Over recent years, the EU has done much to keep Europe’s economic and social recovery on track. However, we must not let ourselves become bogged down in arguments over political and economic doctrine. Policymakers must set the path for the future of Economic and Monetary Union by using the correct instruments to address the challenges of the twin transitions as well as to provide stability for the euro. The last two years have been marked by the COVID-19 pandemic, and the characteristics of the Omicron variant raise questions about whether we are transitioning from a pandemic to an endemic disease.
The European economy still faces a very difficult path; disruptions to shipping and import shortages have led to considerable bottlenecks in global supply chains. Meanwhile, gas and electricity prices have surged as our economies reopened after the shutdowns imposed in response to the coronavirus crisis; however, increasing inflation – if it persists - can act as a brake on the economic recovery.
“Unless Europe deals with the recovery in a sensible and realistic way, it may again face serious economic disruptions, breaking the significant progress and stability achieved over the last two years”
In recent years, the European Union has deployed an innovative recovery instrument, making the Recovery and Resilient plans a reality thanks to the extensive work of the European Parliament in their design and implementation. We are now moving towards a decisive point that could set the path for the future of Economic and Monetary Union. Yet unless Europe deals with the recovery in a sensible and realistic way, it may again face serious economic disruptions, breaking the significant progress and stability achieved over the last two years.
How the EU chooses to handle the recovery and prevent the yields rising on sovereign bonds will be decisive for the future of the common currency. The European instruments created to address the pandemic were revolutionary, not only in their size but also in their nature. To ignore - in the course of future discussions on the revision of the fiscal rules - the importance of keeping the principles enshrined in these instruments and within the EMU toolbox, will be a sign of disruption for the eurozone.
The NextGenerationEU recovery instrument of up to around five percent of EU GDP based on the common issuance of European bonds, was a remarkable sign for the financial markets of the EU’s capacity on the issuance of bonds, 30 percent of which will be through the issuance of green bonds. The EU, in particular the eurozone, must be equipped with a borrowing capacity to allow for stabilisation as well as for facing the twin transition challenges ahead.
Despite the faster-than-expected recovery - mostly due to the way Europe handled it - the nature of the pandemic crisis may exacerbate divergences among euro area countries. This pandemic may lead to medium-to-long-term changes in economies, labour markets, productivity and even the consumer behaviour of European citizens. Not all countries, sectors and population groups have been affected in the same way, which can lead to significant divergences within the EU.
The high government spending, in response to the pandemic, interrupted the reduction of public debt achieved over the last decade. Corporate and private indebtedness has also increased abruptly, and the uncertainties on the overall economy poses high risks to the solvency of companies and an increase of non-performing loans.
“Building on the principles of the NextGenerationEU, we must upgrade the level of the discussion and avoid becoming lost in political doctrines”
This high uncertainty and risks to the eurozone clearly illustrate the need for a central fiscal capacity with a borrowing capability to provide countercyclical support in the case of severe economic downturns and to boost long-term potential growth. Moreover, the ecological and digital transition will require around €600bn per year in investments. The investment needs demand a collective effort from the public and private sector to make our economies more resilient, fair, sustainable and a global role model for the digital transformation.
The Recovery and Resilience facility is an important instrument in supporting investment. However, given the challenges ahead, we need to reflect on how best to promote significant public investment that truly matches the investment gaps and how to better protect public investment from spending cuts.
While I consider that there is a common understanding on the need to invest strongly in the ecological and digital transitions, there are different approaches on how to do it – at national or European level - and the debate on the revision of the fiscal rules will be the arena for this discussion. The governance of the Recovery and Resilience facility provides several elements, such as its framework, that can deliver on the EU’s political priorities and targets, involve stakeholders, design investment programmes and ensure that the role of the European Commission and European Parliament and serve as a footprint for new tools to promote investment.
The discussions on lending and borrowing capacities at EU level are highly political and encompass differing views. The discussions on the fiscal rules must not overlook this aspect, otherwise we risk breaking the stability of Economic and Monetary Union. Policymakers should not adhere to concepts that may lead to a deadlocked situation. Building on the principles of the NextGenerationEU, we must upgrade the level of the discussion and avoid becoming lost in political dogma.
Political efforts must therefore focus on the deployment of all necessary tools to safeguard the stability of the eurozone while ensuring a sustainable and inclusive investment and growth strategy.