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European Union member states must strengthen their institutions for resilient growth to shield against economic crises, protect the most vulnerable and ensure incomes can rebound quickly, says a new World Bank report. The latest European Union Regular Economic Report – entitled Including Institutions – outlines

priorities for countries to most effectively respond in the event of an unexpected downturn. Three critical factors are identified. First, countries must secure strong overall growth, both at the country level and in lagging regions.  Second, the benefits of growth – jobs and incomes – must be shared among all citizens. Third, growth must be resilient so that incomes, if hit hard, can quickly rebound. 

 “The report learns from the lessons of Europe’s recent crises, which caused median household incomes across the EU to fall by five percent between 2007 and 2014, and by 13 percent in southern Europe,” said Arup Banerji,Regional Director for the European Union Countries at the World Bank.“In fact, the World Bank’s calculations show that the number of people in the EU earning below €23 per day rose to a high of 105 million in 2013. But recovery, first in central Europe and more recently in southern Europe, has reversed the trend – and we expect the number of such lower-income people to soon drop below 85 million, fewer than in 2008.”

The report shows that the resilience of growth varied considerably across European countries. The countries where household incomes were most resilient had a mix of policies marked by flexible labor markets paired with active labor market policies and protection for the poorest, together with competition and regulatory policies that allow firms to quickly adjust production and new firms to enter. Of particular importance is the role of poverty-targeted social protection institutions – not yet universal in the EU – that can quickly absorb those who are at risk of falling into poverty when shocks hit.

The report’s analysis also underlines the role of a policy environment marked by trust between government, labor unions and the private sector – which leads to better formulation of the sorts of institutions most conducive to safeguarding economies against major shocks such as those experienced since 2008.

Banerji added: “People’s confidence in the institutions that govern them plays a fundamental role in the economic stability of a nation. High levels of inequality and distrust can put that stability in jeopardy and restrict a government’s response to an unforeseen crisis. The stronger a country’s institutions are, the quicker it will be able to rebound, recovering jobs and economic activity, after a slowdown.”

The report highlights a ‘vicious cycle’ whereby an increase in inequality erodes public trust, which weakens the resilience of national institutions. In turn, those weaker institutions are then shown to perpetuate increased distrust among the public. Half of the EU’s 28 Member States were found to have below average levels of public trust in their governing institutions.

“Some EU countries need to find new ways to absorb economic shocks effectively while ensuring that the eventual rebound will be inclusive and not leave sections of society behind. That’s a major trust problem Europe is facing today,” Rogier van den Brink, Lead Economist at the World Bank,“Lack of trust has implications for volatility in employment and competitiveness, while higher levels of trust lead to more output and sustained levels of household income.”