COMMISSION STAFF WORKING DOCUMENT Analysis of the euro area economy Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on the economic policy of the euro area
Date: 2021-11-24
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: EU banking union, coronavirus disease, economic growth, economic reform, epidemic, euro area, fiscal policy, labour market, macroeconomics, structural adjustment

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 24.11.2021  SWD(2021) 362 final  COMMISSION STAFF WORKING DOCUMENT Analysis of the euro area economy Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on the economic policy of the euro area {COM(2021) 742 final}  
 
 
Table of Contents 
Introduction ............................................................................................................................................. 2 

Macro Developments .......................................................................................................................... 2 

Policy developments and progress in the implementation of the 2021 euro area recommendation 5 

1. 

Fiscal and monetary policy mix ....................................................................................................... 6 

1. 

Fiscal Policy Stance ...................................................................................................................... 6 

2.  Composition and quality of public finances ................................................................................ 9 

3.  Revenue policy .......................................................................................................................... 10 

4.  Monetary Policy Stance ............................................................................................................. 11 

2. 

Long-term macroeconomic impact of COVID-19 .......................................................................... 13 

1. 

Impact on capital accumulation and productivity ..................................................................... 14 

2.  Phasing out of support to the corporate sector ........................................................................ 15 

3. 

Labour market challenges ......................................................................................................... 16 

3. 

Structural Policies .......................................................................................................................... 18 

1.  Business environment, access to finance and Capital Market Union ....................................... 18 

2. 

3. 

4. 

Insolvency frameworks .............................................................................................................. 19 

Labour market policies and skills strategies .............................................................................. 20 

Institutional quality and measures to increase fund absorption .............................................. 21 

4.  Macro-Financial Stability ............................................................................................................... 23 

1.  Current state of play .................................................................................................................. 23 

2.  Risks to financial stability and potential reforms ...................................................................... 26 

5. 

The euro area in the World ........................................................................................................... 28 

1. 

The euro area and global economic developments .................................................................. 28 

2.  Global value chains and trade linkages ..................................................................................... 30 

3.  Global Imbalances ..................................................................................................................... 30 

4. 

The International Role of the Euro ............................................................................................ 32 

Annexes ................................................................................................................................................. 33 

Annex 1: 2021 Euro Area Recommendation ..................................................................................... 33 

Annex 2: Correspondence between reforms implemented in the Recovery and Resilience 
Programmes and priorities in the Euro area Recommendation 2021 .............................................. 35 

1 

 
 
 
 
Introduction 
This  Staff  Working  Document  (SWD)  underpins  the  Recommendation  for  a  Council 
recommendation on the economic policy of the euro area (Euro Area Recommendation, EAR). 
The recommendation provides policy guidance on the reforms and investments that euro area 
Member States should put forward, including by implementing their Recovery and Resilience 
Plans (RRP), and highlights areas where Member States could work collectively to improve 
the economic and social resilience of EMU. 

The SWD offers first an overview of the main macroeconomic and policy developments since 
the  2021  Euro  Area  Recommendation  (EAR)1.  It  then  provides  an  assessment  of  the 
developments in five areas of particular relevance: (i) the overall policy stance underpinning 
the recovery; (ii) the medium-term impact of the crisis; (iii) the role of structural reforms to 
ensure  a  sustainable  recovery;  (iv)  macro-financial  stability  and  (v)  the  interconnectedness 
between  the  euro  area  and  the  global  economy.  These  are  areas  where  spillovers  and  euro 
area common goods are particularly important; that are crucial for the correct functioning of 
the euro area; and that are of high relevance in the current recovery context. 

Macro Developments  

A  strong  economic  recovery  has  taken  hold  in  2021  and  the  EU  is  now  moving  into 
expansion. The euro area economy is rebounding faster and more forcefully than previously 
expected  from  the  COVID-19  crisis.  Economic  growth  came  in  at  2.1%  in  2021Q3, 
surpassing expectations. Growth continued unabated at 2.2% in the third quarter, allowing the 
euro area to  virtually  close its  gap with  pre-pandemic output levels  (2019Q4)  – one quarter 
earlier than previously expected. The rebound was driven by consumption of investment, the 
two demand components most hit by the pandemic crisis during the first half of 20202 (Graph 
2). According to the European Commission Autumn 2021 Economic Forecast3, growth in the 
euro  area  economy  is  expected  to  slow  down  to  0.8%  in  the  fourth  quarter  and  achieve  a 
yearly  rate  of  5.0%  in  2021.  The  economy  would  then  continue  expanding  by  a  still  robust 
4.3% in 2022, before moderating to 2.4% in 2023. Importantly, by 2023, real GDP in the euro 
area is expected to converge to the level that was expected before the pandemic hit, based on 
an extrapolation of trend growth in the Forecast (Graph 1).  

The COVID-19 shock had different impacts across sectors and regions. By its nature, the 
crisis had a much stronger impact on services that require physical interaction. At the trough 
of  the  crisis,  gross  value  added  in  contact-intensive  services  fell  by  around  25%4,  against  a 
decrease of 19.5% in manufacturing and 6.5% in other services. By 2020Q2, value added in 
contact-intensive activities still remained 8% below the pre-pandemic level. The impact of the 
crisis  has  also  been  asymmetric  across  regions,  with  areas  with  large  tourist  sectors  being 

1 After the presentation of the proposal by the Commission on 18 November, and the Eurogroup agreement on 16 December 2020 (following 
negotiations  at  technical  level),  the Council  approved the  draft  2021 Council  recommendation  on the  economic  policy  of the  euro  area  in 
January 2021. The Council formally adopted the Council Recommendation on the economic policy of the euro area, on 13 July 2021, after 
the endorsement by the European Council. 
2 See Croitorov, O., Filippeschi, G., Licchetta, M., Pfeiffer, P., Reut, A., Simons, W., Thum-Thysen, A., Vandeplas, A. and Vogel, L. (2021), 
‘The  macroeconomic  impact  of  the  Covid-19  pandemic  in  the  euro  area’,  Quarterly  Report  on  the  Euro  Area  (QREA),  Vol. 20,  No. 2, 
European Commission. 
3 Based on European Commission, (2021), ‘European Economic Forecast: Autumn 2021’, Directorate General for Economic and Financial 
Affairs, Institutional Paper 160, November 2021, Publications Office of the EU 2021, Luxembourg. 
4 Contact-intensive sectors include: arts, entertainment and recreation as well as wholesale and retail trade, transport, accommodation and 
food service activities. 

2 

 
 
                                                           
more severely affected5. Weekly hours worked also dropped significantly in moderately and 
less developed regions. 

Graph 1: GDP level since 2019Q4 versus pre-
crisis trend line (various forecasts)  

Graph 2: Decomposition of quarterly real GDP 
growth in the euro area  

Note: The series are indexed at 2019Q4 = 100. 
Source: AMECO. 

Note:  At  the  date  of  15/11/2021,  the  decomposition  of  quarterly  GDP  in 
2020Q3 is still not available. 
Source: Eurostat. 

Labour  markets  continue  to  recover,  though  pockets  of  labour  market  shortages  are 
emerging.  The  monthly  unemployment  rate  in  the  euro  area  was  7.4%  in  September  2021 
(Graph  3), down  from  a peak of 8.6% in  September 2020 and slightly  below the pre-crisis 
level  recorded  in  January  2020  (7.5%).  Meanwhile,  the  job  vacancy  rate  has  steadily 
increased  since  2020Q1  and  reports  of  pockets  of  labour  shortages  are  starting  to  emerge, 
particularly  in  sectors  where  activity  is  surging  most.  The  broad  use  of  short-time  work 
schemes, including via the Support to Mitigate Unemployment Risks in Emergency (SURE), 
has cushioned the impact of the pandemic on the labour market (see also Section 3). Given the 
widespread use of these schemes, the contraction in employment was most visible in the sharp 
reduction  in  hours  worked.  The  fall  in  headline  employment  (Graph  4)  was  rather  mild 
compared with the recorded loss in output. Total hours worked decreased particularly strongly 
in  contact-intensive  services.  In  the  second  quarter  of  2021,  total  employment  and  average 
hours  worked  per  person  remained  below  their  pre-crisis  levels,  also  reflecting  remaining 
labour  market  slack.  As  the  economy  has  started  recovering,  also  labour  market  conditions 
improved markedly, as both headcount employment and hours worked increased. At the same 
time,  the  number  of  workers  benefiting  from  job  retention  schemes  fell  and  the 
unemployment  rate  decreased  further.  However,  the  recovery  progressed  unevenly  across 
sectors and Member States. According to the European Commission Autumn 2021 Economic 
Forecast,  employment  in  the  euro  area  will  surpass  its  pre-crisis  level  by  2022  and  further 
expand to a record high level in 2023.  

Graph  3:  Euro  area  unemployment  rate,  long-
term  unemployment  rate  and  very  long-term 
unemployment rate  

Graph 4: Euro area hours worked, total 
employment and activity (20-64)  

5 Batista e Silva, F., Marin-Herrera, M.A., Rosina, K., Barranco, R., Freire, S., Schiavina, M. (2018), ‘Analysing spatiotemporal patterns of 
tourism in Europe at high resolution with conventional and bit data sources’. Tourism Management, volume 68, p. 101-115. 

3 

 
 
 
 
                                                           
Source: Eurostat. 

Note: The series are indexed at 2008Q1 = 100. 
Source: Eurostat (Labour Force Survey). 

The  strong  resumption  of  activity  has  been  accompanied  by  a  stronger  than  expected 
pick-up in inflation, but inflationary pressures are expected to abate in 2022. Following 
several years of very low inflation, the recovery has been accompanied by a surge in inflation 
rate. Annual HICP inflation in the euro area hit a ten-year high of 4.1% in October. This swift 
increase  reflects  to  a  large  extent  strong  base  effects,  as  factors  that  dragged  down  prices 
during the pandemic in 2020 are ceasing to play a role this year. In recent months, increases in 
energy prices well above the pre-pandemic levels have ignited new inflationary pressures and 
price increases have become broad-based, also under the impact of disruptions to production 
and logistics in many parts of the world (see also Box 1). Inflation in the euro area is set to 
peak at 3.7% in the last quarter of the year and continue recording high prints in the first half 
of  2022.  Being  to  a  large  extent  linked  to  the  re-opening  of  the  economies  and  ensuing 
economic  adjustment,  the  current  elevated  price  pressures  are  still  expected  to  be  largely 
transitory. Inflation is thus expected to moderate sharply thereafter and fall down to 1.4% by 
2023. 

The  COVID-19  crisis  has  temporarily  increased  divergences  across  the  euro  area.  The 
depth of the economic contraction caused by the pandemic in 2020 varied significantly across 
Member  States.  The  length  and  stringency  of  the  containment  measures,  the  sectoral 
specialisation,  and  degree  of  resilience  have  been  important  factors  in  explaining  the 
differences in the impact of the pandemic crisis across Member States. In spite of a successful 
coordination, the extent and type of policy support also mattered. As the economies re-opened 
and  the  recovery  took  hold,  new  patterns  of  heterogeneity  have  come  to  the  fore.  Notably, 
supply-side disruptions matter most for the countries that have either a high degree of trade 
exposure or a relatively large manufacturing sector. Going forward, the NGEU/Recovery and 
Resilience  Facility  is  set  to  play  an  important  role  in  reducing  divergences  and  improving 
convergence processes within the euro area6.   

6 Estimates from the European Commission seem to confirm that countries that experienced the highest GDP fall in 2020 will be also the 
ones benefiting the most from the facility. See Pfeiffer, P., et al. (2021), ‘Quantifying spillovers of the the Next Generation EU investments’, 
Directorate-General for Economic and Financial Affairs, Discussion Paper 144, European Commission.  

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Policy developments and progress in the implementation of the 2021 euro area 
recommendation 

In  response  to  the  pandemic,  the  euro  area,  the  EU  and  the  Member  States  took  very 
bold policy measures. At the EU level, the policy response included, first, measures granting 
flexibility  to  Member  States  to  support  their  economies  (activation  of  the  general  escape 
clause of the Stability and Growth Pact, temporary framework to use the flexibility under EU 
state aid rules and redirection of cohesion policy funds) and, second, a series of safety nets. 
Throughout 2020, support measures were established for workers (the temporary Support to 
mitigate  Unemployment  Risks  in  an  Emergency  -  SURE);  for  businesses  (Pan-European 
Guarantee  Fund  by  the  European  Investment  Bank);  and  for  Member  States  (European 
Stability Mechanism (ESM)’s Pandemic Crisis Support). Together with sizeable measures put 
in place, individually and in a coordinated manner by Member States, to contain the pandemic 
and  provide  support  to  individual  and  business,  as  well  as  the  resolute  monetary  policy 
interventions by the ECB (see Section 1), the policy response effectively mitigated the impact 
of  the  crisis  on  EU  economies:  it  effectively  mitigated  the  risk  of  further  divergence, 
supported the recovery, and participated to the enhancing of social and economic resilience in 
the euro area by tacking structural challenges.  

The  European  recovery  strategy  is  centred  on  the  Recovery  and  Resilience  Facility 
(RRF). The RRF, as the main component of the NGEU, makes available, through grants and 
loans,  up  to  EUR  723.8  billion  (in  current  prices)  in  financial  support  for  reforms  and 
investment based on Recovery and Resilience Plans (RRPs) proposed by Member States. As 
of Mid-November 2021, 26 EU Member States had submitted their plans to the Commission, 
out  of  which  all  but  one  euro  area  country7.  The  Council  had  adopted  the  recovery  and 
resilience plans of 22 Member States, including of eighteen euro area countries, after positive 
assessments by the Commission. The Commission has already paid close to EUR 50.5 billion 
in  pre-financing  to  euro  area  Member  States  since  August  2021.  With  the  roll-out  of  the 
Recovery and Resilience Facility and first funds disbursed to Member States, the focus now 
turns  to  the  implementation  phase.  The  timely  and  full  implementation  of  reforms  and 
investments  by  Member  States,  in  line  with  the  agreed  milestones  and  targets,  can  spur  the 
recovery, strengthen resilience and ensure a lasting impact on the EU’s society and economy.  

The  RRPs  will  also  be  central  to  implementing  the  recommendation  on  the  economic 
policy  of  the  euro  area.  The  RRPs  of  euro  area  Member  States  need  to  be  consistent  both 
with  the  relevant  country-specific  recommendations  and  with  the  challenges  and  priorities 
“identified  in  the  most  recent  Council  recommendation  on  the  economic  policy  of  the  euro 
area”. The 2021 Council recommendation on the economic policy of the euro area focused on 
five  areas,  with  the  aim  to  (i)  ensure  a  policy  stance  that  supports  the  recovery  from  the 
COVID-19  crisis;  (ii)  further  improve  convergence,  resilience  and  sustainable  and  inclusive 
growth;  (iii)  strengthen  national  institutional  frameworks;  (iv)  ensure  macro-financial 
stability;  and  (v)  complete  the  EMU  and  strengthen  the  international  role  of  the  euro  (see 
Annex  1).  RRPs  contribute 
the  euro  area 
recommendations related to public finances, to structural reforms and to the strengthening of 
the  national  institutional  framework  (see  Annex  2).  Measures  aimed  at  ensuring  macro-
financial stability are comparatively less present in RRPs: only four euro area Member States 
appear to have taken measures to that effect. However, the very creation of NGEU has clearly 
boosted confidence in the euro area, thus contributing to macro-financial stability. Actions to 

implementation  of 

to  progress 

the 

in 

7 As at 15/11/2021, the Netherlands had not yet submitted a Recovery and Resilience Plan.   

5 

 
 
                                                           
make further progress on deepening the Economic and Monetary Union, with specific focus 
on  the  Banking  Union  and  the  Capital  Markets  Union,  are  essentially  collective  tasks  and 
therefore are not addressed as such by the national RRPs.  

Beyond  the  RRF,  the  Union  has  put  forward  an  ambitious  policy  agenda  to  steer  a 
sustainable, fair and inclusive recovery and to make the EU’s economy more resilient to 
future shocks, while transforming our economies and societies in line with the ambition 
of  the  twin  transition.  Since  the  last  EAR  Staff  Working  Document,  the  Commission  has 
taken concrete steps to deliver on our green, digital and social ambitions8. The 2022 Annual 
Sustainable  Growth  Survey  presents  the  four  dimension  of  the  EU  economic  agenda,  as 
guiding  principle  for  EU’s  competitive  sustainability:  (i)  environmental  sustainability;  (ii) 
productivity;  (iii)  fairness;  and  (iv)  macroeconomic  stability.  These  dimensions  are  closely 
interrelated and should be mutually reinforcing; they have guided Member States’ reform and 
investment  agenda  over  the  past  years  and  feature  prominently  among  the  objectives  of  the 
Recovery and Resilience Facility. Moreover, after a temporary adaptation in 2021 due to the 
launch  of  the  Recovery  and  Resilience  Facility,  in  2022  the  annual  cycle  of  economic  and 
employment  policy  coordination,  of  which  the  EAR  are  a  key  part,  is  expected  to  restart, 
supporting  Member  States  to  deliver  on  their  sustainable  growth  agenda.  Finally,  the 
Commission has relaunched the public debate on the review of the EU economic governance 
framework  to  build  broad-based  consensus  on  how  to  enhance  the  effectiveness  and 
transparency  of  the  framework,  tackle  macroeconomic  imbalances  and  address  long-term 
fiscal challenges in a growth-friendly manner, taking into account the lessons learnt from the 
COVID-19 crisis. 

1. Fiscal and monetary policy mix 

The policy mix, which results from the interaction of  monetary and fiscal policies, is  a 
key pillar of the euro area economic policy. The supportive policy mix during the COVID-
19 crisis has ensured effective macroeconomic stabilisation, mitigating risks of scarring and 
supporting rapid economic recovery. Monetary policy has avoided fragmentation in euro-area 
debt  markets  and  has  facilitated  the  transmission  of  fiscal  impulses  to  the  entire  euro  area 
economy,  while  also  increasing  the  available  fiscal  space.  At  the  same  time,  the  fiscal 
response  has  helped  cushion  the  impact  of  the  COVID-19  crisis,  by  ensuring  favourable 
financing conditions and continued access to external funding, as well as by providing direct 
support to firms and households in the euro area. Going forward, a supportive, consistent and 
coordinated policy mix9 will continue to play an important role in strengthening the recovery, 
including  by  stabilising  financial  markets,  and  boosting  potential  growth  by  supporting  the 
economic transition. Fiscal and macroeconomic policies are set to move away from temporary 
emergency  measures  towards  recovery  measures  over  the  short-term  and  towards  more 
sustainable growth-friendly measures over the longer-term.  

1.  Fiscal Policy Stance 

Fiscal policy stance and main components 

Euro  area  Member  States  have  provided  significant  and  timely  fiscal  support  to  their 
economies.  In  2020,  Member  States  provided  an  unprecedented  amount  of  fiscal  support 

8 For more information, see Annual Sustainable Growth Survey 2022. 
9 In full compliance with the Treaty safeguards concerning the respective institutions. 

6 

 
 
                                                           
totalling around 6½% of GDP10. Discretionary fiscal measures adopted since March 2020 are 
expected  to  amount  to  5.2%  of  GDP  in  2021  and  2.8%  of  GDP  in  2022,  while  automatic 
stabilisers  have  also  made  a  significant  contribution.  Temporary  emergency  measures 
supported health systems and compensated workers and firms for pandemic induced income 
losses.  Other  crisis-related  measures  have  included  public  investment  and  other  spending 
focused on ensuring a sustainable recovery.  

With  the  economic  recovery  taking  hold,  fiscal  policy  is  expected  to  pivot  from 
temporary  emergency  measures  to  recovery  support  measures  in  202211.  Temporary 
emergency measures are estimated to represent over half of total discretionary fiscal support 
in  2021  but,  contingent  on  the  evolution  of  the  pandemic,  they  are  projected  to  be  mostly 
phased out in 2022 (Graph 5) and to expire in 2023. In contrast to the gradual winding down 
of temporary emergency measures, the cost of recovery support measures (in part funded by 
RRF grants) is  expected to  increase from  around 1.5%  of GDP in  2021  to  2.3%  of GDP in 
2022. Some of these recovery support measures are expected to last beyond 202212. The euro 
area aggregate general  government deficit is expected to  reach 7.1% of GDP in 2021 but to 
fall  to  3.9%  of  GDP  in  2022,  as  measures  are  withdrawn  and  economic  activity  returns  to 
trend.  The  deficit  projections  from  the  Commission  2021  Autumn  Economic  Forecast  are 
slightly  lower  than  aggregates  calculated  on  the  basis  of  Member  States’  2022  Draft 
Budgetary  Plans.  All  euro-area  Member  States  plan  markedly  lower  deficits  in  2022 
compared to 2021.  

Graph 5: Discretionary fiscal measures in the 
EU, 2020-2022 (% of GDP) ) 

Graph 6: Public investment in the euro area, 
2019-2022 (% of GDP)  

Source: European Commission Autumn 2021 Economic Forecast. 

Source: European Commission Autumn 2021 Economic Forecast. 

Public investment, which had suffered after the  global financial crisis, is set to support 
the recovery in the coming years. Public investment decreased substantially in the aftermath 
of  the  global  financial  crisis  (GFC),  averaging  2.8%  of  GDP  between  2012  and  2016, 
compared  to  3.4%  of  GDP  between  2007  and  2011.  In  net  terms13,  public  investment  has 
remained stagnant for a good part of the last decade, oscillating between -0.1% and 0.1% of 

10 Measured as the year-on-year change in the aggregate primary general government balance. 
11  Temporary  emergency  measures  are  aimed  at  supporting  health  systems  and  compensating  workers  and  firms  for  pandemic-induced 
income losses. They are by nature temporary, with an expiry date in 2023 or earlier.  Recovery support measures include public investment 
and other measures focusing on ensuring a sustainable recovery. They can be either temporary or permanent, and some may be funded by 
RRF grants. Measures with a budgetary impact in 2023 that is below 10% of the initial budgetary impact are considered temporary. 
12 These measures mainly consist of increase in public sector wages, in pensions and social benefits, and reductions in personal income taxes 
and social security contributions. Some non-temporary measures will finance public investment, thus supporting potential growth and fiscal 
sustainability. 

7 

 
 
 
 
                                                           
GDP,  a  level  barely  sufficient  to  maintain  the  public  capital  stock.  In  contrast,  public 
investment  in  euro  area  Member  States  is  forecast  to  reach  3.5%  of  GDP  in  both  2021  and 
2022, compared to 3.3%- of GDP in 2019 (Graph 6). In 2022, almost all Member States are 
expected to  spend more  on public investment  than in  the pre-pandemic  period.  EU funding, 
mostly through RRF grants, is expected to contribute to this increase in public investment in 
the euro area by 0.2% of GDP in both 2021 and 2022. 

Table 1: General Government budgetary position  

Note: Contribution to change in actual balance may not add up to total due to rounding. 
Source: European Commission Autumn 2021 Economic Forecast, Ameco. 

Overall,  the  euro  area  fiscal  stance  –  including  support  from  the  EU  budget  but 
excluding  temporary  emergency  measures  –  is  projected  to  remain  supportive  both  in 
2021  and  2022.  In  2020,  the  euro  area  fiscal  stance  is  estimated  to  have  been  only  slightly 
expansionary (¼% of GDP), as the lockdowns affected the ability of governments to spend on 
permanent activities. In 2021, the fiscal expansion is expected to be sizeable at 1¾% of GDP, 
in  line with  the Council recommendations of spring  (Graph  7). Nationally-financed current 
expenditure is  expected to  provide an expansionary  contribution  of  just over 1% of GDP in 
2021,  with  positive  contributions  also  coming  from  public  investment  and  other  capital 
spending  financed by the national  and EU budgets. The expansionary  contribution  from  the 
EU  budget  (close  to  ½%  of  GDP)  mainly  reflects  the  implementation  of  Member  States’ 
RRPs. A further fiscal expansion of about  1% of GDP is forecast in the euro area for 2022, 
with  almost  all  Member  States  expected  to  maintain  a  supportive  fiscal  stance.  While  the 
aggregate  euro  area  fiscal  stance  appears  appropriate  in  2022,  a  better  composition  and 
calibration could better contribute to medium-term fiscal sustainability.  

Debt dynamics 

After a peak in 2021, the euro area general government debt-to-GDP ratio is set to start 
declining in 2022. The large government deficits recorded in 2020 and 2021, resulting from 
the severe economic recession and the necessary policy response to the COVID-19 pandemic, 
have increased debt levels for all Member States. According to the Autumn 2021 Economic 
Forecast,  the  euro  area  aggregate  debt-to-GDP  ratio  rose  by  around  14  points  to  just  below 
100%  of  GDP  in  2020,  and  is  expected  to  remain  at  around  the  same  level  in  2021.  A 

13 Net public investment is defined as gross fixed capital formation net of the consumption of fixed capital. 

8 

2017201820192020202120222023Total revenue (1)46,246,446,346,646,145,545,5Total expenditure (2)47,146,946,953,853,249,447,9Actual balance (3) = (1) - (2)-0,9-0,4-0,6-7,2-7,1-3,9-2,4Interest expenditure (4)1,91,81,61,51,41,21,2Primary balance (5) = (3) + (4)1,01,41,0-5,7-5,7-2,7-1,2One-offs (6)-0,1-0,1-0,2-0,10,00,00,0Cyclically-adjusted  balance (7)-1,1-0,9-1,4-3,7-5,6-3,8-2,7Cyclically-adjusted primary balance (8) = (7) + (4)   0,80,90,3-2,2-4,2-2,6-1,6Structural budget balance (9) = (7) - (6)-1,0-0,9-1,2-3,6-5,7-3,8-2,7Structural primary balance (10) = (7) - (6) + (4)0,91,00,4-2,1-4,3-2,6-1,6Change in actual balance:0,50,5-0,2-6,60,13,31,5of which change in:   - Cycle 0,80,30,2-4,22,01,50,4   - Interest (reverse sign)0,20,10,20,10,10,20,1   - One-offs-0,20,0-0,10,00,20,00,0   - Structural primary balance-0,30,0-0,5-2,5-2,21,71,1Change in cyclically-adjusted primary balance-0,40,1-0,6-2,5-2,01,61,1Change in structural budget balance-0,10,2-0,3-2,4-2,11,81,1Public debt (% GDP)89,687,585,599,3100,097,997,0 
 
 
                                                                                                                                                                                     
reduction  in  the  ratio  is  forecast  for  2022  (to  close  to  98%  of  GDP)  on  the  back  of  lower 
deficits and the pick-up in nominal GDP growth. Member States’ 2022 Draft Budgetary Plans 
project similar dynamics in the euro area debt-to-GDP ratio. 

The general government debt-to-GDP ratio is expected to remain elevated over the next 
decade. In the euro area, the debt ratio is expected to remain broadly stable, reaching 99% of 
GDP by 203214, although this stabilisation could be hampered in the case of adverse economic 
shocks.  Stochastic  projections,  featuring  the  uncertainty  surrounding  baseline  projections, 
suggest  that  debt-to-GDP  ratio  could  stand  between  more  than  79%  and  112%  of  GDP  by 
2026 with an 80% probability. While it results from appropriate fiscal support throughout the 
crisis, the increase in debt ratios in Member States observed in 2020 could turn into a source 
of vulnerability for macroeconomic stability. A progressive reduction in debt ratios is thus set 
to be a policy objective over the next years across the whole euro area.  

Several  factors  affect  debt  projections.  On  the  one  hand,  longer  debt  maturities  and 
relatively stable financing sources, with a diversified and large investor base, reduce pressure 
on public finances. Moreover, historically low borrowing costs and the continued favourable 
interest  rate-growth  differentials  expected  in  the  coming  years  should  help  governments  to 
stabilise  or  reduce  their  debt  ratios.  The  successful  implementation  of  fiscal  and  growth-
enhancing  reforms  and  investment  under  the  RRF  is  further  expected  to  support  potential 
growth,  improving  debt  sustainability  and  maintaining  favourable  financing  conditions.  On 
the  other  hand,  government  debt  levels  may  increase  if  a  large  number  of  state  guarantees 
materialise.  A  sudden  and  large  reversal  in  the  currently  observed  low-interest  environment 
over  the  medium  term  could  also  aggravate  vulnerabilities.  Finally,  taking  a  longer-term 
perspective,  government spending related to  climate change may  add  to  pressures on public 
finances.  

2.  Composition and quality of public finances 

The  crisis  has  significantly  impacted  public  expenditures  across  the  euro  area,  placing 
considerable strains on Member States’ public finances. Total expenditure to GDP ratio is 
projected to remain broadly stable (53.8% and 53.2% in 2020 and 2021, respectively) before 
decreasing  by  3.8  percentage  points  in  2022.  Most  of  the  increase  in  expenditures  has  been 
directed  to  support  economies  and  citizens,  as  public  support  has  been  extended  to  keep 
businesses and households afloat (see Section 2.1).  

In  a  moment  of  unprecedented  fiscal  efforts  to  support  the  recovery,  measures  to 
improve the composition and quality of public expenditure appear particularly relevant. 
High-quality public investment enhances growth potential, ensures a sustainable and inclusive 
recovery,  and  supports  the  green  and  digital  transitions  and  well-functioning  public 
investment  management  schemes  have  the  potential  to  enhance  its  effectiveness.  These 
schemes rely on financially realistic long-term strategic planning, transparent  and consistent 
project  selection,  capital  budgeting  integrated  in  a  medium-term  perspective,  effective 
procurement, and implementation and monitoring throughout the lifetime of the asset15. Most 
countries  are  using  the  opportunity  presented  by  the  RRF  to  reform  their  public  investment 
management  systems,  for  example  through  reform  of  public  procurement  and/or  increased 

14 The Commission’s debt sustainability analysis (DSA), which combines sensitivity tests and stochastic projections around the baseline, is 
the central tool to assess medium-term debt developments. The Commission baseline scenario assumes that structural primary balances will 
remain constant (before ageing costs) over the projection period.  
15  See  for  example  Kim,  J.  H.,  Fallov,  J.  A.,  and  Groom,  S.  (2020),  ‘Public  investment  management  reference  guide’,  International 
Development  in  Practice,  World  Bank;  IMF,  (2018),  ‘Public  Investment  Management  Assessment  –  Review  and  Update’,  International 
Monetary Fund. . 

9 

 
 
                                                           
administrative  capacity.  Moreover,  Recovery  and  Resilience  Plans  are  required  to  provide 
detailed  information  on  implementation  and  monitoring,  audit  and  control  mechanisms,  as 
well as protection against corruption and fraud. In addition, expenditure reviews may help in 
creating fiscal space for public investments, rationalise public spending and direct it to areas 
in  greater  need.  By  offering  a  better  understanding  on  how  to  spend  public  resources, 
spending reviews can improve the composition of public expenditure, including by targeting 
growth-friendly and sustainable expenditures. In that respect, ‘green budgeting’ tools can also 
support  this  process,  while  helping  address  the  challenges  of  climate  mitigation  and 
environmental  protection16.  For  example,  while  fossil  fuel  subsidies  in  Europe  amounted  to 
EUR 52 billion in 202017, green budgeting efforts suggest that wider environmentally harmful 
subsidies  are  much  larger.  Finally,  effective  public  procurement  systems  can  improve  the 
efficiency of spending, ensuring that public authorities get the best value for money.  

3.  Revenue policy 

Revenue policy has become even more fundamental in the  aftermath of the COVID-19 
crisis. The contraction in consumption and incomes, the negative effect of the crisis on many 
firms  and,  to  a  lesser  extent,  the  temporary  measures  to  cut  or  defer  taxes  during  the  crisis 
contributed  to  a  considerable  decline  in  tax  revenue  in  202018.  Nevertheless,  total  revenues 
increased slightly as a share of GDP in 2020 (to 46.6%, up from 46.3% in 2019), as receipts 
of  some  taxes  did  not  immediately  respond  in  full  to  the  unprecedented  drop  in  economic 
activity.  In  both  2021  and  2022,  total  revenue  is  forecast  to  decline  as  a  share  of  GDP,  as 
growth  in  tax  receipts  slightly  lags  the  strong  rebound  in  GDP,  to  46.1%  and  45.5% 
respectively. 

Graph 7: Euro area fiscal stance, 2020-2022 (% 
of GDP)  

Graph  8:  Structure  of  taxation  by  economic 
function of the tax base, 2019 (% of GDP) 

Source: European Commission Autumn 2021 Economic Forecast. 

Note:  2019  is  the  last  year  for  which  data  on  structure  of  taxation  by 
economic function is available 
Source:  European  Commission,  Taxation  trends  in  the  European  Union, 
2021. 

There  is  scope  to  make  tax  systems  more  growth-and  environment-friendly.  The  tax 
burden in the euro area remains high, and above that in other advanced economies. In 2019, 
the last year for which data is available, the tax burden in the euro area (40.5% of GDP) was 

16  See  for  example  Bova,  E.  (2021)  ‘Green  Budgeting  Practices  in  the  EU:  A  First  Review’,  Economic and  Financial  Affairs,  Discussion 
Paper 14, European Commission.  
17 See ‘State of the Energy Union 2021 – Contributing to the European Green Deal and the Union’s recovery’, European Commission, 
COM(2021) 950 final. 
18 See European Commission, (2021), ‘Taxation Trends in the European Union 2021.  

10 

 
 
 
 
                                                           
6.7  percentage  points  above  the  OECD  average.  The  overall  tax  burden  is  skewed  towards 
labour and production factors, with more growth-friendly environmental taxes representing a 
small share of tax revenues. Labour tax provides just over half of revenues in the euro area, 
followed by consumption and capital taxes. By comparison, corporate income taxes (circa 7% 
of  total  receipts),  environmental  taxes  (circa  6%)  and  property  taxes  (circa  5%)  contribute 
relatively  little.  Moreover,  the  tax  wedge  on  labour19  in  the  majority  of  euro  area  Member 
States  remains  above  the  OECD  average,  despite  recently  decreasing.  A  greater  use  of 
environmental taxes, while being careful to mitigate possible negative distributional effects20, 
could  support  revenues  and  boost  GDP,  contribute  to  behavioural  changes  and  make  the 
polluters pay21,22. There are a number of national examples that are proven, and could be more 
widely  adopted  in  Europe.  Environmental  taxes  are  considered  relatively  less  distortive  for 
market  outcomes,  in  part  due  to  Pigouvian  effects,  and  are  generally  characterised  by  low 
administrative  cost  and  relative  ease  of  management.  Government  revenues  from  the 
auctioning of emissions permits, including the EU Emission Trading System, are also treated 
as tax receipts and are an important source of revenue.  

A robust, efficient and fair corporate tax framework is important for the recovery and 
to ensure a level playing field. A sizeable tax gap in the euro area, highlights risks linked to 
tax evasion and tax avoidance practices. The increasing digitalisation of the economy and the 
internationalisation  of  businesses  has  eroded  the  relevance  of  the  concept  of  tax  residence. 
Companies are able to carry out their activities across the world and book the profits derived 
from  these  activities  in  low  tax  jurisdictions.  In  that  context,  differences  between  Member 
States’  tax  systems  can  create  compliance  cost  for  businesses  and  carry  risks  of  double 
taxation.  It  also  leads  to  loopholes  and  complexities  that  can  leave  open  opportunities  for 
aggressive tax planning, hampering the level playing field.  At the international level, efforts 
have  been  made  to  reform  the  global  corporate  tax  framework.  In  October,  137  member 
jurisdictions  of the OECD/G20  Inclusive Framework reached an  agreement  on a solution  to 
ensure  a  fair  allocation  of  taxing  rights  and  a  minimum  effective  taxation  of  large 
multinationals’ profits, subsequently endorsed by G20 Finance Ministers and G20 leaders. All 
EU Member States support the agreement. A number of Member States have also put forward 
measures  in  the  Recovery  and  Resilience  Plans  to  address  aggressive  tax  planning.  In  this 
context,  efforts  to  fight  tax  evasion  and  tax  fraud,  through  digitalisation  and  exchange  of 
information, also remain a priority. 

4.  Monetary Policy Stance 

Since  the  outset  of  the  crisis,  the  ECB  has  put  in  place  forceful  monetary  policy 
measures. These were aimed at supporting credit supply and ensuring the smooth functioning 
of different financial market segments (i.e. sovereign, commercial paper, corporate bond), in 
order to offset the downward impact of the pandemic on price stability over the medium term. 
These  measures  mostly  consisted  of  (i)  additional  asset  purchases;  (ii)  easing  of  collateral 

19 Defined as the sum of personal income taxes and employee and employer social security contributions net of family allowances, expressed 
as a percentage of total labour costs. 
20 At the same time, the political viability of some measures could be limited, in particular at a time of high energy prices. See Murauskaite-
Bull, I. and Caramizaru, E. (2021), ‘Energy taxation and its societal effects’, Publications Office of the European Union, Luxembourg, EUR 
30552 EN. 
21  In  line  with  the  recommendations  in  the  European  Court  of  Auditors'  Special  Report  No  12/2021,  ‘The  Polluter  Pays  Principle: 
Inconsistent application across EU environmental policies and actions’. 
22 The 2021 study ‘Green taxation and other economic instruments’ examines the potential for internalisation of environmental externalities. 
It finds that the costs of air pollution, GHGs and water pollution alone amount to at least EUR 750 billion per year across the EU. However, 
polluters are charged only 44% of the cost of air pollution and GHGs, whilst water polluters pay almost nothing. See European Commission 
(2021), ‘Green taxation and other economic instruments. Internalising environmental costs to make the polluter pay’, Publications Office of 
the European Union, Luxembourg. 

11 

 
 
                                                           
requirements; and (iii) new and more favourable liquidity provision operations. By providing 
over EUR 2.2 trillion of funding through its different liquidity-provision operations, notably 
the third series of targeted longer-term refinancing operations (TLTROs III), the Eurosystem 
has  ensured  that  banks  could  continue  to  grant  loans  at  favourable  terms  to  firms  and 
households.  

Graph 9: ECB deposit rates and balance sheet of 
the Eurosystem  

Graph 10: Inflation Expectations  

Source: European Central Bank. 

Source: Bloomberg. 

The  ECB  monetary  policy  stance  is  expected  to  remain  accommodative.  It  will  support 
the ongoing recovery and, ultimately, bring inflation durably to its 2% target. Following the 
adoption of a new monetary policy strategy in July 2021, which has in particular introduced a 
2%  symmetric  inflation  target  over  the  medium  term,  the  ECB  has  revised  its  forward 
guidance on policy rates. According to the new forward guidance, the ECB expects to keep its 
key interest rates at their current levels or lower, until it sees inflation reaching 2% well ahead 
of the end of its projection horizon (currently 2023) and durably for the rest of the projection 
horizon, supported by sufficient progress in underlying inflation.  

Box 2: Inflation dynamics  

Inflation has picked up in the euro area since the beginning of the year, following years 
of inflation well below the definition of price stability. Headline inflation rose to a ten-year 
high  of  3.4%  in  September  2021,  while  core  inflation  in  the  euro  area  remained  at  1.9%. 
Eurostat’s flash estimate for October stood even higher, at 4.1%. This swift increase reflects 
to a large extent strong base effects. Moreover,  a number of factors put  upward pressure on 
consumer  prices,  including  rising  energy  and  commodity  prices,  supply  chain  bottlenecks, 
resulting in a shortage of inputs and capacity constraints in a context of strong demand both at 
home  and  abroad.  The  observed  inflation  dynamics  differ  across  euro  area  Member  States; 
however,  while  certain  measures  of  inflation  dispersion  have  picked  up,  they  remain  of  an 
order  of  magnitude  observed  over  the  past  decade23.  An  increase  in  inflation  was  expected 
with the economic recovery. Still, and although the hike in price is contained in comparison to 
other large economies such as the US, UK and Canada, the speed and magnitude of the pick-
up  have  come  as  a  surprise.  Going  forward,  the  Commission  Autumn  2021  Economic 

23  The  slight  increase  in  inflation  dispersion  measures  can  be  attributed  to  the  uneven  and  sometimes  unsynchronised  severity  of  the 
pandemic and of restrictions, as well as pandemic-related policy measures that have directly affected national prices and inflation, notably 
shifts in  seasonal  sales  or  generalised  or  sectoral  indirect  tax  reductions. Moreover,  the uneven  reaction to  the  recent hikes in  oil and  gas 
prices further pushed up dispersion. 

12 

 
 
 
 
                                                           
Forecast  expects  the direct  impact  of the current  increases in  higher energy  and commodity 
prices to further raise inflation before progressively fading out. Inflation in the euro area is set 
to peak at 3.7% in the last quarter of the year and continue recording high prints in the first 
half of 2022, before starting to decrease by the end of 2022. Annual inflation is thus projected 
to reach 2.4% and 2.2% in 2021 and 2022, respectively. 

While  driven  by  temporary  factors,  the  current  inflation  increase,  if  sustained,  could 
have consequences for wage formation and price setting. Being to a large extent linked to 
the  post-pandemic  re-opening  and  ensuing  economic  adjustment,  the  current  elevated  price 
pressures  are  expected  to  be  largely  transitory.  Inflation  expectations  have  picked  up,  but 
remain  anchored  below  2%.  Moreover,  despite  signs  of  tightening  in  some  labour  market 
segments, there are, for the time being, no indications of strong wage pressures. However, the 
risk  of  mutually  reinforcing  wage/price  dynamics  increases  with  the  length  of  the  supply 
disruptions and labour shortages. Rising inflation would affect in particular low-wage earners 
with  potential  increases  in  in-work  poverty.  In  addition,  the  pandemic  is  also  causing 
structural changes that may impact inflation in the medium term. The COVID-19 pandemic is 
likely to remain as a potential localised threat and disruptor of economic activity, which may 
influence strategic business decisions, notably those related to cross-border fragmentation of 
production.  Supply  constraints  seem  to  be  driving  up  producer  prices,  however  more 
markedly in industry than in services. In addition, in the event that the energy price increases 
are  more  permanent  than  expected,  this  could  have  implications  for  the  overall  inflation 
dynamics  and  economic  activity,  as  higher  energy  prices  could  affect  supply  chains,  profit 
margins  and  the  likelihood  for  pass  through  to  consumer  prices  and  to  the  wage  bargaining 
process. 

Inflation  developments  have  important  implications  for  monetary  policy,  fiscal  policy 
and convergence capacity of the euro area. As elevated inflation has been unusual over the 
past  decade,  the  recent  inflationary  dynamics  force  policy-makers  to  account  for  a  different 
policy  environment.  High  inflation  pressures,  if  persistent,  could  be  followed  by  monetary 
tightening and also lead to higher inflation risk premia on government bond yields, weighing 
on public finances. At the same time, an increase in inflation could, in the short term, reduce 
the real value of debt with an impact on the debt holders’ balance sheets. 

2. Long-term macroeconomic impact of COVID-19  

A strong economic recovery has taken hold in the euro area  in 2021, pointing to lower 
than  initially  feared  scarring  effects.  While  activity  and  labour  market  seem  to  have 
rebounded, there remains uncertainty around the long-term impact of COVID-19 on potential 
output. Historical evidence suggests that economic scarring following recessions is common, 
although  the  magnitude  of  the  losses  varies  greatly  among  types  of  crises24.  In  particular, 
there remains uncertainty –linked in part to data limitations- over the economic impact of the 
COVID-19 crises on  capital  accumulation and productivity, the impact  of unwinding policy 
support on corporates and over developments in the labour market25.  

24 The latest IMF Staff Country Report (2021), ‘Austria – Selected Issues’ shows that permanent output losses after a crisis ranges from less 
than 5% (currency crisis and health crisis), to over 10% (civil wars). See also Dieppe, A. (2021), ‘Global Productivity: Trends, Drivers, and 
Policies’, Advance Edition. World Bank Group. 
25 See European Commission, ‘Adjustment to large shocks in the euro area - insights from the COVID-19 pandemic’, technical note for the 
Eurogroup, 2021. 

13 

 
 
 
 
                                                           
1.  Impact on capital accumulation and productivity 

The contraction in gross fixed capital formation (GFCF) in 2020 turned out to be short-
lived but the recovery remains incomplete. After a strong contraction in GFCF in the first 
half  of  2020  (-23%  versus  2019Q4)  GFCF  rebounded  strongly  in  2020Q3  and  continued  to 
grow  since,  albeit  at  a  much  slower  pace  (Graph  11).  Nevertheless,  the  recovery  remains 
incomplete and, by mid-2021, GFCF was about 9 % below its pre COVID-19 levels26. Going 
forward, the pre-crisis level of GFCF is expected be reached in the course of 2022. The lower 
accumulation  of  capital  and  slower  adoption  of  capital-embodied  new  technologies  could 
weigh  on  lower  labour  productivity27,  while  the  mobility  restriction  and  the  reduced 
possibility  of  face-to-face  contact  could  also  hinder  knowledge  acquisition  and  transfer.  As 
observed  in  the  aftermath  of  the  global  financial  crisis,  weak  capital  accumulation  in  some 
Member States can translate into uneven recoveries and widening growth divergences within 
the euro area.  

Graph 11: Gross Fixed Capital Formation in the 
euro  area  (real  terms)  during  COVID-19  and 
GFC  

Graph 12: Number of bankruptcies and business 
registrations in the euro area  

Note: Q0 = 2019Q4 in COVID-19 and 2008Q1 in global financial crisis.  
Source: Eurostat. 

Note: The series are indexed at 2015Q1 = 100. 
Source: Eurostat. 

Corporate  debt  increased  further  during  the  COVID-19  crisis,  risking  to  drag  on 
investment.  Revenue  losses  might  have  constrained  firms’  ability  to  finance  investment 
projects.  By  mid-2021,  around  one-third  of  all  euro-area  businesses  were  estimated  to  have 
accumulated losses beyond their  cash buffers28, indicating the protracted and deep nature of 
the  shock.  These  losses  pushed  non-financial  corporations’  consolidated  debt-to-GDP  ratio 
from 76.2% in 2020Q1 to 83.1% in 2021Q1, before decreasing again to 80.5 in 2021Q2. In 
particular, the increase in indebtedness seems to be concentrated in a subset of already highly 
leveraged  companies29.  The  resulting  deleveraging  needs  may  stifle  corporate  investment 
going forward,  with  negative implications for the recovery.  Recent  analysis30 found that, on 

26 However, it is broadly unchanged from 2019Q4 if the volatile Irish data are excluded from the comparison. 
27 See Adler, G., Duval, R., Furceri, D., Kılıç Çelik, S., Koloskova, K., Poplawski Ribeiro, M. (2017), ‘Gone with the Headwinds; Global 
Productivity’, IMF Staff Discussion Notes 2017/004, IMF. 
28 Croitorov, O. et al. (2021), ‘The macroeconomic impact of the Covid-19 pandemic in the euro area’, Quarterly Report on the Euro Area 
(QREA), Vol. 20, No. 2 (2021), European Commission. 
29 See ECB Financial Stability Review, 2021, May.  
30  Demmou,  L.,  Calligaris,  S.,  Franco,  G.,  Dlugosch,  D.,  Adalet  McGowan  M.  and  Sakha,  S.  (2021),  ‘Insolvency  and  debt  overhang 
following the COVID-19 outbreak: Assessment of risks and policy responses’, OECD WP 1651. 

14 

 
 
 
 
                                                           
average, a percentage point increase in the equity leverage ratio between 2019 and 2020 was 
associated with a 2% drop in capital expenditures.  

On  the  upside,  the  twin  transition  could  have  a  positive  impact  on  investment  and 
productivity.  The  accelerated  adoption  of  digital  technologies  during  the  pandemic  could 
have lasting impact on companies31. In addition, during the pandemic and similar to the trends 
observed during the global financial crisis, investment in intellectual property (e.g. investment 
in software and research and development) has held up better than investment in machinery 
and  equipment.  Most  RRPs  aim  to  promote  digitalisation  across  public  and  private  sectors 
(especially  SMEs),  and  will  provide  further  impetus  to  that  trend.  In  addition,  the  need  for 
companies to adapt to the green transition will translate into significant investment needs, in 
particular to tackle the impacts of weather events and reduce carbon emissions32.  

2.  Phasing out of support to the corporate sector 

In  2020  and  2021,  the  policy  response  focused  on  easing  firms’  liquidity  pressures  to 
prevent  bankruptcy  of  viable  firms.  Liquidity  measures  taken  at  national  level  included 
loan moratoria; state guarantees in support of credit flow. They added to the support provided, 
in particular by job retention programmes, to mitigate the impact of the crisis on employment 
and  firm’s  viability.  Besides  financial  and  liquidity  support,  temporary  adjustments  to 
insolvency  frameworks  (e.g.  suspension  of  the  obligation  to  file  for  bankruptcy)  have  also 
contributed to reduce number of bankruptcies. As a result, and despite the large contraction in 
GDP, the number of bankruptcy filings fell in 2020 as compared with the situation before the 
COVID-19  outbreak  (Graph  12).  As  support  schemes  are  being  phased  out,  quarterly  data 
suggest  that  bankruptcies  have  started  growing  in  the  euro  area  as  a  whole  in  2021. 
Bankruptcies  are  also  above  pre-crisis  levels  in  some  of  the  sectors  most  affected  by  the 
COVID-19  pandemic,  notably  accommodation  and  food.  There  is  a  risks  of  significant  job 
shedding in these sectors, depending on the extent to which the demand for the related goods 
and services will recover.  

Calibrating  the  phasing  out  of  policy  support  measures  can  mitigate  an  increase  in 
business  failures  and  capital  retirement,  and  allow  for  a  job-richer  recovery.  As  the 
emergency policy support measures for firms are lifted too abruptly, this might contribute to 
an  increase  in  corporate  distress,  in  turn  raising  financing  constraints.  Available  estimates 
suggest remaining pockets of underlying financial vulnerabilities among firms mainly because 
of depletion of equity following protracted periods of losses, and because of high debt burden, 
notably in the sectors most affected by COVID-1933. Measures to avoid excessive corporate 
deleveraging  have  included  providing  equity  and  quasi-equity,  or  incentives  to  mobilise 
private capital. Still, recent surveys suggest that businesses expect insolvencies to increase in 
the next two years, particularly in high-contact services sectors34.  

Meanwhile,  excessive  prolongation  of  support  measures  would  risk  keeping 
unproductive  and  unviable  businesses  afloat,  with negative  impact  on  productivity.  By 
pushing unproductive firms into bankruptcy, crisis have a “cleansing effect” on the corporate 
sector  conducive  of  faster  productivity  growth  in  the  ensuing  recovery.  On  the  contrary, 

31  McKinsey  (2020),  ‘How  COVID-19  has  pushed  companies  over  the  technology  tipping  point—and  transformed  business  forever’,  5 
October.  
32 ECB (2021), ‘The euro area capital stock since the beginning of the COVID-19 pandemic’, ECB Economic Bulletin Issue 2/2021. 
33 See Archanskaia L., Canton E., Hobza A., Nikolov P., Simons W. (2021). ‘The sectoral impact of the COVID-19 shock: a novel approach 
to quantifying its economic impact’, Forthcoming. 
34 OECD (2021) Economic Policy Survey, Euro Area. 

15 

 
 
                                                           
extended  financial  support  to  companies  can  give  rise  to  so-called  “zombie  firms”,  which 
have  very  low  productivity  but  survive  thanks  to  poorly  targeted  support  schemes.  While 
Member  States  generally  set  up  broad  and  unconditional  support  scheme,  preliminary 
evidence suggest that financial support did not benefit predominantly companies with lower 
productivity, indicating that long-term negative impact on business dynamics and productivity 
may  be  contained35.  In  addition,  data  for  2021Q2  suggests  that  business  registrations  are 
already above pre-COVID levels (Graph 12). 

3.  Labour market challenges  

The policy response has helped keeping the unemployment rate broadly stable through 
the crisis. During the first wave of the pandemic, the number of jobs benefiting from national 
and  EU  public  support  through  short-time  work  schemes  and  similar  measures  reached 
unprecedented levels, peaking at 23.5% of total  employment in the euro area in April 2020. 
As  a  result,  the  initial  impact  of  the  crisis  on  the  unemployment  rate  remained  well  below 
what  would  be  implied  by  the  historical  relationship  between  unemployment  and  GDP 
growth36. Reflecting the easing of restrictions, the number of workers in job retention schemes 
declined  significantly  in  2021,  decreasing  to  2.7%  of  the  labour  force  in  July  2021  (or  4.1 
million  people)37.  While  the  phasing  out  of  job  retention  schemes  is  set  to  lead  to  further 
reduction  in  those  numbers,  the  number  of  beneficiaries  remains  testimony  of  the  still 
incomplete  adjustment  of labour  market.  In particular, a number of sectors, such as tourism 
and hospitality, have not recovered their pre-crisis level and may not recover fully in the near 
future.  While  short-time  work  schemes  and  other  job  retention  measures  have  effectively 
mitigated  the  negative  impact  of  the  pandemic  on  the  European  labour  market,  their 
prolongation may, under some conditions, hamper transitions between jobs and sectors.  

The  impact  of  the  crisis,  and  the  ensuing  recovery,  has  been  uneven  across  Member 
States  and  sectors.  The  recovery  will  sustain  job  creation,  but  getting  back  to  pre-crisis 
employment  levels  is  not  expected  before  2022  in  the  euro  area,  and  will  occur  at  different 
pace across Member States, regions and sectors. By its nature, the COVID-19 shock has had a 
much stronger impact on services activities that require physical interaction and has thus been 
more  detrimental  to  euro  area  countries  where  those  activities  predominate.  Consistently, 
employment decreased especially in sectors most hit by the pandemic (Graph 13). The speed 
and extent of the return of workers to employment will depend largely on the resilience of the 
different sectors, as well as the speed and completeness of their recovery. At the same time, 
supply-chain  bottlenecks  may  slow  down  the  rebound  of  employment  in  manufacturing,  as 
observed in some Member States. 

Though  the  recovery  will  take  some  time  to  fully  materialise,  labour  shortages  are 
already  manifesting  in  some  sectors.  In  2020,  labour  shortages,  which  had  reached  an 
historical peak in 2019, declined in almost all Member States. Containment measures linked 
to the pandemic and the resulting economic disruptions drove the decline in labour shortages 
as many firms withdrew their job openings during the lockdown. Vacancy rates reached 1.6% 
in 2020Q2, compared to 2.3% a year earlier. Since then, labour shortages are on the rise again 
in  most  Member  States.  The  situation  nonetheless  varies  across  countries  and  sectors.  In 
industry, labour shortages are rising rapidly and exceed their pre-pandemic levels on average 

35 On the risk of lending to non-viable firms (‘zombification), see Laeven L., Schepens, G. and Schnabel, I. (2020), ‘Zombification in Europe 
in  times  of  pandemic’.  Also  see  Bighelli,  T.,  Lalinsky,  T.  and di  Mauro, F.  (2021),  ‘Covid-19  government  support  may  have  not  been as 
unproductively distributed as feared’, VOX, CEPR Policy Portal (voxeu.org). 
36 See European Commission (2020), ‘Labour Market and Wage Development in Europe’, Publications Office of the European Union, 
Luxembourg. 
37 ECB (2021), Economic Bulletin, Issue 6/2021.   

16 

 
 
                                                           
in  the  EU,  while  overall  they  remain  below  their  pre-pandemic  levels  in  services.  In 
construction, they have by now returned to their pre-pandemic levels.  In some sectors, such 
as construction and information and communication, shortages constituted a structural feature 
already  before  the  COVID-19  pandemic  while  in  other  sectors,  the  current  shortage  can  be 
more  directly  linked  to  the  on-going  post-COVID  recovery.  These  are  partly  driven  by 
remaining health concerns of workers to come back to high-contact occupations, uncertainties 
about  business  closures  and  re-openings  (hospitality),  or  lower  labour  intra-EU  labour 
mobility  and  migration  flows  (agriculture  and  health  sector).  Furthermore,  the  pandemic 
accelerated the shift towards higher-skilled jobs. As such, the increasing labour shortages may 
not only reflect the quick recovery from the deep recession and a decrease in the number of 
migrant workers, but also signal rising skills mismatches linked to the twin transition. 

Graph  13:  Change  in  employment  in  various 
sectors  between  2019Q4  and  2021Q2 
(% 
change) 

Graph 14: Change between 2019Q4 and 2021Q2 
in  employment  by  type  of  contract,  skill  level, 
gender and age (% change) 

Note: The graph only takes into consideration those sectors that experienced 
a fall in employment level. 
Source: Eurostat (Labour Force Survey). 

Source: Eurostat (Labour Force Survey). 

The  COVID-19  crisis  and  the  structural  transformation  it  has  accelerated  have 
persistent  distributional  implications38  (Graph  14).  In  contrast  with  initial  expectations, 
available  figures  suggest  that  women  and  men  were  affected  to  a  similar  extent  by  the 
pandemic, though at the peak of the pandemic total hours worked dropped more substantially 
among  women  than  men39.  The  COVID-19  crisis  impacted  strongly  young  people,  due  to 
their  over-representation  in  hardest-hit  industries  (e.g.  art  and  entertainment,  travel  and 
transport, tourism and hospitality) and in  non-standard jobs. As a consequence, the share of 
those (aged 15-29) neither in employment, nor in education and training (NEETs) has risen in 
the euro area, after 6 years of constant decline. The highly asymmetric impact of the COVID-
19  crisis  on  the  labour  market  may  also  increase  income  differences,  in  particular  between 
high-skilled workers that could telework and low-skilled workers in sectors badly hit by the 
crisis  (e.g.  tourism).  Differences  in  skills  levels  may  in  turn  risk  exacerbating  income 
inequalities.  Low-skilled  individuals  have  experienced  among  the  largest  negative  falls  in 
employment. This risk is further compounded by the fact that the pandemic has disrupted the 
provision  of  training  and  education  at  all  levels.  Learning  losses  were  significant  even  in 

38  See  Furceri,  D.,  Loungani,  P.,  Ostry,  J.D.,  and  Pizzuto,  P.  (2020),  ‘Will  COVID-19  affect  inequality?  Evidence  from  past  pandemics’, 
Covid  Economics,  Issue  12,  pp.  138-157.  See  also  Schnabel,  I.  (2020),  ‘Unequal  scars  –  distributional  consequences  of  the  pandemic’, 
speech at the Deutscher Juristentag (18 September). 
39 In addition, women were often more exposed to a double burden of work and increasing care responsibilities. In this regard, women with 
children experienced larger employment losses than those without children 

17 

 
 
 
 
                                                           
countries  with  a  well-developed  IT  infrastructure  and  were  more  severe  for  students  from 
more  deprived  socio-economic  backgrounds40.  Finally,  the  transformation  of  the  economy 
linked to the twin transition will introduce new opportunities but also new challenges to the 
labour market, including a possible negative impact on some low-skilled jobs.  

3. Structural Policies  

Structural  policy  efforts  are  needed  to  ensure  a  solid  long-term  economic  recovery.  In 
that respect,  the implementation  of  the RRF, which  also  seeks to  boost investment, lays the 
ground  for  enhancing  reforms  uptake.  This  section  builds  on  the  previous  one  to  draw 
structural policy implications in the areas of labour and product markets, as well as related to 
the  corporate  sector.  Insolvency  frameworks  and  institutional  quality  are  singled  out  as  two 
transversal  issues  that  can  support  the  well-functioning  of  markets  in  a  context  of  recovery 
and structural transformation. In the financial markets area, a more advanced Capital Markets 
Union can be instrumental in supporting private investment besides direct public support for 
investment  (see  Section  1).  In  parallel,  the  need  for  resource  reallocation  linked  to  the 
recovery, and to some extent to the green and digital transition, means that the efficiency of 
insolvency systems will be of particular importance. Labour market-wise, measures in favour 
of  job  transitions,  upskilling  and  re-skilling  can  minimize  risks  of  skill  mismatches  and 
facilitate  structural  transformation.  Finally,  and  given  the  very  large  investment  and  reform 
packages put forward by Member States, the quality of the institutional framework is essential 
to  ensure  the  fund  absorption  capacity  and  the  adequate  implementation  of  the  recovery 
strategy.  

1.  Business environment, access to finance and Capital Market Union 

A  number  of  measures  can  make  the  business  environment  more  conducive  to  private 
investment.  Reforms  improving  the  business  environment  and  the  quality  of  public 
administration  are  shown  to  be  positively  correlated  with  investments  in  the  euro  area.  A 
number  of  Member  States  have  included  measures  in  this  direction  in  their  RRPs,  such  as 
policies for simplifying procedures for business and private investments and cutting red tape, 
reforming  judicial  and  corporate  governance,  facilitating  business  activity  through  updating 
the  regulatory  framework.  RRPs  also  include  more  direct  measures  to  support  access  to 
finance, for example through the set-up of independently managed investment funds, or using 
promotional banks, to support businesses through measures leveraged via the financial sector. 
At  the  EU  level,  the  EIB  Group  is  also  employing  sizable  financial  instruments,  such  as 
dedicated  guarantees  to  contain  the  COVID-19  impact  by  unlocking  borrowing  from  the 
commercial  banks,  to  support  European  SMEs  and  small  mid-caps.  Such  measures  can 
strengthen  the  equity  of  SMEs  and  bring  in  additional  private  investment  in  innovation,  in 
start-ups and innovative companies.  

Progress in the Capital Markets Union (CMU) will help diversify funding sources in the 
economy. Beyond banking lending (see Section 4), capital market funding can play a key role 
in complementing bank-lending to sustain the economic rebound and improve its resilience. 
Accordingly,  as  part  of  its  response  to  the  COVID-19  crisis,  the  Commission  proposed  a 
capital  market  recovery  package  in  summer  2020  that  aims  to  simplify  access  to  capital 
market funding. A few euro area countries also include in their RRPs measures to improve the 
functioning  of  their  national  capital  markets.  Despite  the  prompt  recovery  of  capital  market 

40See for example Engzell, P., Frey, A., and Verhagen, M.D. (2021) ‘Learning loss due to school closures during the COVID-19 pandemic’, 
procedings of the National Academy of Sciences of the United States of America. 

18 

 
 
                                                           
funding,  investment  and  growth  in  the  euro  area  continue  to  be  held  back  by  the  level  of 
development and integration of capital markets. The euro area’s capital markets are still small 
when  compared  to  other  advanced  economies.  This  potentially  deprives  companies  of  an 
important  source  of  finance  and  constrains  investment  levels.  Euro  area  capital  markets 
continue  also  to  be  strongly  fragmented  along  national  borders,  with  companies’  access  to 
finance and funding costs varying greatly across Member States. 

CMU  can  be  key  to  mobilise  long-term  investments  in  new  technologies  and 
infrastructure.  It is instrumental in fostering structural adjustment to tackle climate change 
and  to  deliver  on  the  commitments  made  under  the  Europe’s  New  Green  Deal  and  Digital 
Agenda.  The  Commission’s  CMU  action  plan  of  September  2020  contains  key  measures  to 
help achieve these objectives. In 2021 and 2022, the Commission will put forward a number 
of legislative proposals that will seek to make it easier for companies to access financing and 
fight capital market fragmentation. For example, the Commission plans to adopt a legislative 
proposal  that cuts  the red tape for companies wanting to  raise  funds on  EU public markets, 
while  preserving  market  integrity  and  investor  protection.  The  new  rules  will  make  it  more 
attractive for companies, in particular SMEs, to list and to remain listed and for investors and 
financial  intermediaries  to  invest  in  listed  companies.  Further  initiatives  are  underway  to 
explore  ways  how  to  best  support  the  Member  States’  work  in  encouraging  citizens  to 
supplement public pensions with life-long savings and investments, and how to alleviate the 
tax-associated burden in cross-border investment. Finally, the CMU plays an important role in 
the euro area as it can address remaining imbalances. A more advanced CMU would facilitate 
the  channelling  the  historically  high  levels  of  savings  towards  equity,  which  would  help 
reduce leverage in the corporate sector. 

2.  Insolvency frameworks  

The economic turmoil calls for well-functioning insolvency frameworks. The COVID-19 
crisis  has  led  to  substantial  revenue  losses  for  many  firms  and  continues  to  pose  risks  to 
corporate  solvency  across  the  euro  area,  including  through  increased  levels  of  corporate 
indebtedness  (see  Section  2).  Effective  insolvency  frameworks  play  a  crucial  role  in 
supporting viable firms undergoing temporary problems and in providing for the orderly exit 
of non-viable firms. Moreover, well-performing insolvency frameworks matter for economic 
performance. The benefits of proper regimes range from reducing the loss of value, improving 
access to finance, enhancing the deepness and size of capital markets and  contributing to an 
effective  management  of  non-performing  loans  (NPLs)41.  Moreover,  well-functioning 
insolvency  frameworks  are  needed  to  ensure  re-allocation  of  productive  resources  in  the 
corporate  sector  and  to  facilitate  the  smooth  exit  of  less  efficient  firms  while  granting  a 
second chance for firms with a viable business model but impaired balance sheet.  

Despite actions at EU and Member States’ level, insolvency regimes across the euro area 
still  differ  substantially.  Divergences  exist  across  Member  States  on  a  number  of  issues, 
including the criteria to open an insolvency proceeding, the ranking of creditors, the valuation 
procedures and the role of participation of creditors in an insolvency proceeding42. A number 
of actions have been put forward. For preventive restructuring and debt discharge, the 2019 
Directive  on  preventive  restructuring  frameworks43  achieved  minimum  harmonisation  in 

41 AFME and Frontier Economics (2016), ‘Potential economic gains from reforming insolvency law in Europe’. 
42  McGhee  P.,  Suarez  J.,  and  Simmons,  G.  (2016),  ‘The  importance  of  better  EU  insolvency  regimes’,  VOX,  CEPR  Policy  Portal 
(voxeu.org). 
43 The Restructuring and Second Chance Directive (2019/1023) was adopted to introduce minimum standards across Member States in order 
to  ensure  that  preventive  restructuring  frameworks  are  available  to  debtors  in  financial  difficulty,  to  provide  procedures  leading  to  a 

19 

 
 
                                                           
 
certain  areas.  In  the  meantime,  several  Member  States  have  updated  their  insolvency 
legislation to reflect the circumstances originated by the pandemic. In addition, several RRPs 
include  commitments  to  pursue  reforms  in  this  area  and  the  judiciary  system  at  large. 
However, there is currently still little evidence of Member States significantly boosting their 
insolvency  regime  capacity  (e.g.  creation  of  special  insolvency  courts,  designation  and 
accelerated  training  of  insolvency  judges,  support  staff  increases  on  a  significant  scale)  in 
anticipation of an increase in insolvencies.  

Going  forward,  actions  will  be  needed  to  avoid  putting  some  administrations  under 
strain.    In  the  long-term,  the  convergence  of  non-financial  insolvency  rules  remains  one  of 
key  structural  reforms  necessary  for  a  genuine  integration  of  national  capital  markets.  This 
would  bring  significant  value  added  to  the  euro  area  economy,  as  it  would  improve  the 
business  environment,  strengthen the resilience of the monetary union  and attract  additional 
international  investors.  As  regards  core  insolvency  regimes  dealing  with  non-viable 
companies, the Commission seeks to harmonise targeted aspects of the corporate insolvency 
framework  and  procedures.  The  Commission  is  currently  working  on  a  proposal  for  a 
Directive.  The  exact  form  of  a  future  initiative  will,  however,  still  be  subject  to  exchanges 
with Member States and a positive impact assessment. In the absence of an effective system 
that  distinguishes  viable  from  non-viable  businesses,  prolongation  of  insolvency  moratoria 
and  forbearance  of  NPLs  entails  difficult  decisions  as  it  might  lead  to  misallocation  of 
resources and increase the losses under an eventual bankruptcy.  

3.  Labour market policies and skills strategies 

The  new  jobs  being  created  may  be  different  in  terms  of  skills  requirements.  The 
COVID-19 crisis has had a strong sectoral dimension, with job losses mostly concentrated in 
the sectors particularly hit by containment measures, and teleworkable sectors having largely 
recovered  to  pre-pandemic  levels  (see  Section  2).  As  the  COVID-19  crisis  has  accelerated 
structural changes in the world of work, labour markets are expected to experience structural 
adjustments, some of which may be long-lasting.  

Measures  that  support  job  transitions  will  be  key  to  ease  adjustment  and  prevent 
unemployment  from  becoming  entrenched.  Effective  active  labour  markets  policies 
(ALMPs)  in  the  context  of  coherent  policy  packages  of  hiring  incentives,  upskilling  and 
reskilling and enhanced support by employment services, can foster a swift labour market (re-
)integration and prevent scarring effects on certain groups. Accordingly, the Commission has 
put  forward  a  Recommendation  on  an  Effective  Active  Support  to  Employment  (EASE) 
following the COVID-19 crisis. More broadly, the European Pillar of Social Rights provides 
the framework for policy action to address current labour market, skills and social challenges 
and promote upward economic and social convergence in the Union44.  

Skills  development  is  conducive  of  smoother  reallocation  of  labour,  also  in  light  of  the 
green and digital transitions. Low-skilled workers and workers with less transferrable skills 
risk  being  less  employable,  in  the  event  of  dismissal  due  to  structural  transformations.  Up-
skilling  and  reskilling  effectively  contribute  to  ease  job  transitions,  and  mitigate  the  risk  of 

discharge of debts incurred by over-indebted entrepreneurs, and to increase the efficiency of restructuring, insolvency, and debt discharge 
procedures. This Directive will have to be transposed into national law by 17 July 2022. 
44  In this context, the Commission’s Action Plan on the implementation of the Pillar proposed new EU targets on employment, skills and 
poverty reduction by 2030, which were welcomed by EU leaders in the Porto declaration of 8 May and the European Council conclusions of 
25 June. By 2030 (i) at least 78% of people aged 20-64 should be in employment; (ii) at least 60% of all adults (25-64) should participate in 
learning activities every year; and (iii) the number of people at risk of poverty or social exclusion should be reduced by at least 15 million 
compared to 2019.  

20 

 
 
                                                                                                                                                                                     
raising  inequality  following  a  crisis.  The  digital  transition  is  expected  to  create  new 
employment opportunities, however it may also entail risks to existing jobs, in particular for 
routine-intensive and low-skilled activities. Technological change will require future workers 
to be equipped with a broad set of skills beyond digital, including transversal skills, such as 
social,  communication  and  leadership  skills45.  In  addition,  the  transformation  linked  to  the 
green  transition,  while  increasing  the  demand  for  medium-skilled  jobs,  may  also  bring  job 
losses in some sectors (notably in resource extractive and energy intensive sectors). Managing 
the  effects  of  these  transitions  requires  a  close  cooperation  among  education  and  training 
institutions, public employment services, social partners and other stakeholders46.  

Social  protection  systems  can  smoothen  transitions  within  and  across  jobs  and  make 
economies and societies more resilient. A substantial reinforcement of social protection in 
the short term has prevented a surge in income poverty and inequality47, but there is a risk that 
the  latter  may  increase  when  measures  are  phased  out.  This  would  have  adverse  effects 
particularly on the most  vulnerable  groups.  Promoting adequacy and sustainability of social 
protection  systems  as  well  as  strengthening  access  remains  highly  relevant,  given  the 
complexity of the challenges at stake and the structural changes that euro area economies are 
undergoing.  At  the  same  time,  they  can  play  a  role  in  smoothening  transitions  within  and 
across jobs, and to make economies and societies more resilient. Moreover, as the effects of 
the  pandemic  may  have  persistent  distributional  effects,  adversely  affecting  low  income 
earners,  promoting  adequate  minimum  wages,  while  preserving  competitiveness  and  job 
creation, will help mitigating in-work poverty and income inequality48.  

The RRF provides an opportunity to build more resilient and inclusive labour markets. 
All the Recovery and Resilience Plans submitted by euro area Member States so far address 
social and employment challenges. For instance, they include measures for improving labour 
market participation, promoting upskilling and reskilling, the modernisation of labour market 
institutions  and  services,  as  well  as  of  social  protection  and  healthcare  systems,  thus 
complementing  more  traditional  cohesion  policy  funding  in  these  domains  (like  European 
Social Fund + and European Regional Development Fund). In order to support the recovery, it 
will  be  crucial  to  deliver  on  the  agreed  ambitions,  while  respecting  financial  and  time 
commitments.  

4.  Institutional quality and measures to increase fund absorption 

The  implementation  of  the  RRF  provides  a  clear  rationale,  and  a  strong  incentive,  to 
increase  the  quality  of  institutions,  and  in  particular  the  effectiveness  of  public 
administration. For a number of euro area Member States, notably Greece, Slovakia, Latvia, 
Lithuania, Estonia and Portugal, the sum of grants received through cohesion policy funds and 
NextGenerationEU may well represent more than 2% of GDP in annualised terms for the next 
5 years. Administratively, this will require careful planning and implementation to ensure that 
EU outlays are efficiently and timely spent on the ground. An effective public administration 
is  needed  to  (i)  plan,  develop  and  coordinate  policies;  (ii)  recruit  and  provide  career 
development to civil servants that is based on merit; (iii) have strong oversight institutions to 
which  the  government  is  held  accountable  for;  (iv)  define  a  citizen-oriented  policy  that 

45  See  for  example  Morandini,  M.C.,  Thum-Tysen,  A.,  and  Vandeplas,  A.  (2020)  ‘Facing  the  Digital  Transformation:  are  Digital  Skills 
Enough?’, European Commission, Economic Brief, 054, July 2020, Brussels.   
46 In this context, the Just Transition Mechanism will also help address the social and economic effects of the transition, focusing on the 
regions, industries and workers who will face the greatest challenges, inter alia through a Just Transition Fund. 
47 Analysis in the ‘Employment and Social Developments in Europe, Annual Review 2021’, based on EUROMOD simulations, suggests that 
low-income  households  have  faced  relatively  large  losses  in  market  income,  but  that  tax-benefit  systems  have  protected  their  disposable 
income, though to a different extent across Member States. 
48 The proposal for a Directive on adequate minimum wages in the EU aims at supporting these efforts. 

21 

 
 
                                                           
delivers  quality  and  accessible  public  services;  and  (v)  count  with  sound  public  financial 
management49.  All  euro  area  Member  States  have  committed  measures  to  modernise  their 
administration  in  the  context  of the  RRF.  National  RRPs  also  include measures  specifically 
linked to removing barriers to investments, including improving the functioning of the single 
market and the business environment. Previous studies have suggested a focus on governance 
effectiveness, administrative capacity-building and fighting corruption across lagging regions 
can indeed improve absorption rates of European cohesion policy funds50.  

Strengthening  the  single  market  can  also  improve  the  framework  conditions  for 
investment. A well-functioning Single Market has the potential to strengthen the euro area’s 
recovery  and  resilience,  in  particular  through  the  reallocation  of  production  factors.  In  that 
respect,  the persisting barriers in  the areas of market  surveillance for products,  procurement 
and in services markets51 are an impediment to the good functioning of the euro area. In terms 
of investments, unnecessarily stringent product market regulations are associated with lower 
investment levels52.  

In  the  longer  term,  institutional  quality  contributes  to  a  more  resilient  EMU.  Large 
cross-country institutional quality divergences may jeopardise the functioning of the currency 
union  in  the  short-term,  as  countries  with  lower-quality  institutions  may  become  more 
sensitive  to  shocks.  Thus,  enhancing  the  quality  of  institutional  settings  has  the  potential  to 
increase resilience of the whole euro area and improve the functioning of monetary policy53. 
In  addition,  institutions  have  long  been  recognized  as  a  key  growth  driver.  The  average 
growth of real GDP per head is positively correlated with the average rule of law index of the 
World Bank (Graph 15). Countries with better performing public administrations tend to be 
countries with higher GDP per head (Graph 16), while countries with better governance tend 
to show higher growth in GDP per head and in total factor productivity.  

Graph  15:  Relationship  between  real  GDP  per 
head and the rule of law 

Graph  16:  Relationship  between  real  GDP  per 
head and government effectiveness 

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3

2

1

0

LU

IE

BE

FR

AT

DE

NL

FI

y = 0,7937x - 1,6091
R² = 0,5237

IT

EL

HR

LT

CY
ES

MT

EE

PT

SI

SK
LV

3

4

5

6

7

8

9

10

Government effectiveness 1996-2019 

Note:  Y-axis:  Unexplained  average  growth  after  controlling  for  the  initial  Note:  The  chart  shows  the  positive  correlation  between  growth  of  real  GDP 

49  OECD-SIGMA  (2019),  ‘Methodological  Framework  for  the  Principles  of  Public  Administration’,  OECD  Publishing,  Paris.  The 
Commission services rely on the OECD–SIGMA principles of public administration for its own analyses of public administration. 
50 Incaltarau C., Pascariu, G., and Surubaru N. (2019), ‘Evaluating the Determinants of EU Funds Absorption across Old and New Member 
States – the Role of Administrative Capacity and Political Governance’, Journal of Common Market Studies, Volume 58, Issue 4, p. 941-
961. 
51 European Commission(2021), ’Annual Single Market Report’, SWD(2021) 351 final. 
52  Egert,  B.  (2017),  ‘Regulation,  Institutions  and  Aggregate  Investment:  new  Evidence  from  OECD  countries’,  OECD  Economics 
Department Working Papers No. 1392. 
53  See  Pérez-Moreno  S.,  Bárcena-Martín  E.  and  Ritzen,  J.  (2020),  ‘Institutional  quality  in  the  Euro  area  countries:  any  evidence  of 
convergence?’, Journal of Contemporary European Studies, Volume 28, 2020 - Issue 3; and Christodoulakis, N., Dimelis, S., and Kollintzas, 
T. (1995), ‘Comparisons of Business Cycles in the EC: Idiosyncracies and Regularities’, Economica,  
Vol. 62, No. 245. 

22 

 
 
 
 
                                                           
 
 
 
 
 
 
level of income. The chart shows the positive correlation between growth of 
real GDP per head and the average rule of law index. 
Source: World Bank Governance indicators, AMECO. 

per head and government effectiveness. 
Source: World Bank governance indicators, Ameco, European Commission. 

4. Macro-Financial Stability 

Given a high degree of interdependence between its member economies, macro-financial 
stability is key for the functioning of the euro area as a whole. As different actors of the 
financial  system  are  interlinked  (banks  and  other  intermediaries,  borrowers  and  lenders), 
shocks may lead to spillover effects and can easily threaten the overall stability of the system. 
Given the high degree of financial integration, Member States’ financial stability also depends 
on national authorities in other euro area Member States as well as supranational action.  

The policy support and the upswing that started in 2021Q2 attenuated concerns about 
weak  corporate  fundamentals  (see  Section  2),  and  the  impact  on  bank  balance  sheets. 
Nevertheless, euro-area banks are likely to experience some deterioration of asset quality over 
the  short  to  medium  term.  This  will  compound  the  long-standing  challenge  of  low 
profitability  and  potentially  reduce  banks’  ability  to  lend.  While  corporate  and  bank 
vulnerabilities  declined  so  far,  adjustment  in  the  price  of  financial  assets  or  adverse 
developments  in  the  housing  market  could  have  an  impact  on  macro-financial  stability. 
Progress  in  completing  the  Banking  Union,  including  the  early  introduction  of  the  common 
backstop  to  the  Single  Resolution  Fund,  would  help  mitigating  some  of  the  downside  risks 
and enhance macro-financial stability  going forward. The full implementation of Basel  III  – 
as proposed by the Commission on 27 October – would further contribute to the stabilisation 
of the banking sector, with positive macroeconomic impacts54. 

1.  Current state of play 

The banking sector has weathered the crisis well so far. Euro area banks entered the crisis 
much  better  capitalised  and  with  a  higher  liquidity  buffer  than  before  the  global  financial 
crisis. Thanks also to the policy response to the crisis, banks have been able to maintain their 
robust capital and liquidity positions, and to keep the credit channel open. Nevertheless, loan 
growth to the private sector has slowed significantly in recent months, in particular as regards 
loans for non-financial corporates. After an initial  worsening, the overall credit risk outlook 
for banks improved, with inflow of loans with a significant increase in credit risk (“stage 2” 
loans)  moderating  since  mid-2020.  Thanks  to  government  support  measures  and  moratoria, 
the quality of banks’ assets has not deteriorated as much as initially feared. Moreover, banks 
in Member States with highest non-performing loan (NPL) ratios managed to actively dispose 
large  holdings  of  NPLs,  partly  due  to  a  high  volume  of  NPL  securitisations.  As  a 
consequence, the ratio of NPLs remained stable or even decreased (Graph 17). However, an 
increase in NPLs may still materialise to the degree that the number of insolvencies picks up 
with some delay (see Section 2). 

The  euro  area's  largest  banks  appear  resilient  even  when  faced  with  severe  economic 
stress. The European  Banking Authority’s  (EBA) 2021 stress  test  assessed the resilience of 
EU banks. With an average CET1 capital of 15.0% of risk-weighted assets, EU banks entered 
the 2021 stress test with higher capital ratios than last time (14.0% at the end of 2017). Under 
the baseline scenario, all tested banks' CET1 capital ratios remain above their overall capital 
requirement.  In  the  adverse  scenario,  assuming  a  prolonged  recession  in  a  lower-for-longer 

54  See 
https://www.ecb.europa.eu/pub/financial-stability/macroprudential-bulletin/html/ecb.mpbu202107_1~3292170452.en.html 

(2021),  Macroeconomic 

impact  of  Basel 

finalisation  on 

also  ECB 

euro 

area,  26 

the 

III 

July  2021, 

23 

 
 
                                                           
interest rate environment, EU banks' capital ratios would take a hit, but 36 of the 38 euro area 
banks  in  the  sample  would  manage  to  maintain  capital  cushions  above  minimum 
requirements. The breakdown of the aggregate results by clusters of banks shows that capital 
depletion is lower for banks with high net interest income and for banks less concentrated on 
domestic  markets;  moreover,  the  analysis  based  on  a  dimensional  factor  shows  no  relevant 
difference between capital depletion of largest banks and other banks55. 

Graph  17:  Non-performing  loans  in  selected 
euro area Member States  

Graph 18: Bank stability indicators for the euro 
area  

Note:  Gross  non-performing  debt  instruments  as  a  percentage  of  total  gross 
debt instruments. 
Source: European Central Bank. 

Source: European Central Bank. 

The  COVID-19  crisis  has  added  to  the  long-standing  challenge  of  banks’  low 
profitability.  In  the  wake  of  the  pandemic,  profitability  of  the  banking  sector  took  a  hit, 
mainly due to increased provisioning needs. This was reflected in a sharp decline in return-on-
equity  (Graph  18).  Although  it  recovered  in  the  first  quarters  of  2021  for  large  listed  euro 
area banks, low profitability may have an adverse impact on the  stability of institutions and 
supply of credit in the future. Moreover, the very accommodative monetary policy stance has 
had adverse effects  on lending margins.  Indeed,  in an environment  of negative policy  rates, 
bank deposit rates – especially for households – have been floored around zero in most euro 
area  Member  States,  putting  additional  pressure  on  bank  profits56.  The  ECB  has  introduced 
some offsetting measures (e.g. the tiered  excess  reserve remuneration, favourable pricing of 
the  targeted  longer-term  refinancing  operations),  and  banks  have  also  benefitted  from 
quantitative  easing  purchases,  but  the  drag  of  low  interest  rates  on  bank  lending  margins 
might be raising over time57.  

There has been an additional supply of sovereign bonds amid strong policy interventions 
at EU level58. The volume of the  AAA- and AA-rated euro area government bond issuance 
increased  during  the  crisis,  but  the  proportion  of  highest  rated  government  securities  as 
percentage of euro-area GDP is still lower than in the first decade of this century, mainly due 
to sovereign downgrades at the beginning of the previous decade (Graph 19). Issuance by the 

55  EBA  (2021),  ‘2021  EU-wide  stress  test  -  results’,  30  July  2021.  At  https://www.eba.europa.eu/eba-publishes-results-its-2021-eu-wide-
stress-test 
56  Feng  S.,  and  Stehn,  J.  (2021),  ‘European  Daily:  ECB—Checking  in  on  Negative  Rates’,  Goldman  Sachs,  18  June  2021. 
https://publishing.gs.com/content/research/en/reports/2021/06/18/b254c1da-634b-473c-be5e-803b7382e6ae.html 
57  Altavilla  C.,  Boucinha,  M.,  and  Peydró,  J.-L.  (2019),  ‘Monetary  policy  and  bank  profitability  in  a  low  interest  rate  environment’, 
Economic Policy, Volume 33, Issue 96, October 2018, p. 531–586.  
58  Cœuré  B.  (2016),  ‘Sovereign  Debt  in  the  Euro  Area:  Too  Safe  or  Too  Risky?’,  European  Central  Bank,  Keynote  address, 
3 November 2016. At https://www.ecb.europa.eu/press/key/date/2016/html/sp161103.en.html  

24 

 
 
 
 
 
                                                           
Commission  on  behalf  of  the  EU  under  NGEU  provides  additional  high-quality  euro-
denominated  debt  securities  of  up  to  EUR 672.5 bn  (in  2018  prices).  In  2021,  the  annual 
borrowing  decision  allows  the  Commission  to  issue  up  to  a  maximum  amount  of 
EUR 125 billion  in  long-term  funding  and  up  to  a  maximum  outstanding  amount  of 
EUR 60 billion  in  short-term  funding.  The  ECB  intervention  (Graph  20)  through  the  PEPP 
stabilized yields and liquidity conditions in sovereign bond markets.  

Graph  19:  Euro  area-19  government  debt 
securities by rating (% of euro area GDP) 

Graph  20:  Euro  area  gross  government  debt  by 
holder( % of euro area GDP) 

Note: Government debt securities by rating, as applied by Moody's, S&P and 
Fitch.  Constant  euro  area-19  composition  applied  from  1999.  Common 
issuance is not included. 
Source: European Central Bank. 

Note: *Rest of the world includes holdings in other euro area Member States. 
Source: European Central Bank. 

Banks  have  increasingly  diversified  their  sovereign  holdings,  reducing  the  concerns  of 
growing  interconnectedness  between  banks  and  sovereigns59.  Following  the  decline  in 
sovereign-bank interlinkages observed between 2014 and 2019, exposures between banks and 
their sovereigns were again on the rise in the first half of 202060. In contrast to the situation 
ahead of the sovereign debt crisis of 2013, bank sovereign holdings are diversified, since the 
second half of 2020, the share of domestic bonds in banks’ total sovereign bond holdings is 
decreasing. However, the situation differs across countries and, in some Member States, the  
concentration  in  bond  holdings  observed  was  the  highest  in  years,  even  without  including 
COVID-19-related  guarantee  exposures,  which  represent  contingent  liabilities  potentially 
linking closer sovereigns and their banks. Also, some Member States see at the same time a 
higher concentration of NPLs and domestic sovereign exposure (Graphs 21 and 22).  

Finally,  house  prices  have  been  growing  at  their  fastest  rate  since  the  global  financial 
crisis61.  Compared  to  other  G7  economies,  euro  area  households  hold  a  significant  part  of 
their wealth in real estate. During the Covid-19 crisis, excess savings and the low-interest rate 
environment  allowing  for  cheap  financing  have  boosted  residential  property  demand  amid 
significantly constrained housing supply. As a result, unlike in other recessions, house prices 
growth has remained buoyant. The house price recovery in recent years has been driven to a 

59  Dell’Ariccia  G.  et  al.  (2018),  ‘Managing  the  sovereign-bank  nexus’,  ECB  Working  Paper  Series,  No 2177,  September  2018.  At 
https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2177.en.pdf  
60 Lozano Guerrero S., Metzler J., and Scopelliti A. (2020), ‘Developments in the sovereign-bank nexus in the euro area: the role of direct 
https://www.ecb.europa.eu/pub/financial-
sovereign 
stability/fsr/focus/2020/html/ecb.fsrbox202011_04~f83a448770.en.html  
61 See 2022 Alert Mechanism Report. 

exposures’,  ECB  Financial  Stability  Review,  November 

2020.  At 

25 

 
 
 
 
 
                                                           
lesser  extent  by  household  loans,  which  limited  the  probability  of  a  bubble.  The  current 
context  is  also  different  compared  with  the  period  before  the  global  financial  crisis,  in 
particular  since  macro-prudential  frameworks  have  been  strengthened  and  macro-prudential 
tools are increasingly used across the euro area. By contrast, commercial real estate markets 
have  already  been  facing  a  substantial  market  correction.  It  remains  to  be  seen  how  far 
increases  in  office  vacancy  rates  would  reverse,  given  the  possible  structural  shift  towards 
teleworking.  The  retail  real  estate  sector  might  also  be  affected  by  a  shift  towards  online 
shopping.  Overall,  further  declines  in  commercial  real  estate  prices,  due  to  a  persistent 
downshift  in  demand  in  key  market  segments,  might  also  lead  to  a  deterioration  of  banks’ 
asset quality, given the commercial property sector’s reliance on debt.  

Graph  21:  Domestic  sovereign  exposure  and 
non-performing loan ratio of euro area banks 

financial 
Graph  22:  Domestic  monetary 
institutions - excl. central bank - holdings of total 
sovereign (% of GDP) 

Note:  Share  of  credit  to  domestic  general  government  in  total  assets  (as  of 
July  2021).  Gross  non-performing  debt  instruments  as  %  of  total  gross  debt 
instruments  (as  of  2021Q1),  not  yet  reflecting  a  possible  increase  in  NPLs 
due to the pandemic. 
Source: European Central Bank. 

Source: European Central Bank, Eurostat and government finance statistics. 

2.  Risks to financial stability and potential reforms 

Financial markets are vulnerable to disruptive repricing, affecting the broader financial 
system.  Equity  markets  have  broadly  recovered  to  above  pre-COVID-19  levels,  even  if  the 
pace  of  recovery  has  been  uneven  across  euro  area  Member  States  and  sectors.  Spreads  on 
euro area non-financial corporate bonds, in particular for the high-yield segment, have fallen 
below pre-pandemic levels despite growing vulnerabilities. The biggest risk facing euro area 
financial  markets  is  now  a  sudden  reassessment  of  valuations  amid  a  general  decoupling  of 
securities  prices  from  economic  fundamentals62.  Also,  liquidity  buffers  of  investment  funds 
have declined below pre-pandemic levels, potentially leaving some funds (particularly those 
with  relatively  illiquid  assets)  vulnerable  to  fire  sales  spirals  if  a  market  correction  triggers 
unanticipated investor redemptions. The low yield environment is adding to the challenges for 
pension funds and insurance companies. A number of possible developments could lead to a 
the 
sudden 
macroeconomic or public health situation, political and policy uncertainty, geopolitical issues, 
a  reassessment  of  commodity  prices  or  the  long-run  growth  outlook  in  light  of  e.g.  climate 

including  negative  surprises 

reassessment  of 

risk  premia, 

regarding 

European 

62 
and  Markets  Authority 
https://www.esma.europa.eu/sites/default/files/esma50-165-1761_risk_dashboard_no_1_2021.pdf  

Securities 

(2021), 

ESMA 

Risk  Dashboard, 

3 

June 

2021. 

At 

26 

 
 
 
 
 
                                                           
change.  Moreover,  a  sustained  increase  in  real  interest  rates  could  also  reduce  the  fiscal 
policy’s room for manoeuvre (Box 2). 

There  are  risks  resulting  from  a  potential  deterioration  of  the  quality  of  assets.  The 
increased  share  of  stage-2  loans  –  for  which  credit  risks  are  considered  to  have  increased 
considerably -  observed already in 2020 suggests that the euro-area banks are recognising the 
risk of a potentially deteriorating asset quality, adding to the long-standing challenge of low 
profitability,  and  potentially  constraining  their  lending.  This  could  be  exacerbated  by 
withdrawal of corporate sector policy support, and the deterioration in asset quality would be 
concentrated  in  some  sectors  and  in  some  Member  States;  however,  it  could  put  a  drag 
generally  on  banks’  profitability  going  forward.  In  this  context,  efficient  insolvency 
frameworks can have a positive effect on bank balance sheets63.  

The climate and digital transitions can have significant financial stability implications. 
Up  to  30%  of  euro  area  bank  corporate  exposures  could  be  impacted  by  physical  climate 
hazards  (e.g.  floods,  wildfires,  heat  and  water  stress);  these  exposures  are  concentrated  in 
certain  regions.  Exposures  to  emission-intensive  firms,  which  will  be  affected  by  the  green 
transition  (mainly  in  the  manufacturing,  electricity,  transportation  and  construction  sectors), 
represent  14%  of  collective  euro  area  banking  sector  balance  sheets64.  In  the  medium  to 
longer term, also thanks to the transition planning and the supervisory powers proposed by the 
Commission  in  the  Banking  package,  reducing  the  exposure  to  fossil  fuel  activities  would 
support  the  green  transition  and  limit  market  risk  connected  with  these  industries.  On  the 
digital side, a high level of interconnectedness across financial entities, financial markets and 
financial market  infrastructures exposes the financial system to  cyber risks.  The widespread 
use of a limited number of closely connected ICT third party providers by a large number of 
financial  institutions  can  lead  to  macro-prudential  risks,  such  as  concentration  and  systemic 
risks.  

The common backstop to the Single Resolution Fund (SRF) will reinforce risk-sharing. 
The SRF was  established by the EU  for resolving failing banks in  the  Banking  Union, thus 
protecting against financial instability. It is financed by contributions from the banking sector 
and  will  be  built  up  progressively.  However,  in  case  of  a  larger-scale  bank  failure  or  the 
failure  of  multiple  banks,  there  is  a  risk  that  the  means  in  the  SRF  could  be  depleted.  The 
Eurogroup strengthened the resolution pillar of the Banking Union through the establishment 
of a common backstop to the SRF in the form of a credit line from the ESM. This backstop, 
which  will  become  operational  in  early  2022,  will  strengthen  the  resilience  of  the  Banking 
Union while reinforcing risk sharing. 

Completing  Banking  Union  remains  a  priority  and  the  current  crisis  has  made  the 
benefits of the Banking Union and its safety nets even more evident. The Banking Union 
is still missing its third pillar: the European Deposit Insurance Scheme, which would increase 
depositor confidence and financial stability, as  well as weaken the bank-sovereign nexus. A 
complete  Banking  Union  could  help  unlock  further  market  integration,  in  particular  cross-
border consolidation and foster European banks’ competitiveness internationally. This could 
pave  the  way  for  a  more  robust  Economic  and  Monetary  Union  and  for  Europe’s  strategic 
autonomy.  In  addition,  cross  border  market  integration  would  need  to  be  accompanied  by 

63 Countries with better insolvency proceedings, higher recovery rates, and shorter resolution time, see more bankruptcies and restructurings 
happening,  which  in  turn  leads  to  earlier  removal  of  troubled  assets  from  banks  balance  sheets  and  more  lending  to  firms  with  better 
investment  opportunities.  See  Becker  B.,  and  Ivashina,  V.  (2021),  ‘Corporate  insolvency  rules  and  zombie  lending’,  ECB.  At 
https://www.ecb.europa.eu/pub/conferences/ecbforum/shared/pdf/2021/Ivashina_paper.en.pdf  
64 ECB/ESRB Project Team on climate risk monitoring (2021) ‘Climate-related risk and financial stability’, July 2021.  

27 

 
 
                                                           
appropriate  common  safety  nets  protecting  financial  stability  at  national  level  in  times  of 
crises65.  

In particular, as part of the work on completing the Banking Union, the efficiency and 
coherence  of  the  bank  crisis  management  and  deposit  insurance  framework  could  be 
increased in order to cater for banks of all sizes and business models. The EU bank crisis 
management and deposit insurance framework lays out the rules for handling bank failures. It 
was  built  with  the  objectives  of  maintaining  financial  stability,  protecting  depositors, 
mitigating  financial  contagion,  minimising  taxpayer  losses,  limiting  moral  hazard  and 
improving  the  internal  market  for  financial  services.  However,  so  far,  the  resolution 
framework has been used in a limited number of cases.  

5. The euro area in the World 

The  trade  and  financial  inter-dependencies  between  the  euro  area  and  its  global 
partners are a key driver of economic performance. Economic and financial developments 
in  advanced  and  emerging  market  economies  have  direct  repercussions  on  the  euro  area 
through  a  number  of  channels,  including  global  value  chains,  trade  and  monetary  policy. 
Moreover, the level of interconnectedness of economies has increased steadily. The extensive 
trade  and  financial  linkages  present  for  the  euro  area  are  important  channels  for  the 
transmission  of  economic  and  financial  shocks  both  from  and  towards  the  euro  area.  The 
economic size and integration of the euro area gives it a prominent role in the build-up and 
unwinding of global imbalances. The disruption in global supply chains that arose in the wake 
of the recovery further testifies to the growing interconnectedness of the euro area economy. 
Finally,  strengthening  the  international  role  of  the  euro  remains  an  important  strategic 
objective of the euro area. 

1.  The euro area and global economic developments 

The COVID-19 health and economic crisis has had large socio-economic impact across 
advanced and emerging economies. According to the Autumn 2021 Economic Forecast, the 
global  economy  is  projected  to  grow  by  5.7%  in  2021,  and  4.5%  in  2022.  In  this  context, 
Advanced  Economies  (AEs)  are  expected  to  grow  by  5.3%  and  4.1%  in  2021  and  2022 
respectively,  on  the  back  of  the  effective  policy  response  and  swift  reopening  of  the 
economies,  linked  to  successful  vaccination  campaigns.  The  euro  area,  which  has  been  a 
stabilising factor throughout the crisis, would thus grow at a slightly slower pace than some 
other  advanced  economies  in  2021.  Meanwhile,  emerging  and  developing  economies  are 
forecast  to  grow  by  6.0%  and  4.8%  in  2021  and  2022,  but  with  large  divergences  across 
countries, reflecting the pace of reopening, structure of exports and size of policy response.  

The  evolution  of  the  health  crisis,  the  vaccination  rollout  as  well  as  the  extent  of  the 
policy support are key factors in explaining divergent economic developments. Contrary 
to the global financial crisis, the emerging market economies are expected to recover slower 
than advanced economies, also due to their limited fiscal capacity, and suffer from long-term 
scarring effects. The spread of the Delta variant, in particular in emerging market economies, 
weighed  on  the  rebound  of  services  and  softened  the  recovery  in  manufacturing  and  global 
goods trade. In addition, vaccine production and access has also become a clear dividing line 

65 The 2021 Recommendation on the economic policy of the euro area stressed the importance of completing the Banking Union, including 
the bank crisis management and depositor insurance framework. 

28 

 
 
                                                           
between advanced and emerging economies. The different size and type of policy support lies 
behind divergent impact across regions (Graph 24).  

Risks  to  the  recovery  in  emerging  economies  have  implications  for  the  euro  area.  As 
vaccination rates outside the largest advanced economies remain low, disruptions in economic 
activity  in  emerging  markets  could  result  in  negative  effects  on  the  euro  area,  including 
through  global  supply  chains  channels.  According  to  IMF  estimates,  failure  to  close  the 
massive gap in vaccination rates could hold back a global recovery, driving cumulative global 
GDP  losses  to  USD  5.3  trillion  over  the  next  five  years.  Moreover,  if  the  current  global 
inflationary pressures were to prompt monetary tightening, financing costs would increase, in 
particular  for  emerging  economies.  Investors’  portfolio  reallocation  would  then  bring, 
possibly disorderly, adjustments in global financial markets. Such tensions may in turn have 
an impact on credit risks for the euro area, with impacts on banks and financial institutions.  

Graph  23:  GDP  developments  EA,  US,  JP,  CA, 
UK  

Graph 24: Policy response across countries  

Source: Eurostat and Office for National Statistics for the UK. 

Note:  Policy  support  is  measured  as  cumulative  change  in  net  primary 
balance  versus  2019.  AEs  stands  for  Advanced  Economies;  EMDEs  stands 
for Emerging Market and Developing Economies. 
Source: IMF 2021 October WEO. 

The  US  policy  mix  generates  spillovers,  which  affect  the  euro  area.  The  US  recovered 
rapidly in late 2020 and early 2021, reaching pre-pandemic GDP levels in 2021Q2. Headline 
CPI inflation dropped to 1.2% in 2020 as the pandemic took hold, but rose sharply in 2021, 
influenced by strong base effects, high energy prices, and supply constraints. In this context, 
the  Fed’s  new  monetary  policy  framework  allows  for  some  temporary  overshoot  of  the  2% 
PCE inflation target, and the target Fed funds rate remains at 0.25%, though in September it 
was indicated that tapering of asset purchases could begin soon. The US Federal Open Market 
Committee’s decision to reduce the purchase of  US Treasuries at a faster rate than expected 
might  lead  to  an  increase  in  the  US  bond  yields,  which  could  in  a  negative  scenario, 
potentially  provoke  tensions  in  global  equity  and  financial  markets  and  a  disorderly  asset 
price  correction66.  Tightening  by  the  Fed  could  also  affect  financing  conditions  of  the  euro 
area  corporate  bonds  sector  as  well  as  industrial  production67.  A  fast  correction  of  the 
valuation  of  financial  assets  and  real  estate  prices  –  possibly  generating  outside  of  the  euro 
area - could also have effects. In addition, the US fiscal support packages are expected to have 

66 See Grothe M. et al. (2021), ‘Risk of spillovers from US equity market corrections to euro area markets and financial conditions’, ECB 
Financial Stability Review, May 2021. 
67 Ca’Zorzi M. et al. (2021), ‘Making waves – Fed spillovers are stronger and more encompassing than the ECB’s’, ECB’s Research Bulletin 
No 83, 15 April 2021.  

29 

 
 
 
 
                                                           
a  non-negligible  impact  on  EU  real  GDP,  which  would  derive  primarily  from  international 
trade linkages68.  

2.  Global value chains and trade linkages 

Global merchandise trade has rebounded since the second half of 2020 but recent data 
suggest a slowdown. Global trade in goods increased by almost 14% in the first 6 months of 
2021 compared to the same period last year, and is now well above pre-pandemic levels. On 
the  other  hand,  services  trade  is  still  below  pre-pandemic  levels.  Overall,  global  imports  of 
goods  and  services  (excluding  EU)  is  forecast  to  grow  by  9.3%  in  2021,  6.1%  in  2022  and 
4.5% in 2023. The recent slowdown has been mostly due to a slowdown in demand for goods, 
as well as supply-chain disruptions and transport hiccups.  

Global supply chains and trade linkages help mitigate the impact of internal shocks but 
are also channels for shock transmission globally. The euro area economy is both a major 
importer  and  exporter  on  the  international  stage,  and  the  pandemic  has  highlighted  the 
dependency of the EU and the euro on imports from third countries for the supply of critical 
goods, including medical equipment. The strong trade linkages increase economic efficiency, 
they help absorb shocks and speed up recovery support economy activity. They also transmit 
shocks  to  and  within  the  economy69.  The  effect  on  the  euro  area  economy  of  the  recent 
transport  and  supply  side  disruptions,  highlight  the  importance  of  this  channel.  Within  the 
euro area, recent analytical evidence suggests that the shock amplification force of the trade 
channels is substantial, as the transmission to the rest of the euro area of a shock originating in 
one of the five largest Member States ranges from 15% to 28% of the original shock’s size70.  

Bottlenecks  in  global  supply  chains  may  hamper  the  functioning  of  the  single  market. 
Supply  chain  bottlenecks,  including  the  lack  of  supply  of  critical  raw  material71,  bear  a 
negative  impact  on  firm’s  productivity  levels,  employment,  turnover  and  entry-exit  rates. 
Safeguarding  the  Single  Market  and  the  free  movement  of  workers,  goods,  services  and 
capital  can  mitigate  the  effects  of  temporary  or  persistent  global  disruptions  and  address 
shortages  of  essential  inputs.  The  Commission  has  conducted  work  to  improve  crisis 
preparedness and identify strategic dependencies72. Understanding current and possible future 
strategic  dependencies  and  taking  steps  to  address  them  could  contribute  to  building  up 
resilience and strengthen EU’s open strategic autonomy. 

3.  Global Imbalances 

The impact of COVID-19 on current account developments has been uneven. The impact 
of  the  pandemic  shock  on  countries’  external  positions  has  been  uneven  depending  on 
countries’ economic structure and institutional features. In particular, stronger fiscal support 
in advanced countries has affected their fiscal stance relative to trade partners. According to 
the  IMF,  global  current  account  imbalances  declined  between  2015  and  2019,  but  widened 
again during the pandemic from 2.8 percent of world GDP in 2019 to 3.2 percent of GDP in 

68 See European Commission Spring 2021 Economic Forecast. 
69 See ECB (2021), ‘The implications of globalisation for the ECB monetary policy strategy’, ECB Occasional Paper Series related to the 
ECB’s Strategy review 2020-21, No 263. 
70 Di Nino, V., and Veltri, B. (2020), ‘The viral effects of foreign trade and supply networks in the euro area’, ECB Economic Bulletin, Issue 
6/2020.  
71 OECD (2018), Global Material Resources Outlook to 2060. 
72 See ‘An Open, Sustainable And Assertive Trade Policy, Open Strategic Autonomy’, 2021, European Commission. 

30 

 
 
                                                           
202073 (however, imbalances are projected to start declining again following the pandemic). 
The increase in imbalances contrasts with the patterns observed in the aftermath of the global 
financial  crisis.  Looking  at  stock  positions,  the  international  investment  positions  are 
historically high and beyond their benchmark rates in a number of countries; differently from 
current account balances, NIIP have widened in the aftermath of the global financial crisis.  

Graph  25:  Global  current  account  balance  and 
current account norms (percent of GDP, 2020) 

Graph 26:  Euro denominated share of foreign 
exchange reserves, international debt securities 
and cross-border loans 

Note:  indicators  for  EA  are  built  using  Balance  of  Payment  concepts;  for  other 
countries, National Account concepts are used instead.  
Source: European Commission External Balance Indicators. 

Source: IMF Database, BIS Database. Own computations. 

Global  imbalances  can  have  a  number  of  negative  consequences,  including  risks 
stemming  from  asset  price  adjustments,  financial  market  tensions,  as  well  as  trade 
tensions  across  countries.  While  no  such  factors  are  currently  observed  or  expected,  large 
financial  imbalances  have  the  potential  to  negatively  affect  global  economic  developments 
and  create  instability  in  financial  markets.  A  faster  than  expected  potential  tightening  of 
financing  conditions  in  advanced  economies  could  affect  negatively  emerging  market 
economies,  in  particular  through  capital  outflows,  financial  market  volatility  and  financing 
difficulties. In addition, the presence of large and persistent current account imbalances could 
fuel trade tensions across countries.  

In this context, the euro area current account  surplus  continued  to narrow in  2020, as 
domestic  demand  held  up  better  than  in  most  trade  partners74.  In  2020,  the  euro  area 
current  account  recorded a surplus of 2% of GDP, which came close to  the current  account 
norm that reflects the euro area's economic fundamentals, estimated at 1.7% of GDP75. Data 
for the first half of 2021 show an increase in the euro area current account surplus to 2.9% of 
GDP by 2021Q2, driven mainly by a higher balance of trade in services. The euro area current 
account  is  currently  forecast  to  return  close  to  2019  levels  in  2021,  and  to  mildly  increase 
going forward. This reflects a return of the difference between GDP and aggregate demand to 
its  pre-pandemic  level,  and  thus  the  continuation  of  the  persistent  demand  shortfall  that 
characterised  the  2010s.  In  terms  of  stock  positions,  the  NIIPs  of  euro  area  Member  States 

73  Global  imbalances  are  measured  as the absolute  sum  of  current account  deficits and  surplus  worldwide.  See  2021  IMF  External  Sector 
Report. 
74 For more information, see 2022 Alert Mechanism Report 
75 According to the IMF External Sector Report, the euro area current account norm comes at 1% of GDP in 2020, which would imply a gap 
to cyclically-adjusted current account equal to 0.8% of GDP. After making adjustments for the transitory impact of the COVID-19 crisis the 
estimated gap is reduced to 0.6%.  

31 

 
 
 
 
                                                           
differ  substantially,  but  broadly  offset  each  other;  in  2020,  the  euro-area  NIIP  was  9.6%  of 
GDP, closer to balance than in most other G20 Members.  

4.  The International Role of the Euro 

Strengthening  the  international  role  of  the  euro  is  a  strategic  objective  for  the  euro 
area76.  The  latest  2020  ECB  assessment  shows  that  the  pandemic  has  not  led  to  any 
significant  shift  in  the  euro’s  share  across  global  currencies77.  The  euro  remained  thus  the 
second most important currency in the international monetary system; however, the share of 
the euro across various indicators of international currency use was close to historical lows, 
averaging  around  19%.  Inter  alia,  the  share  of  the  euro  in  global  foreign  exchange  reserves 
remained  broadly  stable,  albeit  decreasing  by  0.7  percentage  points,  when  measured  at 
constant exchange rate (while it increased at current exchange rate, owing to the appreciation 
of  the  euro).  The  share  in  foreign  currency-denominated  debt  issuance  decreased  more 
noticeably,  by  around  2  percentage  points.  All  in  all,  the  international  role  of  the  euro 
remained broadly stable in 2020, when observing a composite index of the international role 
of the euro.  

Increasing  the  international  role  of  the  euro  would  strengthen  the  economic  and 
financial  autonomy  of  the  euro  area.  The  bond  issuances  under  the  SURE  and  NGEU 
programmes  will  increase  the  amount  of  highly-rated  euro-denominated  assets.  Moreover, 
ambitious  structural  reforms  in  euro-area  Member  States  as  outlined  in  their  Recovery  and 
Resilience  Programmes  will  improve  the  euro-area’s  economic  resilience  and  hence  boost 
investor confidence in euro-denominated assets. An increased role for the euro could increase 
the  resilience  of  the  international  monetary  system,  reduce  dependence  on  other  currencies, 
especially the US dollar, and open up more choices for market operators across the globe. As 
a result it would support diversifying the global  currency regime and alleviate the effects of 
asymmetric shocks, in particular linked to monetary policy measures by third countries78. 

Finally, the digital euro could unlock  a number of benefits but  it needs  to be carefully 
designed to find a balance between different objectives. As a new form of a central bank 
money  made  available  in  digital  form  for  use  in  retail  payments,  a  digital  euro  would  be 
complementary  to  cash.  Its  introduction  could  contribute  to  supporting  the  economy’s 
digitalisation (and development of the digital single market), further spur innovation in retail 
payments and contribute to Europe’s open strategic autonomy at a time when foreign central 
bank  digital  currencies  and  private  foreign  digital  means  of  payment  are  emerging.  At  the 
same  time,  the  digital  euro  would  have  effects  on  the  euro  area  financial  sector.  Its  design 
therefore will require finding a balance between different objectives, e.g. between privacy and 
countering money laundering, and will need to limit potential adverse repercussions including 
on financial intermediation and financial stability.  

76 Enhancing the international role of the euro is part of the Commission agenda for strengthening the economic and financial autonomy of 
the EU. See ‘The European economic and financial system: fostering openness, strength and resilience’, 2021, European Commission. 
77 See ECB (2021) ‘The international role of the euro’, June 2021. 
78 See ‘The European economic and financial system: fostering openness, strength and resilience’ 

32 

 
 
 
                                                           
Annexes 
Annex 1: 2021 Euro Area Recommendation  
The Council recommended that euro area Member States take action, individually, including through their Recovery and Resilience Plans, and collectively 
within the Eurogroup, in the period 2021–2022 to: 

(1) Ensure a policy stance that supports the recovery from the COVID-19 crisis. As the health emergency persists, adopt fiscal policies that remain supportive 
in all euro area Member States throughout 2021. Adopt policy measures that are tailored to country-specific circumstances and timely, temporary and targeted. 
Continue  coordinating  actions  to  effectively  address  the  COVID-19  pandemic,  sustain  the  economy  and  support  a  sustainable  recovery.  When  the 
epidemiological and economic conditions allow, phase out emergency measures while combatting the social and labour-market impact of the crisis. Pursue 
fiscal policies that aim to achieve prudent medium-term fiscal positions and to ensure debt sustainability, while enhancing investment. Pursue reforms that 
strengthen  the  coverage,  adequacy  and  sustainability  of  health  and  social  protection  systems  for  all.  Pay  particular  attention  to  the  quality  of  budgetary 
measures.  Improve  public  procurement  frameworks  and  public  financial  management,  including  in  particular  investment  frameworks  and  the  use  of  green 
budgeting tools. Make use of spending reviews to better focus public expenditure on recovery and resilience needs.  

(2) Further improve convergence, resilience and sustainable and inclusive growth. Mitigate the risk of further divergence, and enhance economic and social 
resilience  in  the  euro  area  by  continuing  to  tackle  structural  challenges,  by  implementing  reforms  that  strengthen  productivity  and  employment,  ensure  a 
smooth  re-allocation  of  resources  and  improve  the  functioning  of  markets  and  public  administration,  by  increasing  the  level  of  public  investment,  and  by 
fostering private investment to support a fair and inclusive recovery consistent with green and digital transitions. Further integrate the single market for goods 
and  services,  including  the  digital  single  market,  by  removing  unnecessary  restrictions,  enhancing  market  surveillance  and  guaranteeing  sufficient 
administrative capacity. Ensure effective active labour market policies and support for job transitions, in particular towards the green and digital economy. 
Foster fair working conditions, address labour market  segmentation and strengthen inclusion. Ensure the effective involvement of social partners in policy 
making, and strengthen social dialogue and collective bargaining. Strengthen inclusive education and training systems and investment in skills, addressing 
skills shortages. Continue working within the framework of the Council on a global consensus-based solution to address the tax challenges arising from the 
digitalisation of the economy within the OECD Inclusive framework on Base Erosion and Profit Shifting, with the expectation that agreement will be reached 
by  mid-2021  in  that  forum.  Engage  in  the  relevant  preparatory  work  on  the  way  forward  in  order  to  address  those  tax  challenges  arising  from  the  digital 
economy, including in the absence of an international consensus by mid-2021. Make further progress to combat aggressive tax planning, lower the tax wedge 
and support a shift towards carbon pricing and environmental taxation. 

(3) Strengthen national institutional frameworks. Pursue and frontload reforms to address bottlenecks to investment and to ensure the efficient and timely use 
of  Union funds,  including through the  Recovery  and Resilience Facility.  Strengthen  the effectiveness  and digitalisation  of  public  administration, including 
justice  and  health  systems,  as  well  as  public  employment  services.  Reduce  the  administrative  burden  for  firms  and  improve  the  business  environment. 

33 

 
 
Continue  to  improve  the  frameworks  for  countering  fraud  and  corruption  and  for  preventing  money  laundering  and  terrorism  financing.  Promote  concrete 
actions to increase the efficiency, effectiveness and proportionality of insolvency frameworks, to work out non-performing exposures and ensure an efficient 
allocation of capital. 

(4) Ensure macro-financial stability. Maintain the credit channels to the economy and measures to support viable companies as long as necessary during the 
emergency of the unprecedented COVID-19 crisis. Keep sound bank sector balance sheets, including by continuing to address non-performing loans through, 
amongst others, the development of secondary markets for non-performing loans. 

(5) Complete the EMU and strengthen the international role of the euro. Make progress on deepening the EMU to increase the resilience of the euro area by 
completing the Banking Union, by continuing to work, without delay, and with the same level of ambition, on all elements, including those discussed in the 
High Level Working Group on a European Deposit Insurance Scheme, and by deepening the Capital Markets Union, as well as through support for initiatives 
implementing digital finance, retail finance and sustainable finance policies. Work further on solutions for overcoming limitations in the current set-up for 
liquidity  provision  in  resolution  and  on  strengthening  the  Union’s  regulatory  and  supervisory  framework,  including  by  ensuring  consistent  and  effective 
supervision and enforcement of anti-money laundering rules. 

Further steps in deepening the EMU should take into account the lessons learnt from the Union’s comprehensive economic policy response to the COVID-19 
crisis. Progress in deepening the EMU, in full respect of the Union’s internal market and pursued in an open and transparent  manner towards non-euro area 
Member States, will contribute to enhancing the international role of the euro and promote the Union’s economic interests globally.’-  

34 

 
 
 
 
Annex 2: Correspondence between reforms implemented in the Recovery and Resilience Programmes and priorities in the 
Euro area Recommendation 2021 

The Regulation establishing the Recovery and Resilience Facility (RRF) (Regulation (EU) 2021/241) foresees that the Recovery and Resilience Plans (RRP) 
submitted  by  Member  States  “shall  be  consistent  with  the  relevant  country-specific  challenges  and  priorities  identified  in  the  context  of  the  European 
Semester, as well as those identified in the most recent Council recommendation on the economic policy of the euro area for Member States whose currency is 
the euro” (Article 17.3). Accordingly, the table below identifies the reforms and investments planned by the various euro area Member States that respond to 
the challenges identified in the Euro area recommendation of 202179. EAR 5 was focusing on “completing the EMU and strengthening the international role of 
the euro” and individual action by Member State can only indirectly respond to this common challenge. Accordingly, this challenge is not included in the table 
below.  

The information included in the table has been collected by the staff of the European Commission based on the RRPs and, for Member States for which the 
assessment of the plan has already been adopted by the Commission, on the analysis provided in the staff working document accompanying the Commission’s 
proposals for Council implementing decisions.  

BE 

EAR 1: Ensuring a policy stance 
which supports the recovery  

The BE plan pursues reforms to 
strengthen the coverage, adequacy and 
sustainability of social protection 
systems, most notably in the area of 
pensions. The pension reform included 
in the plan aims to reinforce the 
insurance principle of the pension 
system by increasing minimum pensions 
and strengthening the link between 
contributions and benefits. 
The plan integrates spending reviews in 
the budget planning cycles of all 

EAR 2: Further improving 
convergence, resilience and 
sustainable and inclusive growth 
Reforms and investments in the BE plan 
are expected to support overall 
productivity and an improved efficiency 
of the public administrations’ action. 
This should foster private investment to 
address the recovery and the twin green 
and digital transition. In parallel, efforts 
will be made to match the skills of 
human capital with labour market needs 
through the modernisation of education 
and training systems, and to promote 
effective active labour market policies. 

EAR 3: Strengthening national 
institutional frameworks 

EAR 4: Ensuring macro-financial 
stability 

The BE plan includes measures to 
modernise and digitise public 
administrations. In the area of business 
environment, certain measures aim to 
remove unnecessary or disproportionate 
administrative barriers to business 
creation and growth. 

79 The 2021 Council recommendation on the economic policy of the euro area, which were approved by the ECOFIN Council on 25 January 2021, were the first to take into account the challenges linked to the COVID-
19 pandemic. As such, although they were formally  adopted by the Council only on 13 July 2021, they are the most relevant document to assess the extent to which recovery and resilience plans reflect economic 
priorities set for the euro area.  

35 

 
 
 
 
 
                                                           
government levels to improve spending 
efficiency. Further, the plan aims to 
foster the resilience of the Belgian health 
system, notably through targeted 
investments in e-health solutions that 
aim to increase the quality, speed and 
agility of healthcare through the 
digitalisation of health processes.  

DE 

The DE plan includes investments that 
aim to increase the resilience of the 
health care sector, e.g. by providing 
better digital infrastructure for hospitals. 

EE 

IE 

The EE plan includes reforms and 
investments aimed at supporting the 
provision of integrated and human-
centred health care, raising the capacity 
of health institutions to adapt to crisis 
situations and addressing the shortages 
of health workforce. 
The IE plan contains several measures 
that are expected to support the 
recovery. In this respect, the work 
placement experience programme is 
expected to help combat the labour 
market impact of the crisis, while the 
eHealth and health reform measures 
have the potential to support the 
accessibility and cost-effectiveness of 
the healthcare system. 

The DE plan contains investments that 
focus on supporting digital education, 
increasing social inclusion and 
supporting a fair recovery through the 
post-pandemic catch-up education 
programme for children and young 
people. To support parents and increase 
equality of opportunity, childcare is 
bolstered. Companies receive financial 
incentives to hire and retain apprentices, 
supporting the apprenticeship system. 
The EE plan includes reforms and 
investments to improve the capacities of 
businesses to achieve the green and 
digital transition, promote climate 
change adaptation and mitigation and 
support employment and labour market 
participation of young people.  
The IE plan includes measures that are 
expected to increase public investment 
and foster private investment to support 
a recovery consistent with the green and 
digital transitions, while also aiming to 
support a shift towards carbon pricing 
and environmental taxation. Other 
measures have the potential to 
strengthen inclusion and support job 
transitions, as well as to make further 
progress in combatting aggressive tax 
planning. 

36 

The DE plan puts forward reforms that 
strive to modernise and digitalise public 
administration, increase its efficiency 
and to tackle investment bottlenecks. 
These reforms are expected to reduce the 
administrative burden for businesses and 
citizens and improve the business 
environment.  

The EE plan includes measures aimed at 
contributing to the digital transformation 
of public services and public 
administration. The EE plan equally 
includes a measure to strengthen the 
fight against money laundering. 

The IE plan is expected to strengthen 
national institutional frameworks, by 
among others digitalising public 
administration and aiming to lower 
barriers to entrepreneurship with an 
SME test. The plan also has the potential 
to strengthen the European regulatory 
and supervisory framework by 
reinforcing the supervision and 
enforcement capacities of Ireland’s anti-
money laundering framework. 

 
 
 
 
 
 
The EL plan aims at addressing the lack 
of affordable financing for companies, 
with loans passed on to the private 
sector through international financial 
institutions and commercial banks. This 
could help overcome the significant 
constraints in providing credit through 
the Greek banking sector, which suffers 
from the still high volume of non-
performing loans and low profitability. 
Moreover, the plan contains financial-
sector reforms aimed to a) enhance 
credit decision-making and empower the 
non-performing loan market through 
tackling information asymmetries and b) 
to strengthen capital markets, thus 
increasing Greece’s economic resilience 
to future shocks. 

EL 

ES 

The EL plan contains reforms and 
investments to improve the quality and 
sustainability of public finances and the 
accessibility and resilience of the health 
system. 
Among others, the plan contains 
investments, primarily in the green and 
digital areas, and measures to further 
improve the business environment and 
the efficiency of the public procurement 
framework, including through the digital 
transformation of public procurement 
processes and the set-up of an effective 
governance system. 

The EL contains a wide range of 
measures that support productivity and 
employment. It has a strong focus on 
active labour market and social welfare 
policies, including in the area of 
education, and contains measures to 
support public and private investments, 
including for the green and digital 
transition. Targeted interventions aim to 
stimulate research, development and 
innovation performance and address 
skill mismatches.  

Measures in the ES plan are expected to 
mitigate the impact of the crisis and 
support the recovery. In the medium 
term, the reform of the pension system is 
set to increase related expenditures. Still, 
measures included in the plan to 
strengthen the fiscal system and enhance 
the efficiency of public spending will 
support investment and improve the 
sustainability of public finances. The 
modernisation of public procurement 
can also play a role in this respect. 
Measures improving the resilience and 
quality of the health system are also 
included in the plan.  

Reforms and investments in the ES plan 
are expected to support productivity and 
better functioning markets and public 
administrations. This should foster 
private investment to address the 
recovery and the twin green and digital 
transition. 
The plan also shows commitment to 
deepen the Internal Market, including 
the digital one. In parallel, efforts will be 
made to correct labour market 
segmentation, to match the skills of 
human capital through the modernisation 
of education and training, and to 
promote effective active labour market 
policies across the national territory. 
This is to be done within the framework 
of social dialogue and with the broadest 
possible consensus, with a view to 
ensuring that reforms are effective in the 
medium and long term. Further reforms 

37 

The plan contains measures to improve 
public administration and governance 
systems, including by modernising staff 
hiring procedures and strengthening the 
national public procurement framework. 
Reforms of the justice system (revision 
of the judicial map, digitalisation and 
upskilling of judges and judicial clerks) 
aim at modernising the system and 
increasing its quality and efficiency.  
Reforms regarding the anti-money 
laundering framework, fight against 
corruption and improving tax collection 
capacity are addressed through various  
components, which will enhance the 
AML/CFT framework, as well as 
modernize and digitalise the relevant 
infrastructures and databases.  
Measures have been taken to simplify 
administrative procedures for the 
efficient absorption of European funds, 
in particular those of the RRF. The Plan 
also provides for measures to modernise 
and digitalise public administrations, 
particularly in the areas of health, justice 
and public employment services. In the 
area of business climate, reforms 
envisaged can help remove unnecessary 
or disproportionate administrative 
barriers to business creation and growth. 
They can also facilitate business 
restructuring processes through 
amendments to the insolvency 
framework. 

 
 
 
 
FR 

IT 

CY 

Measures included in the FR plans will 
support the economy while contributing 
to a sustainable recovery. In particular, 
the reform of the governance of public 
finances and efforts to increase the 
efficiency of public spending will 
contribute to prudent fiscal positions in 
the medium term.  
The FR plan also aims to implement 
measures contributing to the resilience 
of the health and social security system, 
in particular by strengthening the 
healthcare and socio-medical sectors, as 
well as social measures supporting 
employment. The quality of the 
country’s public financial management 
should, among others, be strengthened 
by the digitalisation of the public 
administration and fiscal structural 
reforms. 
The IT plan includes measures that will 
support the economy while contributing 
to long-term sustainability. In particular, 
it foresees an improvement of the public 
spending reviews to also support green 
budgeting.  
The plan also aims to strengthen the 
coverage, adequacy and sustainability of 
the health system. A number of 
measures are envisaged to reinforce 
local health care facilities, fostering the 
digital transition throughout the health 
system and use health data to assess the 
quality of care and support health care 
decisions and planning for improving 
the governance of the healthcare system.  
The CY plan contains several measures 

of the tax system are planned to move 
towards greener taxation. 
The FR plan includes measures to 
promote the climate transition and 
includes investments to promote the 
digital transformation. There are 
measures aimed at supporting 
educational and pedagogical innovation 
through digitalisation and 
modernization, as well as strengthening 
vocational education and training and 
upskilling and reskilling. These are all 
expected to enhance productivity, 
employment and labour market 
integration.  

The FR plans includes measures to boost 
the digital transition of the public service 
and of the national health system.  
Several reforms included in the FR plain 
aims at simplifying the regulatory 
environment for companies and reduce 
administrative burdens.  

The FR plan includes measures aimed at 
strengthening the equity of SMEs and 
the quality of public finances.  

The IT plan includes measures that aim 
at enhancing the green transformations 
of the economy, by improving energy 
efficiency and building renovation, 
promoting renewables and hydrogen 
production as well as fostering circular 
economy and better agricultural 
practices. Furthermore, a number of 
measures is also envisaged to contribute 
to improving labour market 
participation, particularly for women 
and young people, and to enhancing the 
quality of the education and training 
services. 

The IT plan includes measures aiming at 
increasing the effectiveness of the public 
administration, the efficiency of the 
justice system and the resilience of the 
healthcare system. Moreover, to improve 
the business environment, the Plan 
includes measures to remove barriers to 
competition, improve regulation in 
certain sectors and streamline the public 
procurement code. The IT plan also 
includes reforms of the justice system, 
including in measures to reinforce the 
insolvency framework. 

The CY plan contains a variety of 

The CY plan includes reforms linked to 

The CY plan aims to address financial 

38 

 
 
  
that are expected to support the 
recovery. More specifically, it contains 
reforms and investments to strengthen 
the effectiveness, accessibility and 
overall resilience of the healthcare 
sector, supporting the recently 
introduced National Health System 
through various interventions. These 
include the (i) modernisation and 
digitalisation of health care 
infrastructure and equipment, (ii) 
stepping-up of e-Health services, (iii) 
accreditation of provided health care 
services and introduction of evidence-
based clinical protocols and quality 
monitoring systems, as well as (iv) 
upskilling opportunities for health 
workers. 

LV 

LV plans reforms and investments to 
support provision of integrated and 
human-centred health care, raise the 
capacity of health institutions to adapt to 
crisis situations and to address the 
shortages of health workforce. LV also 
aims to improve the adequacy of the 
minimum income support system. 

measures that support productivity and 
employment in a sustainable way. There 
is a dedicated component promoting a 
new growth model and diversification of 
the economy, aiming to reduce 
overreliance on certain economic 
sectors, such as tourism, by addressing 
challenges in the primary and secondary 
sectors.   
In addition, the plan contains measures 
to improve access to finance for SMEs. 
It also contains measures aiming to 
support public and private investments 
with strong focus on green and digital 
transition.  There is also a strong focus 
on active labour market policies and 
social protection as well as improving 
the education system and upskilling the 
workforce.   
Furthermore, the CY Plan includes 
measures aimed at safeguarding fiscal 
and financial stability such as securing 
tax collection capacity and improving 
tax administration. 
LV plans reforms and investments to 
promote the climate change adaptation 
and mitigation and digital transition. It 
aims to reduce inequalities and includes 
measures to improve labour market 
participation. The plan includes 
measures to foster regional 
development, research and innovation as 
well as support schemes for business 
investment. The plan also promotes 
investment in skills, including digital 
skills. 

improving the business environment, to 
the efficiency of public administration 
and the effectiveness of the justice 
system, including anti-corruption.  
It also includes investments for the 
digitalisation of the public 
administration and the justice system.   
In addition, it foresees a more 
decentralised local government 
framework, which is expected to 
improve the services provided to the 
citizens and improve the efficiency of 
the central and local governments.  

stability inter alia by:  (i) reducing 
legacy risks in the banking sector, to a 
large extent related to remaining stocks 
of non-performing loans, (ii) putting in 
place measures against high private 
indebtedness, such as improving 
monitoring, enhancing insolvency 
frameworks and improving financial 
literacy, and (iii) improving supervision 
in the non-bank sector (insurance, 
pension funds, and securities markets). 

LV plans to improve the functioning of 
public administration by increasing the 
efficiency of tax administration, 
strengthening the competencies of the 
justice system, modernising public 
administration and improving the quality 
and efficiency of public procurement. 
The plan includes measures for the 
digital transformation of public 
administration, public services and 
businesses. The plan is expected to 
continue work on the implementation of 
the anti-money laundering strategy.  

LT 

LT aims to reform the minimum income  The plan includes measures increasing 

The digitalisation of the public sector 

39 

 
 
 
 
 
 
LU 

scheme, increase the coverage of the 
unemployment social insurance and 
improve pension indexation 
mechanism.  The plan also provides for 
introduction of an additional benefit 
to single elderly and disabled people as 
well as setting-up an accreditation 
scheme for social care. A set of reforms 
and investments is directed towards 
improving the quality and accessibility 
of health services and promoting 
innovation, improving long-term care 
services and strengthening the resilience 
of the healthcare system to deal with 
emergencies. 
Lithuania has envisaged measures to 
improve its medium-term budget 
framework and introduce spending 
reviews. 
The LU plan contains several measures 
that will support the recovery. It 
promotes investment in skills, including 
digital skills, which will increase the 
qualification and employability of the 
workforce, including older workers. 
Investment in renewable energy and in 
green mobility will also contribute to the 
economic growth of the country. The 
plan also includes measures to 
strengthen the resilience and efficiency 
of the healthcare system.  
The LU plan includes a component with 
reforms and investments to modernize 
the health system, with a view to 
increasing its preparedness, efficiency 
and resilience ahead of the challenges 
that ageing populations will pose to the 
sustainability of public finances in the 
medium term. 

the scope and diversity of employment 
support measures with a focus on high 
value added jobs supporting the 
objectives of digital and green 
transformation. The plan also aims at 
improving the operational processes of 
public employment service through 
digitalisation and increasing customer 
orientation. 
The Plan also encompasses measures to 
improve HR management in the public 
service and extensive training of the 
civil service. 
In addition, Lithuania intends to expand 
environmental taxation. 

includes measures to (i) fully 
consolidate state information resources, 
IT infrastructure and services, (ii) ensure 
the availability of reliable public sector 
data and the possibility to share it across 
sectors; and (iii) fully digitalise 
government processes and expand 
digital public services, while ensuring 
that all digital public services are 
accessible for citizens with disabilities. 

Lithuania also plans to develop digital 
tools facilitating insolvency procedures 
of businesses. 

The LU plan addresses social 
vulnerabilities by including measures to 
foster training for jobseekers and short-
time workers. It promotes social 
cohesion by reforms incentivising the 
supply of affordable and sustainable 
housing. 
Among the largest projects of the plan 
features the development and 
deployment of a secure communication 
system among several MSs, which will 
facilitate a secure exchange of data and 
digital integration, contributing to the 
digital transition. 

The plan includes reforms intended to 
ensure effective supervision and 
enforcement of the anti-money 
laundering framework as regards 
professionals providing trust and 
company services, and investment 
services. 

The LU plan is also set to strengthen the 
effectiveness and digitalisation of public 
administration. 
The integrated set of digital tools being 
deployed will improve the public service 
accessibility and interaction with the 
population and economic actors. The 
service aims to become a platform, on 
which stakeholders and the institutions 
can jointly build digital capacity and 
trust towards a more inclusive and 
engaged society. 

40 

 
 
 
 
 
 
MT 

AT 

PT 

The MT plan promotes key investments 
to strengthen growth potential and 
creating jobs. The plan contains 
measures that contribute to the resilience 
of the health system. In the area of social 
policy, the plan includes reforms and 
investments to assess and review 
unemployment benefits and the pension 
system to ensure their adequacy and 
sustainability.  

The MT plan contains investments and 
reforms that aim to contribute to the 
green transition, circular economy and 
the digital transformation of the country. 
It also expands opportunities for 
upskilling and reskilling, especially low 
skilled adults, strengthens vocational 
training, and reinforces access to quality 
education, especially for pupils with 
special needs.  

The AT plan includes a proposal for 
spending reviews related to the green 
and digital transition. 
The plan includes several measures that 
help address the challenges of the fiscal 
sustainability of the pension system. In 
addition, the pension splitting 
contributes to narrowing the gender 
pension gap, a long-recognised 
challenge in Austria. Further, the plan 
aims to foster the resilience of the 
Austrian health system, notably through 
a reform to strengthen primary care. 

The PT plan aims at strengthening the 
social response network and the 
response capacity of the National Health 
Service, strengthening qualification of 
the labour force to help to mitigate the 
social and labour impact of the crisis. PT 
seeks to improve the quality of the 
country’s public financial management 
by the digitalisation of the public 
administration and fiscal-structural 

The AT plan includes reform and 
investment measures related to the green 
and digital transition to improve 
Austria’s growth potential. 
The proposal of an eco-social tax reform 
included in the AT plan has the potential 
to become a key enabling reform for the 
green transition and a sustainable 
economic recovery. 
The plan also includes several  measures 
to enhance the skills of the labour force, 
improve education outcomes and 
mitigate adverse social effects of the 
crisis. 
The PT plan includes investments to 
promote the climate transition and 
digital transformation. It supports 
educational and pedagogical innovation 
through digitalisation and 
modernization. PT aims to enhance 
productivity, employment and labour 
market integration by strengthening 
vocational education and training, and 
reskilling and upskilling. 

41 

MT plans to improve the governance of 
the justice system, including by 
changing the appointment and dismissal 
procedures of the judiciary and ensuring 
the independence of specialised 
tribunals, as well as reinforcing the 
institutional framework to tackle 
corruption. On AML, Malta commits to 
complete the implementation of the 
national action plan on the AML/CTF 
and actions requested by the special task 
force. The plan includes investments to 
fast-track the digitalisation of the public 
administration, the health care and 
justice systems. 
The AT plan is expected to support 
structural changes in the country’s 
public administration. This is 
particularly the case for the digitalisation 
of the country’s public administration 
and digitalisation in the primary health 
care sector. Several measures aim to 
reduce administrative burden and to 
improve the business environment. 

The PT plan contributes to the 
modernisation and digitalisation of the 
justice system and includes the 
development of an information system 
to monitor Portugal’s national anti-
corruption strategy. Digitalisation 
measures are equally expected to 
strengthen the National Health Service. 
It foresees modernisation of public 
administration and digital transition, and 

The PT plan aims to support viable 
companies and facilitate access to 
finance complementing the reforms to 
develop the Portuguese capital market. 

 
 
 
 
SI 

SK 

FI 

reforms. PT is set to address several 
bottlenecks impacting on the quality of 
public finances.  
The SI plan is expected to provide a 
short-term boost to the economy, 
through considerable investments, while 
it also envisages a series of reforms that 
are set to boost economic resilience and 
raise growth potential, including long-
term care, healthcare and pension 
reforms. These reforms are equally 
expected to contribute to long-term 
fiscal sustainability. 
The SK plan includes reforms and 
investments to support the recovery.  It 
represents a detailed response to 
Slovakia’s healthcare challenges, 
including the modernisation of its 
hospital network, and a reform of social 
and long-term care. The plan also 
envisages improving the sustainability of 
the pension system. It foresees a new 
public investment methodology aims at 
improving the prioritisation of mature 
projects.  A public procurement reform 
aims at accelerating and simplifying 
procedures. 
FI’s plan includes measures to 
strengthen the coverage, adequacy, and 
sustainability of health and social 
protection systems. 

seeks to reduce the administrative 
burden and improve the business 
environment. 
The SI plan includes reforms to 
modernise public administration; it seeks 
to increase the efficiency, and greening, 
of public procurement to strengthen the 
national institutional framework. The 
plan aims to improve capital markets 
framework to attract equity investments. 

The SK plan includes several measures 
to strengthen national institutional 
frameworks. The plan seeks to improve 
the effectiveness and integrity of the 
justice system and to fight corruption 
and money laundering. The plan also 
envisages a large-scale shift to digital 
public services. Quicker and simplified 
insolvency processes targeted by the 
plan could also help to address a long-
running complication for entrepreneurs 
operating in Slovakia. 

FI plans to strengthen the effectiveness 
and digitalization of public 
administration, the health system and 
public employment services. The 
measures related to the data economy 
and information sharing are set to reduce 
the administrative burden for firms and 
improve the business environment. The 
plan contains a reform of the AML/CTF 
framework. 

The SI plan includes measures to 
improve business environment and boost 
investment and R&D and to ensure the 
digital and green transitions. These 
include reforms and investments in RDI 
and education and trainings. 

The SK has strong focus on inclusive 
education, public governance and 
productivity-enhancing investment into 
the green and digital transition. The plan 
places a particular emphasis on 
improving human capital and raising the 
skill level of population.  

FI plans to strengthen productivity and 
employment and provide support to 
private investment to foster the green 
and digital transitions, support job 
transitions, address labour market 
segmentation and address skills 
shortages. 

42 

 
 
 
 
 
 
43