The EU’s response to COVID-19: success or lost opportunity?
The COVID-19 crisis represents a common threat for all 27 member states of the European Union; however, Europe has been criticised for being slow to formulate a collective response.
Since the start of the crisis, one of the first important collective decisions came on 17 March when EU leaders agreed to a 30-day ban on nonessential travel of non-EU citizens (or those of associated countries) into the bloc. But across Europe, the severity and timing of other measures have continued to differ from country to country. In the past few weeks, the focus has shifted to the financial aid mobilised by Brussels in response to the corona crisis. And, although we have seen divisions between North and South, the EU has raised significant financial resources to tackle the healthcare and economic effects of the pandemic.
So what can we make of all this? We reached out to Prof. Clemens Kool, professor of Macroeconomics and International Monetary Economics at SBE to hear his thoughts on Europe’s response to the crisis thus far.
Responding to COVID-19 at national and European level
The COVID-19 virus has disrupted our lives and economies for the last couple of months and most likely will continue to do so for quite some time. At the national level, authorities have taken unprecedented measures. Some measures, such as different forms of lockdowns, explicitly aim at preventing contagion to spread too quickly or too widely. Other measures are more economic in nature and aim at preventing mass unemployment and mass corporate default. These latter measures require an enormous increase in government expenditures.
On top of national responses, there has been a call on Europe, and not without reason. First, EU countries are bound together by strong cultural, geographical and historical ties, and the EU is set up as an economic community, for the benefit of all. Second, neither the virus itself nor its societal and economic effects stop at national borders. So, a forceful EU response feels like a no-brainer. However, the institutional form we have chosen in the past for the EU makes such forceful joint response difficult. In the end, we have decided each country is on its own to solve its own economic problems. Because of this attitude, attempts to design cross-country adjustment mechanisms through insurance or transfers have always met strong resistance.
COVID-19: a threat as well as an opportunity for Europe
COVID-19 in that sense offers both a threat and an opportunity. Let's take the opportunity first: the shock is clearly exogenous - no single country is to blame -, it potentially has strong negative spill over effect across borders, some countries are hit much more than others and some countries can afford to respond on their own much better than others. It is the ideal scenario to show the benefits of a united Europe. It could form the basis for a narrative that allows Europe to jump over its own shadow. The threat is that each country digs into its own position, tries to solve the crisis on its own and sees the rest of Europe as a burden. Ultimately, it could lead to the dissolution of the EU.
Success or lost opportunity?
So what did Europe do? I would say it does what it usually does, it muddled through. Obviously, we failed to seize and exploit the opportunity provided by this crisis to strengthen trust and belief in Europe as a meaningful institution. On the other hand, we managed to avert a complete meltdown by designing a rescue package of considerable size. On top of all national stimulus, there now is a €540 billion support package for jobs, workers, businesses and worker states. In addition, the ECB stands ready to buy €750 billion of European debt, and discussions on a new fund of €1,500 billion or more are ongoing. In pure monetary terms, Europe for now has done what it needed to do. Unfortunately, the process through which this has been achieved has cost a lot of negative energy instead of generating significant positive energy. The money may be enough to fight COVID-19, but this has not brought countries or citizens closer together. A lost opportunity.
Prof. Clemens Kool is currently investigating country-specific probabilities of a future recession change over time and how they depend on financial conditions in each countries
'It is well-known that the euro area is not an Optimum Currency Area (OCA). That is, individual euro area members can be hit by country-specific shocks without sufficient stabilizing mechanisms. This can lead to divergent economic developments in the euro area and increasing economic and political tensions between countries.
In a current project with one of my PhDs, we investigate how country-specific probabilities of a future recession change over time and how they depend on financial conditions in each countries. Among other things, we find that booming financial cycles in the early Euro period translated into continuously rising recession probabilities in the peripheral euro area countries, but not for the core countries. It suggests that the crisis has been looming for a long time in periphery countries, before the crisis really hit.'