The resilience of EU member states to the financial and economic crisis

This study presents an empirical analysis of the resilience of European countries to the financial and economic crisis that started in 2007.1 The analysis addresses the following questions: Which countries showed a resilient behaviour during and after the crisis? Is resilience related only to the economic dimension? Has any of the EU countries been able to use the crisis as an opportunity and 'bounce forward'? Is it possible to identify any particular country characteristics linked to resilience? The analysis is based on the JRC conceptual framework for resilience (Manca et al., 2017) which places at its core the wellbeing of individuals, thus going beyond the merely economic growth perspective. The study carefully selects a number of key economic and social variables that aim to capture the resilience capacities of our society. Resilience is measured by investigating the dynamic response of these variables to the crisis in the short and medium run. In particular, we define four resilience indicators: the impact of the crisis, the recovery, the medium-run, and the ‘bouncing forward’. Results from a narrow exercise focusing on macroeconomic and financial variables confirm the validity of the proposed measurement approach: Germany appears to be among the most resilient countries; Ireland, after having been severely hit, shows a good absorptive capacity; Italy seems to be still struggling with the recovery, while Greece remains the most affected. After measuring resilience, we identify underlying country characteristics that may be associated with resilient behaviour. As such, these could indicate entry points for policies to increase countries' resilience to economic and financial shocks. Results from a narrow exercise focusing on macroeconomic and financial variables confirm the validity of the proposed measurement approach: Germany appears to be among the most resilient countries; Ireland, after having been severely hit, shows a good absorptive capacity; Italy seems to be still struggling with the recovery, while Greece remains the most affected. After measuring resilience, we identify underlying country characteristics that may be associated with resilient behaviour. As such, these could indicate entry points for policies to increase countries' resilience to economic and financial shocks. The exercise has led to the following results and conclusions. - Ranking countries according to their resilience is not trivial. Their resilience performance depends on the indicator of reference: countries that are more resilient in their short-term response may not necessarily be the ones that perform better in the medium term. For example, while Germany and Poland appear to be among the most resilient countries both in the short and medium run, Bulgaria and the Baltics score better in the medium run than in the short run. - Broadening the perspective from a purely economic to a socio-economic viewpoint has an impact on the resilience assessment of a number of countries. For instance, Bulgaria proves more resilient when social variables such as social exclusion, happiness, health expenditures and wages are included in the analysis. Conversely, Hungary becomes less resilient when the social dimension is factored in. The importance of this broader perspective further reinforces the case for the European Pillar of Social Rights, and for the inclusion of the social dimension in the work of the European Semester. - We assess whether countries have been overall able to 'bounce forward', i.e. to improve their situation compared to the pre-crisis period. Countries'performance in this respect is substantially heterogeneous: while Croatia, Cyprus, Greece, Italy and Spain still lag behind their pre-crisis performance in the majority of relevant socio-economic dimensions, countries like Germany and Malta managed to bounce forward in many areas. - In most countries, active labour market measures, productivity and R&D expenditures have increased compared to their pre-crisis level. Countries have been generally able to 'bounce forward' more as far as monetary aspects of wellbeing (GDP, consumption and income) are concerned, compared to non-monetary aspects of wellbeing (e.g. happiness, inequality, social exclusion and the share of young people not in employment, nor education, nor training). This latter finding confirms the need to consider the social dimension. - The analysis tested over 200 candidate characteristics for their association with resilience. Relevant country characteristics can differ in their association with short- and medium-run resilience. In particular: - High values of pre-crisis government expenditures on social protection turn out to be the most important feature in predicting the country absorptive capacity (lower impact). - When focusing on the medium run, the countries performing better are those that exhibit higher political stability. - As for the capacity of countries to ‘bounce forward’, what becomes critical is the business environment and in particular the perception of wages being related to productivity. - More generally, data show that countries that are net creditors vis-`a-vis the rest of the world tend to be more resilient than net debtors in all dimensions analyzed.