EUROPEAN COMMISSION Brussels, 24.11.2021 COM(2021) 741 final REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE Alert Mechanism Report 2022



































Prepared in accordance with Articles 3 and 4 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances {SWD(2021) 361 final}



Contents Executive summary 1.The macroeconomic context and evolution of imbalances in the euro area 2.Imbalances, risks and adjustment: main developments across countries 2.1.A snapshot of the scoreboard outcomes 2.2.External sector and competitiveness 2.3.Private debt and housing markets 2.4.Government sector 2.5.Financial sector 3.Summary of main challenges and surveillance implications 4.Member States specific commentaries Annex 1: Forecasts and nowcasts of the headline scoreboard indicators Annex 2: MIP scoreboard This alert mechanism report (AMR) initiates the eleventh annual round of the macroeconomic imbalance procedure (MIP). The procedure aims at detecting, preventing and correcting imbalances that hinder the proper functioning of Member State economies, the economic and monetary union or the Union as a whole, and at eliciting appropriate policy responses. The implementation of the MIP is embedded in the European Semester of economic policy coordination to ensure consistency with the analyses and recommendations made under other economic surveillance tools (Articles 1 and 2 of Regulation (EU) No 1176/2011). The AMR analysis is based on the economic reading of a scoreboard of selected indicators, complemented by a wider set of auxiliary indicators, analytical tools and assessment frameworks, and additional relevant information, including recently published data and forecasts. This AMR includes a reinforced forward-looking assessment of risks to macroeconomic stability and for the evolution of macroeconomic imbalances. The AMR also includes an analysis of the euro area-wide implications of the Member States macroeconomic imbalances. The AMR identifies Member States for which in-depth reviews (IDRs) should be undertaken to assess whether they are affected by imbalances in need of policy action (Article 5 of Regulation (EU) No 1176/2011). Taking into account discussions on the AMR with the European Parliament and within the Council and the Eurogroup, the Commission will then prepare IDRs for the Member States concerned. The IDRs will be published in spring 2022, and will provide the basis for the Commission assessment regarding the existence and severity of macroeconomic imbalances, and for the identification of policy gaps. Executive summary This Alert Mechanism Report is the second one marked by the COVID-19 pandemic, as the economy recovers from the crisis that hit suddenly and unexpectedly in 2020. The COVID-19 pandemic caused an economic crisis unique in its severity. Following the disruptions in the first half of 2020, an initial phase of the economic recovery was quick to materialise when containment measures were eased across Europe. The deployment of vaccines marked a change in the economic outlook for the better. While differences among Member States persist, the efforts in dealing with immediate effects of the economic shock are bearing fruit. The successful rollout of vaccinations, accompanied by an effective and targeted containment strategy, brought a stronger revival of economic activity from spring 2021, and economic policy coordination has shifted to laying the foundations for a solid and inclusive recovery and stronger resilience. According to the Commission autumn 2021 economic forecast, most Member States are expected to close the distance to their pre-crisis output levels by the end of 2021, with only a few countries closing it next year. The pandemic struck as most imbalances were undergoing a process of correction amid favourable macroeconomic conditions while new risks associated with signs of overheating were emerging. A sustained period of economic growth over most of the past decade facilitated a gradual correction of imbalances. These were related to high levels of private and public debt-to-GDP ratios, which were the legacy of both the global financial crisis and the build-up that preceded it. Large current account deficits or buoyant credit growth had also been corrected, resulting in external debt being gradually reduced and banking systems being strengthened. In more recent years, there had been a build-up of challenges and risks associated with signs of overheating in some sectors in some countries after a continued economic expansion, mainly at the level of house prices and cost competitiveness, especially in countries where economic growth was more buoyant. The pandemic interrupted the reduction in debt-to-GDP ratios, while housing prices accelerated, suggesting an overall aggravation of macroeconomic risks. Imbalances related to high government and private debt worsened, driven by the sharp drop in GDP and the fiscal impact of the necessary measures taken to address the COVID-19 crisis, protecting production capacities and limiting the employment and social impact. House prices, which had already been buoyant, accelerated further and are a risk in several countries, in particular where they are accompanied by a significant increase in mortgage debt. Thanks to their strong capital ratios and high liquidity buffers, banks were able to keep providing credit to the economy. However, second round effects in the banking sector could materialise as protective measures are lifted and the longer-term impact of the pandemic on firm solvency works its way through the economy. External accounts worsened in countries dependent on cross-border tourism revenues. Extended policy support helped contain unemployment and stabilised household incomes. As the recovery takes hold, labour shortages and cost pressures are emerging in some countries, and substantial wage increases are foreseen in a number of countries.

The swift and coordinated policy response to the pandemic cushioned its economic impact, and the Recovery and Resilience Facility (RRF) provides a unique opportunity to emerge stronger from the crisis. The general escape clause of the Stability and Growth Pact was activated right after the pandemic outbreak, supporting national fiscal measures. Agreement on the State Aid Temporary Framework enabled Member States to use the full flexibility foreseen under state aid rules. The European instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE) helped protect jobs. Governments delivered unprecedented fiscal and policy support, and the European Central Bank (ECB) implemented a broad range of measures to preserve financial stability and ensure the smooth functioning of financial markets. As the recovery unfolds, the effective implementation of reforms and investment in the recovery and resilience plans (RRPs) will help foster a durable recovery, strengthen resilience and accelerate EU’s green and digital transitions. The implementation of RRPs can support a reduction in imbalances and mitigate macroeconomic risks. The plans provide a unique opportunity to place the Member States most affected by the COVID-19 crisis on a sustained higher growth path, which will foster job creation, improve debt sustainability and help to rebalance the European economy as a whole.



The horizontal analysis presented in the AMR can be summarised as follows: ·The COVID-19 crisis has temporarily affected external positions, but has not fundamentally changed current account patterns. Countries with important cross-border tourism sectors have generally seen a marked increase in current account deficits or a reduction in their modest surpluses. This is expected to correct gradually with the recovery in travel. Some of the large current account surpluses declined mildly in 2020, bringing the current account for the euro area as a whole in line with fundamentals. However, the data for the first half of 2021 show a marked increase in the euro area current account surplus, driven mainly by a higher balance of trade in services. The euro area current account is currently forecast to return to its 2019 level in 2021, reflecting continued subdued domestic demand. Overall, the largest changes in current accounts have been compositional: in all Member States, the private sector has increased its net saving position while the government sector’s net lending positions decreased markedly because of the impact of the COVID-19 pandemic and of measures taken to mitigate it. Several Member States with large negative net international investment positions (NIIP) recorded a worsening of their current accounts in 2020, but the impact on their NIIP-to-GDP ratios is forecast to gradually reverse. ·The disruption of economic activity in 2020 led to large increases in unit labour costs, which are expected to be partially reversed with the recovery, but labour shortages and cost pressures are emerging in a number of cases. Unit labour costs rose across the EU as a result of stable employment headcounts despite sharply falling production, enabled by the various public job retention initiatives, especially short-time work schemes, which favoured a reduction in hours worked rather than employment levels. These effects are reflected in temporary reductions in headline labour productivity in 2020. With the recovery, productivity is edging up and reversing part of the losses in unit labour costs. In some countries though, wage increases are picking up sometimes resuming trends from before the pandemic. However, the labour market situation differs across sectors and countries, and while in some cases employment has broadly recovered to pre-crisis levels, in others gaps remain significant. In some cases, increased reallocation between jobs, firms and sectors may continue in the recovery and may lead to some permanent changes to the productive capacity of countries. In some other cases, labour shortages are emerging, especially in countries less affected by the crisis and amid higher demand. In combination with other factors, such as rapidly rising energy prices, cost pressures may turn significant and become a risk going forward. ·A range of policy measures preserved jobs and production capacity during the crisis by supporting private sector liquidity and solvency. Support measures such as moratoria on debt repayments and government guarantees for credit helped avoid private sector liquidity shortages turning into solvency troubles at the beginning of the COVID-19 crisis. Moratoria allowed a delay in debt repayments, increasing the nominal debt stock and related interest burden. With the phasing out of those measures, possible repayment difficulties may surface, especially in sectors more affected by the crisis and among firms already vulnerable beforehand. In many countries, increases in both corporate and households borrowing have been accompanied by increased net savings. ·Corporate indebtedness increased in most EU countries in 2020, sometimes sharply. New borrowing to cover sudden revenue losses and liquidity shortages resulting from the pandemic contributed to the increase in the corporate debt-to-GDP ratios on top of the effect of the sharp recession. While significantly increased net credit flows lasted until early 2021, their more recent moderation could be both a sign of lower demand, which could be related to corporations using accumulated liquidity, or lower supply of credit. ·Household borrowing has picked up as the recovery strengthens. In 2020, higher household debt-to-GDP ratios were mostly due to the large fall in GDP. Credit flows at the height of the pandemic were muted, mainly on account of a sharp fall in consumption loans. At the same time, many countries saw increases in mortgage loans in the face of high real estate market activity and accelerating house prices. Since early 2021, net credit flows have become more significant in several countries as the recovery unfolds.

·The COVID-19 crisis and the measures governments took to cushion it have had a major impact on government debt. The vital extensive support that governments have delivered has contributed to redirecting part of the adverse economic impact of the pandemic away from households and firms, protecting jobs and growth potential. Government debt-to-GDP ratios have increased more in the countries disproportionately affected by the recession, principally due to their tourism sectors. With the recovery, debt-to-GDP ratios are expected to stabilise and some have already started declining; but overall governments are emerging from this crisis with clearly higher indebtedness. The supportive fiscal stance and monetary policy measures have been mutually reinforcing in maintaining confidence and stability. Borrowing conditions for governments have remained supportive despite their increased financing needs, both due to monetary policy measures and longer-term factors such as the excess of savings over investment in the euro area. In light of inflation developments, costs of borrowing have tightened slightly but remain overall low. Borrowing costs have increased somewhat more for some Member States outside the euro area with floating exchange rates. Some of them have non-negligible shares of debt denominated in foreign currency or relatively short debt maturities. ·The pandemic has been accompanied by a further acceleration of housing prices. Following years of increases, house prices accelerated further in 2020 and the first half of 2021 and reached their fastest growth rates since the global financial crisis. Various EU countries are displaying risks of overvaluation. That raises concerns particularly where household debt is high or rising fast. The growth of house prices has been driven by a variety of factors fuelling demand and constraining supply. Supply constraints were already present before the pandemic and lockdowns exacerbated them temporarily. The pandemic may have led to some structural changes in housing demand as the shift to more remote working may change geographical preferences. Financial conditions have been accommodative and overall are likely to continue supporting elevated housing demand, while household incomes growing with the recovery are likely to sustain further house price growth. ·The banking sector has maintained strong capital ratios but profitability weakened in 2020 and the full impact of the crisis on bank balance sheets may only be visible with a delay. Conditions in the banking sector have improved considerably since the global financial crisis with capital buffers built up in the pre-pandemic years and capital ratios increased further in 2020, including due to temporary regulatory limits on dividend payments. The impact of the COVID-19 crisis on the banking sector has been limited thanks to the strengthening of the sector achieved after the financial crisis and due to extensive temporary policy measures such as credit guarantees, debt repayment moratoria or temporary regulatory relaxation. Non-performing loans continued decreasing in 2020, particularly in countries where they were sizeable and where banks disposed of legacy assets. However, the long-standing issue of low profitability remains. Moreover, the full impact of the crisis on asset quality, profitability and capital buffers may still materialise once the policy measures are withdrawn. Potential feedback loops between banks, sovereigns and the corporate sector should be closely monitored. While the impact of the pandemic has been mitigated by the decisive policy action, the pandemic exacerbated divergences among euro area countries. Member States with a significant cross-border tourism sector were most exposed to the economic impact of the COVID-19 pandemic, leading to divergent impacts on employment and growth. As these countries were also characterised by relatively large public, private or external debts, this has led to a wider dispersion of indebtedness within the euro area. Some of these patterns are linked to temporary factors, such as the impact of the travel restrictions, but, despite the success of the decisive policy action in mitigating the widening of economic and social divergences, the crisis risks leaving a legacy and entrenching divergences. A large current account surplus persists for the euro area as a whole, which highlights that there is room to sustain the recovery at the euro area aggregate level. This would also contribute to a faster reduction in imbalances. The current account for the area as a whole has temporarily declined to a level close to its fundamentals, but is projected to return to pre-crisis levels above fundamentals. The outcomes at Member State level vary very significantly. The external rebalancing in the euro area is all the more important given the limited room for additional monetary support to sustain demand.



In light of the interconnections among euro area economies, an appropriate combination of macroeconomic policies across Member States is needed in order to sustain the recovery, while correcting imbalances and addressing emerging risks. An economic expansion in euro area net-creditor countries, including on the basis of supportive demand conditions, would not only be beneficial for those countries themselves, but also for net-debtor countries, as higher growth in the euro area supports growth and deleveraging as well as the improvement in external positions in the latter group of countries. A withdrawal of the extraordinary policy support taken over the crisis timed to the adjustment needs would help in that respect. Marked and lasting improvements in productivity and competitiveness in net-debtor countries would also contribute to external rebalancing and help easing the debt burdens. An effective use of instruments put in place at euro area and EU level, with effective implementation of the necessary reforms and investment would help fostering a durable recovery and strengthening resilience, including by addressing imbalances and emerging risks. It will be crucial that Next Generation EU and Multiannual Financial Framework (MFF) financing is fully absorbed and channelled to the most productive uses. This would maximise the economic impact of the funds and contribute to balanced growth. The full impact of the pandemic on imbalances will only be clear with a lag, as second round effects may play out. On the corporate side, pockets of underlying financial vulnerabilities due to depletion of equity following protracted losses and high debts remain. Some corporates could be affected by structural changes that necessitate adjustments to their business models. The expiration of support measures may lead to an increase in non-performing loans and bankruptcies at least in the sectors most affected by the COVID-19 crisis and among firms that were vulnerable prior to the crisis. This may take some time to materialise, depending on the types of forbearances that may be offered to otherwise insolvent borrowers. The ability of insolvency proceedings to clear existing impairments are important to ensure the flow of new credit to the economy. Government provision of guarantees for corporate loans help to preserve viable corporate entities, but if sizeable could also result in feedback loops between the corporate and government sectors, also affecting banks. Corporate balance sheet weaknesses risk having an impact on the labour market, and by extension the ability of some households to repay their credit. Strong increases in mortgage credit are an additional risk factor, particularly in the event of a correction in housing markets. Likewise, a further deterioration of commercial real estate asset prices might also weaken the financial sector. Financing conditions will affect the evolution of imbalances. The low interest rate environment has enabled governments, corporations and households to take on higher debt and cushion the effect of the pandemic, protecting jobs and production capacity. An increase in interest rates would raise the financing costs of debt in both the public and private sectors, increasing risks where financing needs are high. Inflation has picked up markedly in the euro area and many other advanced economies since the beginning of 2021. While the determinants of this pick-up in inflation, including the surge in energy prices, appear mostly transitory, there is a risk that the duration may not be so short-lived. As long as financing conditions are not tightened, higher inflation can ease the debt burden. But a protracted increase in inflation could result in tighter financing conditions and higher borrowing costs. Developments in housing markets warrant close monitoring. High house prices represent a risk, particularly when combined with high household indebtedness, compounded by uncertain labour market adjustments. This poses a risk for households’ ability to meet their mortgage obligations. Increased interest rates could put additional pressure on mortgage repayment ability, with knock-on effects on the banking sector. Continued price increases as the recovery continues could feed into wage pressures and drive higher mortgage borrowing. Housing affordability has deteriorated in recent years, with potentially adverse macroeconomic consequences, linked to lower private consumption and labour mobility, and a diversion of credit away from productivity-enhancing investment. Reducing the high levels of both government and private debt crucially depends on the recovery developing into a sustained expansion, which requires productive investment. A sustained recovery hinges on a supportive policy stance and well-timed withdrawal of the extraordinary policy support taken over the crisis. A sustained economic expansion depends on strengthening economic and social resilience, which requires the implementation of adequate reforms and investment. Productivity-enhancing investment is needed to drive growth in the medium term and to support structural transformations that are needed to deliver the green and digital transitions amid demographic change. That is all the more important as a number of countries are marked by high public and private debt and relatively low potential growth, which makes reducing high levels of debt more difficult. In a situation of high government debt improving the composition of expenditure and revenue is needed to create the space from which public investment is delivered, as deleveraging, on the basis of a credible fiscal adjustment strategy, is also necessary to ensure space to address any future crises. At the same time, private investment may be hampered by corporate deleveraging needs. The effective implementation of the RRPs has an important role to play in supporting public and private investment, thereby helping to overcome the long-term impact of the pandemic and opening a path to stronger growth and resilience. The new RRF, in combination with European Structural and Investment funds, will promote an investment-rich recovery and their effective implementation will make the EU economy more sustainable, inclusive, resilient and better prepared for the green and digital transition, consistent with the Union objectives in that regard. The pandemic has highlighted the positive role of counter-cyclical discretionary fiscal policy, supportive monetary policies and European coordination in responding to the economic crisis. The COVID-19 crisis has shown that sizeable discretionary fiscal reactions can be effective in mitigating the immediate impact of a large shock, and successful in paving the way for a swift rebound. The immediate national fiscal effort was buttressed by the use of flexibility existing within the EU regulatory frameworks. The collective reaction fostered confidence. Monetary policy measures contributed to preserving favourable financing conditions for all sectors of the economy throughout the pandemic, underpinning economic activity and safeguarding medium-term price stability. The mutually reinforcing effects of fiscal and monetary policies have been crucial for cushioning the impact of the crisis and supporting the recovery. While monetary policy is expected to remain accommodative in the coming years, the low interest rate environment and the recent edging up of inflation limit the possibility for further monetary easing. Fiscal policy may thereby need to maintain a stabilisation role if downside risks emerge while prudent budgetary policy in normal times creates confidence in the effectiveness of budgetary policy in times of crisis. Preventing and correcting macroeconomic imbalances remains essential. First, a weak economic recovery could cause a spike in corporate bankruptcies leading to job losses as well as increased calls on crisis-related guarantees for corporate loans and a retrenchment of investment. Second, adverse economic developments could accentuate the sovereign-bank loops. Third, booming asset and house prices could increase the vulnerability of the household sector due to unsustainable asset price booms. These risks can adversely affect government debt sustainability, and limit the room for fiscal policy to respond to future challenges. Unwinding the build-up of vulnerabilities will also help consolidate the recovery and strengthen long-term growth. More similar economic structures and more synchronised business cycles will contribute to increasing the effectiveness of the common monetary policy. By promoting an investment-rich recovery, the RRF will contribute to macroeconomic stability. The effective implementation of the recovery and resilience plans will make the EU economy more sustainable, inclusive, resilient and better prepared for the green and digital transitions. It will also help mitigate the risk of divergences within the EU as the RRF grants are targeted towards Member States with lower GDP per capita, higher unemployment and hit the hardest by the COVID-19 crisis. Moreover, in contrast to the years following the global financial crisis, higher public investment will support the post-pandemic recovery. RRF grants will fund high-quality investment projects and enable productivity-enhancing reforms, without giving rise to higher national deficit and debt ratios. These grants and other sources of EU financing are estimated to boost public investment in Member States by an average of about 0.5% of GDP per year in 2021 and 2022.

Preventing and correcting macroeconomic imbalances enhances Member States’ ability to respond to shocks and supports economic convergence. Unwinding or preventing the build-up of imbalances will help consolidate the recovery and strengthen long-term growth. Countries with existing imbalances need to resume their pre-pandemic trajectory of correction, supported by policies to bolster potential growth. The reduction of imbalances can also yield positive spillovers across countries. Deeper economic and financial integration and more synchronised business cycles will contribute to increasing the effectiveness of the common monetary policy especially in the case of euro area members, enabling it to better respond to future challenges. This AMR concludes that IDRs are warranted for 12 Member States: Croatia, Cyprus, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Romania, Spain, and Sweden. These Member States were subject to an IDR in the previous annual cycle of MIP surveillance, and were considered to be experiencing imbalances (Croatia, France, Germany, Ireland, the Netherlands, Portugal, Romania, Spain, and Sweden) or excessive imbalances (Cyprus, Greece, and Italy). The new IDRs will assess how those imbalances have developed, analysing their gravity, evolution and the policy response delivered by Member States, with the view to update existing assessments and assessing possible remaining policy needs. Section 3 provides a summary of how those imbalances have evolved and section 4 elaborates on country-specific information. In addition, a number of Member States that were not subject to an IDR in the previous round display developments that merit particular attention. Slovakia is marked by strong house price growth alongside a sustained albeit slowing increase in household borrowing. Exports are markedly concentrated in a few specific sectors and there have been cost competitiveness losses, but export market shares have so far not been adversely affected. In the case of Hungary, the interplay between government borrowing and external financing in a context of significant debt exposure in foreign currency merits attention. House price growth has been strong. Cost competitiveness pressures are mounting, but export market shares have so far not been adversely affected. There is also the need to monitor the development of risks in other Member States, in many instances linked to housing markets. In the case of Denmark and Luxembourg, developments in the housing market point to a build-up of risks. While changed preferences, supportive financial conditions and supply constraints may sustain house price growth, the risk of a downward correction, with potential implications for the wider economy, cannot be dismissed. Czechia is marked by strong house price growth and persistent cost competiveness losses that have been significant for some years. In Malta, growing private debt combined with weaknesses of the insolvency framework create particular vulnerabilities. Monitoring and surveillance should follow developments closely in these six Member States and ascertain whether they are consistent with and conducive to macroeconomic stability. The balance of risks does not at present point to a need for an IDR. Section 4 provides more information on country-specific developments. 1. The macroeconomic context and evolution of imbalances in the euro area The economic backdrop This AMR is prepared against the economic backdrop of the COVID-19 pandemic. The initial impact of the pandemic was a sharp recession, as restrictive measures to contain the spread of the virus had a marked impact on economic activity in 2020. The result was a GDP retraction of 5.9% in the EU and 6.4% in the euro area in 2020, with considerable variation across countries. Some countries recorded falls at around or over the double-digit mark and others experienced mild recessions. The improving health situation enabled an easing of containment from the second quarter of 2020, starting the recovery. Different waves of the pandemic drove an uneven recovery until early 2021. The roll-out of vaccinations, accompanied by an effective and targeted containment strategy, as well as extensive public support measures enabled higher mobility and a stronger-than-expected revival of economic activity from spring 2021. Overall, the Commission autumn 2021 economic forecast expects GDP to grow by 5% in both the EU and the euro area in 2021 and by 4.3% in 2022. Most Member States are forecast to close the distance to their pre-crisis output levels by the end of 2021, with only a few countries closing it next year (Graph 1.1 a). ( ) While the impact has been mitigated by the decisive policy action, the pandemic exacerbated divergences among euro area countries. This reflects the uneven toll of the pandemic and differences in economic structures. Contact-intensive services have been more adversely affected by the restrictions than manufacturing. This has resulted in a wide divergence in the economic performance, both within and across countries. Countries that have substantial cross-border tourism sectors, and have been particularly affected by the mobility restrictions, experienced sharper-than-average GDP contractions alongside substantial deteriorations of their external accounts. This is the case for Greece, Portugal and Spain. The recession has also hit hard countries with high domestic debt such as France and Italy (see Graph 1.1 b). Those are also countries with some of the highest private, government or external debts in the EU. The recovery is forecast to be slower in some of these countries. An exceptional policy response has been crucial for cushioning the impact of the COVID-19 crisis and for supporting the recovery, while having a positive impact on macroeconomic stability. Governments have delivered unprecedented fiscal support in order to protect jobs and incomes and support businesses, reducing the risk of corporate bankruptcies. Moratoria were provided for tax payments and debt repayments by households and corporations, and government guarantees were provided for bank loans. As a result, in 2020, household gross disposable income was essentially constant in the EU as a whole despite the marked recession. The EU's unemployment rate rose by just 0.4 percentage points and corporate bankruptcies were very contained, as much of the impact was absorbed by governments. An unprecedented coordination of policy responses took place at EU level. The general escape clause of the Stability and Growth Pact was activated right after the pandemic outbreak, supporting fiscal measures. Agreement on the State Aid Temporary Framework enabled Member States to use the full flexibility foreseen under state aid rules. The European instrument for temporary support to mitigate unemployment risks in an emergency (SURE) protected labour markets. The Coronavirus Response Investment Initiatives (CRII and CRII plus) and REACT-EU mobilised and topped up cohesion policy funds to support the public health sector, enterprises and the most vulnerable population. Financial instruments were made available by the European Stability Mechanism and the European Investment Bank. The effective implementation of reforms and investment Recovery and Resilience Facility (RRF) will help make the EU economy more sustainable, inclusive, resilient and better prepared for the green and digital transition, consistent with the Union objectives in that regard. A concerted global monetary policy response led to accommodative financial conditions. The European Central Bank (ECB) implemented a broad range of measures to preserve financial stability and ensure the smooth functioning of financial markets. It provided additional liquidity for banks, eased collateral requirements, and undertook substantial additional purchases of public and private sector assets. The accommodative monetary policy stance underpinned benign financial market sentiment and helped avoid a credit crunch, and valuations in many bond and stock markets surpassed pre-pandemic levels. Together with longer-term factors, including the excess of savings over investment in the euro area amongst others, high market liquidity ensured low sovereign borrowing costs, in some cases even lower than before the onset of the crisis and spreads within the euro area narrowed. Expectations of a strong recovery added to the positive sentiment in the markets, reinforced by the breakthrough in vaccine developments in autumn 2020. Financial conditions remain at historical low levels but signs of tightening should be monitored. Although sovereign bond yields have risen slightly in 2021, they typically remain well below historical averages. Governments with the strongest ratings enjoy negative or close-to-zero interest rates on their debts, while some increases have occurred in a number of Member States especially outside the euro area. Easy, albeit slightly tightening, financing conditions have been evident in corporate bond markets and bank lending rates have been at or close to record lows in the EU. The euro appreciated in the second half of 2020 before receding somewhat, and this was mirrored by the currencies of a few non-euro area members. Inflation picked up in 2021 but the increase is expected to be mostly transitory. Headline inflation in the euro area rose to a ten-year high in recent months, following below-target inflation over almost a decade. Inflation has been above targets in a number of non-euro area Member States. Energy price increases have been a major contributor to the increase, with core inflation increasing less. The pick-up in inflation is expected to be mostly transitory, although not necessarily short-lived. Some frictions tied to the transition away from fossil fuels may take a while to resolve. The economic reopening has brought a marked increase in demand but activity is constrained by supply bottlenecks. Some pass-through of rising costs to some consumer prices is likely, although its extent is uncertain, and reduced profit margins may absorb some of the increase. The risks of sustained inflation dynamics currently seem contained, as inflation expectations in the euro area remain well anchored and broadly reflect a return to pre-pandemic trends. However, structural adjustments, including the reaction of consumption patterns to the pandemic and industry-specific skills shortages, may affect relative prices and wages, which may increase inflation volatility. A protracted increase in inflation could lead to changes in the timing of the normalisation of monetary policy and result in tighter financial conditions and higher borrowing costs. The EU economy is recovering faster than anticipated but the economic outlook remains uncertain. Across the EU, successful vaccination campaigns have reduced the need for strong containment measures to address future infection waves. Globally, pandemic-related risks remain relevant due to lower vaccination roll-out. Trade is still recovering from the pandemic-induced restrictions and it has been dampened by supply-side bottlenecks, which affect activities highly integrated in global value chains. Lasting re-orientations of value chains generate costs and may bring risks as well as opportunities for EU countries. The erosion of firms’ profitability and the rise in leverage have reduced private investment. This can detract from the recovery, and hamper corporate deleveraging. The withdrawal of policy support may trigger a repricing of risk. Uncertainty could heighten volatility in financial markets with adverse effects on financial and real estate asset prices given a general decoupling of securities prices from economic fundamentals. ( ) ( ) ( ) On the upside, faster progress in controlling the pandemic worldwide and the implementation of ambitious and coordinated reforms and investment across the EU could pave the way for a sustained recovery. The strong recovery is supportive of macroeconomic stability but second round effects from the recession may come with a lag and still pose risks. Amid strong GDP growth, high government and private sector debt ratios have stabilised or are slightly declining in most EU countries after increasing markedly last year. The removal of policy support will inevitably expose potential underlying vulnerabilities in industries and areas most affected by COVID-19. The lifting of moratoria on debt repayments could lead to debt servicing difficulties for firms and households, and result in corporate insolvencies and unemployment. The interlinkages between sovereign and private debts and the financial sector are a mechanism for the transmission of risks. A deterioration in government and private asset quality may affect the balance sheets of financial institutions, whose low profitability has fallen further under the pandemic. Difficulties in servicing debt may reduce investment, household incomes and consumption, dampening economic growth and undermining deleveraging. The pandemic has led to a deterioration of cost competiveness in a number of countries with strong labour cost increases already before the crisis, which are in some cases forecast to continue. House prices are growing at their fastest pace in over a decade, uninterrupted or even reinforced during the pandemic. Unlike the increases in indebtedness, the economic recovery is unlikely to lead to a correction in housing prices, although some short-term supply difficulties may ease. Accelerating house prices are a concern for macroeconomic stability especially when accompanied by high household debt and strong credit growth. Worsening housing affordability can have economic costs by reducing consumption and undermining labour mobility. At the same time, real estate and other asset price corrections could lead to a deterioration of balance sheets of financial institutions. Graph 1.1:GDP in relation to pre-pandemic levels and pre-crisis debt levels and the COVID-19 recession Source: AMECO, Eurostat and European Commission 2021 autumn economic forecasts Spill-overs and euro area adjustment issues ( ) The COVID-19 crisis has exacerbated imbalances within the euro area. The majority of the countries that were most affected by the COVID-19 crisis were those that entered the pandemic with higher government, private sector or external debt, in some cases compounded by low potential GDP growth. The COVID-19 crisis has markedly affected the external positions of net-debtor countries with large tourism sectors with more limited effects on other countries' external accounts. Some of the countries hit hardest by the recession are recovering fast but the recovery in others is progressing more slowly. This suggests that economic growth may contribute less to addressing stock-related imbalances, at least in the near future, and highlights the importance of effective reforms and investment to address structural weaknesses and boost potential GDP going forward. ( ) The euro area trade balance increased slightly in 2020 as output declined in tandem with falling demand. Both exports and imports of goods and services declined in 2020. The surplus of trade in goods strengthened, largely supported by lower energy prices, while the services surplus fell, mainly due to the fall in international travel. Overall, this paused the reduction in the euro area trade surplus that started in 2017. The trade balance is forecast to expand slightly in 2021 and remain broadly constant in 2022 (Graph 1.2). In 2021, despite the still sizeable output gap, euro area core inflation (headline inflation excluding energy and unprocessed food) is expected to pick up while remaining below the headline inflation target.

Graph 1.2:Euro area output, domestic demand, trade balance and core inflation Source: AMECO and European Commission autumn 2021 economic forecast. The euro area current account surplus continued its gradual decline in 2020 to the level consistent with that suggested by euro area fundamentals but is increasing again in 2021. In 2020, the euro area current account recorded a surplus of 2% of GDP (Graph 1.3 a). ( ) Despite the slight increase of the trade balance, slightly lower income balances brought about the small decline of the current account. Both the headline and cyclically-adjusted current accounts that equalled 1.6% of GDP came close to the current account norm that reflects the euro area's economic fundamentals, estimated at 1.7% of GDP. ( ) That reflected domestic demand holding up better than in most trade partners. However, data for the first half of 2021 show an increase in the euro area current account surplus, driven mainly by a higher balance of trade in services. Overall, the euro area current account is currently forecast to return to its 2019 level in 2021. This reflects a return of the difference between GDP and aggregate demand to its pre-pandemic level, and thus the persistency of subdued domestic demand (Graph 1.2). Graph 1.3:Euro area current account by countries; and net lending and borrowing by sectors Source: Eurostat Balance of Payments, AMECO, and European Commission autumn 2021 economic forecast. Graph 1.4:Geographical distribution of the euro area government sector net borrowing Source: Eurostat Balance of Payments and AMECO. In 2020, the main changes to the external balances were sectoral rather than geographical. The current account surpluses of the largest contributors to the euro area surplus, Germany and the Netherlands (Graph 1.3 a), declined further in 2020. The positive contribution by Italy, as well as the negative contribution from France increased somewhat. The increase in the euro area surplus in the first half of 2021 was largely driven by a surge in the current account of Ireland. The contributions from Germany and the Netherlands to the euro area surplus also grew and returned to their 2019 levels. The share of Italy’s surplus further increased and reached that of the Netherlands. The geographical composition of the euro area surplus is currently forecast to remain broadly stable going forward. By contrast, the sectoral contributions to the external balance changed substantially in 2020 (Graph 1.3 b). Increased savings by households and, to a lesser extent, corporations, were offset by strong expansionary fiscal policies. Private sector net lending is forecast to further expand in 2021, driven primarily by the corporate sector and despite a fall in precautionary savings and an increase in consumption by households. Government net borrowing is forecast to remain almost unchanged, with the large increase in the German deficit strongly contributing to the large euro area net government borrowing (Graph 1.4). Government positions are expected to narrow substantially in 2022 (see also Section 2.4 on the government sector). As a decline of similar magnitude is forecast for the private sector net lending, the external position is projected to remain stable. Policy response The pandemic has highlighted the positive role of counter-cyclical discretionary fiscal policy, supportive monetary policies and European coordination in responding to the economic crisis. The COVID-19 crisis has shown that sizeable discretionary fiscal reactions can be effective in mitigating the immediate impact of a large shock, and successful in paving the way for a swift rebound. The immediate national fiscal effort was buttressed by the easing of the EU regulatory frameworks. The collective reaction fostered general economic confidence. Monetary policy measures contributed to preserving favourable financing conditions for all sectors of the economy throughout the pandemic, underpinning economic activity and safeguarding medium-term price stability. The mutually reinforcing effects of fiscal and monetary policies have been crucial for cushioning the impact of the crisis and supporting the recovery. While financing conditions are set to remain supportive, the low interest rate environment and the recent edging up of inflation limit the possibility for further monetary easing. Fiscal policy may thereby need to maintain a stabilisation role if downside risks emerge while prudent budgetary policy in normal times creates confidence in the effectiveness of budgetary policy in times of crisis. Preventing and correcting macroeconomic imbalances remains essential. First, a weak economic recovery could cause a spike in corporate bankruptcies leading to job losses as well as increased calls on crisis-related guarantees for corporate loans and a retrenchment of investment. Second, adverse economic developments could accentuate the sovereign-bank loops. Third, booming asset and house prices could increase the vulnerability of the household sector due to unsustainable asset price booms. ( ) These risks can adversely affect government debt sustainability, and limit the room for fiscal policy to respond to future challenges. Unwinding the build-up of vulnerabilities will also help consolidate the recovery and strengthen long-term growth. More similar economic structures and more synchronised business cycles will contribute to increasing the effectiveness of the common monetary policy. Reducing the high levels of both government and private debt crucially depends on the recovery developing into a sustained expansion, which requires productive investment. The former hinges on a supportive policy stance during the recovery and a well-timed withdrawal of the extraordinary policy support taken over the crisis. The strength of the expansion depends on boosting the economic fundamentals, which requires the implementation of adequate reforms and investment. That is all the more important as a number of countries are marked by high public and private debt and relatively low potential GDP growth. That makes reducing their debt burdens more difficult and calls for a credible return to prudent medium-term positions when economic conditions allow. In light of the interconnections among euro area economies, an appropriate combination of macroeconomic policies across Member States is needed in order to sustain the recovery, while correcting imbalances and addressing emerging risks. An economic expansion in euro area net-creditor countries, including through supportive demand conditions, would not only be beneficial for those countries themselves, but also for net-debtor countries, as higher growth in the euro area supports growth and deleveraging as well as the improvement in external positions in the latter group of countries. A withdrawal of the extraordinary policy support taken over the crisis timed to the adjustment needs would help in that respect. Marked and lasting improvements in productivity and competitiveness in net-debtor countries would also contribute to external rebalancing and help easing the debt burdens. An effective use of instruments put in place at euro area and EU level, with effective implementation of the necessary reforms and investment, would help fostering a durable recovery and strengthening resilience, including by addressing imbalances and emerging risks. It will be crucial that Next Generation EU financing is fully absorbed and channelled to the most productive uses. This would both strengthen the economic impact of the funds and prevent the risk of an excessive growth of non-tradable activities and external imbalances in countries where EU funds inflows account for a large share of GDP. By promoting an investment-rich recovery and strengthening resilience, the effective implementation of reforms and investment under the RRF will contribute to macroeconomic stability. The effective implementation of the recovery and resilience plans will make the EU economy more sustainable, inclusive, resilient and better prepared for the twin transitions. It will also help mitigate the risk of divergences within the EU as the RRF grants are targeted towards Member States with lower GDP per capita and hit the hardest by the COVID-19 crisis. By supporting potential growth, the implementation of the RRPs could improve debt sustainability, especially in Member States facing the highest fiscal risks and too high private debts. Moreover, in contrast to the years following the global financial crisis, higher public investment will support the post-pandemic recovery. RRF grants will fund high-quality investment projects and enable productivity-enhancing reforms, without giving rise to higher national deficit and debt ratios. These grants and other sources of EU financing are estimated to boost public investment in Member States by an average of about 0.5% of GDP per year in 2021 and 2022. 2. Imbalances, risks and adjustment: main developments across countries 2.1. A snapshot of the scoreboard outcomes The AMR builds on an economic reading of the MIP scoreboard of indicators, which provides a filtering device for detecting prima facie evidence of possible risks and vulnerabilities. The scoreboard includes 14 indicators with indicative thresholds in the following areas: external positions, competitiveness, private and government debt, housing markets, the banking sector, and employment. It relies on data of good statistical quality to ensure data stability and cross-country consistency. In accordance with the MIP regulation (Regulation (EU) No 1176/2011), the role of the Commission is to undertake an economic reading of the scoreboard values that enables a deeper understanding of the overall economic context and taking into account country-specific considerations; the scoreboard indicators are not be read mechanically. ( ) A set of 28 auxiliary indicators complements the reading of the scoreboard. In addition, this report uses forecasts, nowcasts and high-frequency data to better gauge the possible evolution of risks for macroeconomic stability. The official AMR scoreboard contains data up to 2020. Given the significant uncertainty around the full impact of the COVID-19 crisis, this report includes a forward-looking assessment of the potential implications of the crisis for macroeconomic stability and the evolution of existing macroeconomic imbalances. That is in line with the approach pursued in the AMR published in November 2020. Values of scoreboard variables for 2021 and subsequent years have been estimated using Commission forecast data and nowcasts are based on in-year data (see Annex 1 for details). There is substantial uncertainty underlying those forecasts and it is necessary to bear this in mind in order to uphold the principles of transparency about analysis and data used, and prudence on the conclusions. In addition, as in previous years, insights from assessment frameworks, as well as findings in existing IDRs and relevant analyses, are also taken into consideration in the AMR assessment. The scoreboard data suggest that the recent correction of stock imbalances has been interrupted with the COVID-19 crisis, while risks of overheating mainly related to housing markets may have become more widespread. Counting the instances of values outside the thresholds in the AMR scoreboard over the years reveals the following (Graph 2.1.1) ·The economic expansion between 2013 and 2019 helped reduce private and government debt-to-GDP ratios, which was reflected in a falling number of Member States exhibiting debt ratios beyond the thresholds until 2019. The COVID-19 crisis interrupted this reduction and more countries have recorded, or are expected to record, readings of private and government debt above the thresholds. ·Higher house prices have led to a growing number of country readings being above the relevant thresholds in recent years. That pattern became clearly more visible in 2020 with more countries exceeding the threshold. ·Unit labour cost (ULC) growth (based on cumulative changes over 3 years) had been above the thresholds in a number of cases before the COVID-19 crisis and ULC further grew sharply in 2020. This was mostly driven by a mechanical effect of a much lower productivity due to reduced activity in a context of significant labour hoarding. ULC growth is expected to slow down as the recovery should allow headline productivity to revive. Readings beyond the real effective exchange rate and export market share thresholds became more numerous in 2020 but are expected to unwind relatively quickly.

·A significant number of Member States has current accounts readings (based on 3-year averages) that continue to surpass either the upper or the lower thresholds. In recent years, there have been more countries with current account surpluses in excess of the upper threshold than countries with deficits beyond the lower threshold. The COVID-19 crisis has not fundamentally changed current account patterns, although a few more countries have marginally crossed the thresholds. ( ) The recovery is expected to help reduce the number of cases of very negative net international investment positions in terms of GDP, which would mean a resumption of pre-pandemic trend of improving external positions. ·The crisis is showing an impact on the labour market. While unemployment rates have remained overall contained, activity rates have declined and crossed the respective threshold in a few Member States amid more people leaving the labour markets, which is also behind the more contained increases in headline unemployment rates. Long-term and especially youth unemployment are exhibiting their usual high sensitivity to changes in the labour market situation. The rest of the AMR looks closely into these and other related issues. Graph 2.1.1:Number of Member States recording scoreboard variables beyond threshold Source: Eurostat and Commission services calculations (see Annex 1) 2.2. External sector and competitiveness 2.2.1.External sector The current accounts of several Member States that have been marked by large stocks of external liabilities were adversely affected by the COVID-19 crisis, while the current account surpluses of several countries remained large. Across the EU, current account balances moved in different directions during 2020, with countries that rely heavily on exports of travel services experiencing strong deteriorations in their current accounts. This included Croatia, Cyprus, Greece, and Malta, and to a smaller extent, Portugal and Spain (Graph 2.2.1). With the exception of Malta, all of them were marked by large stocks of external liabilities before the COVID-19 crisis. Conversely, considerable improvements in current accounts have been recorded in Czechia, Latvia, Lithuania and Poland, mainly on account of higher trade balances, but also supported by rising investment income balances, amid reduced foreign investors’ income in the crisis. Large current account surpluses have declined during the pandemic in Germany, Denmark and in particular in the Netherlands, but they remain sizeable. In the case of Slovenia, the current account surplus increased further. Lower energy prices during 2020 increased the current accounts of nearly all Member States. While changes in external balances remained mostly limited and temporary given the magnitude of the economic shock, there has been a big shift in sectoral contributions to EU countries’ external flows. Households increased their savings for precautionary reasons and because of limited consumption possibilities, while corporates typically reduced their investment amid uncertainty, leading to increases in the net lending/borrowing positions of private sectors (Graph 2.2.3 a, b and c). Conversely, governments intervened to support the economy in the crisis, while simultaneously facing lower revenues, leading to large government net borrowing in all EU countries. The large sectoral swings broadly offset each other and so did not induce substantial changes in the countries’ overall net lending/borrowing positions in most Member States. Graph 2.2.1:Current account balances and benchmarks in 2019 and 2020 Source: Eurostat and Commission services calculations. The current accounts of three Member States were below the lower MIP scoreboard threshold, which reflects the three-year average, in 2020. The large current account deficit of Cyprus continued deteriorating in 2020 reaching -10.1% of GDP mainly on account of reduced international tourism but also due to deepening of the primary income balance deficit. Its three-year average moved further below the MIP threshold. The current account is below its norm as well as below the level required to bring the NIIP at the prudential benchmark over the next 10 years. ( ) ( ) The current account of Romania maintained its steady downward trend by recording a marginal decline to -5% of GDP, which slightly increased the gap to the respective norm. While the current account of Ireland equalled -2.7% of GDP in 2020, the 3-year average came out close to -6%, driven by an exceptionally large deficit in 2019. ( ) In 2020, four Member States had current account surpluses exceeding the upper MIP threshold. That has been the case for Denmark, Germany, and the Netherlands for nearly a decade. The surpluses in Denmark and Germany equalled 8.1% and 6.9% of GDP respectively in 2020, down compared with 2019, and the surplus of the Netherlands fell from 9.4% to 7% of GDP, driven also by the activities of multinational corporations. While the Danish surplus declined as a result of a lower trade balance, in Germany and the Netherlands falls were driven mainly by a lower investment income balance. The high surplus in Slovenia expanded from 6% to 7.4% of GDP during the crisis, amid higher trade and primary income balances. Surpluses in all four countries remained substantially above their respective current account norms and the NIIP-stabilising current account benchmarks. The current accounts of most other EU countries exceeded their country-specific levels suggested by fundamentals in 2020, with some notable exceptions. Both headline and cyclically-adjusted current accounts were above, or close to current accounts justified by fundamentals, as well as above the NIIP-stabilising current accounts in most Member States (Graph 2.2.1). ( ) Notable exceptions were Greece and Portugal, with current account outturns below both the norm and the balance needed to reach the prudential NIIP over 10 years. For both countries, and especially for Greece, the COVID-19 crisis caused a considerable decline in their current accounts, which had strengthened significantly in previous years. Graph 2.2.2:Evolution of current account balances Source: Eurostat, European Commission autumn 2021 economic forecast and Commission services calculations. The current account deficits of countries with substantial cross-border tourism sectors are forecast to slowly improve over 2021 and 2022, while the largest surpluses are mostly but not always expected to mildly decline (Graph 2.2.2). Going forward, a gradual recovery of international travel is expected, which could, however, be uneven and remain incomplete by the forecast horizon (see Box 1 on tourism). It will lend support to improvements in the current accounts of countries strongly relying on tourism exports, most notably Croatia, Cyprus and Greece. Yet the large current account deficit of Cyprus is expected to improve only slowly. The current account of Romania is forecast to further worsen. Conversely, the volatile current account of Ireland is projected to record large surpluses over the forecast period. The large surpluses of Denmark, Germany and Slovenia are forecast to decline, even if only very mildly in the case of Germany, while the surplus of the Netherlands is forecast to rebound to nearly its 2019 level by 2022. From the savings and investment perspective, the contribution of different sectors to external positions is not expected to change substantially in most Member States. While private sectors are expected to mostly remain net lenders, governments are projected to stay net borrowers in 2021 (Graph 2.2.3 d). Within private sectors, the net lending positions of corporations are forecast to increase in most Member States, and that of households to decline somewhat. On average, governments' net borrowing is expected to decrease mildly. Within public sectors, the net lending positions of Member States with a high current account surplus will have an impact on their external position. Graph 2.2.3:Net lending/borrowing by sector in 2019-2021 Source: AMECO and European Commission autumn 2021 economic forecast. During 2020, the net international investment positions (NIIPs) worsened in most large net-debtor countries, while they mostly improved in those with large positive positions. After having increased in all but four EU countries in 2019, there were considerable cross-country differences in NIIP developments during 2020, with the NIIPs of nearly half of the Member States declining. In 2020, there were ten EU countries with NIIPs below the scoreboard threshold of -35% of GDP, one less than in 2019. In all those cases, for 2021, their positions are expected to remain lower than the NIIPs suggested by fundamentals, and in six of them the NIIPs are projected at levels below the prudential thresholds (Graph 2.2.4). ( ) Large negative NIIPs are mainly forecast to improve. In the medium term, three Member States with NIIPs below the -35% mark in 2020 are expected to surpass it. Large positive NIIPs are projected to further increase or remain broadly stable. Graph 2.2.4:Net international investment positions (NIIP) 2019-2022, 2025, and benchmarks in 2021 Source: Eurostat and Commission services calculations (see also Annex 1). The Member States with the largest negative NIIPs experienced the strongest declines during 2020 but the recovery is expected to allow improvements in most cases. Cyprus, Greece, Ireland, and Portugal have NIIPs below -100% of GDP and below their fundamental and prudential benchmarks. They are followed by Spain with an NIIP of around -85% of GDP. With the exception of Ireland, these Member States experienced strong deteriorations in their positions, which in the case of Cyprus and Greece amounted to around 20 percentage points of GDP. The main drivers were the nominal GDP declines, in particular in Greece, and the large current account deficits, especially in Cyprus. In Ireland, as well as in Cyprus, NIIP levels largely reflect cross-border financial relations of multinational enterprises and of special purpose entities. All those five countries are characterised by comparatively large negative NIIP excluding non-defaultable instruments (NENDI), i.e. large shares of net debt liabilities in their external position. ( ) Most of the external liabilities of Greece is composed of public debt at concessional terms. External sustainability of some Member States with large negative NIIPs will be supported by, sometimes sizeable, inflows of grants under the Recovery and Resilience Facility (RRF), in addition to EU transfers under the Multiannual Financial Framework (MFF). Still, current projections suggest stagnation of Cyprus’ NIIP, even in the medium term. Conversely, the NIIPs of other countries with large negative NIIPs should gradually improve towards 2022 and over the medium term, on the back of strong GDP growth and improved current accounts, with the expected progress being exceptionally swift in the case of Ireland, amid large forecast current account surpluses. Most of the EU countries with moderately negative NIIPs did not experience large changes in their positions in 2020 and forecasts suggest improvements in most of them going forward. All of these countries, Croatia, Hungary, Poland, Romania, and Slovakia, are expected to have NIIPs below their fundamental benchmarks in 2021, but only the NIIPs of the latter two Member States are forecast at levels below prudential thresholds. The NIIPs of all these Member States, as well as of other central and eastern European and Baltic countries, are characterised by large stocks of inward foreign direct investment, and NENDIs that are much more favourable than their NIIPs. In addition, these countries are comparatively large recipients of EU transfers under the MFF, which lends non-negligible support to their external positions. The RRF grants that come on top of the MFF transfers further underpin increases in the NIIPs of most of these countries. Overall, forecasts suggest improvements in the NIIPs of these countries going forward, with the exception of Romania whose position is expected to mildly deteriorate (Graph 2.2.4).

Diverging developments in 2020 have been recorded also within the group of Member States with large positive NIIPs. The NIIPs of the Netherlands, Germany, Malta, and Belgium expanded further, on the back of the continued sizeable current account surpluses for the first two countries, and in all four cases helped by the decline in nominal GDP. In particular, the Netherlands, but also Malta, recorded also strong positive valuation effects. Conversely, negative valuation changes limited the increase in the German NIIP. Large positive NIIPs of Denmark and Luxembourg declined amid negative valuation changes, despite strong current account surpluses in the latter two countries. Graph 2.2.5:Nominal effective exchange rates (NEER) Source: European Commission External financing conditions may tighten going forward, which could have consequences for some non-euro area countries. At the onset of the COVID-19 crisis, global financial market tensions were felt in several non-euro area countries. At the time, currencies of some non-euro area Member States, most notably Hungary's forint, were under pressure and depreciated in March and April 2020 but recovered and stabilised already in May (Graph 2.2.5) as the global risk sentiment improved and capital flows stabilised. Some renewed capital flows volatility or tightening of external financing conditions cannot be excluded going forward, partly in anticipation of monetary tightening in the USA and other advanced economies. In this context, non-euro area countries with forecast large net lending positions are less exposed to external (re-)financing risks if these would re-emerge, as are the Member States with substantial foreign exchange reserve stocks. External financing needs, both of the private and the government sectors, also play a role in this context (see section 2.4 on the government sector). 2.2.2.Competitiveness Unit labour costs rose across the EU as a result of marked temporary reductions in headline labour productivity over the COVID-19 crisis. The scoreboard shows ULC growth, based on cumulative growth over the three years to 2020, above the threshold in 18 Member States, compared to eight countries one year ago. Prior to 2020, signs of potential overheating pressures existed in some countries, including Bulgaria, Czechia, Estonia, Hungary, Latvia, Lithuania, Luxembourg, Malta, Romania and Slovakia. In 2020 alone, ULC growth accelerated in 22 Member States. However, this exceptional ULC growth is projected to be partially reversed in many countries in 2021 and 2022, amid generally increased ULC volatility. The impact of the COVID-19 pandemic and structural frictions emerging in the recovery makes changes in cost competitiveness difficult to assess. The sharp acceleration in ULC growth in 2020 and its expected partial reversal in most countries in 2021 and 2022 is dominated by a statistical effect due to extensive labour hoarding and the subsequent fall in headline per capita productivity (Graph 2.2.6). This was induced by the government support to job retention schemes, mainly in the form of temporarily expanded short-time work schemes, which favoured a reduction in hours worked rather than impacting employment levels. The combination of labour market slack and skill shortages point to volatility and uncertainty about ULC developments going forward. These are linked to supply chain issues and frictions from the uneven economic recovery, as well as the accelerated digital transformation and longer term structural changes. Given that recent years have been marked by high ULC growth for many countries, cost competitiveness losses remain a risk to be watched, notably to grasp the extent to which the losses recorded in 2020 can be recouped over the recovery. Policies to promote competitiveness and productivity remain highly important for a sustainable recovery from the COVID-19 crisis. Labour productivity fell in almost all EU countries in 2020, but it is expected to recover this year and next (Graph 2.2.6 c). Labour inputs decreased during the COVID-19 crisis, mainly on account of reduced hours, while headcount employment moved little, supported by government measures including expanded short-time work schemes, the use of which has declined significantly over the recovery. As a result, labour productivity based on the number of employees declined stronger as compared to labour productivity based on hours worked in most countries. In 2021 and 2022, as the recovery sets in and labour hoarding effects are reversed, an upward jump in productivity figures is expected. In 2022, productivity per person is forecast to be above its 2019 level in all Member States, except in Luxembourg, Malta, Portugal and Spain. Wage increases were moderate in 2020, but are expected to pick up, sometimes markedly, in 2021 and 2022. Wage growth was subdued in most EU countries during the COVID-19 crisis (Graph 2.2.6 d). Compensation per employee is forecast to increase at an annual rate of over 5% in Bulgaria, Czechia, Hungary, Italy, Latvia, Lithuania, Poland, Romania and Slovakia in 2021 and 2022. For Belgium, Estonia and Ireland, the increases should average between 4% and 5%. In Bulgaria, Czechia, Estonia, Hungary, Latvia, Lithuania, and Romania and Slovakia, persistently high wage and ULC growth was already a concern before the pandemic, raising questions about cost competitiveness. Across the euro area, ULC developments should return to supporting external rebalancing when the productivity effects have cleared. ULC growth in 2020 was stronger in some net-debtor countries, such as Greece, Portugal and Spain as they recorded sharper recessions and substantial labour hoarding. By 2022, the change in ULC growth will once again have become more supportive of external rebalancing, as it is forecast to be slightly lower in net-debtor than net-creditor ones (Graph 2.2.7). The more limited impact on rebalancing compared to the pre-pandemic time was affected by the lingering impact on productivity, which would need to be addressed to overcome existing divergences. Conversely, employee compensation is forecast to be higher in net-creditor than in net-debtor countries. Graph 2.2.6:Unit labour cost, compensation and productivity growth Source: AMECO and European Commission autumn 2021 economic forecast. Graph 2.2.7:Unit labour cost growth across the euro area Source: AMECO and European Commission autumn 2021 economic forecast Nominal effective exchange rates appreciated in most countries in 2020. The strongest appreciations were recorded for Bulgaria, Greece, Latvia, Lithuania and Sweden. Only Hungary, and to a lesser extent, Czechia and Poland recorded nominal depreciations. The appreciation in nominal effective exchange rates reflects also the appreciation of the euro at the onset of the COVID-19 pandemic and the associated flight to safe haven. In 2021 so far, nominal effective exchange rates have appreciated in most EU countries, although in most cases more moderately than in 2020. HICP-based real effective exchange rates (REERs) appreciated moderately in most Member States in 2020 which partly reflects nominal appreciations. The only countries that witnessed a depreciation of the HICP-based REER were Croatia and Hungary. The strongest appreciations were recorded in Bulgaria, Lithuania and Sweden. This moderate appreciation follows a depreciation witnessed in most Member States in 2019. Going forward, the GDP-deflator-based REER, for which forecasts are available for 2021, suggests that real exchange rates can be expected to increase moderately, with notable appreciations only in Bulgaria, Czechia, Lithuania and Sweden (Graph 2.2.8 b). REER developments are supportive of external rebalancing, but only to a limited extent. Some net-creditor countries, including Denmark, Germany, the Netherlands and Malta exhibited a REER appreciation slightly above the EU average in 2020. Some large net-debtor countries or countries that have been more affected by the COVID-19 recession, such as Cyprus, Croatia, Greece, Italy, Portugal or Spain, recorded some competitiveness gains vis-à-vis those net-creditor countries thanks to lower inflation, as suggested by more moderate REER developments (Graph 2.2.8). This tendency seems to also persist in 2021, suggesting that REER developments remain moderately supportive of external rebalancing in the near-term. Graph 2.2.8:Nominal and real effective exchange rates (NEER and REER) dynamics Source: AMECO and European Commission autumn 2021 economic forecast. Export market shares fluctuated strongly in 2020 and three Member States recorded losses beyond the scoreboard threshold. Based on the cumulated change over five years, France, Greece and Spain recorded substantial export market share losses in excess of the threshold. In contrast, many countries also recorded substantial gains, in the case of Ireland, Lithuania and Poland beyond 30 percent. Export market shares fluctuated strongly in 2020. EU countries, on average, gained some export market shares in 2020 alone, but with strong differences across countries. Some countries with important export market share losses in 2020 are expected to recover only part of the losses in the near future. Apart from in Austria and Estonia, the sharp drop in the services balance in the context of the COVID-19 crisis stopped in recent quarters in Bulgaria, Croatia, Cyprus, Greece, Hungary, Italy, Malta, Portugal and Spain. The services trade balance of Germany remains slightly in surplus, after a sharp improvement since the beginning of 2020. Trade balances in goods developed more favourably in several countries since 2019 and partly offset the decline in the service trade balance. Export market shares are expected to increase particularly strongly in Croatia and Greece and Spain in 2021 and 2022, as cross-border travel recovers, but not in all cases enough to recover all losses witnessed in 2020. Overall, for the period 2020-2022, export market shares are expected to increase most in Estonia, Ireland, Lithuania, Luxembourg and Poland, and to decrease in Greece, Spain, France, and Portugal.

Export market share developments may contribute to some external rebalancing going forward. Countries with large current account surpluses, including Denmark, Germany and the Netherlands, are expected to lose, export market shares over the period 2020-2022. Data for the second quarter of 2021 continue to show service balance surpluses, in percentage of GDP, amidst strengthening goods trade balances in Germany and the Netherlands. Nonetheless, these countries will likely lose part of the export market share gains in services from the COVID-19 period as tourism flows recover. Box 1: Tourism during the COVID-19 crisis Tourism was one of the most heavily affected economic activities in the COVID-19 crisis, as the measures to contain the pandemic included restrictions in the hospitality sector and on international travel. The magnitude of the adverse impact is reflected in the large fall of nights spent by tourists (Graph 1): in April 2020, the number of nights spent in tourist accommodations dropped by 95% as compared to the same month in 2019. A substantial recovery was recorded in the summer months, as domestic tourism came close to 2019 levels in August 2020. Conversely, at the August peak, cross-border tourist nights remained 60% below their level in August 2019. With the second wave of the pandemic, travel activity declined again. A recent, stronger recovery, including in cross-border tourism, started in May 2021. It followed substantial progress in vaccination and in the coordination on cross-border travel rules within the EU, through the introduction of the EU Digital COVID Certificate. Both domestic and cross-border tourism increased in July, as compared to 2020 level, with the latter improving more strongly. Taking also nowcasts for August and September into account suggests that overall tourism activity in summer 2021 increased by around 30% as compared to 2020, but still remains 16% below the 2019 levels, with some compositional changes. ( I ) While domestic tourism seems to have exceeded the levels attained in summer of 2019 during the summer months of 2021, especially in September, cross-border travel still lags behind the pre-pandemic levels by more than 40%. Comparing the first nine months of 2021 with the same period in 2020, shows that tourism performance in 2021 grew only by some 12%, partly reflecting the fact that the first quarter of 2020 was largely unaffected by the pandemic. Graph 1:Tourist nights spent in the EU in 2020 and 2021 Source: Eurostat and European Commission estimates. Member States that rely strongly on exports of travel services were hit especially hard as cross-border travel plunged with the pandemic. The large fall in international tourism had a particularly strong impact on some net-debtor countries, such as Croatia, Cyprus, Greece, Portugal or Spain, that have been recording large surpluses in trade of travel services, as well as for Malta (Graph 2 a). ( II ) For most of these countries, the impact of the decline of international tourism on trade balances broadly accounts for the deterioration in their overall trade balances during 2020. ( III ) ( IV ) The negative effects on large exporters of tourism services are gradually reversing in 2021, as the recovery of cross-border tourism gained momentum. At the other end of the spectrum are countries which normally import more travel services than they export. For them, the reduction in international travel had a partial positive effect on their trade balances, as tourists turned to domestic destinations. Graph 2:Impact of tourism decline on trade balances, and nights spent projections for 2021 Source: Eurostat and European Commissions estimates. Preliminary data on 2021 indicate a partial and gradual recovery in international tourism, which nonetheless varies across countries. The number of nights spent in tourism accommodations by foreign tourists in 2021 is projected to increase substantially in Croatia, Cyprus and Greece, and somewhat less in Spain (Graph 2 b). ( V ) At the same time, a rebound of international tourism activity in Portugal seems more muted, but the level remains slightly above the level projected for Spain. Significant increases in cross-border tourism are projected also for Bulgaria, Italy, Romania and Slovenia and while for e.g. Austria and the Netherlands, along with a few other Member States, declines are expected, likely reflecting different seasonal distributions of foreign tourists’ visits, as well as the travel diversion effects during 2020 and 2021. 2.3. Private debt and housing markets 2.3.1.Private debt Private sector debt ratios increased markedly with the COVID-19 crisis but are forecast to return to their declining trend in 2021 in most countries. In 2020, the private sector debt-to-GDP ratio increased in all EU countries, except Denmark, Ireland and Lithuania (Graph 2.3.1), interrupting the deleveraging that was underway in many countries. The increase in 2020 was principally due to the decrease in GDP but borrowing also increased in most countries, particularly for corporates. Credit guarantees and debt repayment moratoria were important policy measures to overcome liquidity shortages at the beginning of the COVID-19 crisis, but have also contributed to the debt increase. Private sector debt-to-GDP ratios exceeded the scoreboard threshold of 133% of GDP in 12 Member States (Belgium, Cyprus, Denmark, Finland, France, Ireland, Luxembourg, Malta, the Netherlands, Portugal, Spain and Sweden), compared to 10 countries one year ago, when Spain and Malta were below (Graph 2.3.1). There were marked increases for other Member States which stayed below the threshold. Total private debts stocks appear high when compared with benchmarks that account for country-specific economic fundamentals and with thresholds that account for prudential concerns. ( ) This is the case for Belgium, Cyprus, Denmark, France, Greece, Ireland, Luxembourg, Malta, the Netherlands, Portugal, Spain and Sweden. Overall, the COVID-19 crisis has increased risks associated with private debt levels. With the economic recovery, private debt-to-GDP ratios are forecast to start declining in 2021 across the EU (Graph 2.3.1). Nonetheless, they are expected to remain above their 2019 levels in most EU countries. As government support measures are phased out, firms’ and households’ ability to meet their repayment obligations may be compromised, especially sectors among those more severely hit by the COVID-19 crisis and where balance sheets were already weaker before the crisis, leading to a deterioration in debt quality. In addition, the rising debt levels by firms, households, governments and banks also led to higher interconnectedness between sectors, potentially accelerating the transmission of shocks across sectors. Disruptions to global value chains and frictions from the uneven economic recovery, in a context of accelerated digital transformation, pose risks and induce structural changes and a churning of firms and jobs. Graph 2.3.1:Private debt Source: Eurostat, AMECO, European Commission autumn 2021 economic forecast, and Commission services estimates for private debt in 2021 (see Annex 1). Debt comprises loans (F4) and debt securities (F3). 2.3.1.1.Debt of non-financial corporations

Corporate indebtedness increased in most EU countries in 2020, sometimes sharply. In 2020, the corporate debt-to-GDP ratio increased in 19 countries, largely due to the sharp drop in GDP. However, net corporate credit flows also contributed to the increase, in light of marked revenue losses and perceived liquidity shortages in 2020, which also contributed to a strong increase in corporate deposit holdings. Non-financial corporations’ (NFC) debt-to-GDP ratios increased particularly strongly in a number of countries with already high corporate debt levels or large tourism sectors that were hard hit by the recession (Graph 2.3.3 a). These countries include Cyprus, France, Greece, Italy, Malta, Portugal and Spain. Very high levels of corporate debt also continue to exist in Belgium, Ireland, Luxembourg and the Netherlands, although vulnerabilities are partly mitigated by a sizeable share of foreign direct investment loans and cross-border intracompany borrowing. NFCs debt-to-GDP ratios remain high in many Member States and debt ratios were above levels suggested by both economic fundamentals and prudential thresholds in 14 countries in 2020. These are Belgium, Cyprus, Denmark, France, Greece, Ireland, Luxembourg, Malta, the Netherlands, Portugal, Spain, Sweden, and more marginally Austria and Italy (Graph 2.3.2). For most countries, NFC debt is below its previous peak, given the substantial deleveraging that has taken place in recent years, but the pandemic has undone some of this progress. For some countries, such as Austria, Belgium, Denmark, France, Finland, Germany, Greece, Italy, Luxembourg, Poland, Slovakia, and Sweden, corporate debt is at or very close to its highest level since the mid-1990s. Going forward, the high nominal GDP growth will mechanically lower the debt-to-GDP ratio in 2021 and beyond, but starting from higher debt levels. The strong recovery of GDP makes corporate debt-to-GDP ratios likely to decrease – in some cases significantly – in 2021 in all EU countries, except Greece, Hungary and Sweden (Graph 2.3.3 b). Credit flows are expected to exceed their pre-pandemic levels in more than half of the Member States. The high nominal GDP growth will mechanically lower the debt-to-GDP ratio in 2021 and beyond. The exceptional measures put in place in 2020 will be gradually phased out and lead to increased debt repayments. In addition, NFCs may run down the sizeable liquidity buffers they built up in 2020, as uncertainty recedes and as an alternative to new borrowing, which may also help with deleveraging. Graph 2.3.2:Non-financial corporations debt Source: Eurostat, AMECO, European Commission autumn 2021 economic forecast, and Commission services estimates for NFC debt in 2021 (see Annex 1). Debt comprises loans (F4) and debt securities (F3). Graph 2.3.3:Decomposition of the change in NFC debt-to-GDP in 2020 and 2021 Source: AMECO, Eurostat and Commission services estimates and calculations based on ECB monthly data on MFI loans and debt securities transactions (flows) with the private sector from the BSI database, European Commission autumn 2021 economic forecast. Overall, credit flows to NFCs since the beginning of the COVID-19 crisis have had distinctive patterns reflecting different phases of the pandemic (Graph 2.3.3 b). ( ) Bank loans to NFCs increased in over two thirds of Member States in 2020, including in a number of Member States with high NFC debt, such as Denmark, France, Greece, Italy, Malta, the Netherlands, Portugal, Spain and Sweden. That happened against a setting where government credit guarantees helped maintain credit flows and moratoria on debt repayments kept the nominal debts higher than what they would have been. However, credit growth to NFCs clearly lost momentum in some large Member States more recently, attaining rates of increase below the pre-pandemic level in most cases by early 2021, in contrast to the increasing picture in the smaller Member States (Graph 2.3.4 b). To the extent that the demand for credit by NFCs is reduced due to corporations using accumulated liquidity buffers, credit flows may pick up in due course. However, the overall reduction in credit could also be a sign of muted demand for or supply of credit, which could indicate low investment activity ahead. Credit guarantees and debt repayment moratoria helped NFCs ride out the pandemic but increased debt repayment difficulties may still emerge going forward. Credit guarantees and debt repayment moratoria were important policy measures to overcome liquidity shortages at the beginning of the COVID-19 crisis, but have also contributed to the debt increase. In some cases, non-viable and technically insolvent companies will have been able to stay in the market, defer their payment obligations, and delay liquidations that would otherwise have taken place. The delay in debt repayment by NFCs allowed by the moratoria across the EU, either as a government measure or as voluntary initiative by lenders, implied a mechanical increase in the debt stock. The phasing out of repayment moratoria over the course of 2021, may uncover debt repayment difficulties in parts of the corporate sector. The COVID-19 crisis has not resulted in an increase in corporate insolvencies so far, but these may emerge as normality returns, potentially exposing risks for the financial sector. Graph 2.3.4:Gross operating surplus of corporates and bank loan flows to non-financial corporates Source: AMECO and ECB, BSI database. High corporate debt levels and low profitability in some sectors could dent investment and debt repayment prospects going forward. Profitability of corporates deteriorated in most Member States in 2020 (Graph 2.3.4 a). Although profitability of corporates rose in the first months of 2021 in nearly all Member States, vulnerabilities in service sectors more exposed to the pandemic remain. Sustained inflation dynamics could also lead to compressed profit margins and debt repayment difficulties of some firms if costs increase more than revenues, with recent developments in energy prices being a risk factor. Investment in equipment declined since the end of 2019 in all Member States but Cyprus. The decline was strong in a number of countries with large corporate debts, including Ireland, Luxembourg, the Netherlands and Belgium, as well as some countries with large tourism sectors, such as Italy, Malta, Portugal and Spain. High corporate debt levels are a risk factor for private investment going forward, particularly given the additional needs to support the green and digital transformations. As the recovery progresses, there are emergent signs that structural changes may be underway, in a context of increased supply chain disruptions. These are evidenced by the combination of tightness and slack in the labour market and persistent skill mismatches. 2.3.1.2.Household debt Household debt increased with the pandemic in nearly all EU countries. Households in most EU countries were deleveraging in the run-up to the pandemic, but still displayed high levels of indebtedness (Graph 2.3.5). The pandemic interrupted household deleveraging or pushed household indebtedness further up in countries that were already on an increasing debt trajectory (Graph 2.3.6). The increase in household debt-to-GDP ratios in 2020 was, in most cases, due to the large decline in GDP (Graph 2.3.7). This impact will be at least partly reversed in 2021 as the economies start to recover. In a number of countries, dynamic credit growth, particularly mortgage debt, is likely to contribute to a more lasting increase in debt ratios in face of high real estate market activity and accelerating house prices (Graph 2.3.7 b). Overall, a number of countries, particularly those with household debt-to-GDP ratios that were above country-specific benchmarks prior to the pandemic, will continue to display high household debt. In 2020, household debt levels in eight countries were above both what fundamentals and prudential thresholds would suggest. As in 2019, these are Denmark, Finland, France, Greece, the Netherlands, Portugal, Spain and Sweden (Graph 2.3.5). Household debt continues to exceed prudential levels in Belgium and Cyprus, despite being close to what can be explained by fundamentals, while household debt is significantly above fundamentals-based benchmarks in Croatia and Slovakia, despite being still below prudential levels. In some countries, debt ratios appear considerably higher when computed as a share of household gross disposable income. This is the case in Ireland, Luxembourg and Malta, where household debt is estimated to exceed 100% of household gross disposable income. ( ) Graph 2.3.5:Household debt Source: Eurostat, AMECO, European Commission autumn 2021 economic forecast, and Commission services estimates for household debt in 2021 (see Annex 1). Debt comprises loans (F4) and debt securities (F3). Graph 2.3.6:Evolution of household debt-to-GDP ratios across the EU Source: Eurostat and Commission services estimates Household net credit flows were less affected by the pandemic than those of corporates. In 2020, debt moratoria and reduced repayments helped sustain net credit flows to households, with some variation across Member States. In Luxembourg and Sweden, countries with relatively high household debt (in Luxembourg, relative to household gross disposable income), net credit flows to households in 2020 reached around 4 to 5% of GDP. In other countries with relatively high household debt, including Belgium, Finland and France, net flows were more contained and ranged between 2% and 3% of GDP. This was also the case in Slovakia, where household debt remains below the prudential benchmark but has been increasing for a number of years above the level suggested by fundamentals, and in Malta, where household debt has also been increasing and is close to the prudential benchmark. On aggregate, bank lending to households resumed its previous trend after the intense pandemic months. The pandemic marked a temporary decline in the net flow of bank loans (Graph 2.3.8 a). This was most marked in France and Spain (among the large euro area countries) and overall corresponded to a decline in the net flow of loans for consumption (Graph 2.3.8 b). Those patterns may have been linked to restrictions on mobility that hampered consumption opportunities. Conversely mortgage lending remained relatively stable before accelerating towards the end of 2020. Household borrowing has become more dynamic in 2021. Net credit flows to households are expected to be more sizeable in a number of countries this year. Forecasts for changes in debt and net credit flows based on ECB monthly bank lending data (see Annex 1), indicate transactions picking up in most countries. The most marked increases are in Luxembourg, Malta and Sweden, with increases of over 4% of GDP, followed by Belgium, France, and Slovakia (Graph 2.3.7 b). In Finland, among the countries with higher household debt, credit flows to households are expected to remain close to 2% of GDP in 2021.

Although households have increased their savings, risks to their debt servicing capacity could still materialise. The household savings rate increased in 2020, due to forced savings in the lockdown or precautionary motives. In 2021, the aggregate household savings rate is also forecast to be above its 2019 level. Household savings rates remain relatively low in Cyprus and Greece. Denmark has also a significantly lower savings rate than other countries with high debt in terms of households gross disposable income (Graph 2.3.9 a). Over 2020 and early 2021, households accumulated financial assets, particularly deposits, leading to strengthened financial positions. Debt repayment risks related to an increase in unemployment that would negatively affect household income remain limited (Graph 2.3.9 b). However, although households currently face very low interest burdens, a change in the stance of monetary policy may affect their debt servicing capacity, particularly where variable rate contracts predominate. ( ) Graph 2.3.7:Decomposition of the change in household debt-to-GDP in 2020 and 2021 Source: Eurostat. Net credit flows (debt transactions) correspond to transaction of loans (F4) and debt securities (F3) from the Eurostat sectoral financial transactions accounts. Other sources are AMECO and Commission services estimates and calculations based on ECB monthly data on MFI loans and debt securities transactions (flows) with the private sector from the BSI database. Graph 2.3.8:Euro area bank loan flow to households Source: ECB Graph 2.3.9:Household debt, household savings and unemployment risks Source: Eurostat and AMECO. For Malta GDI is obtained using the ratio of household GDI to GDP calculated from data for real GDI per capita, available in Eurostat (B6G_R_HAB). For Bulgaria and Croatia household GDI was also calculated using 2020 GDP and the last available ratio household-GDI-to-GDP, as GDI data for 2020 is not available also for these countries. 2.3.2.Housing In 2020, ten Member States experienced real house price increases above the scoreboard threshold of 6%. These are Austria, Croatia, Estonia, Germany, Lithuania, Luxembourg, the Netherlands, Poland, Portugal and Slovakia (Graph 2.3.10 b), two countries more than one year ago. In the cases of Croatia, Luxembourg, Poland and Slovakia, this is the second consecutive year with house price increases above this threshold, while Portugal has had increases above 6% in every year since 2016. In 2021, house prices have continued growing strongly in most Member States. Real house prices have further accelerated in the first half of this year, with 14 EU countries displaying year-on-year real house price increases beyond 6% (Graph 2.3.10 b). In Czechia, Denmark, Estonia, Latvia and Luxembourg year-on-year real growth exceeded 10%. Over the first two quarters of 2021, real house prices decreased in Cyprus, and to a lesser extent, Romania, and were essentially constant in the cases of Ireland and Italy. The growth of house prices has been driven by a variety of factors fuelling demand and constraining supply. Supply constraints were present before the pandemic and while lockdowns exacerbated them temporarily, they can be expected to persist over coming years. The pandemic may have led to some structural changes in housing demand as a shift to remote working may change geographical preferences. In some locations this could mean demand outpacing supply. Financial conditions have been accommodative and overall are likely to continue supporting elevated housing demand. With household incomes growing with the recovery, further house price growth appears likely. The recent house price increases reinforce the steady upward trend in house prices that has taken place since 2013 across the EU. Real house prices have increased in all Member States with the exception of Italy. The largest increases, by decreasing order, have been observed in Hungary, Luxembourg, Ireland, Portugal, Czechia, Estonia and Lithuania (Graph 2.3.10 a). In 2020, the only EU country that did not see a continuation of this increasing trend was Ireland, which displayed bro