Social Europe

politics, economy and employment & labour

  • Themes
    • Global cities
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter
  • Membership

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.


Become part of our Community of Thought Leaders


Get fresh perspectives delivered straight to your inbox. Sign up for our newsletter to receive thought-provoking opinion articles and expert analysis on the most pressing political, economic and social issues of our time. Join our community of engaged readers and be a part of the conversation.

Sign up here

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.

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.


Support Progressive Ideas: Become a Social Europe Member!


Support independent publishing and progressive ideas by becoming a Social Europe member for less than 5 Euro per month. You can help us create more high-quality articles, podcasts and videos that challenge conventional thinking and foster a more informed and democratic society. Join us in our mission - your support makes all the difference!

Become a Social Europe Member

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

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

You are here: Home / Economy / Covid-19 is an opportunity for Europe

Most Popular Posts

Ukraine,fatigue Ukraine’s cause: momentum is diminishingStefan Wolff and Tetyana Malyarenko
Russia,information war Russia is winning the information warAiste Merfeldaite
Nanterre,police Nanterre and the suburbs: the lid comes offJoseph Downing
Russia,nuclear Russia’s dangerous nuclear consensusAna Palacio
Belarus,Lithuania A tale of two countries: Belarus and LithuaniaThorvaldur Gylfason and Eduard Hochreiter

Most Recent Posts

G7,BRICS,China,Russia G7 versus the BRICS: taking stock in 12 figuresThorvaldur Gylfason
solar energy,photovoltaic,Europe,EU,PV Powering up: the EU and solar energyFrancesco Crespi, Dario Guarascio, Serenella Caravella and Giacomo Cucignatto
Nagorno-Karabakh Nagorno-Karabakh: it’s not over yetSvante Lundgren
Sweden,climate,green Sweden’s climate policy—off the railsLisa Pelling
Biden,Detroit,UAW,strike Detroit, Joe Biden and a union renaissancePaul Knott

Other Social Europe Publications

strategic autonomy Strategic autonomy
Bildschirmfoto 2023 05 08 um 21.36.25 scaled 1 RE No. 13: Failed Market Approaches to Long-Term Care
front cover Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship

Foundation for European Progressive Studies Advertisement

The summer issue of the Progressive Post magazine by FEPS is out!

The Special Coverage of this new edition is dedicated to the importance of biodiversity, not only as a good in itself but also for the very existence of humankind. We need a paradigm change in the mostly utilitarian relation humans have with nature.

In this issue, we also look at the hazards of unregulated artificial intelligence, explore the shortcomings of the EU's approach to migration and asylum management, and analyse the social downside of the EU's current ethnically-focused Roma policy.


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

WSI European Collective Bargaining Report 2022 / 2023

With real wages falling by 4 per cent in 2022, workers in the European Union suffered an unprecedented loss in purchasing power. The reason for this was the rapid increase in consumer prices, behind which nominal wage growth fell significantly. Meanwhile, inflation is no longer driven by energy import prices, but by domestic factors. The increased profit margins of companies are a major reason for persistent inflation. In this difficult environment, trade unions are faced with the challenge of securing real wages—and companies have the responsibility of making their contribution to returning to the path of political stability by reducing excess profits.


DOWNLOAD HERE

ETUI advertisement

The future of remote work

The 12 chapters collected in this volume provide a multidisciplinary perspective on the impact and the future trajectories of remote work, from the nexus between the location from where work is performed and how it is performed to how remote locations may affect the way work is managed and organised, as well as the applicability of existing legislation. Additional questions concern remote work’s environmental and social impact and the rapidly changing nature of the relationship between work and life.


AVAILABLE HERE

Eurofound advertisement

Eurofound Talks: does Europe have the skills it needs for a changing economy?

In this episode of the Eurofound Talks podcast, Mary McCaughey speaks with Eurofound’s research manager, Tina Weber, its senior research manager, Gijs van Houten, and Giovanni Russo, senior expert at CEDEFOP (The European Centre for the Development of Vocational Training), about Europe’s skills challenges and what can be done to help workers and businesses adapt to future skills demands.

Listen where you get your podcasts, or for free, by clicking on the link below


LISTEN HERE

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

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube