Coronavirus: will the European economy be rescued?

Coronavirus: the European economy has been put to the test during the lockdown. Will the European Union be able to use this unique moment for strengthening solidarity and cohesion?

The Covid-19 pandemic is not only a disastrous global health crisis, but has also had a massive impact on worldwide economies. With a predicted GDP decrease of over 7 % percent and the forecast loss of 12 million workforces in 2020, the European Union has been put to the most crucial test since its foundation; a test which will either showcase the EU’s functioning through successful recovery efforts, or severely threaten its raison d’être in case of failure.

All eyes have been on decision-makers as the EU, with slight delay but joint decisiveness, jumped in for emergency measures to cushion the most immediate social and economic impacts of the looming crisis. In one of the first responses, ​the Coronavirus Response Investment Package was launched to support the states most affected by the pandemic with immediate liquidity and loosened spending rules, followed by the injection of ​€540 billion in loans into the Eurozone to directly support workers, businesses and member states . The European Central Bank’s purchase of bonds from banks and companies​, ​within its proposed ​€1,350 billion Pandemic Emergency Purchase Program, has further increased lending abilities across the EU and was designed to bring inflation back on track in the medium-term.

The EU’s economic emergency response, however, was not constrained to financial aid. Concerted efforts to relieve national healthcare systems and invest in research were key to a mitigation of the virus. Even more so, the focus on reinstalling the flow of goods and capital in the single market alleviated the impact of the lockdown and helped ensure supply chain operability after initial uncoordinated border shutdowns. Similarly, the reopening has been crucial for those particularly hard-struck countries such as Italy, Spain and Greece, whose tourism-driven economies strongly depend on the free movement of people.

These measures brought significant short-term advantages for buffering the most immediate effects of the crisis; and the allocation of fully financed funds is a relief for the recipients. However, businesses and nations supported by bonds may lack the financial capabilities to repay their value and interest after the pandemic​, ​rendering the implications of additional liabilities subject to heated debates. Likewise, the structural differences and the heterogeneous fitness of member state economies must be appreciated for the targeted allocation of funds to prevent internal market fragmentation. This means long-term success of the emergency measures is by no means certain.

Rather, saving the economy depends on the Community’s future motions. Under growing pressure, the​Commission has proposed a €750 billion long-term recovery package on top of a revamped Multiannual Financial Framework (MFF) for 2021-2027, to be discussed by the Council in the coming weeks. Next to the question of financing, the topic of debt mutualisation will be decisive for the Union’s economic rebuilt and cohesion efforts. At the heart of the discussion is the alignment of the economic recovery with the twin objectives of the Green Deal and the Digital Transformation. The turnout of these discussions will be a profound indicator of the EU’s ability to work in solidarity and set a precedent for the credibility of the EU as a major economic actor.

Owed to the unpredictability of Covid-19 developments, it would be a pure guessing game to state that the EU has been successful in saving its economy. What can be said, though, is that the initial emergency measures were effective in providing financial aid to those in need and sent a stark signal that the EU can act as a union if only the crisis is urgent enough. It remains to be seen if the EU can propel the economy through this unprecedented crisis and use this unique policy window for strengthening cohesion and solidarity.

Inevitably, the world is watching, and Europe’s path to recovery will give a lasting impression of the EU’s functionality.