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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.

On behalf of the Finnish authorities, we thank the mission team led by Wojciech Maliszewski for the candid and constructive discussions and the well-balanced Article IV Report. The mission was conducted under exceptional pandemic circumstances and took place both virtually and in person. The authorities highly appreciate staff’s views on economic context, outlook, risks, and policy priorities, which contribute to the policy debate in Finland. The authorities agree with the thrust of staff’s appraisal and agree that further efforts are required to combat medium and long-term challenges.

Ian W.H. Parry and Mr. Philippe Wingender
Finland has pledged to cut net greenhouse gas emissions to zero by 2035 and has sectoral targets for deploying electric vehicles, phasing out coal generation, and oil-based space heating. Fiscal policies at the national and sectoral level could play a critical role in achieving these objectives. Carbon dioxide emissions are already priced significantly in Finland but prices vary substantially across fuels and sectors. The paper discusses a reform to both scale up, and progressively harmonize, pricing while using revenues to address equity issues. It also discusses the potential use of revenue-neutral feebate schemes to strengthen mitigation incentives for the transportation, industry, building, forestry, and agricultural sectors.
Mr. Alvar Kangur, Koralai Kirabaeva, Jean-Marc Natal, and Simon Voigts
We study the properties of the IMF-WEO estimates of real-time output gaps for countries in the euro area as well as the determinants of their revisions over 1994-2017. The analysis shows that staff typically saw economies as operating below their potential. In real time, output gaps tend to have large and negative averages that are largely revised away in later vintages. Most of the mis-measurement in real time can be explained by the difficulty in predicting recessions and by overestimation of the economy’s potential capacity. We also find, in line with earlier literature, that real-time output gaps are not useful for predicting inflation. In addition, countries where slack (and potential growth) is overestimated to a larger extent primary fiscal balances tend to be lower and public debt ratios are higher and increase faster than projected. Previous research suggests that national authorities’ real-time output gaps suffer from a similar bias. To the extent these estimates play a role in calibrating fiscal policy, over-optimism about long-term growth could contribute to excessive deficits and debt buildup.
International Monetary Fund. European Dept.
This Selected Issues paper describes wages and competitiveness in Norway. Norway may have to downwardly revise its expectations for wage growth if it is to avoid a significant loss of competitiveness and manage the transition to a less oil-dependent economy. Norway was able to afford very high wage growth in the past (notwithstanding the noted challenges in several sectors) thanks to good fortune in its terms of trade. Going forward, it would be prudent not to count on being fortunate twice: wage moderation would help build resilience in case of less favorable trends in international prices. It would also help facilitate the needed transition out of oil by supporting sectors that did not benefit from past terms of trade gains. Communication from the government can continue to help in managing public expectations. Fiscal policy plays a key role in promoting competitiveness and containing the spending effect of Dutch Disease. After a prolonged expansion of fiscal policy—partly enabled by large valuation gains of the sovereign wealth fund—it is now appropriate to gradually start tightening fiscal policy. The ongoing up-cycle provides an ideal setting to get started on structural consolidation, which will ultimately be needed to face to address aging pressures.
Ezequiel Cabezon and Christian Henn
Based on a permanent income analysis, Gagnon (2018) has prominently suggested that Norway has saved too much, thereby free-riding on the rest of the world for demand. Our public sector balance sheet analysis comes to the opposite conclusion, chiefly because it also accounts for future aging costs. Unsurprisingly, we find that Norway’s current assets exceed its liabilities by some 340 percent of mainland GDP. But its nonoil fiscal deficits have grown very large (to almost 8 percent of mainland GDP) and aging pressures are only commencing. Therefore, Norway’s intertemporal financial net worth (IFNW) is negative, at about -240 percent of mainland GDP. As IFNW represents an intertemporal budget constraint, this implies that Norway’s savings are likely insufficient to address aging costs without additional fiscal action.
Ms. Dora Benedek, Ruud A. de Mooij, and Mr. Philippe Wingender
This paper estimates the pass through of VAT changes to consumer prices, using a unique dataset providing disaggregated, monthly data on prices and VAT rates for 17 Eurozone countries over 1999-2013. Pass through is much less than full on average, and differs markedly across types of VAT change. For changes in the standard rate, for instance, final pass through is about 100 percent; for reduced rates it is significantly less, at around 30 percent; and for reclassifications it is essentially zero. We also find: differing dynamics of pass through for durables and non-durables; no significant difference in pass through between rate increases and decreases; signs of non-monotonicity in the relationship between pass through and the breadth of the consumption base affected; and indications of significant anticipation effects together with some evidence of lagged effects in the two years around reform. The results are robust against endogeneity and attenuation bias.
International Monetary Fund. European Dept.
This Selected Issues paper analyzes Norway’s economy that has a maturing oil and gas industry. Norway’s half century of good fortune from its oil and gas wealth may have peaked. Oil and gas production will continue for many decades on current projections, but output and investment have flattened out, and the spillovers from the offshore oil and gas production to the mainland economy may have turned from positive to negative. Thus far, economic policy has needed to focus on managing the windfall, and Norway’s institutions have been a model for other countries. Going forward, the challenges are expected to become more complex.