Social Europe

politics, economy and employment & labour

  • Themes
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

Covid-19 is an opportunity for Europe

Lucrezia Reichlin 17th March 2020

The EU has always advanced on the back of crises. The Covid-19 outbreak represents a chance to pool resources towards a co-ordinated fiscal policy.

Covid-19 co-ordinated action fiscal stimulus
Lucrezia Reichlin

For years, fears have been mounting that a ‘black swan’ would test the European Union’s crisis-management capabilities. With the outbreak of the coronavirus, those fears have come to pass—and it is not at all clear that the EU will be able to withstand it.

The Covid-19 epidemic is not just any stress test. For starters, it is likely to affect the entire world, leading to a synchronised growth slowdown or even recession. Synchronised recessions are virtually always deeper and longer-lasting than downturns affecting individual economies, and they hit open economies such as the EU particularly hard.

Compounding the problem, because every EU member state is facing a severe shock, they will be far less able to help one another than they were during the eurozone crisis that began in 2010. To be sure, Italy has suffered the most so far. But past transmission patterns elsewhere suggest that Covid-19 will continue to spread across Europe, putting every country under growing strain.

Of course, it is impossible to say precisely how the epidemic will unfold. But that uncertainty will only exacerbate the economic fallout, because it will undermine investment and household consumption.

Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content.


We will never send you spam and you can unsubscribe anytime.

Thank you!

Please check your inbox and click on the link in the confirmation email to complete your newsletter subscription.

.

Harbinger of recession

Already, the virus has disrupted supply chains and slowed global trade, with predictably negative effects on corporate revenues and employment. The tourism and transport sectors have been hit particularly hard, owing not only to government-mandated travel restrictions, but also to voluntary ‘social distancing’ and reductions in movement. As a result, overall demand is already declining, reflected in plummeting oil prices—typically a harbinger of global recession.

To be sure, the consequences of a negative shock such as Covid-19, however painful, could be shortlived. But while China seems to have brought new infections under control, the number of cases continues to rise elsewhere. Unless this changes soon, the economic effects are unlikely to be temporary.

A more probable scenario is that the Covid-19 shock will test the resilience of public-health systems, labour relations, and formal and informal solidarity mechanisms across the EU. And if the pandemic is not confronted with an aggressive and timely policy response, its effects are likely to be long-lasting, especially if amplification mechanisms are activated.

Such mechanisms typically work through the financial sector. The good news is that, thanks to improved regulation, banks are better capitalised than they were in 2008, when the last global financial crisis erupted. But some countries still have serious weaknesses, and the resilience of small and medium-sized enterprises remains dubious. In the manufacturing sector, SMEs are already suffering. In the event of a protracted crisis, the damage to them will end up on banks’ balance sheets.

Co-ordinated action

In the EU, the capacity to mount an effective response and withstand unavoidable damage (including from the overall decline in demand) varies across member states. But, even in relatively well-equipped countries, unilateral, ad hoc measures have only limited potential. Co-ordinated action—especially on the fiscal front—would be far more effective.


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

This does not mean simply allowing member states to run larger fiscal deficits. Though this would help—not least by improving the relationship between the EU and its citizens—it would affect some countries’ risk premia (as the Italian case shows). We learned a decade ago that this could threaten the eurozone’s very survival and exacerbate the crisis by leading to financial segmentation.

Monetary policy can help in different ways—namely by providing liquidity where needed. For example, policy-makers could implement targeted operations conditional on banks lending to SMEs. More broadly, central banks need to use all available tools to offset downward pressure on inflation expectations from the fall in oil prices.

But what the EU really needs is a co-ordinated fiscal stimulus that takes advantage of its joint-financing power. Yet, at present, it has no instrument in place to support member countries amid large common shocks. The European Stability Mechanism could be activated in an extreme scenario but using it as a demand-management tool would be inappropriate. And the EU Solidarity Fund is too small for the job.

Crisis-management mechanism

The Covid-19 pandemic thus represents an opportunity for the EU to create a powerful crisis-management mechanism, which pools member states’ resources and channels them toward a co-ordinated fiscal policy. The idea of such an ‘insurance fund’ is not new: several economists championed the idea after the last crisis, when discussion of governance reform was in full swing.

The EU has tended to make the most progress in bad times. And, as the millions of people on lockdown in Italy and beyond can attest, the Covid-19 outbreak is a very bad time. Now is the moment for the EU to take swift co-ordinated action and capitalise on the momentum to build the institutions it needs to facilitate even more effective action next time.

The current geopolitical context should reinforce Europe’s motivation to bolster its crisis-management capacity. In 2008, international co-operation predominated, and the United States was a reliable partner to Europe. When European banks desperately needed US dollars, currency swap lines were quickly established to safeguard financial stability.

Today, by contrast, isolationism is on the rise, with the US taking the lead. The US Federal Reserve consulted no one before implementing its recent emergency interest-rate cut. One shudders to think what would happen if European banks urgently needed dollar funding in this context.

Covid-19 should serve as a powerful warning to governments worldwide. The combination of environmental degradation and deep economic interconnection has made the world more vulnerable than ever to sudden, large-scale shocks. The EU owes it to its citizens to ensure that it can respond.

Republication forbidden. Copyright Project Syndicate 2020 Covid-19 is an opportunity for Europe

Lucrezia Reichlin
Website

Lucrezia Reichlin, a former director of research at the European Central Bank, is professor of economics at the London Business School.

Home ・ Economy ・ Covid-19 is an opportunity for Europe

Most Popular Posts

schools,Sweden,Swedish,voucher,choice Sweden’s schools: Milton Friedman’s wet dreamLisa Pelling
world order,Russia,China,Europe,United States,US The coming world orderMarc Saxer
south working,remote work ‘South working’: the future of remote workAntonio Aloisi and Luisa Corazza
Russia,Putin,assets,oligarchs Seizing the assets of Russian oligarchsBranko Milanovic
Russians,support,war,Ukraine Why do Russians support the war against Ukraine?Svetlana Erpyleva

Most Recent Posts

Sakharov,nuclear,Khrushchev Unhappy birthday, Andrei SakharovNina L Khrushcheva
Gazprom,Putin,Nordstream,Putin,Schröder How the public loses out when politicians cash inKatharina Pistor
defence,europe,spending Ukraine and Europe’s defence spendingValerio Alfonso Bruno and Adriano Cozzolino
North Atlantic Treaty Organization,NATO,Ukraine The Ukraine war and NATO’s renewed credibilityPaul Rogers
transnational list,European constituency,European elections,European public sphere A European constituency for a European public sphereDomènec Ruiz Devesa

Other Social Europe Publications

The transatlantic relationship
Women and the coronavirus crisis
RE No. 12: Why No Economic Democracy in Sweden?
US election 2020
Corporate taxation in a globalised era

Hans Böckler Stiftung Advertisement

Towards a new Minimum Wage Policy in Germany and Europe: WSI minimum wage report 2022

The past year has seen a much higher political profile for the issue of minimum wages, not only in Germany, which has seen fresh initiatives to tackle low pay, but also in those many other countries in Europe that have embarked on substantial and sustained increases in statutory minimum wages. One key benchmark in determining what should count as an adequate minimum wage is the threshold of 60 per cent of the median wage, a ratio that has also played a role in the European Commission's proposals for an EU-level policy on minimum wages. This year's WSI Minimum Wage Report highlights the feasibility of achieving minimum wages that meet this criterion, given the political will. And with an increase to 12 euro per hour planned for autumn 2022, Germany might now find itself promoted from laggard to minimum-wage trailblazer.


FREE DOWNLOAD

ETUI advertisement

Bilan social / Social policy in the EU: state of play 2021 and perspectives

The new edition of the Bilan social 2021, co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), reveals that while EU social policy-making took a blow in 2020, 2021 was guided by the re-emerging social aspirations of the European Commission and the launch of several important initiatives. Against the background of Covid-19, climate change and the debate on the future of Europe, the French presidency of the Council of the EU and the von der Leyen commission must now be closely scrutinised by EU citizens and social stakeholders.


AVAILABLE HERE

Eurofound advertisement

Living and working in Europe 2021

The Covid-19 pandemic continued to be a defining force in 2021, and Eurofound continued its work of examining and recording the many and diverse impacts across the EU. Living and working in Europe 2021 provides a snapshot of the changes to employment, work and living conditions in Europe. It also summarises the agency’s findings on issues such as gender equality in employment, wealth inequality and labour shortages. These will have a significant bearing on recovery from the pandemic, resilience in the face of the war in Ukraine and a successful transition to a green and digital future.


AVAILABLE HERE

Foundation for European Progressive Studies Advertisement

EU Care Atlas: a new interactive data map showing how care deficits affect the gender earnings gap in the EU

Browse through the EU Care Atlas, a new interactive data map to help uncover what the statistics are often hiding: how care deficits directly feed into the gender earnings gap.

While attention is often focused on the gender pay gap (13%), the EU Care Atlas brings to light the more worrisome and complex picture of women’s economic inequalities. The pay gap is just one of three main elements that explain the overall earnings gap, which is estimated at 36.7%. The EU Care Atlas illustrates the urgent need to look beyond the pay gap and understand the interplay between the overall earnings gap and care imbalances.


BROWSE THROUGH THE MAP

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us on social media

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube