# **1 Introduction**

Europe has been one of the world’s regions most severely affected by COVID-19, with more than 100 million cumulative cases registered in the first two years of the pandemic, corresponding to over 20% of the global count. The demand and supply shocks induced by the COVID-19 pandemic hit economies in the region in an unprecedented way during 2020, undermining welfare gains and poverty reduction experienced in the last decade.

Governments in Europe have responded to the crisis with a combination of measures aiming at preserving jobs, supporting firms, especially individual employers and SMEs, and by protecting vulnerable groups (e.g., informal workers, low-wage workers) recently fallen into poverty, by expanding existing safety nets and unemployment insurance, or by introducing emergency programs. Additionally, many European countries have responded to the crisis in an unprecedented way (both in scope and scale) by introducing or expanding monetary compensation schemes (Moreira and Hick, 2021), consisting of both short-term work schemes and monetary support for the self-employed. Shortly after EU countries introduced lockdown measures in March 2020, 42 million people in the EU were in such schemes, which amounts to 20 percent of all employees in the region (European Commission, 2020; Müller and Schulten, 2020). Especially the short-term work schemes prevented a high number of lay-offs by allowing employers to reduce the working hours of their employees more flexibly while still protecting the incomes of affected workers. As a result, EU unemployment rates remained more stable than for example in the US, albeit with welfare-regime specific differences (Ebbinghaus and Lehner, 2022). Ebbinghaus and Lehner (2022) furthermore find regional differences in the design logics of schemes with the Continental, Mediterranean and liberal welfare state focusing more on preserving the employment relationship than the Nordic, Central and Eastern European countries.

In this paper, we assess the effectiveness of social protection systems in mitigating COVID-19related income shocks in the EU. Specifically, we analyze whether mitigation effects are largely based on newly introduced monetary compensation schemes, driven by other COVID-19-related policy changes or due to automatic stabilizers, i.e., the automatic response of pre-COVID-19 taxbenefit policies to the income shock. The role of automatic stabilizers is disaggregated into the contribution of unemployment insurance, social assistance and other benefits as well as taxes and social insurance contributions (SIC). This allows for a more fine-grained analysis of the cushioning role of existing tax-benefit policies in each country. In addition to the effects for the whole population in each country, we also provide results for the population subgroups most severely affected in each country.

Our analysis makes use of the tax-benefit microsimulation model EUROMOD, which allows for a comparative cross-country analysis of all EU countries. The decomposition analysis of the different tax-benefit elements is based on different counterfactual scenarios simulated using the models together with labor market adjustments to account for COVID-19-related labor market changes. The methodology is built on a rich strand of literature that also uses EUROMOD and similar decomposition approaches. Our contribution to the existing literature is that we expand the decomposition further by also considering other COVID-19-related policy changes and by differentiating between the earnings part of monetary compensation schemes and the actual compensation part. Additionally, we focus on the population as a whole, but also zoom in on those more severely affected by the labor market changes and analyze the extent the tax-benefit system provided a safety-net for them.

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