The EU after coronavirus

In the past weeks I have commented on the economic impact of coronavirus. I have emphasised that the response cannot be left to individual countries, but it needs to be done in a concerted way with the world’s leading economies working together. This should have been quite possible within the European Union, but unfortunately solidarity among European governments has not been very evident.

We had a repetition of the situation we had during the sovereign debt crisis of 2010 to 2012, when everyone was predicting that the eurozone would implode. The cracks which we had then have reappeared and a number of countries are not very keen to share the burden of the cost of the economic impact of the pandemic. This places at risk the existence of the EU itself. Those who wish the EU to disintegrate are probably smiling, but I do not think that EU citizens should be smiling.

There is no doubt that an economic recession will hit the economy of the EU member states, like it will hit the rest of the world. Countries are expecting a dramatic increase in unemployment and government debt will rise again. Last week’s contribution asked if public debt is to be seen as a constraint anymore given that several governments have decided to do “whatever it takes” to save their economy from a total collapse. However the impact on the economy of the EU member states will not be the same everywhere.

There needs to be a credible economic recovery plan that encompasses the whole of the EU

For example, some countries depend on the tourism sector to a greater extent than others, and tourism has been one of the worst hit sectors. Not all countries have the same level of public debt. There are countries whose debt is below the threshold of 60 per cent of the gross domestic product mentioned in the Stability and Growth Path and can therefore afford more to increase public debt, and there are others whose debt is over 100 per cent of the GDP and can ill afford to increase public debt.

It would seem that those countries that have been hurt least by the pandemic are not willing to show solidarity with those countries that have. These latter countries feel that they are being left alone and so one is right to question whether the EU will survive at all.

The way the situation in the EU will develop is really anybody’s guess. All it may take is for a government of one of the larger countries to say that it wants to pull the plug. That could set off a deluge that one cannot stop. Some would refuse to think the unthinkable and they are probably right. The EU can create the right instruments to tackle the current situation and the ensuing economic recession and take on a leadership role on the world stage.

The economic impact of the pandemic is a global one because of the high level of interdependence among countries. Since the economic impact is a global one, we require a global response. The EU could take the leadership role and organise such a global response. The last time such a response was really required was at the end of World War II, 75 years ago. The current situation is different as today political leaders in the so-called West no longer call the shots, and other countries have an equally important say.

A global response could be in the form of setting up a system of global economic governance. If it is true that in the future we could be facing more pandemics (as some experts are claiming), then we will also need global structures in the health sector.

A more fundamental response has to be in the area of macro-economic policy. The EU has always been a proponent of rigid fiscal rules to ensure good economic governance. That served well to give stability to the euro and to economy of the member states. However, EU leaders need to appreciate that now is not the time for economic austerity. There needs to be a credible economic recovery plan that encompasses the whole of the EU.

The EU has the ability to emerge in a strong position after the coronavirus. However, it needs to go back to basics and rediscover the ideas and ideals of its founding fathers.