CEPR e-book: Four phases, four responses to coronavirus economic fallout

Europe will need four different responses in four phases to tackle the global coronavirus (COVID-19) pandemic as it unfolds, write Hertie School Professor Emeritus of Economics and Public Management Jean Pisani-Ferry and other leading economists in a new eBook published by the Centre for Economic Policy (CEPR) in London and its policy portal VoxEU.

In this second e-book on the coronavirus, experts agree that the case for decisive and coordinated fiscal stimulus is overwhelming. Pisani-Ferry co-authored the chapter “Europe needs a catastrophe relief plan”, together with Agnès Bénassy-Quéré, Ramon Marimon, Lucrezia Reichlin, Dirk Schoenmaker and Beatrice Weder di Mauro.

“Beyond its public health dimension, the unfolding coronavirus epidemic also represents a severe economic stress test for Europe that comes from a totally unexpected side,” they write. “This time, it is primarily a shock to the real economy hitting all European countries more or less equally. For this reason, and because its fallout for integration may be persistent, this crisis calls for a common Europe-wide response. This is not only an economic crash test, but also a test of European unity.”

One of the biggest weaknesses of Europe in tackling this crisis is the fact that “on the fiscal side, the European roof is not only leaking, it is missing altogether for the kind of shock that is unfolding.” Based on the assumption that the epidemic will be over in summer this year, the economists say that the crisis in Europe will go through four different, partially overlapping, phases: the China Shock (January to March), sectoral disruptions (starting in February), acute overall disruption (starting early March in Italy, 1-3 weeks later in other European countries), and recovery (starting in May or June).

“The right policy response depends on which phase the economy is in,” they argue. “The bottom line, though, is that phase 3 will create not just a liquidity problem but also a solvency problem in the various economies, although to a varying extent depending on specific sectors and firm sizes. These solvency problems cannot be addressed by monetary policy and even less so by micro- and macroprudential policies; fiscal intervention will be key.”

They propose a comprehensive emergency package through which the EU would take responsibility for a meaningful share of the overall emergency effort. This, however, would require finding the means to release tens of billions of euros from EU resources, which could include: existing EU funds, reallocations within the EU budget and cooperation among member states outside the framework of the EU budget.
“Policymakers in all countries will likely be better-off if they can be granted for solidarity in the face of a common health drama than if they muddle through and ultimately have to cope with new emergency assistance, new conditionalities, and the involvement of the ECB in solving another sovereign debt crisis,” they state. “It is time for the Europeans to think more deeply about opportunity costs, which are at the same time economic, social and political.”

You can download the e-book here.