EU-RER-No5-Full-Report.Pdf

© 2019 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. 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Contents 9 Acknowledgements 10 Countries and Regions 11 Abbreviations 13 Executive summary 17 Overview 18 Part One: Inclusive growth 24 Part Two: Including institutions to build resilience in Europe 25 Resilience to shocks in the eurozone 26 The real exchange rate is not a policy instrument 26 Resilience in the EU 28 Convergence, business cycle synchronization and the real exchange rate 29 Low-income protection 29 Labor market conditions 31 Private sector conditions 31 Trust and inequality 37 Part One: Inclusive Growth 39 Strong and balanced growth 44 Shared growth 44 The spatial dimensions of growth: across countries and regions 48 Has growth fed into the well-being of low-income households? 51 The evolution of income inequality and links to labor market shifts 57 Resilience at the household level 60 Policies to support inclusive growth through household resilience 61 Fiscal policy 62 Social protection 63 Labor market policies 69 Part Two: Building resilience in the EU 70 Dealing with shocks in the eurozone 72 Why adopt the euro? 74 The eurozone experience 77 Eurozone institutional architecture: a work in progress 79 The resilience of inclusive growth in the EU (2004 – 2014) 84 An optimal currency area indicator: business cycle synchronicity 87 Protecting low-income households 88 Labor market conditions 95 Product and service market institutions 100 Can a flexible exchange rate policy compensate for weak institutions? 101 Trust 113 Conclusions 116 Annex 1: Data used in the convergence and resilience analysis 118 Annex 2: Poor-weighted growth elasticities 121 Annex 3: A deeper look at low-income thresholds 123 Annex 4: EU members and eurozone accession 124 Annex 5: Results on Beta- and Sigma-convergence 126 Annex 6: Optimal currency area indicators 130 Annex 7: Business cycle dynamics and their relationship to selected institutional variables 135 Annex 8: Grouping of countries by exchange rate regime type 136 Annex 9: Additional figures and table 140 References Boxes 25 Box O.1 The euro experience to date 90 Box 2.9 The cooperative cure for 72 Box 2.1 The European Monetary System the Dutch disease 75 Box 2.2 Adherence to the Maastricht 90 Box 2.10 Belgium: Keeping the real criteria was not strictly enforced exchange rate competitive by decree 78 Box 2.3 Eurozone institutional 91 Box 2.11 Italy: collective bargaining led to “architecture” devaluations and rising unemployment 79 Box 2.4 Zimbabwe’s attempts to control 92 Box 2.12 Labor market regulation and the real exchange rate cooperative employer-worker relations 80 Box 2.5 Selecting theoretically, 94 Box 2.13 Germany’s real exchange rate economically and statistically significant adjustments through firm-level wage institutional variables moderation 82 Box 2.6 Description of the variables used 101 Box 2.14 Poland’s successful weathering in the heatmap of the crisis 86 Box 2.7 Portugal — Capital flowing 102 Box 2.15 Screening and selecting downhill measures of trust 88 Box 2.8 Bulgaria: how a lack of wage 103 Box 2.16 Greece — the high costs of lack flexibility led to job losses of trust in institutions Figures 18 Figure O.1 Country convergence stalled 22 Figure O.6 Amplification of growth and post-2009, regions diverged contraction on bottom 20 contrasts with a 19 Figure O.2 Output per capita and median relatively stagnant but protected middle incomes were hardest hit in Southern class Europe and have yet to recover their 2007 23 Figure O.7 Substantial variation in the levels, contributing to the stalling of the extent to which periods of contraction are convergence machine passed through to poorer household 20 Figure O.3 Income and employment 32 Figure O.8 Trust in institutions and levels in Southern Europe were hardest hit people (Eurobarometer) and have yet to recover, and growth rates 39 Figure 1.1 Output per capita and median across the EU are still below their pre-crisis incomes were hardest hit in Southern levels Europe and have yet to recover to their 20 Figure O.4 Public debt has risen to 2007 levels the extent that the space for a fiscal 40 Growth rates across the EU are policy response to a new crisis has been Figure 1.2 significantly reduced still below their pre-crisis levels 41 Private consumption remains 21 Figure O.5 Shift in the geography of those Figure 1.3 under €23 per day towards Southern the leading growth driver Europe. Half of this population continues 41 Figure 1.4 Investment remains low, to be found in Central Europe however particularly in Southern Europe 41 Figure 1.5 Firm investments have dipped 50 Figure 1.18 The share of the population since 2008 but have contributed to rising living under €23 a day 2011 PPS is projected investment in Western Europe to decline across the 10 countries with the 42 Figure 1.6 Savings are trending upward, highest rates in 2016, with the sharpest supporting improvements in external declines forecast in Poland and Slovakia ª balances. 52 Figure 1.19 The average level of inequality 42 Figure 1.7 Majority of imbalances that had in EU-28 countries has remained broadly built up in the pre-crisis boom years have stable between 2006 and 2016. At a country been corrected level, more countries have seen stable or 43 Figure 1.8 Strengthened fiscal falling inequality than rising inequality. performance helped limit the increase 53 Figure 1.20 Countries with lower initial of debt inequality measures recorded declines in 43 Figure 1.9 Revenue increase stood behind the degree of redistribution while those improved fiscal performance with higher initial inequality recorded increases 43 Figure 1.10 The effects of the crisis have held back productivity growth, in 54 Figure 1.21 The earnings of 25 to particular in Southern Europe 29-year-old workers born after 1983 were substantially affected during the crisis in 44 Figure 1.11 Public debt levels, which increased during the crises, are slower to Southern Europe, but relatively protected improve in Northern Europe. While the starting wages of these younger workers continued 46 Figure 1.12 Long-term convergence to be suppressed in 2016, the gradient with between 2004 and 2014 has been strongest age had returned at the national level 56 Figure 1.22 Part-time work accounted 46 Figure 1.13 While Central European for nearly a quarter of all employment in countries continued to converge to those Western Europe in 2017 and has become in Western Europe, the divergence of more prevalent in Southern Europe since countries in Southern Europe fed into the 2008 stalling of the convergence machine 56 Figure 1.23 Temporary work is for the 47 Figure 1.14 Country convergence stalled after 2009, and regions diverged. most part involuntary, reflecting an Convergence processes appear to have inability to find permanent employment resumed after 2015 57 Figure 1.24 Hours worked have been 49 Figure 1.15 The share of the population on the decline since 2000, reflecting with incomes under €23 a day declined decreasing hours worked in full-time from 27 to 23 percent between 2004 and employment as well as increasing part- 2016. It is projected to further decline to time work and female employment 18.5 percent by 2020 58 Figure 1.25 In Western Europe the 49 Figure 1.16 The number of people living incomes of the bottom 20 percent of in low income households dropped by 20m households were sheltered from the crises between 2012 and 2017 and is expected to compared to better-off households, while decline by a further 10m by 2020 in Southern Europe bottom 20 percent incomes have seen the greatest reduction. 50 Figure 1.17 Shift in the geography of the population living under €23 per day 2011 59 Figure 1.26 Amplification of growth and PPS towards Southern Europe. Half of contraction on bottom 20 percent of the this population continues to be found in distribution contrasts with a stagnant but Central Europe however. relatively protected middle class 60 Figure 1.27 Growth tends to be shared 98 Figure 2.13 PMR — Gap to the frontier ª with poorer households but there is more 99 Figure 2.14 Product Market Indicator variation in the extent to which periods of 99 Figure 2.15 Contribution to Product contraction are passed through to poorer Marker Indicator changes (2016 vs 2007, households.

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