Forum 4 2020.Indd

A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Bénassy-Quéré, Agnès; Weder di Mauro, Beatrice Article European Pandemic Recovery: An Opportunity to Reboot Intereconomics Suggested Citation: Bénassy-Quéré, Agnès; Weder di Mauro, Beatrice (2020) : European Pandemic Recovery: An Opportunity to Reboot, Intereconomics, ISSN 1613-964X, Springer, Heidelberg, Vol. 55, Iss. 4, pp. 205-209, http://dx.doi.org/10.1007/s10272-020-0903-3 This Version is available at: http://hdl.handle.net/10419/224747 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ www.econstor.eu DOI: 10.1007/s10272-020-0903-3 Forum Agnès Bénassy-Quéré and Beatrice Weder di Mauro* European Pandemic Recovery: An Opportunity to Reboot After a period of hesitation, national governments in Eu- and government defi cits in the order of 10% of GDP or rope have reacted forcefully to the pandemic through more. To restate the obvious, during a pandemic, coor- various strategies combining social distancing, test- dination is key as the virus disregards national borders ing, quarantining and lockdowns. Although doing noth- and is powerful enough to disrupt cross-border sup- ing was not an option and would itself have disrupted ply chains. However, even under such obvious circum- economic activity, several weeks of strict lockdown have stances, European coordination has proved as painful triggered an economic crisis of at least twice the size as ever. Accordingly, pre-COVID-19 weaknesses in the of that of 2009. Furthermore, the recovery is likely to be governance of the euro area have quickly come back to slow due to depressed consumption and investment, the forefront. and it will require fast reallocations in both the labour market and the capital market. Fundamental fl aws of the euro area architecture Europe’s failure to manage a bold, common response The fault lines of the Maastricht architecture are now would further increase divergence, strengthen anti-Eu- widely recognised (e.g. Bénassy-Quéré and Giavazzi, ropean forces and fuel populism. The debate about the 2017). During and after the sovereign debt crises of the fi nancing of the euro safety net (e.g. coronabonds versus 2010s, several major reforms were carried out: introduc- the European Monetary Mechanism, ESM) has already tion of an emergency assistance scheme (ESM), exten- been very bruising and has created the impression of sion of the ECB’s toolkit with Outright Monetary Trans- disregarding European solidarity. The German Consti- actions (OMTs), negative interest rates and quantitative tutional Court ruling on the ECB’s past policy may also easing, reinforcement of fi scal and macroeconomic sur- contribute to further polarisation. This is not the time to veillance and a banking union. play with matches. Although these reforms were far-reaching, they were The shock being both exogenous and dramatic, one still unfi nished. As argued notably by the “7+7 report” could have expected European politicians to temporar- (Bénassy-Quéré et al., 2018), fi nancial markets were still ily set their disagreements aside. Before the crisis, they fragmented within the euro area, the ‘doom loop’ (close were discussing whether the next Multiannual Financial relationship between banking risk and sovereign risk) Framework (MFF – the seven-year budget of the Euro- was alive and well, macroeconomic convergence was a pean Union) would be set at 1.02%, 1.07% or 1.11% of work in progress, infl ation was too low despite the fact gross national income. Just a few months later, we are that monetary policy had not yet been normalised, fi scal talking about thousands of lives, millions of unemployed, policy had little room for manoeuver in various countries and was inexistent at the federal level. In brief, despite © The Author(s) 2020. Open Access: This article is distributed under the its stronger banking system, the euro area was not ready terms of the Creative Commons Attribution 4.0 International License for the next crisis. (https://creativecommons.org/licenses/by/4.0/). Open Access funding provided by ZBW – Leibniz Information Centre Even more worrisome, the fundamental fl aw of the euro for Economics. area architecture was not addressed before the COV- * This article is based on Bénassy-Quéré and Weder di Mauro (2020). ID-19 crisis. Given that both monetary fi nancing of government defi cits and fi scal bailouts are prohibited by the treaty, a country with plunging nominal GDP and sky- rocketing government debt will likely need some form of debt relief. But debt restructuring is extremely diffi - Agnès Bénassy-Quéré, Université Paris 1 Pan- cult given the concentration of government debt in the théon-Sorbonne, France. balance sheets of the resident banks. Some banks may see their capital wiped out. They may also fall short of Beatrice Weder di Mauro, Johannes Gutenberg liquidity since government bonds are routinely used to University of Mainz, Germany. get liquidity on the repo market and from the central bank. ZBW – Leibniz Information Centre for Economics 205 Forum Figure 1 Phases of the coronavirus crisis Time Phase I Phase II Phase III Full lockdown Gradual opening Open (with some restrictions) Instruments Maintain liquidity Liquidity to solvency: Mixture of debt and grants: funding of public and private Cash, debt and guarantees equity or equity-like investment Principles “Do everything you can” Repair: design smart 1. Allocate based on the severity of the economic and to prevent mass equitable burden sharing social impact insolvencies 2. Promote investment in future technologies and sectors, support reallocation out of sectors with long- term damage 3. Relevel the playing field, revitalise the internal market, protect the Schengen area Source: Authors’ elaboration based on Anderson, J., S. Tagliapietra and G. Wolff (2020), Rebooting Europe: a framework for post-Covid-19 economic recovery, Bruegel Policy Brief, 2020/1. Before the COVID-19 crisis, the euro area debate was 2020). In the acute emergency, governments have pro- evolving along three main lines: vided cash, loans and guarantees to compensate as much as possible the losses incurred because of the • How to stabilise the fi nancial sector through a smooth lockdown. Considerations about fi rms’ future repayment transition towards more diversifi ed balance sheets, ability (due to possible long-term changes in demand together with the introduction of deposit reinsurance patterns or because they may already have been unvi- as a ‘safe asset’ (Schnabel and Véron, 2018); able before this crisis) had to take a back seat. Similarly, questions about the long-run debt sustainability of fi rms • How to restore the fi re power of macroeconomic poli- and sovereigns were pushed into the future. cies, notably through a reshuffl ing of fi scal rules and the introduction of a European ‘fi scal capacity’ (7+7 In the second phase, the gradual reopening of the econ- report, 2018; European Fiscal Board, 2018, 2019); omy starts. In this phase, demand is still sluggish since people are cautious and chose to decrease their mobil- • How to avoid a defl ationary bias related to the asym- ity. Social distancing and other regulations mean that metric adjustment burden between surplus and defi - some businesses and sectors will not recover quickly. cit countries (Bénassy-Quéré, 2017). They also have to pass on to the consumer the cost of the new distancing regulations, which contributes to As the crisis unfolds, the consequences of this unfi n- depressing the demand in some sectors. Uncertainty ished work will progressively appear. about longer-run prospects remains high and the wait- and-see attitude towards private investment continues. Repair, reboot, recover This is also the time when some of the more long-term damages of this crisis start to become more visible. Figure 1 illustrates the progression of the crisis over Some fi rms are unable to repay the loans they received three phases. The fi rst was the acute phase of the medi- and insolvencies increase. Industrial restructuring plans cal emergency with the economy in lockdown. In this are announced. phase, the fi rst priority of government was to avoid un- necessary suffering, closure of fi rms and loss of jobs. The defi ning principle during this phase should be to Governments’ and central banks’ actions were all about repair corporate balance sheets in order to avoid the providing enough liquidity to households, fi rms and problems of a debt overhang, disincentives to invest and banks, and the guiding principle was “act fast and do mass insolvencies. This suggests a different package of whatever it takes” (see Baldwin and Weder di Mauro, measures. Intereconomics 2020 | 4 206 Forum Cleaning corporate balance sheets The (temporary) rise in households’ savings rates should be relied on. Although risk aversion will likely be on the Since the outbreak of the pandemic, national gov- rise, share prices will be low, offering good opportuni- ernments have been at the frontline.

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