By Gauthier Perdereau-Bilski.

Abstract

The current economic landscape, characterised by uncertainty, necessitates a considered approach to post-pandemic recovery. The European Union’s (EU) combination of fiscal and monetary policies, as a response to a 7.4% GDP contraction in 2020 _^[1], represents a strategic and balanced methodology in this context. In the aftermath of the COVID-19 pandemic, which has led to a significant increase in government debt-to-GDP ratios, averaging 90.7% across the EU in 2021 _^[1], it is essential to view these policies as complementary strategies in the framework of economic recovery.  This study advocates for meticulous and thoughtful policy-making, emphasising the advantages of collective and coordinated actions by institutions and member states in formulating sustainable solutions. The pandemic has caused extensive damage, and a sole reliance on monetary policy poses significant risks. Incorporating fiscal policy can provide additional means to navigate towards a safer and more stable European economic environment. This essay delineates a path that navigates these complex issues, encouraging a unified and concerted effort towards recovery.

Introduction

The European Union has encountered substantial challenges because of the COVID-19 pandemic, resulting in a profound impact on its economy, reflected by a 7.6% surge in unemployment rates in 2020 _^[2].

A clever mix of monetary and fiscal policy, informed by the European Central Bank’s Pandemic Emergency Purchase Programme (PEPP) of €1.85 trillion ^_[2], is suggested as a practical way to handle these issues and promote stabilization and recovery. This article critically examines the EU’s post-pandemic approach to economic management, particularly how it may foster prosperity, allocate resources wisely, lower unemployment, and lessen the likelihood of hyperinflation. The analysis will explore the necessity of a synergistic relationship between government spending and monetary rate adjustments for the EU’s economic rejuvenation. Fiscal strategies may include increased spending on public infrastructures to stimulate job creation and demand. Moreover, monetary strategies could involve the expansion of bond purchasing to reduce borrowing costs for member states, consumers, and businesses, a crucial step in preventing negative economic repercussions ^_[3]. 

The threat of hyperinflation presents a significant concern, potentially hindering economic growth and stability _^[3]. As demand increases in the European Union, a reduction of unemployment is anticipated. However, there are inherent risks associated with a potential skewed recovery process. The allocation of resources must be equitable across all European nations. This essay thus delves into the intricacies of the EU’s policy decisions, highlighting the critical importance of a coordinated approach, akin to a captain and first officer navigating together through perilous waters. The combined efforts of fiscal and monetary policies are vital in guiding the EU towards a more stable and prosperous economic future _^[4].

Simplification of Fiscal Rules for Transparency and Flexibility

The call for simplifying fiscal rules is rooted in the need to enhance their transparency and adaptability. According to Alesina and Giavazzi (2013) in their work “The Future of Europe: Reform or Decline” ^_[4], overly complex fiscal rules can undermine economic efficiency and create barriers to effective policy implementation. Simplification aims to make rules more understandable, reducing bureaucratic inefficiencies and improving policy effectiveness. This aligns with the notion that clearer and more flexible fiscal policies can better accommodate diverse economic scenarios and facilitate more responsive governance.

Including Supranational Risk-Sharing Mechanisms

The Economic and Monetary Union must incorporate new supranational risk-sharing mechanisms– including the creation of European banking supervision for example as part of the “Bank Recovery and Resolution Directive” –to absorb major economic shocks effectively. Baldwin and Giavazzi’s (2015) article “The Eurozone Crisis: A Consensus View of the Causes and a Few Possible Solutions” _^[5] goes into depth on how historically the EU’s inability to implement such systems has hampered its ability to respond to systemic economic crises as a group. It is imperative to integrate these mechanisms to improve the EU’s economy’s resilience, provide more efficient handling of asymmetric shocks, and foster economic stability among its member states.

Reforms at the National and Supranational Levels

The third segment of the strategic plan emphasises the need for in-depth structural reforms at the national level, complemented by significant progress in developing the capital markets union at the EU supranational level in tandem with budgetary adjustments _^[6]. The Income Transfers and Firm Support, for example, is a key adjustment to put forward. During the epidemic, the ECB’s monetary policy helped cut real interest rates to historically low levels. This, in conjunction with fiscal policy, effectively compensated for the loss of private sector income. For instance, while labor income in the Eurozone declined by 3.5% in 2020, household real disposable income fell only by 0.3% because governments’ transfers compensated for the income loss. These income transfers, together with firm-supporting policies, aided in preventing the erosion of productive capacity. This is crucial since the Next Generation EU (NGEU) initiative intends to boost potential production in the following years, with a 7% rise over the 2019 level projected by 2024_^[7]. The European Commission’s 2020 Economic Governance Review _^[8] highlights the necessity of coordinated reforms that include both wider EU-level initiatives and structural adjustments at the national level _^[9]*. This two-pronged plan aims to foster a more robust and connected economic environment by increasing the EU’s overall competitiveness and financial integration. In essence, these policies reflect a proactive and deliberate reorientation of the EU’s fiscal policy framework illustrated by the NextGenerationEu (NGEU) stimulus package with a total investment of 806.9 billion euros**. Beyond the constraints of gradual modifications, the suggestions demonstrate a recognition of the need for a comprehensive and adaptive policy framework capable of navigating the complexity of a fast-changing global economic environment. If implemented correctly, these improvements might establish a precedent for fiscal governance by demonstrating how complex, integrated, and forward-thinking policies can produce a durable and vibrant economic union.

To enhance the specificity and clarity of the paragraph in question, let’s focus on refining the terms “advancements,” “structural adjustments,” and “EU’s fiscal policy framework,” incorporating more detailed analysis and sourcing. In particular, these policies represent a proactive, intentional shift in the EU’s fiscal policy approach. They move beyond simple, incremental changes, acknowledging the necessity for a holistic and adaptable policy framework. This framework is crafted to effectively navigate the complexities of a rapidly evolving global economic landscape. Precise implementations of these reforms could set a new standard in fiscal governance, illustrating how sophisticated, cohesive, and progressive policies can cultivate a resilient and thriving economic union. This approach is not just about adjusting existing policies but about reimagining and reengineering them to be more dynamic, responsive, and suited to modern economic challenges and opportunities.

The European Union has demonstrated resilience despite numerous challenges, maintaining stability through effective monetary and fiscal policies. The Economic Governance and EMU Scrutiny Unit (2023) _^[8] acknowledges this achievement, particularly in navigating the complex economic environment. The unprecedented nature of the COVID-19 pandemic, as outlined by Buti & Papaconstantinou (2021) _^[9], necessitated innovative approaches to address this unique crisis. In response, the EU has devised a blend of fiscal and monetary strategies aimed at fostering recovery, equitable resource distribution among member states, reducing unemployment, and averting hyperinflation and other potential risks. The EU advocates for a more streamlined regulatory framework to ensure a smooth journey towards economic stability. Alloza et al. (2021) _^[10] suggest that prioritising transparent flexibility over rigid regulations will empower countries to adapt to economic fluctuations more effectively. Additionally, introducing new supranational mechanisms for risk-sharing within the Union is proposed to bolster economic stability during severe downturns. Both national and continental reforms are deemed essential in maintaining the fiscal integrity of the EU. Structural adjustments within individual nations are necessary to enhance growth and competitiveness. Concurrently, Union-level initiatives, such as integrating capital markets, are proposed to ensure the unimpeded flow of finance across borders _^[11]. In addition, coordinating fiscal and monetary policies is identified as a key element for post-pandemic rebalancing within the EU _^[12]. The proposed changes aim to establish a flexible and adaptable framework, capable of responding effectively to crises and fostering sustainable growth. By harmonising monetary policies and spending, coupled with reforms at both the member state and Union levels, the EU is positioned to navigate future economic challenges successfully.

Conclusion

In conclusion, the European Union’s strategic integration of fiscal and monetary policies in the aftermath of the pandemic is akin to performing a delicate balancing act, aiming to foster growth while simultaneously preventing inflation. If executed with precision and skill, this policy combination has the potential to guide the EU towards a robust recovery comparable to a captain’s adept navigation of a vessel. It also seeks to ensure the endurance of this recovery, reminiscent of the maturation process of fine wine. As we progress, it is imperative for policymakers to engage in careful and thoughtful planning, crafting sustainable solutions that benefit all member states. The EU must remain vigilant and agile, prepared to respond to any emerging challenges with the alacrity of a watchful guardian facing unforeseen adversities. This proactive and adaptable approach is essential for the EU to traverse these novel and challenging economic conditions with the sharpness and precision of a ship’s prow slicing through the waves. By successfully navigating these complex circumstances, the EU could set a precedent for other nations, offering a stimulus spending _^[13] to achieve prosperity while avoiding potential pitfalls, much like providing sustenance in times of scarcity.

* As illustrated at national level in France in 2022 with the pension reform for example. This reform proposed reforms such as increasing the retirement age and altering the computation of pension payouts to address the long-term viability of the pension system.

** More detailed information:  https://commission.europa.eu/strategy-and-policy/recovery-plan-europe_en

Edited by Justine Peries.

References

[1]. European Commission Directorate-General for Economic and Financial Affairs. European Economic Forecast: Autumn 2021. Institutional Paper 160, Publications Office of the European Union, 2021.

[2]. Monetary and Economic Department. “BIS Papers No. 122: The Monetary-Fiscal Policy Nexus in the Wake of the Pandemic.” Bank for International Settlements, Mar. 2022, 

[3]. Bender, C., et al. “Changing Europe’s Budgetary Framework.” _Intereconomics Review of European Economic Policy, 2023.

[4]. Alesina, A., and Giavazzi, F. “The Effects of Austerity: Recent Research.” The Reporter, National Bureau of Economic Research, Sep. 2015. 

[5]. Baldwin, R., and Giavazzi, F. “The Eurozone Crisis: A Consensus View of the Causes and a Few Possible Solutions.” CEPR, 2015. 

[6]. Arnold, I. J. M. “The Activation Conditions of the Transmission Protection Instrument: Flawed by Design?” Intereconomics Review of European Economic Policy, 2023. 

[7]. Maximilian Freier, Charlotte Grynberg, Marguerite O’Connell, Marta Rodríguez-Vives, and Nico Zorell. “Next Generation EU: a euro area perspective.” ECB Economic Bulletin, no. 1, 2022.

[8]. Vesan, P., et al. “The European Commission’s Entrepreneurship and the Social Dimension of the European Semester: From the European Pillar of Social Rights to the Covid-19 Pandemic.” Comparative European Politics, vol. 19, no. 3, 2021, pp. 277-295.

[9]. Economic Governance and EMU Scrutiny Unit (EGOV). “Economic Governance and EMU Scrutiny.” _European Parliament_, Sep. 2023.

[10]. Buti, M., and Papaconstantinou, G. “The Legacy of the Pandemic: How COVID-19 is Reshaping Economic Policy in the EU.” CEPR Policy Insight No. 109, Apr. 2021.

[11]. Alloza, M., et al. “The Reform of the European Union’s Fiscal Governance Framework in a New Macroeconomic Environment.” Documentos Ocasionales N.º 2121, Banco de España, 2021.

[12]. Belitz, H., and Gornig, M. “Digitalisation and Modernity of Capital Stock in Europe.” Intereconomics Review of European Economic Policy, 2023.

[13]. Ashta, A., and Walia, D. “Financing the Recovery from the Havoc Created by Covid: Reinforcing the Need for a World Federal Government.” Marché et Organisations, vol. 43, 2022, pp. 213-235.

[14]. Bonatti, L., et al. “Rethinking Monetary and Fiscal Policy in the Post-COVID Euro Area.” Policy Department for Economic, Scientific and Quality of Life Policies, Directorate-General for Internal Policies, Nov. 2020.

[Cover image] Photo by Marek Studzinski of “European Health PP” licensed under Unsplash