Reforms Can Support Inclusive Growth in Turbulent Economic Times

Reforms supported by investments in green and digital infrastructure and human capital can boost, and even double, the growth potential in some EU member states between now and 2030, according to a new World Bank report.

The latest European Union Regular Economic Report – Living Up to Potential in the Wake of Adverse Shocks – reviews how some EU member states can navigate turbulent economic times to foster long-term growth and inclusion following a pandemic, an ongoing conflict in the region and a cost of living crisis.

“Two consecutive shocks, in quick succession, risk stalling the recovery in the EU.” said Gallina A. Vincelette, Regional Director for the European Union Countries at the World Bank. “The pandemic depleted national budgets and the war in Ukraine leaves governments facing an uphill battle to tackle high inflation, low growth and a cost of living crisis that is hitting the most vulnerable hard. But in the face of adversity lies opportunity. Stronger institutions and better governance to carry out difficult reforms and ensure inclusive, green, and resilient growth are the order of the day.”

Many EU member state economies have recovered to pre-pandemic levels of growth, although at an uneven pace. After contracting by 5.9 percent in 2020, EU27 economic growth surged to 5.3 percent in 2021, its strongest post-recession recovery to date. This was largely driven by a relaxation of COVID-19 restrictions that has since bolstered demand, while unprecedented policy support, increased adaptation, and high vaccination uptake supported recovery. The report recommends that governments build on this encouraging return to growth. In this context, reforms supported by the European Union Member States National Recovery and Resilience Plans (NRRPs) provide a good starting point for countries to address constraints.

“Scarred labour markets, tightening credit, disrupted supply chains, and slowing innovation have shown us how a crisis can reverse years of income gains,” Vinceletteadded. “But there is hope for correcting the course if countries invest prudently, prioritize life-long learning, and remove barriers to firm entry and trade while fostering more competition. Increased attention to the green transition also provides an excellent opportunity for EU member states to decouple economic growth from environmental degradation and put countries on a more sustainable path.”

The report finds that in the long term, higher investment along with reforms, such as increasing labour force participation, integrating migrant workers, strengthening institutions, and improving educational outcomes can raise potential output. If these reforms are implemented, potential growth through the end of this decade (2022-30) in Poland and Romania could significantly outperform the previous decade, while Bulgaria and Croatia could see growth double from the current baseline scenario. These reforms could propel average potential growth during 2022-30 to 4.6 percent in Bulgaria, 3.5 percent in Croatia, 4 percent in Poland, and 5.2 percent in Romania. Undertaking ambitious reform agendas would set these EU member states on the path to stronger convergence with the EU average per capita income levels and offset adverse impacts from the pandemic and war.

The World Bank’s Regional Action in Europe and Central Asia

To date, the World Bank has committed more than $1.7 billion to help emerging economies in Europe and Central Asia mitigate the impacts of COVID-19. While the combined total support mobilized by the World Bank for Ukraine now stands at more than $925 million.

The World Bank’s Global Economic Prospects suggests that global growth is expected to slump from 5.7 percent in 2021 to 2.9 percent in 2022— significantly lower than the 4.1 percent that was anticipated in January 2022. It is expected to hover around that pace over 2023-24, as the war in Ukraine disrupts activity, investment, and trade in the near term; as pent-up demand fades, and as fiscal and monetary policy accommodation is withdrawn.