The EU is
navigating its third crisis in the space of a single decade, following
the euro area financial crisis and the migration crisis. In some
respects, the potential systemic implications of the Covid-19 pandemic
are even more pervasive than those of the previous crises (Baldwin and
Weder di Mauro 2020, Fuentes and Moder 2021). Jean Monnet famously
stated that “Europe will be forged in crises and it will be the sum of
solutions adopted for those crises”. But every crisis has its own
characteristics, and prompts its own response. In certain cases, the
response pushes forward the frontier of European integration – that was
the case of the completion of the Single Market after the Eurosclerosis
of the 1970s or the creation of the euro after German reunification. In
other cases, the response is only partially transformative, as was the
case during the financial crisis that started in 2008.
Therefore, not all
the responses to crises pass what, in a new CEPR Policy Insight (Buti
and Papaconstantinou 2021), we call the triple ‘Monnet Compatibility
Test’ of economic coherence (effective policy action), institutional
coherence (leveraging common governance mechanisms at the right level of
government), and political coherence (maintaining citizens’ support).
This crisis is
different, and the policy response, with the Next Generation EU
initiative at its heart, is breaking new ground (Verwey et al. 2020) and
leading to governance changes at national level (Buti and Polli 2021).
This is true in terms of instruments (use of grants, new ‘own
resources’, issuance of common debt); institutional mechanics (the
return of the so-called Community method); as well as in terms of the
sheer magnitude of the underlying fiscal effort and liquidity provision
at both national and EU levels.1
Why a different policy response this time round?
The decisions taken
by the EU do represent a significant ‘stepping up’ and a break with past
policy. What has underpinned this shift? We believe three broad factors
have driven what we are observing.
The first is the
evolution in our understanding of macroeconomic policy – the new macro
paradigm that has emerged since the global financial crisis, with a
revised consensus on the appropriate overall macro policy stance, a new
understanding on debt sustainability, the right mix of fiscal and
monetary policy, and the role of central banks (Fornaro and Wolf 2020).
With monetary policy at the effective lower bound, fiscal policy – at
national and EU level – has to play a more important role in propping up
the economy. This is key for domestic reasons, but also to make the
European economy less dependent on external demand and hence able to
play a more assertive role in global governance.
The second factor is
the different nature of the current crisis – exogenous, not policy
induced, hence giving less rise to a ‘moral hazard’ narrative. As a
consequence, the focus of the policy response has been on a common
threat requiring a common response. The asymmetric impact of the crisis
has come to be seen as a threat to the whole EU. Hence, solidarity, or
enlightened self-interest, has underpinned the policy decisions. Opinion
polls show a large support for Next Generation EU not only in countries
that are net beneficiaries, but also in Germany and the so-called
‘frugal’ countries that only reluctantly contributed to the rescue
programmes during the financial crisis.
The third factor is
policy learning from the euro area financial crisis – among others, the
need for monetary policy to be forceful to stop self-fulfilling dynamics
or the realisation of negative equilibria, the dangers of early
withdrawal of fiscal stimulus, and the difficulty of achieving an
appropriate euro area fiscal stance only via horizontal coordination of
national policies (Buti 2020, Bartsch et al. 2021).
In sum, if properly
implemented, the economic policy response to the pandemic has a chance
to meet the three criteria of the Monnet Compatibility Test. Will it
also represent a paradigm shift in European integration?
Four post-Covid shaping factors
Looking forward,
Covid-19 is forcing us to rethink attitudes and policies across a number
of areas that will shape the legacy of the pandemic for European
integration. As we argue in Buti and Papacostantinou (2021), some of the
main issues standing out could be grouped under four headings: the new
emerging boundaries between state and market; the notion of subsidiarity
in the new environment; reconnecting the EU/domestic with the
international/global agenda; and the need for EU economies and
policymaking to deal with longer-term structural shifts taking place.
1. Defining the new boundaries between state and market
As the pandemic
ripped through European societies, it brought with it a new realisation
of the importance of well-functioning health systems as well as of the
ability of national governments and the EU collective to protect
Europeans. This simple realisation is concretely translated in policy
shifts or ongoing discussions which may break new ground: a new emerging
paradigm for fiscal balances and policy mix, a new social compact (with
higher minimum wages, a universal basic income, more progressive tax
systems), the debate on strategic autonomy in key sectors/products that
would increase resilience at national and EU level (encapsulated in the
shift from ‘just in time’ to ‘just in case’). In these areas, what is
underlying is a rethink of the balance between what is provided by
states and what is determined mainly by market forces. This policy shift
is evident across most EU nations, as well as in the UK and the US.
Medium term, it will be crucial that the renewed emphasis on strong
social protection does not hamper – but actually enhances – the
reallocation of factors of production. Shifting from on-the-job
protection to in-the-market protection will be a key challenge.
2. Revisiting subsidiarity
A related issue
concerns the balance of what belongs to the domain of national policy in
member states and what is a matter for the EU collective. This gives a
new twist to the discussion on subsidiarity, as can already be seen by
the decisions around the EU Recovery Plan or the proposals on a European
health union. The pandemic revealed the need for coordination at EU
level and forced cooperation in a number of areas, from travel rules to
vaccine procurement. Post-crisis, there will be a review of what has
worked and what not: on certain issues, coordination of national
policies will suffice; on others, direct supply at EU level will be
needed. As health is a global public good, there will be a need to
‘elevate’ a number of issues surrounding the prevention and management
of future pandemics to the to EU level. The same would apply also for
pan-European infrastructure investment projects (Beetsma et al. 2020).
At the same time, the pandemic has highlighted the importance of
rebuilding a more ‘dense society’, achieving solidarity through a sense
of belonging, and not just from the services delivered by the national
welfare state. This would suggest moving policy delivery in the opposite
direction, to the local level, closer to citizens. In Einaudi’s
tradition of marrying economic freedom and social cohesion, in the
post-Covid world, the role of communities and intermediate bodies will
be enhanced (Einaudi 1949, Gigliobianco 2010).2
3. Reconnecting the EU domestic with the global agenda
Covid-19 is also
pushing the EU to reconnect the domestic with the global agenda. This is
where the other dimension of strategic autonomy belongs – the one
dealing not with global supply chains but instead with new geo-economic
relations. In a situation of geopolitical re-ordering, upgrading the
global role of the EU will be essential in order to be able to influence
the discussion on European and global public goods (not just health and
pandemics, but also climate and digital governance), as well as avoid
beggar-thy-neighbour policies in areas such as trade or finance. The
domestic ramifications of a more assertive global role of the Union are
substantial: the Single Market will need to provide more ‘indigenous’
sources of growth and enhance the robustness of Europe’s value chains;
macroeconomic policies will have to reduce the dependency from external
demand, acknowledging that persistent current account surpluses are a
source of vulnerability.
It is also in this
context that one should reflect on the need to complete the EMU; while
bringing to a conclusion the reforms that started with the euro crisis
is important in and of itself in terms of better functioning of the EU
and increasing its resilience to shocks, it is also essential for
bolstering the international role of the euro, thereby increasing the
weight of the European Union on the global economy. The issuance of
common EU debt under Next Generation EU will also help increase the
attractiveness of the euro.3
4. Responding to longer term shifts
The final Covid
policy legacy concerns the need to respond to longer term structural
shifts (Terzi 2021). In the pandemic, everything digital thrived. At a
first level, this clearly requires a European push to digital – and
indeed the EU Recovery Plan is supposed to help the EU "recover and
transform" with the twin digital and green transitions. Indeed, as far
as the latter is concerned, the pandemic may have demonstrated the
devastating dangers of ignoring a ‘slow burn’ crisis such as that of
climate change. At the same time, the dominance of digital raises new
policy issues regarding regulation and competition in digital platforms,
as well as issues of protection of workers in a new online environment.
The changes brought by Covid also force more broadly a rethink of the
role and nature of work, the role and rights of remote workers and even
the new meaning of ‘essential workers’.
The policy response
to the current crisis has broken new ground. At the same time, the
difficulties on vaccines delivery and uncertainties on the follow up at
national level on Next Generation EU have shown that the latest advances
will need to be consolidated. Whether the response to the pandemic
marks a fundamental shift in the paradigm of European integration and
hence or it remains an ‘exceptional one-off’ under extreme duress will
depend on addressing the four shaping factors highlighted above.
Authors’ note: Marco Buti writes in his personal capacity.
References
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Endnotes
1 In terms of the
magnitude of the effort and its adequacy to the task at hand, the recent
debate has focused on comparing the EU response with that of the US.
There are a number of elements to this: whether the US policy response
is economically appropriate, its multipliers in the short and longer
run, its external spillovers, and its implications for the
fiscal-monetary policy mix (e.g. Andersson et al. 2021, ECB 2021). On
all these issues, the jury is still out. What is quite certain is that
doing too little is certainly more costly than doing too much; and that
given its institutional setting, an incongruent policy mix would be much
more costly for the EU than for the US.
2 The role of
communities in breaking the rural-urban divide and the ‘third pillar’ in
finding a new balance between the market and the state are explored by
Collier (2018) and Rajan (2019).
3 The huge success
of EU debt issuance under the programme SURE shows the large appetite in
financial markets for common euro-denominated bonds.