COVID-19 Challenges to the European Economic and Monetary Union: Institutional Responses, Growth Strategies, and Future Prospects in a Changing Macroeconomic Environment—Introduction

Keywords:

• COVID-19
• Economic and Monetary Union of the European Union—EMU
• growth strategies
• post-pandemic recovery

JEL CLASSIFICATION CODES:

• F5
• E6
• G2

This special issue aims to answer three questions: How is European economic governance adapting to the COVID-19 crisis? How are member states’ economic policies adjusting to the current crisis and adapting to the European response? How is the COVID-19 health and economic crisis expected to impact their growth policies and reform trajectories? Seeking to answer these questions, the special issue aims to assess the impact of COVID-19 on the core elements of the political economy of adaptation and adjustment in the eurozone.

One decade after the eurozone crisis, the COVID-19 induced crisis has revamped the reform process in the European Economic and Monetary Union, prompting a new wave of policy and institutional changes in the Economic and Monetary Union of the European Union (EMU). The perhaps most significant change has consisted in the common effort to fend off the COVID-19-induced collective, systemic risks in a more symmetric and mutually supportive way than had happened previously. The policy response rested not only on several tools that were already part of the toolboxes that different European institutions, primarily the Commission and the European Central Bank (ECB), had at their disposal but also through the Member States’ coordinated effort to relaunch investment levels through common bonds emissions (an instrument that had been up to then subject to harsh and unresolved controversies) while momentarily steering away from debt levels reduction.

As Sebastian Dullien effectively points out in his contribution, old and new eurozone reforms have all contributed to the COVID-19 crisis having thus far a different, and more equitable, outcome than the 2009 eurozone crisis. This is so, to the extent that the instituted facility (The Next-generation EU) has targeted countries in a proportion roughly corresponding to the estimated negative impact of the crisis (Watzka and Watt 2020). Additionally, the ECB’s Pandemic Emergency Purchase Programme admits for an equally “flexible” application of the capital key.¹

The COVID-19-induced reforms raise two kinds of questions. The first refers to their long-term consequences for the EMU institutional architecture. The second refers to the Member States’ macroeconomic trajectories against the background of the crisis’ long-term consequences on country-specific growth strategies and adaptation to the EMU’s policy choices and institutional innovations.

While current institutional innovations could actually make the EMU more crisis-proof in the future, as Dullien points out, two key questions remain.

The first question concerns the Member States’ long-term willingness to equip the EMU with durable tools to manage systemic risks in a mutually-supporting way, or rather go back to the complex mix of political and financial competition and cooperation that has characterized the 2010s. Thereto related is the question about the degree of supranational economic integration that the Member States are ready to tolerate, if not to promote, to make possible durable management of common public goods, such as eurozone-wide investment levels (De Angelis 2021). As De Angelis points out in his contribution, the pandemic response has shown numerous ambiguities in this respect. In particular, Member States’ concessions to the supranational management of public goods seem highly dependent on whether the global macroeconomic environment makes alternative strategies possible, and thus continue to privilege “individualistic” exit strategies from collective shocks.

The second question concerns the persisting inequalities between Member States’ capacities both to weather systemic storms and to efficiently adapt to their long-term consequences. In the aftermath of the 2009 crisis, the eurozone’s institutional environment has changed in multiple ways. In particular, the Banking Union and the new institutionalization of rules for macroeconomic policy coordination have required member states to adjust to a different continental environment as regards both fiscal and structural reform policies, and the banking sector (Dolls et al. 2018). This has had an impact on the member states’ institutional make-up, but did not erase either their institutional diversity or their differences in growth policies and strategies (Hall 2018), and had a mixed impact on macroeconomic convergence (Franks et al. 2018).

In relation to this, contributions to this special issue address two key questions: first, the Member States’ path-dependency from engrained growth strategies and institutional capacities; second, the policy options that the EMU macroeconomic framework actually leaves them.

Contributions to this special issue focus in particular on Ireland, Portugal, and Spain. Though rather different among themselves, these Member States have in common both the experience of necessitating financial assistance during the eurozone crisis, and the challenge of maintaining their long-term growth strategies or developing new ones as a response to recent crises.

As regards Member States’ path-dependency, Palma Polyak illustrates the role that the massive presence of Multinational Corporations (MNC) has played during the early phase of the pandemic in maintaining Ireland relatively unscathed from major macroeconomic risks. While it is clear that Ireland’s governing elites are unwilling to give up on their growth strategy based on the national economy’s connection to MNC, the latter’s long-term contribution to Ireland’s growth perspectives remains ambiguous, and the spillover effects onto other sectors of the economy illustrate.

In regards to the policy options that the EMU’s institutional and policy framework leaves open to the Member States, persisting elements of macroeconomic divergence between them and the continuous long-term weaknesses in national economies raise questions about the very virtues of structural reforms.

If Ireland exemplifies the effort to remain faithful to a model that has signified a major leap forward in national GDP in recent decades, Luís Buendia and Pedro Rey-Araújo’s contribution shows the Spanish economy as suffering from the side-effects of a decade-long process of structural reforms and structural adjustment that decision-makers have undertaken in the intent to make the country fit for global and continental challenges.

In a similar vein, Diogo Martins and Ricardo Paes Mamede illustrate the ambiguous effects of structural reforms and fiscal restraint on the Portuguese economy. In particular, they question the fundamental policy choices of the European institutions, show that supply-side policies underestimate the importance of managing aggregate demand for long-term growth, and emphasize the importance of policy choices co-determining a national economy’s specialization profile.

To assess whether and how the COVID-19 crisis is going to affect changes in country-specific trajectories, the authors of this special issue illustrate the persisting institutional and strategic variety of the development paths of eurozone members. They assess how different national growth strategies and dynamics of institutional change react to the COVID-19 challenge, and whether EMU-wide policy and institutional changes may help realign sustainable growth options across the Union. The contributors' assessments are not too optimistic in this respect. In particular, they point out four elements that may indicate why EMU policies may fall short of promoting equitable growth in the future. First, the temporariness of fiscal coordination and joint investment efforts, as Dullien notes in his article. Second, the reasons behind Member States’ resistance against long term solutions, lies in the intergovernmental structure of incentives for decision-makers, as De Angelis points out in his contribution. Third, national political elites’ resistance to rethinking growth strategies whose success is tied up with macroeconomic imbalances and elements of social inequality, as Polyak makes clear in her article. Fourth, the persistence of structural reform policies that systematically neglect aggregate demand and reproduce imbalanced countries’ specialization profiles, as Buendía and Rey-Araújo, as well as Martins and Paes Mamede show in their respective contributions.

Additional information

Funding

Funding has been received from the Portuguese Foundation for Science and Technology (UIDB/00183/2020).

Notes on contributors

Gabriele De Angelis

Gabriele De Angelis is a political theorist and works as a researcher at the NOVA University of Lisbon.

Notes

1 The ECB capital comes from the national central banks of the Member States, whose shares are determined based on a key in which national share in the total EU population and GDP have equal weighting. With the exception of the Pandemic Purchase Programme, ECB purchase programmes use the same key.