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Here we go again: Europe’s inability to face the coronavirus crisis

by Mario Pianta and Matteo Lucchese on 19th March 2020

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The spread of Covid-19 has called into question—once again—the frailties of the European Union.

Italy Europe's inability inadequacy of European institutions
Mario Pianta

Will the coronavirus pandemic be a rerun for Europe of the 2008 financial crash? The collapse and the succeeding southern-European public debt crisis in 2011 showed the inadequacy of European institutions and policies. The outcome has been a decade of low growth, severe social consequences for southern countries and major political upheavals in most of Europe.

The European Union and the eurozone authorities are now showing a similar inability quickly to intervene and address the economic challenge of the coronavirus pandemic. Lacking co-ordination, national governments are taking action in fragmentary ways. Europe is nowhere to be seen.

Italy Europe's inability inadequacy of European institutions
Matteo Lucchese

No co-ordination

On March 16th, the president of the European Commission, Ursula von der Leyen, proposed a 30-day closing of the union’s external frontiers. Many governments have however locked national borders, with no European co-ordination. The same day, a meeting of eurozone finance ministers—with a co-ordinated economic response anticipated—failed to take significant action. The chair, Mário Centeno, merely expressed a general will for fiscal stimulus while emphasising the permanence of European rules: ‘[T]he Stability and Growth Pact has all the flexibility needed to cater for this situation … We welcomed the commission guidance on the scope for supporting firms that is available within state aid rules.’

In fact, such rules are openly—and wisely—being broken by all governments facing the pandemic. Europe’s attitude leaves open the possibility that damaged countries are again asked to follow a stricter path of adjustment of public expenditure, leading to a new round of austerity.

Three days earlier, a comment by the president of the European Central Bank, Christine Lagarde—‘we are not here to close spreads’—had caused stock markets to plunge and worsened the spread in interest rates between Italian and German government bonds. It took a strong reaction from the Italian president, Sergio Mattarella, to push Lagarde to a mild correction: ‘I am fully committed to avoid any fragmentation in a difficult moment for the euro area.’

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The European authorities appear to combine inaction and confusion, with strategies dangerously diverging (again) between Germany and southern Europe.

Major crisis

Everything suggests that the coronavirus pandemic is issuing in a major economic crisis. According to the latest interim report from the Organisation for Economic Co-operation and Development, in a scenario of broader contagion—with an intense spread of the pandemic across western countries—world gross domestic product would be reduced by up to 1.75 per cent at the peak of the shock in the latter half of 2020, while the full-year impact on global GDP in 2020 would be close to -1.5 per cent. But the rapid spread of the pandemic in Europe and the US could suggest a larger fall.

In Italy, where the virus spread earlier, 20 per cent of firms have been severely hit and GDP loss in 2020 could reach 5 per cent. After the 2008 crisis, Italy and southern Europe generally experienced a 20 per cent fall in industrial production, which has become permanent while stagnant wages have increased poverty. A rerun of these effects would, frankly, be the end of European integration.

Policy action in the face of the pandemic is indeed difficult. Monetary-policy tools are less effective than in previous crises. On the day of von der Leyen’s announcement, new liquidity announced by the US Federal Reserve and the ECB failed to prevent a stock-market collapse. The indirect stimulus of expansive fiscal policies and tax relief is crucial to rescue damaged economies. But the most effective tool for containing the crisis is probably a large direct increase in public spending—on public services, the purchase of domestically produced goods and investment in new production activities.


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Decisive action

In this context, more decisive action is urgently needed at the European level. In the short term, the only possibility is to allow for greater autonomy for national governments—not just ‘flexibility’ for pandemic-related spending but a ‘golden rule’ excluding all public investment from spending limits, while pursuing co-ordinated action on fiscal policy.

But more ambitious solutions are needed. The former commission president Romano Prodi and Alberto Quadrio Curzio have returned to their proposal for eurobonds, building on the experience of the European Stability Mechanism (which can already issue European securities) and the activities of the European Investment Bank.

Quadrio Curzio has also specifically proposed a Euro Rescue Bond to address the effects of the coronavirus crisis. The Italian prime minister, Giuseppe Conte, apparently launched this proposal in an official statement during the last European Council.

In the US Michael Lind and James Galbraith have called for a temporary Health Finance Corporation—a public bank modelled on the Reconstruction Finance Corporation of the New Deal—that could pay for emergency costs, medical-care tools and the policies needed to confront the pandemic. A Europe-wide version of such an institution should equally be considered.

Key lesson

In fact, a key lesson from the pandemic is that health is a global public good, vulnerable to deficits in its supply and to the emergence of epidemics from any point on the planet. Another lesson is that public-health systems—with universal and egalitarian coverage—are the best protection from the pandemic. A third is that the model of Europe’s welfare state, with public responsibility for providing fundamental services—health, education, universities, research, pensions, social assistance—to all citizens, regardless of their ability to pay, is an effective alternative to the operation of markets.

If, in this emergency, we were far-sighted enough to look at the coming emergencies related to climate change, we could learn a fourth lesson, on the need for a wide-ranging restructuring of European economies to prevent and adapt to it. The European Commission document ‘A new Industrial Strategy for a globally competitive, green and digital Europe’ again suggests modest steps when an ambitious green industrial policy is now needed.

Without an ability to learn lessons and with no political vision and capacity for action, European institutions could join the human casualties of the coronavirus crisis.

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Home ・ Here we go again: Europe’s inability to face the coronavirus crisis

Filed Under: Economy Tagged With: coronavirus

About Mario Pianta and Matteo Lucchese

Mario Pianta is professor of economic policy at Scuola Normale Superiore in Florence and is co-editor of the journal Structural Change and Economic Dynamics. He has been a member of the Centro Linceo Interdisciplinare of the Accademia Nazionale dei Lincei and has been a research fellow at the European University Institute, the London School of Economics, Université de Paris 1 Panthéon-Sorbonne and Columbia University. He is one of the founders of Sbilanciamoci, a civil-society campaign on economic alternatives. Matteo Lucchese is a researcher at Istat, the Italian National Institute of Statistics, and works on a project on green industrial policy at the Scuola Normale Superiore in Florence. He is part of the Sbilanciamoci team.

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