The COVID-19 pandemic is having huge economic consequences and some have accused the EU of not doing enough for its member states. Professor Leila Simona Talani argues that, after some initial confusion, the European Commission and European Central Bank is now making belated moves in the right direction.
Extraordinary times and circumstances call for extraordinary measures and, although the EU has been accused in the media and by the general public not to have intervened to address the incredible challenges of the COVID19 crisis, this is actually not the case.
The economic impact of the lockdown imposed by the majority of EU Member states to mitigate the expansion of the pandemic has had massive impact on their economies, by far more serious than the 2008-2009 crisis.
Indeed, whereas the Global financial and Economic crisis of 2008-2009 resulted mostly in a liquidity and credit crisis, the current predicament is both a crisis of the aggregate demand and of the aggregate supply.
Some commentators have likened it to the crisis of 1929. Although it is still too early to draw appropriate conclusions, it is clear that this crisis, just like that of the ‘30s, requires extraordinary fiscal and monetary expansionary policies.
This is something which was not allowed in the economic governance scheme of the EU and especially of the Euro-area, where the constraints imposed to national fiscal policy, on state aids and the limits of the ECB as a lender of last resort represent a major obstacle to the implementation of basically unlimited policies of support to the Member States’ economies.
Appropriate emergency response
After an initial moment of confusion, however, both the ECB and the European Commission have lifted the heavy constraints on national and supranational expansionary policies and adopted what seems an appropriate emergency response to the economic debacle.
In terms of Monetary policy, the ECB Governing Council of March 12, 2020 introduced additional longer-term refinancing operations (LTROs) to provide immediate liquidity support to the euro area financial system. New more favourable conditions were also announced for the Targeted Long Term Refinancing Operations (TLTROs) as well as temporary envelope of additional net asset purchases of €120 billion.
Most importantly, on the 18th of March, the ECB increased its Quantitative Easing (QE) measures by launching a new temporary asset purchase programme of private and public sector securities to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the outbreak and escalating diffusion of the coronavirus, COVID-19.
This new Pandemic Emergency Purchase Programme (PEPP) will have an overall envelope of €750 billion. Purchases will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme (APP).
In terms of easing the framework for the conduct of national fiscal policy and adding some EU fiscal support to it, the response of the EU to the COVID19 has taken the form of various emergency measures to be taken at the national and supranational level.
In the Euro-area, by relaxing the EU budgetary rules, the so-called general escape clause, Member States have been allowed to adopt extraordinary expansive fiscal policy measures to react to the economic consequences of the pandemic. These have been estimated by the European Commission to be around 430bn Euros.
For all EU member states, the relaxation of EU state aid rules has allowed rescuing national firms and companies in distress due to the lack of liquidity ensuing form the crisis. The total amount of these measures is estimated to be 2240 bn euros.
A 37bn Coronavirus Response Investment initiative by the EU Commission has been set up under cohesion policy to provide liquidity to small businesses and the health care sector. The EU Commission has also made available €1 billion in an EU budget guarantee to the European Investment Fund (EIF) via the European Fund for Strategic Investments (EFSI).
Moreover, the Commission has adopted a new initiative, called SURE, Support Unemployment Risks in Emergency, for 100bn Euros with the aim to support jobs and families. Finally Farmers and fishermen will also receive support and an EU Solidarity for Health Initiative worth €3billion will cater for the needs of Member States’ health systems.
Finally, at the European Council meeting of April 23rd 2020 important steps have been taken to clarify the use of the European Stability Mechanism loans for COVID19 related expenses without incurring into conditionality. Also, the setting up of an ad hoc Recovery Fund for the reconstruction phase has been agreed in principle, although the details of its financing and functioning will be decided later on.
Overall, the outlook of the EU response to the dire economic consequences of the pandemic seems set on the right track, although it is clearly a very long road ahead.