In the last 18 months, the European Commission and the European Central Bank have used all their monetary and fiscal tools to manage the economic crisis, even if they argue that they have more weapons in their armoury. We will soon be entering the post-pandemic phase where battered economies need to start rebuilding their strengths.
The collateral damage caused by friendly fire during the crisis stage must be acknowledged and fixed as early as possible.
It is ultimately taxpayers who have to foot the bill of the pandemic rescue mission.
Clear indications are emerging on the more significant post-pandemic risks that need to be addressed. To better understand these risks, we need to give more importance to what EU institutions say rather than the circumvent statements of political leaders.
In May, the ECB issued an EU-wide Financial Stability Review that contains some very candid admissions of the fiscal and economic risks created by the pandemic damage limitation strategy.
One of these risks is what an EU paper that formed part of the Stability Review was called “corporate zombification”.
It comes as no surprise to objective observers that the ECB has admitted that “policy measures aimed at supporting corporates and the economy through the coronavirus pandemic may have supported not just otherwise viable firms but also unprofitable but still operating firms – often referred to as ‘zombies’ ”.
Put simply, the risk that EU member states now face is that the zombification in the euro area economy could constrain the post-pandemic recovery.
The ECB is urging member states to acknowledge this risk and tackle it more fundamentally by speeding up reforms to insolvency frameworks and better infrastructure for banks to manage non-performing loans. The last thing the EU needs is another crisis in the financial system.
Another associated risk that ECB economists fret about is that of growing public and private debt. The ECB has warned that “the rising debt levels of eurozone governments and companies have made it more likely that economic aftershocks from the coronavirus pandemic could trigger financial instability”.
Some member states refuse to give up using their own less secure systems to monitor the use of EU funds
I understand those who are optimistic about how fast the eurozone economies seem to be recovering. But I agree with the vice president of the ECB, Luis de Guindos, who warns that “there is a reality that the pandemic will leave a legacy of higher debt and weaker balance sheets, which – if unaddressed – could prompt sharp market corrections and financial stress or lead to a prolonged period of weak economic recovery”.
This risk is more acute in the eurozone than in the US, as economic reform in the EU is slow due to a lack of political will to address structural problems.
The ECB finds itself under political pressure to use monetary policy to compensate for the lack of adequate economic reform that should have been undertaken in the past two decades to inject some dynamism in the eurozone economies.
The Stability and Growth Pact regulations might only be reintroduced in 2023 to give EU economies time to recuperate. Still, governments should be preparing their plans on the corrective measures that need to be taken to put fiscal rectitude at the top of their long-term agenda. Interest rates will inevitably have to be hiked from the historically low present levels. The risk is that this change could spook financial markets as companies have become so dependent on the low cost of borrowing.
Another post-pandemic risk that needs to be addressed is the abuse of the €800 billion recovery funds. The European Commission will be borrowing massive amounts of money to support its Next Generation EU plan. One needs hardly stress that any borrowed money would have to be paid back by future generation taxpayers. So the risk of abuse of these funds must not be underestimated.
Ville Itala, director-general of the European Commission agency Olaf, told the Financial Times that “the gap in the central oversight on the use of these funds could make it harder to monitor the record financial flows even as Brussels builds up other parts of its anti-corruption armoury”.
Abuse and fraud relating to EU funding of projects are endemic. Modern IT-powered systems to track expenditure is improving but some member states refuse to give up using their own less secure systems to monitor the use of EU funds.
Hopefully, the launching of the European Public Prosecutor’s Office should help Olaf see its recommendations on how to curb abuse being implemented effectively thanks to the new prosecution role of this new office.
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