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Coronavirus may cause high economic volatility: EPRS IMF conference

Written by Marcin Grajewski,

Towards European recovery: How big and how quick a rebound will we see in 2021

Towards European recovery: How big and how quick a rebound will we see in 2021

The Covid‑19 pandemic has hit the global economy hard and its future is difficult to predict. Although the development of vaccines and proposed policy responses offer hope for the world to return to a stronger performance, economic rules may have to be modified. These were the main conclusions of a joint conference organised online by the European Parliamentary Research Service and the International Monetary Fund on 8 December 2020. The European Union has so far managed to avoid any devastating economic outcome thanks to robust policy responses, but the outlook is extremely uncertain. It is certainly not the time for fiscal austerity, but rather fiscal stimuli are needed to lift the economy from the doldrums, especially now that the threat of inflation seems to have disappeared from the horizon. The event, entitled ‘Towards European recovery: How big and how quick a rebound will we see in 2021’ was organised as a result of increasingly solid ties between the EPRS and the IMF and was led by the IMFs new Director of the European Department, Alfred Kammer and European Parliament Vice-President Pedro Silva Pereira (S&D, Portugal).

Opening the event, Parliament’s Vice-President Pedro Silva Pereira said the relations between the IMF and the European Union are improving on the whole, leaving behind some disputes between them on how to resolve the financial crisis, and the Greek crisis in particular, following the credit crunch in 2008‑2009. ‘Differences between our institutions did not last very long. Progressive convergence pave the way for the improvement in our relationship, this discussion is part of this cooperation,’ he said. Vice-President Silva Pereira stressed that any government aid must be designed in such a way as to reach the real economy. There are reasons for optimism: ‘There is hope of vaccination, we have had a presidential elections in the US, there is prospect of ending absurd trade wars, which are damaging our economies’, referring to Democrat Joe Biden’s election victory over Donald Trump, whose trade policy was volatile.

In his presentation, Director of IMF’s European Department, Alfred Kammer stressed that the pandemic has dealt a severe blow to Europe’s lives and economic activity, but thanks to a strong policy response – both at national and EU level – more devastating outcomes have been avoided. Economic activity is forecast to rebound in 2021, but the outlook is very uncertain. While recent news on vaccine development is promising, the strength of the near-term recovery will crucially depend on the impact of containment strategies, on people’s behaviour, and the degree of policy support. It is therefore paramount that supportive policies remain in place for some time, including those to limit a cascade of job destruction, bankruptcies, and bank closures. Alfred Kammer also stressed that the crisis represents an opportunity to address challenges that pre-date the crisis, such as inequality and low productivity through investment in green and digital transformations.

Cinzia Alcidi, Director of Research and Head of the Economic Policy Unit at the Centre for European Policy Studies (CEPS) in Brussels, and a research fellow at the LUISS School of European Political Economy, pointed to difficulties in combatting Covid‑19, because the pandemic affected countries and different economic sectors in a different manner and to a different degree. She added that, even with a vaccine in place, certain sectors will be in a bad shape for years to come. Before the situation stabilises, Europe will face repeated peaks and troughs in economic activity, possibly according to the intensity of the pandemic.

Iain Begg, Professorial Research Fellow at the European Institute of the London School of Economics and Political Science, concurred, saying ‘this disparity should alarm us enormously’. He pointed out how difficult it is make predictions, as we do not know with which assumptions to start. Iain Begg warned against dangerous political implications, namely the election of populists, if current government mishandle efforts to fight the disease. He stressed that differing abilities to absorb EU cohesion money among the EU countries aggravated the situation.

Finally, Jacob Funk Kirkegaard, senior fellow at the American think tank the German Marshall Fund and a senior fellow with another such institution, the Peterson Institute for International Economics, warned that the pandemic risks creating a lasting shift in consumer preferences, which will harm certain economic sectors. Even once the Covid‑19 virus is defeated, there may be less appetite in the future for use of civic aviation or going to the cinema or restaurants. He added that the Stability and Growth Pact, a set of rules underpinning the euro, remains, rightly, suspended. The crisis provides a good opportunity to reform the Pact. ‘The risk is doing too little rather than too much,’ he said. At some point, government should shift financial aid from providing immediate help to the business community to implementing structural reforms.

Alfred Kammer concluded the event, noting that the EU’s recovery fund, agreed in July 2020 and involving joint issuance of debt, provides a considerable opportunity to stimulate both the economy and the EU project as a whole.

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