Table O.1: “Heatmap” of outcomes and institutions that support resilience in the EU (2004–14)

Overall, Western and Northern Europe exhibit strong resilience. These economies benefit from relatively strong institutions, with some exceptions. Both Belgium and Austria are examples of small, open economies that benefited from European integration, while euro adoption did not materially alter their monetary policy options. Sweden is not in the eurozone and is floating its currency. France scores relatively less well on private sector conditions and is an outlier in this “neighborhood” when it comes to trust in institutions. Germany’s protection of low incomes is below its peers. The UK also faces challenges on labor market conditions and trust in institutions.

Many Central European countries exhibited considerable resilience during the crises. Poland proved very resilient during the crisis but has overall weaker real exchange rate institutions than its peers: it seems to compensate for these (at least in the short term) through a flexible exchange rate.The Czech Republic’s economy is “in sync” with the eurozone’s core and its global value chains. It also protected low-income groups relatively well. However, this group still suffers from low levels of trust in institutions, creating challenges for reform effectiveness going forward. And while Romania (with little business cycle synchronicity with the euro area’s core) and the Czech Republic have flexible exchange rates that could function as short-term palliatives, Bulgaria does not.

Southern Europe’s resilience and policy mix is relatively weak. Households in Greece, Spain and Italy lived through some of the worst and longest falls in incomes in Europe. Households in Greece saw the greatest overall decline from pre-crisis income levels, with median households seeing a 40 percent decline and the bottom 20 percent of households seeing a 50 percent drop in incomes. While progress is made on some key policy variables (e.g. active labor market policies in Spain, better product market regulation in Italy and Portugal), the overall policy mix needs strengthening. Moreover, in all four countries, collective bargaining is relatively prominent, but it is not underpinned by trust in institutions which makes reaching a cooperative solution between the social partners more difficult. (This combination is also found in France and could create difficulties to reach a coordinated approach to real exchange rate adjustment when confronted with an economic shock.)

Europe’s least resilient economies are a mix of Central and Southern Europe countries. The overall policy and institutional mix in this group needs strengthening to improve resilience before the inevitable next crisis hits. Weak institutions, weak resilience and low trust can create a vicious, “scarring” cycle. Fortunately, Portugal has made substantial institutional improvements since the crises, while trust in institutions is in the “green”. Others made progress on some key policy variables (e.g. active labor market policies in Spain, better product market regulation in Italy). Reform is particularly urgent for Hungary, Croatia, Spain and Greece, as their citizens’ trust in formal institutions is among the lowest in the EU.

After 2008, convergence in the EU stalled at the national and reversed at the sub-national level, undermining resilience. The effectiveness of a common monetary policy should benefit from increased convergence between member states. Resilience should improve. However, as discussed in Part One of this report, post-2008 trends in the EU make improving resilience more difficult. At the national level, convergence has stalled.

More business cycle synchronicity does not necessarily imply stronger resilience. Countries were ranked according to the strength in the correlation of their cyclical output gaps: the darker the color, the stronger the correlations (Table O.1). The eurozone core (Austria, Belgium, Finland, France, Germany, and the Netherlands) exhibit significant correlations of their business cycles and demonstrate relatively strong resilience11. However, the Czech Republic has relatively strong synchronicity but is weaker on resilience,