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International Monetary Fund. European Dept.
Following a deep recession in 2020 and further contraction in 2021Q1, the euro area economy recovered rapidly in the second and third quarters thanks to high vaccination levels, increasing household and business adaptability to the virus, and continued forceful policy support. Looking ahead, while supply chain disruptions, elevated energy prices, and resurgences of Covid-19 cases—including those related to the Omicron variant—are likely to pose near-term headwinds to growth, the recovery is set to continue in 2022 as the impact of the pandemic on economic activity continues to weaken over time and supply-side constraints ease. Medium-term output losses relative to pre-crisis trends will vary significantly across countries and sectors as will the extent of labor market scarring. Price pressures are building up as production bottlenecks are set to persist for a while. However, inflation—despite increasing significantly in recent months due to transitory factors—is projected to moderate during 2022 and remain below the ECB’s inflation target over the medium term. Uncertainty surrounding the outlook remains high and largely related to pandemic dynamics and legacies, including induced behavioral and preference changes.
International Monetary Fund. European Dept.

, staff assesses the REER gap to be in the range of -6.4 to -1.9 percent. As with the CA, the aggregate REER gap masks a large degree of heterogeneity in REER gaps across euro area member states, ranging from an undervaluation of 12.2 percent In Ireland to an overvaluation of 5.1 percent in Belgium. The substantial differences in REER gaps within the euro area highlight the continued need for net external debtor countries to improve their external competitiveness and for net external creditor countries to boost domestic demand. Capital and Financial Accounts

International Monetary Fund. European Dept.

suggests an overvaluation of 6.2 percent, and the EBA REER-level model implies an overvaluation of 0.1 percent. Consistent with the staff CA gap, staff assesses the REER gap to be in the range of -6.4 to -1.8 percent. As with the CA, the aggregate REER gap masks a large degree of heterogeneity in REER gaps across euro area member states, ranging from an undervaluation of 9.6 percent in Germany to an overvaluation of 5.4 percent in Belgium. The substantial differences in REER gaps within the euro area highlight the continued need for net external debtor countries to

International Monetary Fund. Monetary and Capital Markets Department

of –2.8. 2 As with the CA, the aggregate REER gap masks a large degree of heterogeneity in REER gaps across euro area member states, ranging from an undervaluation of 11 percent in Germany to overvaluations of 0 to 9 percent in several small to mid-sized euro area member states. The large differences in REER gaps within the euro area highlight the continued need for net external debtor countries to improve their external competitiveness and for net external creditor countries to boost domestic demand. Capital and Financial Accounts: Flows and Policy

International Monetary Fund. European Dept.
The COVID-19 pandemic has led to severe socio-economic dislocations and hardship. Supported by an unprecedented policy response and by the easing of lockdown measures as the infection rate moderated, the euro area economy initially recovered strongly from the pandemic’s first wave. However, a large second wave and reimposition of containment measures suggest much slower growth momentum in the near term. The outlook is for a subdued economic recovery and low inflation, with a significant permanent output loss relative to the pre-crisis trajectory. Uncertainty remains extremely high, mainly due to different pandemic scenarios, including regarding the availability and effectiveness of potential vaccines and therapies and behavioral changes. Output growth is expected to be much lower through 2021Q1 than projected in 2020 October World Economic Outlook (WEO) but may rebound beyond then in light of recent promising news on vaccine development. The key policy challenge is to continue countering the pandemic while facilitating a robust and inclusive recovery, including by addressing the health crisis, containing economic scarring, supporting resource reallocation and transformation to greener and more digital economies, and limiting the crisis’s impact on inequality and poverty. In a downside scenario, sizable further stimulus would be needed.
International Monetary Fund. European Dept.

appreciating through September by about 6½ percent from end-2019. Assessment . The EBA REER index model suggests an overvaluation of 4.2 percent, and the EBA REER-level model implies an undervaluation of 0.7 percent. The REER gap derived from the IMF staff’s CA gap assessment, with an estimated elasticity of 0.35, implies that the real exchange rate was undervalued by 3.6 percent in 2019. 2 Given the high uncertainty around these estimates, the staff-assessed REER gap range is –5.9 to 0, with a midpoint of –3.0. 3 As with the CA, the aggregate REER gap masks a large degree

International Monetary Fund. Monetary and Capital Markets Department

, the IMF staff assesses the REER gap to be in the range of –3.8 to 0.2 percent, with a midpoint of –1.8 percent. As with the CA, the aggregate REER gap masks a large degree of heterogeneity in REER gaps across euro area member states, ranging from an undervaluation of 9.2 percent in Germany to overvaluations of 0 to 10 percent in several small to large euro area member states. The substantial differences in REER gaps within the euro area highlight the continued need for net external debtor countries to improve their external competitiveness and for net external

International Monetary Fund. Research Dept.

1.7 percent. As of May 2022, the REER was 5.4 percent below its 2021 average. Assessment . Consistent with the staff CA gap, the IMF staff assesses the REER gap to be –3.4 percent in 2021, with a range of –1.7 to –5.1 percent, based on the estimated CA-REER elasticity of –0.35. 1 As with the CA gap, the aggregate REER gap masks a large degree of heterogeneity in REER gaps across euro area member states, ranging from an undervaluation of 10.8 percent in Germany to an overvaluation of 4.9 percent in Belgium. The substantial differences in REER gaps within the euro