVESTMENT FOR THE POOREST WHILE ENSURING FISCAL SUSTAINABILITY 52 REFERENCES F igur ES ES ur G fi / 06 [FIG. 1] THE CRISIS LED TO A SIGNIFICANT INCREASE IN POVERTY CONTENTS IN SEVER AL EU COUNTRIES F O LE 07 [FIG. 2] B YOUNG AND LESS SKILLED PEOPLE WERE MOST AFFECTED TA BY THE INCREASE IN POVERTY 08 [FIG. 3] HOUSEHOLD INCOME HAS DECREASED MORE THAN GDP IN GREECE 09 [FIG. 4] THE DECLINE IN LABOR INCOME AND EMPLOYMENT CONTRIBUTED MOST TO THE POVERTY INCREASE 10 [FIG. 5] GROWTH HAS PICKED UP PACE ACROSS ALL REGIONS FUELED BY CONSUMPTION 11 [FIG. 6] CONFIDENCE IS IMPROVING 12 [FIG. 7] THE COST OF BORROWING FOR ENTERPRISES AND HOUSE PURCHASES HAS REACHED A HISTORIC LOW 13 [FIG. 8] THE EU HAS LOST FEWER JOBS THAN THE US BUT FIRMS PERFORM WORSE 14 [FIG. 9] UNEMPLOYMENT R ATES ARE REACHING PRE-CRISIS LEVELS IN MANY EU COUNTRIES, EXcept in the South 15 [FIG. 10] THE CUMULATIVE UNEMPLOYMENT RESPONSE TO A GDP GROWTH SHOCK IS LARGEST IN SOUTHERN EUROPE 16 [FIG. 11] YOUTH UNEMPLOYMENT IS DECLINING IN MOST EU COUNTRIES 17 [FIG. 12] SIGNIFICANT FISCAL ADJUSTMENT HAS BEEN ACHIEVED THROUGH DIFFERENT APPROACHES 20 [FIG. 13] DIFFERENCES IN THE BUSINESS ENVIRONMENT IN THE EU VARY SIGNIFICANTLY WITHIN AND ACROSS REGIONS AND OVER TIME 22 [FIG. 14] LARGE DIFFERENCES IN REGULATORY PRACTICES DEPEND ON WHERE SMES LOCATE THEIR BUSINESS 26 [FIG. 15] GROWTH R ATES ARE PROJECTED TO RISE ACROSS THE EU THOUGH INVESTMENT GROWTH REMAINS MODEST 32 [FIG. 16] POVERTY IS PROJECTED TO DECLINE T F igur ES R O P E R C I 37 [FIG. 17] ECONOM R EU MEMBER STATES SPEND ON AVER AGE MORE LA ON SOCIAL PROTECTION THAN OECD COUNTRIES U 38 [FIG. 18] EG R THERE ARE FOUR DISTINCT EUROPEAN WELFARE STATES U E 40 [FIG. 19] SOCIAL ASSISTANCE SPENDING VARIES WIDELY ACROSS EUROPEAN WELFARE STATES 40 [FIG. 20] WITH VARYING IMPLICATIONS FOR THE COVER AGE OF BOTTOM 20 PERCENT 41 [FIG. 21] CATEGORICAL PROGR AMS DOMINATE SOCIAL ASSISTANCE SPENDING ACROSS EUROPEAN WELFARE STATES 42 [FIG. 22] HIGHER COVER AGE OF BOTTOM 20 PERCENT IS ACHIEVED MOSTLY THROUGH FAMILY BENEFITS AND SOCIAL EXCLUSION PROGR AMS 42 [FIG. 23] SOCIAL ASSISTANCE LEAKAGE TO THE RICH IS SUBSTANTIAL IN MANY EUROPEAN WELFARE STATES 43 [FIG. 24] LEAKAGE TO THE RICH IS MAINLY DUE TO FAMILY BENEFITS 43 [FIG. 25] LARGE BALANCED WELFARE STATES ARE THE MOST SUCCESSFUL IN POVERTY ALLEVIATION THROUGH SOCIAL ASSISTANCE 43 [FIG. 26] ONLY FEW COUNTRIES CAN AFFORD HIGH COVER AGE AND REASONABLE ADEQUACY 44 [FIG. 27] SOCIAL ASSISTANCE SPENDING FELL IN SEVER AL COUNTRIES DURING THE RECESSION WHILE SOCIAL INSUR ANCE SPENDING WAS PROTECTED 45 [FIG. 28] THE DECLINE IN SOCIAL ASSISTANCE SPENDING WAS MOST COMMON IN TRUNCATED AND LIMITED WELFARE STATES 47 [FIG. 29] CUTS IN SOCIAL ASSISTANCE SPENDING HAD DIFFERENT OUTCOMES ACROSS WELFARE STATES IN TERMS OF COVER AGE OF THE POOREST 47 [FIG. 30] INCREASE IN COVER AGE WAS ACHIEVED PARTLY THROUGH IMPROVEMENTS IN TARGETING ACCUR ACY BOX ES LES B TA / ES X O B / 08 [BOX. 1] POVERTY TRENDS IN GREECE ES ur G 15 [BOX. 2] fi UNEMPLOYMENT ADJUSTMENT TO A GDP SHOCK IN EUROPE 21 [BOX. 3] DIGITAL DIVIDE OR DIVIDEND? 22 [BOX. 4] THE IMPORTANCE OF LOCAL BUSINESS REGULATION: THE CASE OF POLAND AND SPAIN 29 [BOX. 5] THE EU AND THE REFUGEE CRISIS 37 [BOX. 6] SOCIAL PROTECTION FUNCTIONS 39 [BOX. 7] TYPOLOGY OF SOCIAL PROTECTION SYSTEMS TABLES 20 [TABLE 1] EASE OF DOING BUSINESS R ANKINGS IN THE EU T R O P E R C I ECONOM R LA U EG R U E Standard Disclaimer: This volume is a product of the Copyright Statement: The material in this publication is staff of the International Bank for Reconstruction and copyrighted. 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