The EU Turns on the Tap | But Will It Be Enough?

Sweeping away economic orthodoxy, the European Union is releasing €1,300 billion – 10% of GDP – into the economy; now, says Austrian economist Kurt Bayer, it needs to start relieving debt. Fast.

The virus will be among us for a long time. It is hard to imagine that all 500 million EU citizens will accept inoculation – only 8% of Austrians participate in annual flu vaccinations – and it is uncertain how effective any still-to-be found medication will be. We will have to live with some rate of infection for years to come.

The economic costs of the EU-wide lockdown are staggering. In the most favorable scenario – with the lockdown lifted during the second quarter of 2020 – the damage has been estimated at around 10% of GDP.  The EU economy will contract by 7.0% this year, according to the IMF, and unemployment will surpass 10%, up to 25% in some countries.

As a result, previously unheard-of sums have been unleashed by the EU member states, amounting to around 9% of EU GDP. They include grants, loans, guarantees, tax deferrals for business and citizens. In Austria, the government has put together a €38 billion package, covering grants for affected households and one-person and small enterprises, generous subsidies for reduced working hours, grants and guarantees for larger firms, as well as tax deferrals. If needed, all these instruments can be increased.

The crisis has also swept away economic orthodoxy: The EU has temporarily lifted the infamous Maastricht criteria – thresholds of a maximum 60% debt burden and a 3% deficit of spending over income – loosened state aid rules, closed the external border, and more. The reigning dogma that markets trump governments has shown up to be inadequate. Without government guidance and action, the crisis would be devastating.

All together now

We have a global pandemic on our hands. All European countries – inside or outside of the EU – are being hit through no fault of their own. The best solutions would be programs coordinated globally, and for us, at least regionally. This allows for the dissemination of know-how, and the distribution of scarce protective and medical equipment where it is needed most. Unless the virus is mitigated Europe-wide, individual countries’ locked-down borders cannot be opened without danger of importing further infections. This makes joint EU action imperative.

In addition to the member states‘ aid programs, the EU has launched a number of joint packages: The European Central Bank (ECB) has increased its bond purchasing program by €750 billion, the Commission has launched a €100 billion labor market support program, the European Investment Bank will extend extra Corona Loans up to €200 billion, and the European Stability Mechanism, created during the recent financial crisis, has up to €245 billion in loan money for EU states.

In addition, the recent EU summit on April 23 mandated that the European Commission come up with a proposal for a “Phase 2 Recovery Fund” to be folded into the Medium-term Financial Framework (MFF), the 7-year EU budget plan covering the years 2021-2027. This is an adroit way to avoid the acerbic and divisive discussions about so-called “Corona Bonds.” These would have been jointly issued and guaranteed bonds that in particular aid those countries most heavily affected, mainly the southern EU member states, whose already high debt levels make their future access to financial markets problematic. Issuing and backing these bonds jointly would have allowed these countries to pay lower interest rates than they do now.

Over the next few years, because of countries’ aid packages and the effects of the economic lockdown, EU member states will have even higher debt levels. In 2019 the EU‘s overall debt share was above 90% of GDP.  Under current rules, another 10% would lead inevitably to another round of austerity, thus further endangering the recovery as it did following the 2008 crisis and throwing additional groups of citizens into poverty.

For this reason we will need to abandon another tenet of EU economic orthodoxy, and actively reduce the debt burden of member states.

The way forward

The technically easiest way would be to follow the example of the Bank of England and finance member states’ budgets via the ECB – although right now this would violate the EU Treaty. This has two advantages:

a) Central Banks have unlimited amounts of money, they can effectively “print” it;
b) these subsidies would circumvent the shenanigans of financial markets, whose activities caused the previous crisis and whose mainly speculative transactions de-stabilize our economies.

Consider that since the year 2000, US stock prices have increased five times faster than GDP. Other stock markets followed. The recent crash, with prices falling by 30%, was the largest since the Great Depression, exacerbating the crisis.

Another way to prevent increasing debt levels would be via the EU budget, where contributions by richer members – the net payers like Germany, Austria and the Netherlands – are channeled as grants rather than debt into the weaker and/or more affected states, the net recipients, principally Italy, Spain and Greece.

To be effective, the touted EU-wide Recovery Fund must be used to rebuild the economy into a sustainable system through investment. This is an absolute necessity, requiring a Common EU (Industrial) Sustainability Strategy, encompassing the Green New Deal, social welfare systems, infrastructure and research. What it must avoid is a hodgepodge of “my country first” strategies. This would be expensive and ultimately ineffectual.

The future of the EU is now in the hands of the European Council. It will rise to this challenge, albeit in a second-best way.


Long an economist at the Austrian Institute of Economic Research (WIFO), Kurt Bayer has held senior positions at the Austrian Ministry of Finance, the World Bank Group and the European Bank for Reconstruction and Development. He is now a consultant at WIFO and the Vienna Institute of International Economic Studies (wiiw).

He blogs under https://kurtbayer.wordpress.com

Kurt Bayer
Kurt Bayer is Senior Research Associate at wiiw. His research interests focus on crisis prevention and resolution, industrial and innovation policies, anti-corruption and transparency and EU economic policy.

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