An EU economic prescription for the coronavirus

National fiscal stimulus and a European safety net are needed, write Lucas Guttenberg and Johannes Hemker in Jacques Delors Centre Policy Brief. 

Europe's national governments will need to provide huge fiscal stimulus packages to cope with the potential economic fallout of the novel coronavirus (COVID-19), Lucas Guttenberg and Johannes Hemker of the Jacques Delors Centre write in a new policy brief, "Corona: A European Safety Net for the Fiscal Response". Currently, efforts to contain and mitigate the coronavirus rightly focus on health policy, but Europe is also at the cusp of an unprecedented economic situation: a standstill of many if not most European economies, potentially for a long period of time, they write. There is currently no instrument for a coordinated fiscal response across the EU or in the Eurozone in particular, so national governments will have to take action to avoid permanent scars.

In order to support governments in this, the EU must build a safety net so member states will not be subject to speculative attacks, the authors write. This safety net should have three components: 

  • A clear commitment by governments to use all European Stability Mechanism (ESM) instruments necessary to ensure market access of all member states; 
  • A clear commitment by the European Central Bank (ECB) to use all its instruments to prevent fragmentation of bond markets marked by rising differences (spreads) in interest rates between countries; 
  • A clear commitment by member states to a package of flanking measures consisting of a swift implementation of the backstop to the Single Resolution Fund for banks, an insurance for social security schemes, and a co-financing instrument at the European Investment Bank (EIB) to safeguard private sector liquidity.

Fiscal and monetary policy action will need to address both the demand and supply side of the economy. Action is necessary in four areas, they write:

  • Companies need liquidity to stay afloat in the short run as their revenues tumble due to quarantine measures and the interruption of supply chains.
  • Employees and the self-employed need support when they have to stay home and/or if their employers have to reduce working hours.
  • Banks need a backstop so that they can continue to provide liquidity to the real economy
  • The economy will need a timely demand-side boost in order to reduce the loss of output

Read the full policy brief here.