The Resilience of Private Balance Sheets in Europe during COVID-19

• One positive out the pandemic is how little damage it has inflicted on average household and corporate balance sheets in Europe. 
• In the past, recessions were followed by protracted weakness as they left households and businesses with significantly higher debt and lower-income and capital. So far this has not been the case with the COVID-19 crisis, largely thanks to the extraordinary policy response by governments and central banks. 
• The new IMF staff research, observes the resilience of private sector balance sheets. It uses a simple balance sheet vulnerability index, which combines measures of leverage (or indebtedness) and liquidity. Based on the index it can be seen that despite the collapse in GDP in European Union countries and the United Kingdom in 2020, business and household balance sheets in Europe were slightly affected on average. 
• Even in the worst phase of the crisis last year, the index for the corporate sector in Europe only fell marginally and by the end of 2020, the index improved. European household balance sheets also improved on aggregate in 2020, despite higher unemployment and shorter working hours. People stayed home more and spent less, while policy measures supported their income. 
• The question arises if business and household balance sheets did not bear most of the losses from the COVID-19 crisis in Europe, then who did? The short answer is the public sector. The public accumulated more debt to mitigate the effects of the pandemic.

(Source: IMF)