Macroeconomic effects of Europe 2020: stylised scenarios

This brief presents several stylised scenarios to explore the potential macroeconomic benefits of the Europe 2020 strategy. An essential part of Europe 2020 consists of reforms with a medium- to long-term horizon that focus on promoting the sustainability of public finances, enhancing potential growth and realising the Europe 2020 objectives, i.e. ensuring that the EU becomes prosperous, green and fair. Building on policy simulations with the DSGE model QUEST III, the constructed scenarios combine fiscal consolidation efforts with differentiated progress in implementing structural reforms.

The results confirm that if the EU succeeds in generating the necessary reform momentum the gains could be significant and reach up to 7% of GDP by 2020. The extent of the benefits will crucially depend on the depth and breadth of undertaken reforms, however. Clearly, such an ambitious reform scenario would mean a significant departure from the past policies, conditional on a strong political commitment and consensus on the need for change. While non-negligible, the economic benefits from partial or shallow reform would fall short of the Europe 2020 ambition.