Unemployment is projected to rise sharply, and firms have already reduced their labour input significantly by reducing working hours.

The government's two fiscal packages include cuts in income taxes and social security contributions, higher public investment, higher transfers to households and measures to reduce the adverse impact of the crisis on the labour market. These measures will soften the downturn during this year and contribute to the recovery in 2010, notwithstanding some implementation lags associated with infrastructure spending. The main policy challenge is to prevent the rise in unemployment from turning into structural unemployment. In addition, given the deterioration in the fiscal outlook, the new fiscal rule will bolster credibility regarding medium-term consolidation.

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©OECD Observer No 274, July 2009