Fiscal policy

“flexicurity” principle of supporting workers who have been affected by shifting demand to retain their jobs or quickly return to employment after job losses. Labor market policy in most of the countries in Central and Southern Europe is skewed towards passive measures (such as income support and early retirement) rather than towards active labor market programs that support workers to quickly return to employment after job loss and help workers to retain their jobs. We find that countries that spend less on labor market policies overall, regardless of whether active or passive, pass through periods of contraction to worse-off household incomes to a greater degree but that active spending has a slightly greater impact in shielding worse-off households during contractions.

These labor market policies and other institutional structures are examined in greater depth in Part Two, which focuses on the formal and informal rules of the game that support resilience in the EU.

1 EC, 2017a. 2 The framework for inclusive growth monitoring in the EU has been adapted from existing diagnostic structures (Ianchovichina and Gable, 2011; Anand et al, 2013; Prosperity Commission 2018). In the context of multiple downturns, we deviate from the earlier literature in explicitly including an understanding of resilience from both a macro and a micro perspective. 3 Prosperity Commission, 2018. 4 Vertical inequality captures disparities across households or individuals. It can be separated into inequalities between and within groups—for example, differences in living standards within and across the countries in the EU. Horizontal inequality refers to inequality between groups. These groups may be culturally defined (or constructed), such as racial, ethnic, or religious groups; they may be defined by situation, such as regional location or age; or they may be defined based on economic criteria, such as occupation. See Stewart (2009) for a more detailed discussion of horizontal inequalities. 5 A technical recession is when the economy records two consecutive quarters of GDP contraction. 6 The regression analysis that underlies this result is explored in greater detail in the resilience section. 7 Economic Policy Institute, 2018. 8 Countries in the Northern region can be split into two. Median household incomes in Sweden, Finland and

Denmark have remained more stable than those in Latvia, Lithuania and Estonia where median household incomes shrinking between 10–20 percent. 9 Importantly, unemployment rates among the young—who suffered the largest drop in employment during the crisis—are finally declining, but remain high in Croatia, Slovenia and parts of Southern Europe. 10 The net international investment position, is negative at above 50 percent of GDP in Central Europe and at almost 70 percent of GDP in Southern Europe, significantly exceeding the threshold of –35 percent of GDP set in the

EU Macroeconomic Imbalance Procedure. 11 World Bank, 2018e. 12 World Bank, 2018e. 13 EC, 2017b and 2019. 14 Derived from Eurostat, using indicator nama_10r_3gdp. The indicator drawn is Purchasing power standard (PPS) per inhabitant in percentage of the EU average. 15 We use two complementary concepts of convergence derived from the literature on economic growth—beta- and sigma-convergence. Beta-convergence occurs when lower-income countries or regions grow at a faster rate than higher-income countries or regions. As a consequence, lower-income countries catch up with higher-income countries, resulting in rising relative incomes over time. Sigma-convergence refers to the reduction of dispersion across regions over time. We say that a group of regions or countries are sigma-converging if the dispersion of their real per capita GDP decreases over time. While beta-convergence is a necessary condition for the existing of sigma-convergence, it is possible to see absolute beta-convergence and sigma-divergence. 16 Gill and Raiser (2012). 17 Using volume indices of real expenditure per capita in PPS (EU-28=100), indicator prc_ppp_ind. 18 EC, 2017b.