Politics: Catherine Feore reports as the EU prepares for the future.
It is hard to grasp the impact of the COVID-19 pandemic and its resulting economic
consequences. Countries across Europe have had to take draconian actions to rescue health systems that were overwhelmed by patients with acute needs, and the public health measures meant bringing normal day-to-day life almost to a standstill. The treatment was necessary, but it would have severe side-effects on national economies. The shock is described as symmetric, but its reverberations and the path to recovery will be very asymmetric.
The efforts of each country are important for all. This is particularly the case in a single market, with freedom of movement and intricate and intertwined commercial interests. However, some countries and regions were hit much earlier and much harder than others, some sectors will feel the brunt more than others. It is unfair that those hit hardest by the disease are often those most dependent on sectors like tourism.
The measures taken by each country have resulted in the flattening of the curve, slowing the spread of the disease and can therefore be considered to be successful. We are now seeing the gradual lifting of restrictions. The question is how to get out of our collective economic malaise as quickly and as scar free as possible, but in order to do so, Europe’s leaders need to understand that we are all in this together and that solidarity is also self-interest.
The reaction to the resulting economic crisis was a little bumpy at the outset. The
ECB launched a special Pandemic Emergency Purchase Programme (PEPP) that will – if temporarily – suspend the link to the ‘capital key’ normally used to reflect the GDP and population of the different central banks. European Central Bank President Christine Lagarde said initially that “we are not here to close spreads” in sovereign debt markets, causing consternation (and wider spreads) for the worst hit countries.
Lagarde later made it clear that the bank would do everything necessary within its mandate to support the economy through this shock and that the ECB would not tolerate any risks to the smooth transmission of its monetary policy to “all jurisdictions of the euro area”. The ECB is apparently willing to do “whatever it takes” but a consensus emerged that this just wasn’t going to cut it.
The European Commission has led on a number of other actions including support for business liquidity through the European Investment Bank, a new instrument for temporary support to help preserve employment (SURE) and emergency credit lines funded through the European Stability Mechanism with conditionality linked to support health-care spending. The EU has also allowed the triggering of the escape clause in the Stability and Growth Pact, allowing more freedom to spend and for a loosening of the EU’s state aid rules that allow national governments to support their businesses.
This flexibility has raised concerns about further fragmentation and distortion of the single market. Germany alone accounts for around 52% of the state aid approvals so far requested, amounting to nearly €1 trillion. There is a real danger that this gives those with the biggest pockets an unfair competitive advantage that could outlive the crisis. European Commissioner for the Economy, Paolo Gentiloni is particularly cognisant that a great depression could also lead to a great fragmentation and potentially destabilize the very foundations of the European project. It’s one thing for Hungary and Poland to toy with autocracy, another thing when it’s Italy.