COVID-19: The Economic and Social Response of the European Union

di Andrea Angelo Dentamaro - 30 Settembre 2020

   from London, United Kingdom

   DOI: 10.48256/TDM2012_00138

Introduction

The current COVID-19 pandemic is a global health emergency that is affecting economies and societies at their core. Countries are facing a high level of uncertainty, while unemployment and poverty are rising on a global scale. EU leaders have agreed to prioritise limiting the spread of the virus, ensuring an appropriate provision of medical equipment, and promoting scientific research for treatments (KPMG, 2020). However, a coordinated socio-economic response is also important to support the economy and strategically plan the recovery. This programme should comprehend short, medium, and long term goals in an attempt to preserve the confidence and stability of the Member States. As a result, this unprecedented challenge requires the European Union to use existing financial instruments and implement new effective economic measures to mitigate the effects of the pandemic.

Although some European countries will be able to overcome this crisis on their own, Italy is certainly not one of them. Indeed, its pre-existing financial weaknesses have magnified the effect of a sudden economic and industrial stop (Erce et al, 2020). In 2019, Italy’s debt-to-GDP ratio was 134.8% (Reuters, 2020). This figure rapidly increased to almost 160% during the pandemic as the government increased borrowings to support the economy and reduce the effects of the outbreak. Furthermore, before the COVID-19 pandemic hit, Italy’s estimated growth over the next five years was the lowest at just 0.5%. Following the lockdown, GDP drastically decreased by 12.8% in the second quarter of 2020 and by 17.7% in comparison with the second quarter of 2019. Therefore, due to these key vulnerabilities, Italy needs the support of the European Union to gather all the necessary financial resources to fight the virus and stabilise the economy.

 

First Response to the Crisis: PEPP and SURE

The EU’s response to the COVID-19 socio-economic crisis is multi-layered and diverse as it comprehends different financial stimulus and liquidity support measures(European Commission, 2020). The first important and effective intervention was a EUR 750 billion Pandemic Emergency Purchase Programme (PEPP) announced in March 2020 by the European Central Bank (ECB). This monetary policy measure helps to guarantee a smooth provision of credit to the economy and thus, ensuring that businesses and households have favourable financing conditions (European Council, 2020). On 4 June 2020, the Government Council increased the PEPP by EUR 600 billion to a total of EUR 1350 billion (European Central Bank, 2020).

Additionally, as part of the EU’s strategy to protect citizens, the Commission proposed a new instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE). This financial instrument provides support up to EUR 100 billion to the Member States in order to protect jobs by increasing government expenditure. This financial aid consists of loans with favourable terms from the EU based on voluntary guarantees provided by the Member States (European Commission, 2020). The contribution of a Member State is based on its share to the total gross national income (GNI) of the European Union. This coordinated action by the EU Member States is an effective economic policy as well as an important expression of solidarity.

 

The European Stability Mechanism (ESM)

This historical recession has also encouraged the EU to adopt pre-existing financial instruments to fund the Eurozone Member States and ease the effects of this economic shock.  These include the European Stability Mechanism (ESM). The ESM was set up in 2012 following the Eurozone sovereign debt crisis and it provides financial assistance to countries that are experiencing a particular situation of financial distress (Zemskova, 2020).

This instrument was designed to encourage wise fiscal and economic policy in all the countries of the European Union. Indeed, the ESM aims to restore the fiscal sustainability and competitiveness of Member States in order to protect the financial stability of the Eurozone (ECB, 2011). As a result, this financial assistance is subject to rigorous conditions to allow a country to borrow from it, which was also a major topic of political discussion. These conditions comprise a combination of fiscal policies and structural reforms to safeguard the country’s debt sustainability.

The ESM could be used in a manner tailored to the nature of the shock caused by the COVID-19 crisis (Botticchio, 2020). As a result, on 23 April 2020, the European Council announced that ESM established a Pandemic Crisis Support based on its Enhanced Conditions Credit Line (ECCL) available to all Member States. Following a preliminary assessment regarding debt sustainability and financial risk and bank solvency, the European Commission confirmed that all euro area countries are eligible. The sum granted to the countries is 2% of their respective GDP as of the end of 2019 (ESM, 2020). As a result, the total value of this package stands at EUR 240 billion. Most importantly, now the only requirement to access this credit line is to utilise it to support and finance domestic healthcare and related costs due to the COVID-19 crisis.

 

Recovering from the Crisis: EU Recovery Fund

Ultimately, the latest and most discussed measure from the EU is the Recovery Fund. On July 21, the European Commission approved a EUR 750 billion stimulus package named “Next Generation EU” (NGEU). This historical deal was the result of intense and difficult negotiation between all EU leaders, which lasted nearly 5 days. The fund will give out EUR 390 billion in grants and EUR 360 billion in loans to support struggling economies (European Commission, 2020). The NGEU includes several adjustments compared to the original proposal from the European Commission. First of all, it reduces the total amount of grants while increasing the overall number of loans. Moreover, the new allocation method favours those larger countries that experienced greater losses in GDP due to COVID-19 rather than lower-income countries (KPMG, 2020). Most importantly, certain instruments, including those intending financial support for non-EU countries, were abolished.

This package is of utmost importance to help the EU tackle the socio-economic consequences of the outbreak. The main goal is to repair the damage caused by COVID-19, reforming the economies and remodelling societies. Indeed, the grants and loans will support Member States’ national recovery plan and lay the foundations for a sustainable future. Almost 90% of the Recovery Fund (EUR 672.5 billion) will be disbursed through grants and loans from the “Recovery and Resilience Facility” (RFF). 70% of the grants will be committed in 2021 and 2022 while the remaining 30% by the end of 2023.

The countries are now required to set up their respective reform and investment agenda for the years 2021-2023 to prepare their recovery. Then, the plans will be evaluated by the European Commission and adjusted as needed in 2022. The assessment criteria include the country-specific recommendation, the growth potential, and, most importantly, the effective contribution towards a green and digital transition (European Council, 2020).

 

What’s Next for Italy?

Italy is the largest beneficiary of the Recovery Fund as it will receive EUR 208.8 billion of which 81.4 as grants and 127.4 as loans. This deal was considered an Italian success as well as a concrete signal of help from Europe. However, Italy needs to implement some crucial reforms to achieve its economic growth goals. This involves structural changes in the labour market, public administration, and tax system (Wijffelars, 2020). Furthermore, the Italian government must ensure that European money is invested strategically in value-creating activities to have an effective and positive impact on the economy. As a result, this is an invaluable opportunity for the government to design a better Italy and quickly recover from the recession. Italy will have to send its draft proposal to the European Commission by 15 October while the final deadline to present the plan is in January 2021.

 

Conclusion

To conclude, it is clear that the EU has adopted different economic measures to mitigate the effects of the pandemic. The PEPP and SURE were the first immediate response of the EU to provide liquidity to businesses and attempting to preserve employment. Moreover, an existing financial mechanism, such as the ESM, was designed in a way to be able to respond to the current health emergency. Ultimately, the newly established Recovery Fund is an essential tool to fund countries’ plans to react to the crisis. As a result, Member States will have a unique opportunity to address important social challenges such as global warming, poverty, and unemployment. In particular, the Recovery Fund will help Italy to work on some necessary structural reforms to increase its productivity and growth in the short and long term.

 

Bibliography (A-D)

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Autore dell’articolo*: Andrea Dentamaro, studente in Financial Economics with Econometrics alla University of Kent, Canterbury

***

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