Mercator European Dialogue x Advance Politics: EU recovery package – what is plan B?


This Mercator European Dialogue x Advance Politics video call between six members of parliament from Portugal, Romania, and Spain took place while the EU leaders were still discussing the EU’s economic recovery plan on 20. July 2020.

This video call was specially arranged for network members from some of the EU member countries hardest hit by the current economic crisis. The purpose of the meeting was to offer a space for exchange for countries who would depend on EU support. This way, the parliamentarians could consider less-discussed options, potential for negotiation and the most urgent problems related to the crisis with their colleagues.

The experts Hannes Kunz and Nate Hagens from the Institute for Integrated Economic Research (IIER) offered some insights into what could be expected from the EU recovery plan, and warned that even in its most ambitious form, it might not be enough to patch the hole that Covid-19 had ripped into the economy.

The policymakers then shared their concerns and ideas, which can be summarized in the following five threads:

It is key for the EU to find a compromise

Overall, most participants were optimistic that a suitable solution would be found. One MP stressed that this should not be about some countries receiving and some giving, as the continued functioning of the common market is essential for everyone’s wealth. There was a shared view that some countries had more means to spend than others and that EU money was needed to reinvigorate the economy. Some participants stressed that the EU needed to send a signal of strength to inspire confidence and to not damage investment.

In addition to the health and economic crisis, a political crisis may be looming

One participant was worried about the growing numbers of people denying the existence of Covid-19 and all scientific evidence, especially in light of upcoming elections. They stressed the importance of clear communication during the crisis to counter such developments.

Is there opportunity in this crisis?

It was pointed out that this crisis may be unsettling for better-developed economies. For countries that were almost in perpetual crisis, economic disruptions may bring opportunities to innovate and modernize. The participant added that if there was a signal of strong stimulus from the EU, the markets, which are currently awash with capital seeking worthwhile investments, would take care of fixing the crisis. They claimed innovations were already visible, e.g. in the efficiency gains, both monetary and in productivity, achieved by remote work. Another participant agreed and added that while restrictions imposed by the “Troika” after the last crisis impeded some government responses, they also brought about necessary political reforms.

Others replied that the availability of cash at low interest rates meant that the stock market was merely inflated and would crash at some point, leaving a battered real economy with few financial means as central banks are already at the limit of what is possible in terms of monetary stimulus. Interest rates are already at a historical low point and central bank guarantees for business loans can incentivize more lending to failing businesses. This means that they survive longer, but once they start to default on their payments, the damage is larger.

There are different interpretations of the “problem description” of the economic crisis

One participant said that their country was already too indebted to invest large sums into economic recovery. This sparked a conversation on whether high debt/GDP is best countered with a lower debt rate of by keeping the GDP higher through credit spending.

One participant pointed out the particular difficulties of regions relying heavily on tourism: a lot of businesses currently have no income at all, resulting in (fear of) job loss and business foreclosures. However, the EU’s proposed recovery package would channel most money towards innovation and long-term restructuring of the economy, which, the participant feared, would not help these businesses and employees.

Another participant pointed to the problem of migrant workers in the crisis. They are a double burden for sending countries, as the usual flow of remittances is suddenly much lower. Additionally, migrants return home to their countries of origin because they no longer find work, which strains the home country’s social system as they require unemployment benefits.

Blind spots in our crisis response

A member of the network suggested that while public health and the economy were on everyone’s mind, education systems were sidelined in the conversation, even though they are key for all democracies. What will the effects of the months-long closure of schools be?

 

Mercator European Dialogue x Advance Politics

These dialogues are part of “Advance Politics”, a collaboration between the Mercator European Dialogue and The Institute for Integrated Economic Research. The format proposed allows policymakers to challenge assumptions and dig deeper into the big questions of our times, while engaging in out-of-the box thinking with a select group of peers from across Europe.

About IIER

The Institute for Integrated Economic Research is a non-profit organization based in the Netherlands and the U.S. It focuses on identifying empirically validated macroeconomic system descriptions and models. Key aspects of the work of IIER include the development of a thorough understanding of our (human) eco(nomic) system, integrating traditional economics, resource use, financial systems and human behaviour, and providing and promoting inputs for society, academia and policymaking with the aim of broadening knowledge and effort towards understanding and mitigating future risks. For more information about IIER, please click here.