Annual Bronislaw Geremek Lecture September 23, 2020
3 /2020
POLICY PAPER
Costs and benefits from European
integration in the post-COVID world
Policy Paper 3/2020 Author: Piotr Arak
Cooperation: Krzysztof Kutwa
Editors: Jakub Nowak, Małgorzata Wieteska Graphic design: Anna Olczak
Graphic cooperation: Liliana Gałązka, Tomasz Gałązka, Sebastian Grzybowski Polish Economic Institute
Al. Jerozolimskie 87 02-001 Warszawa
© Copyright by Polski Instytut Ekonomiczny ISBN 978-83-66306-95-0
3
Executive summary . . . 4
Introduction . . . 7
Secular stagnation in the West. . . 8
Costs and benefits of EU membership. . . 11
Greatest recession since 1929 . . . 16
Unprecedented public aid . . . 17
The next big thing is… . . . .24
List of charts and tables. . . .28
References . . . .29
Table of contents
4
→
We live in the 20s of the 21st century.A historian in future decades will think of a name for this period because one era may have ended and a new one started.
→
We potentially live in an age of new secular stagnation. What does this mean? The ex- istence of demand barriers, a slowdown in economic growth, a growing gap between potential and actual GDP growth, and per- sistent unemployment. In 2013, former US presidential adviser Larry Summers start- ed discussing the ″new secular stagnation hypothesis″, which states that market forc- es are insufficient to bring the economy to its full-employment growth path due to a permanently negative natural interest rate, as shown by Japan’s experience since the 1990s and the poor performance of the US and Europe after 2007–2008. This hy- pothesis is somewhat in line with the in- creasing alarm about climate change and other environmental threats, which have prompted the ″degrowth″ movement that calls on advanced economies to embrace zero or even negative GDP growth.→
Since the last ″big″ enlargement of the EU, there has been a shift in those countries generating growth because of convergen- ce. The "old" EU-15 countries are not re- cording as high economic growth as the new member states. For each country that joined the EU, this "catching-up" process took place through the single market, ac- cess to a huge consumer base, the inflow of investment, but also the policy of equal opportunities. This can be seen in the in- crease in GDP since the country joined the EU, but also in the average salary. The dura- tion of exposure to these factors keeps theeconomy and wages up. Lithuania, Romania and Poland saw average GDP per capita in- crease by more than 60 percent since 2004. In Italy and Greece, it dropped, while many other countries developed by at least 17 percent, like the Netherlands.
→
A false division into ″takers″ and ″givers″.Taking into account the financial effect of EU membership, member states are of- ten divided into two groups: net contribu- tors and net beneficiaries. Yet this simplis- tic approach does not take into account what businesses owners and governments in Europe realised years ago. You cannot di- vide society into ″takers″ and ″givers″. The economic effects of redistribution create consumption, trade, and so on.
→
The economic impact of the 2004 enlar- gement provided the whole EU-15 with a significant number of additional euros.This was highest in Luxembourg, where each citizen received almost EUR 6,600 per capita. Austria was second with close to EUR 1,820. The impact was smallest in Portugal (EUR 51.7), Spain (EUR 174.7 and France (EUR 260.9). In the Netherlands, the number was above EUR 538.
→
When it comes to the balance of direct pay- ments, 8 out of the 15 countries in the ″old EU″ had a negative balance between 2004 and 2018. The largest negative balance was in Luxembourg (EUR -2.2 billion), followed by Greece (-0.4), Belgium and Portugal (both -0.3). The Swedes (0.12), the Dutch (0.11) and the Germans (0.10) had the best results in terms of the ratio of payments to funds received.→
However, if we take into account the es- timated economic benefits of the EUExecutive summary
5
Executive summary
enlargement, each country has a positive balance. Each euro spent by EU-15 coun- tries generates additional benefits. The largest ones are in Germany (13.6 euro per capita), the UK (11.2) and Austria (10.5).
The Netherlands created approximately 6.4 EUR of economic value for each euro spent.
→
The cost of emigration from CEE countries is severe. No one expected the outflow from Central Europe to reach the num- bers observed since 2004. With their age- ing societies, this is becoming a pressing issue and talks of remigration policies are emerging in all the CEE countries. On av- erage, 4.78 percent of the EU-13 countries’inhabitants moved to the EU-15. Romania lost approximately 10 percent of its inhab- itants, Croatia 8 percent, Lithuania more than 6 percent and Czechia almost 1 per- cent. This increased the population of western Europe. 3 percent of Austria and Ireland’s inhabitants from CEE. In Spain, Germany and Italy, this is around 2 per- cent, and 1.5 percent in the UK.
→
Profit shifting from east to west on the single market is also an issue. Money sent to Central Europe by western coun- tries via the EU budget pales in compar- ison with the profits that western com- panies make from investments in the east. There is nothing wrong with mak- ing a profit, as long as you pay the taxes that you owe. However, the single market has the drawback of intra-EU tax havens, as described by Thomas Tørsløv, Ludvig Wier and Gabriel Zucman in ″The Missing Profits of Nations″. Each country loses parts of its corporate income tax, some- times more than 10 percent. Since join- ing the EU, Poland has lost approximate- ly EUR 9 billion, Czechia almost 5 billion, Hungary 3.6 billion, Romania 3.3 billion,Slovakia 1.8 billion and Slovenia around 800 million.
→
The ongoing pandemic is like a global na- tural disaster. The first effects of the crisis were of a supply nature; companies disap- peared from the market and people often could not perform their job. This is the dif- ference between the current crisis and the financial one of 2008-2009. The latter was a crisis of demand, rather than supply.Exports and investments fell first, which only then led to were layoffs. The effects of a natural disaster depend on its dura- tion and the same will be true of the pan- demic. With short-term disasters, such as tsunamis and earthquakes, the economic response resembles the shape of the let- ter ″V″. With long-term disasters such as droughts, floods or locust attacks, the GDP response is L-shaped. We still are trying to figure out what will happen to the econo- my, but most economists expect a rebound in 2021. The EC Summer 2020 Economic Forecast projects that the Eurozone econ- omy will contract by 8.7 percent in 2020 and grow by 6.1 percent in 2021. The EU econo- my is forecast to contract by 8.3 percent in 2020 and grow by 5.8 percent in 2021.
→
We need to invest our way out of the reces- sion. Mario Draghi, who stepped down as ECB president last November, said debt levels would be high for a long time, but would only be sustainable if ″good debt″were ″used for productive purposes″, in- stead of using ″bad debt″ for unproduc- tive purposes. European stagnation is the greatest threat. Looking at patterns of GDP, we face a huge risk that, as Europe, we will stop growing. The EU investment rate compared to GDP was just 21.3 per- cent. In China, it was 43.3 percent, and around 31 percent in Korea and India.
Even in Russia, it was higher, at 22.8 percent.
6
Executive summary→
The MFF is just right. In July 2020, the lead- ers of the 27 EU member states approved the Multiannual Financial Framework for 2021-2027 and the Recovery Fund, which are expected to total EUR 1.824 trillion.EU leaders agreed on a EUR 750 billion re- covery plan to help the EU tackle the cri- sis caused by the coronavirus pandem- ic. The package offers EUR 390 billion in grants and EU 360 billion in loans. The val- ue of the MFF 2021-2027 will amount to EUR 1.074 trillion. The largest recipients of the funds in nominal terms are Italy (EUR 150.2 billion), Spain (142.6), Poland (124.9) and France (111.8). However, in terms of the intensity of assistance, per capita, Latvia is first (EUR 5.2 per capita), fol- lowed by Lithuania (5.0), Greece (4.9) and Croatia (4.7).
→
We have not learned to expect the things that are to be expected. In 2020, the glob- al business community expected: extreme weather, climate action failure, natural dis- asters, loss of biodiversity and human- caused environmental diseases. The last time that infectious diseases were on thelist of high-impact risk was in 2015, when the Ebola outbreak happened, in 2004 af- ter SARS epidemic, in 2007-2009 just be- fore and during H1N1 pandemic. With the changes in these risks, we see what we ex- pect. After the financial crisis, the economy was the main concern. Since 2011, both the economy and climate have become sub- jects of interest and, for some time, we have been seeing the risk of cyberattacks and technological malfunctions. We expected protectionism, the clash of global powers, political polarisation, extreme heat waves and a cyberattack. What we do not expect is a military conflict between countries and a terrorist attack. Given that what happens is unexpected, we need to be aware that dif- ferent types of risks are out there and that they create cascades of other risks.
→
As the Dutch proverb states, we ″need to be able to tie even the devil to a pillow″, which means that persistence overcomes everything. We need to be persistent when analysing the risks and adapting to re- alities, while remembering our object- ive of creating a fair and solidary Europe.7
The European Union is always under threat.
Each new crisis means that the community must reinvent itself. Think of new solutions or some times use the ones that were discussed many times but no one had the guts to use them. This is the case of the COVID-19 induced recession in 2020 and the economic prospects of the whole European project. We are in a crisis which is as big as the Great Recession of 1929. This crisis brought about political change in almost every country. The Nazis could get to power in Germany because of the mishandling of the economic fallout. Economics changed.
State-driven interventions to the market became the new normal, many countries dropped the gold standard. No one knows what the current crisis will bring about.
We live now in the 20ies of the XXI century.
A historian some time in the next decades is going to think of a name for this period because possibly one era ended and a new one started. The golden years of ″the end of history″ (Fukuyama, 1992) are gone. In order to look into the future it might be best to look more in the past on the road that brought us here so we might think of the best options if we want to change our path.
This is why we look at the past of the integ- ration process of the European Union. What happened in the last years and what can we expect when the EU will welcome other members as North Macedonia and Montenegro. The EU managed to give prosperity and create chances for development for many of its inhabitants. This was one of the reasons why so many people during the Migrant Crisis of 2015 wanted to cross the Mediterranean to find a better life and the European Dream.
Dutch economist Jan Tinbergen - the first Nobel Prize laureate in the field of economics, who created modern econometrics, but also inflation targets that guide central banks had also a lot to
share on international development and the EU.
Tinbergen was initially hostile to the idea of European integration, which he considered a poor substitute for international order. His approach was based on the failings of the League of Nations before World War II for which he worked for. He feared that European integration would lead to a strong continent which would raise important barriers in trade, and tight border controls to outside partners, undoing much of the beneficial effects of decolonization (Dekker, 2020).
After the war, his views began to evolve towards a globalist approach where the world is ruled by a single government. He saw that possible with the creation of United Nations, but seeing that this process did not bring desired results he begun cheering for European integration as a milestone in a bigger process of global integration. He started to suggest that some level of integration between the global and the national might be useful and perhaps even necessary. This is directly linked to this theory of the optimal level of decision-making. But more importantly he rethought the role of Europe in the global economy.
Tinbergen argued that the post-war eco- nomies in Europe were closer to this optimum than the regimes of the United States or the USSR.
This would become a hallmark of his thought in his theory of convergence – the theory we use today in cohesion policy.
Europe is a lifestyle superpower – argued the Polish Economic Institute in a paper on the reforms of the EU. (Arak, Flis, Kutwa, 2018). We live the longest, work the shortest and are happy about our lives.
Event the regional differences in Europe are smaller than in China or the US. Europe is in that sense unique even though EU is not a state. There are however threats to our way of life, as the economic crisis and sluggish growth in the years to come.
Introduction
8
Secular stagnation in the West
Today we potentially live in an age of a new secular stagnation. What does it mean? Existence of demand barriers, slowdown in economic growth, increasing gap between potential and actual GDP growth, and persistent unemployment. This sounds a lot like a description of the economies of developed countries after the economic crisis started in 2008 or today after COVID-19? But this hypothesis was formulated 70 years earlier.
The idea that there may be limits to economic expansion has a long history. In 1938, its creator, Alvin Hansen, linked this phenomenon with negative demographic trends in highly developed countries, where fertility was falling and the society was aging (Backhouse, Boianovsky, 2016). This resulted in a weakening of the demand dynamics. Low de- mand weakened the incentives to invest, which inevitably increased unemployment and was a straight path to stagnation. Then came the war and process of rebuilding nations started.
In the 1950s, the fiscal expansion of Western countries, including through the Marshall Plan and
the emergence of cohesion policy in Europe has decreased usefulness of this thesis which dropped from the textbooks. Then came 2008 and showed once again what an economic crisis looks like, and many economies had difficulty in generating growth afterwards especially those advanced ones.
In 2013, former US President's adviser Larry Summers started discussing the ″new secular stagnation hypothesis″, market forces are insufficient to bring the economy to its full- employment growth path due to a permanently negative natural rate of interest, as shown by Japanese experience since the 1990s and the poor performance of the United States and Europe after the 2007–2008. Moreover, Summers suggests, in the secular stagnation scenario, exceptionally high growth rates – as in the USA during 2003–2007 – often come from dangerous borrowing that turn excess saving into unmaintainable investment levels, as illustrated by the housing bubble. Saving tends to flow into existing assets, causing asset price inflation.
↘ Chart 1. Real Gross Domestic Product per capita in EU-15 and US since 1918 (1918=100)
Source: own elaboration based on Maddison database.
EU-15 US
1 000 750 500 250
0
1926 1922
1918 1930
1950 1970
1934
1954 1974
1938
1958 1978
19421946 1962 1982
1986 1990 1994 1998
2002 2006 2010
2014
1966 2016
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Secular stagnation in the West
This hypothesis goes somewhat in line with increasing alarm about climate change and other environmental threats which have given birth to the ″degrowth″ movement, which calls on advanced countries to embrace zero or even negative GDP growth. ″The faster we produce and consume goods, the more we damage the environment,″ Giorgos Kallis, an ecological economist at the Autonomous University of Barcelona, writes in his manifesto, ″Degrowth″
(Kallis, 2018). ″There is no way to both have your cake and eat it, here. If humanity is not to destroy the planet’s life support systems, the global economy should slow down.″ Slowing down means that many people are going to fell into poverty as we see during the COVID-19 crisis.
All degrowth theories were ousted from the mainstream but we may change the quality of growth being concern not only about the GDP growth rate. This debate is still on but when we
see millions of people loose jobs its difficult to say that recession is somehow a good idea.
Since the last ″big″ enlargement of the EU we can see that there was a shift of those countries generating growth because of convergence.
The "old 15" countries do not achieve as high economic growth as the new member states. For each country that joined the EU, this "catching- up" process took place thanks to the single market, thanks to access to a huge consumer base, thanks to the inflow of investments, but also thanks to the policy of equal opportunities.
Showing the increases in the size of GDP since the country became a member of the EU, but also in the average salary of an employee. The duration of exposure to these factors keeps the economy and wages up. Lithuania, Romania and Poland saw the average GDP per capita increase by more than 60 percent since 2004. Italy and Greece saw a drop and many other countries developed by at least 17 percent as Netherlands.
↘ Chart 2. Gross Domestic Product growth since 2004 (2005=100)
Source: own elaboration based on Eurostat database.
EU-15 EU-13
150
135
120
105
90 2004
2008
2006 2010
2014
2012 2016
2011
2015
2013 2017
2018 2005
2009 2007
2019
10
Secular stagnation in the West↘ Chart 3. Gross Domestic Product at market price, chain linked volume 2010, EUR per capita – ratio 2019 to 2004
Source: own elaboration based on Eurostat database.
2.5 2.0 1.5 1.0 0.5
0
Lithuania Poland Latvia Ireland Hung Malta ary Croatia Estonia
Slovenia Czechia
German y Sweden Romania Slovakia
Bulg aria
Netherlands Portug al
Spain
Belgium Finland Italy
Austria
UK
Cyprus
Denmark France
Luxembourg Greece
1.91 1.88
1.79 1.751.71 1.70
1.58 1.55 1.54 1.43 1.39
1.28 1.28
1.22 1.18 1.17 1.15 1.13 1.13 1.12 1.12 1.11 1.11 1.111.09 1.09 0.960.87
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Costs and benefits of EU membership
The EU is a convergence machine mostly thanks to the single market. There are many arguments for being part of EU, there are always some external effects that bring a cost but for each country the costs outweigh the benefits, even if some make the wrong decision to leave as United Kingdom. Benefits from EU integration are multidimensional: political, economic and cultural.
The EU integration is not confined simply to economic benefits from the establishment of a single market but it consists of the overall progress in both legal, institutional and standards to increase the freedom and scope of choice for consumers and producers as well as for
businesses and employees that is crucial for achieving comparable living standards across countries.
Many of the EU member states were not concerned with accession costs, since membership was mostly a political decision.
In other words, countries decided to join the EU taking into consideration mostly the security benefits as their political situation was really negative. In this way, costs did not truly matter. The table below summarizes the advantages and disadvantages from becoming a member of the EU as was discussed by many scholars1 - see Bitzenis, Andronikidis (2006).
1 For some overview read Cost and benefits of integration in the european union and in the economic monetary union (EMU) Article · January 2006.
12
Costs and benefits of EU membership↘ Table 1. Costs and benefits of EU membership
Source: own elaboration based on Bitzenis, Andronikidis (2006).
Benefits Costs
Enhancement of market opportunities
(access to the single market) The costs of adoption of all EU norms and standards by enterprises (e.g. VAT, climate neutrality) Reduction of trade barriers or even elimination either tariff
or non-tariff barriers Increased criminality because of free movement of people Reduction of business cost Brain drain - emigration of highly skilled population
from poorer to richer countries
Reduction of costs of new market entry Demographic tension - both for the pension as the economy because of the emigration of a large share of working
age population Free movement of employers/ employees across borders
to find and take up employment Intra-European fraud e.g. VAT
Strengthening of international accounting standards Compromise between country's identity and political independence within the European framework which makes
some countries not enter the Union (Norway) Transparency in business operations and business
performance Compromises on religion and tradition
Facilitation of business operations by increasing the intensity
of competition Loosing competitiveness thanks to dropping own currency (for Eurozone members)
Higher GDP growth Costs of adoption of EU law (as a continuous process)
Peace and stability Costs of compliance with European principles More FDI and trade flows through enlargement
and redistributive policies Adoption of fiscal rules and losing some parts of fiscal independence
Faster growth of consumer incomes
(due to GDP growth) Deterioration of kinetic security potential of the member states (as an side effect)
Stabilization and strengthening of institutions No state-aid possible to businesses without EC acceptance Increased administration capabilities
because of EU regulations
Loosing domestic producers’ market position. Loss of market share for local companies and especially for the SMEs due to the increased competition, and the participation of foreign
companies.
Exploitation of the wage cost advantages in CEE countries Dark side of FDI - profit shifting of multinationals Greater international integration and policy cooperation Existence of internal tax havens in the EU distorting market
competition
Improvement of investment climate and business environment Losing the possibility to compete not based on market principles e.g. with state-aid etc. for FDI Better regulations to start up and more predictable investment
decisions and business operations, avoidance of bureaucratic
and selective behaviour of administration in obtaining licences Transition costs of becoming a member Easier technology transfer Need to compromise on some national interests
(e.g. energy security)
New markets provide more opporutnities to animal spirits EU benefits are already achieved for EU applicant and associated countries as Switzerland Strengthening company management
and capital markets Costs of exiting the EU are severe
Countries will not deal with different trade regimes
and custom regulations Increased economic interdependence in times of crisis Access to cohesion policy and structural funds
Easier access to capital Lower borrowing costs
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Costs and benefits of EU membership
Taking into account the financial effect of EU membership, the member states are on many occasions divided into two groups: net contributors and net beneficiaries. But this simplistic approach does not take into account what businesses owners and governments realized in Europe many years ago. You cannot divide a society into ″takers″ and ″givers″.
The economic effects of redistribution cause creation of consumption, trade etc. This is why Henry Ford was for increasing the pay of workers so their purchasing power would increase so they could buy his car. This is why this argu- ment is on many occasions false (Arak, 2020;
Armand, 2020).
The economic impact of enlargement in 2004 provided the whole EU-15 significant amount of additional euros. The highest level among beneficiaries is represented by Luxembourg, where 6.6 thous. euros per capita
were recieved in additional welfare created.
Second is Austria – 1.8 thous. The smallest impact of enlargement in 2004 on EU-15 wealth was in Portugal (51.7), Spain (174.7), France (260.9) and Ireland (322.1).
When it comes to the balance of payments from the EU cash, 8 out of the 15 countries of the ″old Union″ had a negative balance between 2004-2018. The largest negative balance is recorded in Luxembourg (EUR -2.2 billion), Greece (-0.4), Belgium and Portugal (both -0.3). The Swedes (0.12), the Dutch (0.11) and the Germans (0.10) are the countries with the best results in terms of the ratio of payments to received funds.
However, we take into account the estimated economic benefits from the EU enlargement, then each country has a positive balance. One euro spent by EU-15 countries generates additional welfare effects. The largest in Germany (13.6 euro per capita), the UK (11.2) and Austria (10.5).
↘ Chart 4. EU-13 impact on development of EU-15 – additional euros per capita thanks to GDP, consumption and tax revenue (2004-2018)
↘ Chart 5. Balance of transfers of EU-15 Member States with EU funds (2004-2018, EUR per capita)
Source: own elaboration based on European Commission data and Baas (2020).
Luxembourg Austria Belgium Germany Denmark UK Sweden Italy Netherlands Finland Greece Ireland France Spain Portugal
0 4 000 8 000
Revenues per capita Expenditures per capita Balance
Luxembourg
Italy
Ireland Austria Netherlands
Belgium France
Greece
Finland Portug
al
UK German
y
Spain Denmark Sweden
750 0 -750 -1 500 -2 250 -3 000
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Costs and benefits of EU membership↘ Chart 6. How much 1 EUR spending generates economic welfare (per capita, 2004-2018)?
↘ Chart 7. Percentage of EU-13 country’s population who migrated to EU-15 (2004-2019) Source: own elaboration based on European Commission data and Baas (2020).
Source: own elaboration based on Eurostat database.
15 12 9 6 3 0
12 10 8 6 4 2 0 German
y
Sweden
Austria Italy
Luxembourg
Finland Spain
Belgium France Ireland Greece
UK
Netherlands
Denmark Portug
al
Poland Slovakia Croatia
Hung ary Bulg
aria Malta
Lithuania Latvia Estonia Czechia
Slovenia
Romania Cyprus
With EU funds Withouth EU funds
There are also two other numbers needed to be added to this balance sheet. The cost of emigration. No one expected the outflow from Eastern Europe to have reached the numbers
we saw since 2004. With ageing societies in the East this is becoming a pressing issue and talks of remigration policies surface in all CEE countries.
13.6
11.1 10.5
7.1 7.1
6.3 4.8
3.5 3.5
2.6 2.6
1.4 1.3 0.9 0.4
10.0
7.8 6.4
5.6
4.4 3.9 3.9
2.1 2.0 1.9 1.9
1.3 0.8
15
Costs and benefits of EU membership
↘ Chart 9. CIT revenues lost in EU-13 since 2019 (bn euro)
Source: own elaboration based on Eurostat data and https://missingprofits.world/.
↘ Chart 8. Percentage of population increase in EU-15 thanks to the migration from EU-13 countries
Source: own elaboration based on Eurostat database.
14 000 10 500 7 000 3 500 0 -3 500 -7 000 -10 500
10090 8070 6050 4030 2010 0 3.0
2.5 2.0 1.5 1.0 0.5 0
Poland Slovakia
Hung ary
Bulg
aria Malta
Lithuania
Estonia Latvia
Czechia
Slovenia
Romania Cyprus
BelgiumDenmark Ireland
Luxembourg German
y
Netherlands Portug
Spain Italy UK al
France Sweden
Austria Finland Greece
CIT lost nominally per year (left axis) CIT lost in percentage (rigt axis)
2 https://missingprofits.world/wp-content/uploads/2020/05/TWZ2020.pdf Another problem was that money from
western countries send to Eastern Europe through the EU budget pales in comparison with the profits western companies make from investments in the East. There is nothing bad in making profit as long as you pay the taxes that
you owe. But the single market has also the drawback of intra-EU tax havens as described by Thomas Tørsløv, Ludvig Wier and Gabriel Zucman in the missing profits of nations2. Each country loses parts of its corporate income tax due.
2.76 2.63
1.86
1.63 1.60 1.54
1.07 1.02 1.01
0.81 0.80
0.67 0.37 0.31
0.12
16
Greatest recession since 1929
Great Crash of 1929 is something very few living remember but it was the greatest recession in the quantifiable past. 2008 and the repercussions of the financial meltdown were milder in comparison to 1929. However, 1920 might be the worse recession since the Second World War.
The ongoing pandemic is like a global natural disaster. The first effects of the crisis were of the supply nature - companies disappear from the market (are closed/destroyed), and people often could not perform their job. This is the difference between the present crisis and the 2008-2009 financial one. The latter was of demand rather than supply. It was then that exports and investments fell first, and only then there were layoffs. The effects of a natural disaster depend on its duration, and the same will be true of pandemic. In the event of short-term disasters, such as tsunamis and earthquakes, the economy
responds resembles the shape of the letter ″V″. In Japan, the tsunami of March 2011 caused a decline in GDP by 1.4 percent. in Q1 and 0.7 percent in Q3, and then in Q2 GDP rebounded by 2.5 percent.
In the event of long-term disasters such as droughts, floods or locusts attacks the GDP response is ″L″-shaped. GDP drops sharply at the time of a disaster, and later it bounces back very slowly. This was the case, for example, in New Orleans after Hurricane Katrina – GDP did not return to its early 2005 levels until five years after the disaster.
We still are trying to figure out what is going to happen to the economy but most expect a rebound in 2021. The EC Summer 2020 Economic Forecast projects that the euro area economy will contract by 8.7 percent in 2020 and grow by 6.1 percent in 2021. The EU economy is forecast to contract by 8.3 per- cent in 2020 and grow by 5.8 percent in 2021.
↘ Chart 10. Real Gross Domestic Product per capita in EU-28 (prices in USD 2011)
*Assumed an inflation rate at level 2 percent
Source: own elaboration based on Maddison and World Bank database.
40 000 30 000 20 000 10 000
0
1930 1927 1924 1933
19541957 19751978
1936 1939
1942 1960 1981
1945 1963
1984 1948
19661969 1987
1951
19901993 199619992002
2005 20082011
2014 2017
2020*
1972
1929 – 1 year back 2020 – 6 years back
17
Unprecedented public aid
A rebound is highly possible because of unprecedented public aid. There are practically no economists saying that states should tighten their belts in the current situation. Even initial criticism of the loosening the EU’s fiscal rules has abated.
The pandemic is mobilizing states to act more strongly than the financial crisis a decade ago.
The economic policies introduced by countries during the crisis have many common features, but their accents and details differ.
Germany is using Kurzarbeitergeld, which aims to maintain employment at companies despite a fall in turnover. It involves state support for salaries when companies experience a shortage of orders. The changes in Kurzarbeitergeld in- troduced in March 2020 extend it to temporary
workers, increase payments for social insurance for employees and increase the number of companies that can apply for compensation.
Denmark, where the government is paying employees 75 percent of their salaries during the crisis, Britain, which is covering 80 percent of salaries, and most European countries are taking similar steps.
In total, the EU countries plan to spend over 1.290 trillion EUR on fiscal stimulus – already during the first phase of the struggle against the coronavirus in 2020. The Polish fiscal package amounts to 12.4 percent of GDP and is over 11 percentage points higher than during the financial crisis of 2009 (then it was just approximately 1 percent of GDP)3.
3 The net inflow of EU funds in 2009 was EUR 6.488 bn
↘ Chart 11. The key economic responses governments to COVID-19 as a percentage of GDP and in billion euro
Source: own elaboration based on IMF Policy Responses to COVID-19, last updated August 28, 2020.
20 18 16 14 12 10 8 6 4 2 0
350 300 250 200 150 100 50 0
Luxembourg France Greece Latvia Malta Austria Estonia Slovenia
Netherlands Portug
al
German y Finland Belgium Sweden Poland
Bulg
aria Croatia Italy
Ireland Czechia
Slovakia Denmark Cyprus
UK Hung
ary
Romania
Lithuania Spain
Percent of gdp (left axis) Bn euro (right axis)
18
Unprecedented public aid↘ Chart 12. EU funds for 2021-2027 (bn euro)
Source: own elaboration based on European Commission data.
The European budget for the next 4 years and also for the next 7 years is not ambitious at all - it is a realistic response to the huge economic threat of our time.
After 2008, the worst imaginable for the development of the Union was the rapid austerity.
It was an expensive lesson that limited economic
growth in the Union, but also caused many households, especially in the South, to fall into poverty. The same dogma must not be allowed to limit development after a pandemic.
European stagnation is the greatest threat.
Looking at the pattern of GDP, we face a huge risk that, as Europe, we will stop growing.
↘ Chart 13. EU funds for 2021-2027 (EUR per capita) Italy
Spain Poland France Germany Romania Greece Portugal Hungary Czech Bulgaria Slovakia Croatia Lithuania Netherlands Austria Ireland Belgium Sweden Finland Latvia Denmark Slovenia Estonia Cyprus Malta Luxembourg
Latvia Lithuania Greece France Netherlands Finland Austria Sweden Ireland Belgium Cyprus Denmark Germany Malta Poland Luxembourg Bulgaria Spain Portugal Estonia Romania Slovakia Czech Hungary Slovenia Italy Croatia
0 50 100 150 200 0 2 000 4 000 6 000
19
Unprecedented public aid
The President of the ECB, Christine Lagarde, already at the beginning of the pandemic crisis called for a much more active fiscal policy (implemented, inter alia, through taxes and government spending) - not only at the national level, but also at the community level, to participate in stabilization measures this time.
Mario Draghi, who stepped down as ECB president last November, said debt levels would be high for a long time, but they would only be sustainable if ″good debt″ was ″used for productive purposes″ instead of ″bad debt″
being used for unproductive purposes. ″Low interest rates are not in themselves a guarantee of sustainability; the perception of the quality of the debt incurred is just as important,″ he said.
″The more that perception deteriorates, the more uncertain our framework of references will become, which would jeopardise employment, investment and consumption.″ Comparing Europe’s rebuilding from the pandemic to the aftermath of the Second World War, Draghi said the region had to rethink many of its rules (Arnold, 2020).
A debt community is emerging: the hundreds of billions of euros incurred by the bond issue will be repaid - in one form or another
- by all Member States. The way of thinking about common supranational fiscal tools in the event of major crises will also change. The Union will finally have its own taxes. As the Polish Economic Institute, we have been arguing for over a year that it is a necessary internal policy tool needed to reduce the negative side effects of the single market in order to create competitive sustainability – the goal of the European eco- nomic strategy.
Each European country has the so-called list of reforms to be implemented. Each country's balance sheet is negative. In Poland, there are very flexible forms of employment for artists and freelancers - appreciated by employers, some employees - which, however, do not guarantee full social protection. During the crisis, however, the Polish government decided that it would not conduct the process of economic education, that if we decide to work in this formula, people will not receive state aid. Instead, a special allowance tailored for these people was introduced. During a crisis, the most important thing is to help, so that no one is left alone in this situation. This is what Polish solidarity is all about. In this case, Europe would be- nefit from the heritage of Solidarity movement.
↘ Chart 14. Gross capital formation (percent of GDP)
Source: own elaboration based on World Bank database.
50 38 25 13 0
2004-2008 2009-2014 2015-2019
China
Austr alia
European Union India
Canada South Africa
Korea
Russia
United Stat
es
20.8 18.9
23.2 21.3 24.7 22.8
31.0 30.9
43.3
20
Unprecedented public aid↘ Chart 15. EU Competitive sustainability
↘ Chart 16. European Commission Recommendations - Factsheet Source: own elaboration based on European Commission (2020).
Source: own elaboration based on European Commission (2020a).
First-Mover Advantage
AN ECONOMY THAT WORKS FOR PEOPLE & THE PLANET
Inclusive Growth
Investment and Reforms Ensuring a Just Transition
GREEN DEAL PROD UC
TI VITY
STABILITY FAIRN
ESS
COMPETITIVE SUSTAINABILITY
● Boosting sustainable investment
● Green taxation
● Carbon neutrality
● Shifting towards a more circular economy
● Implementing the European Pillar of Social Rights
● Invest in skills and health
● Fighting poverty
● Gender equality
● Fair taxation
● Social and territorial cohesion
● Job quality
● Research and innovation
● Digitisation
● Efficient and competitive markets
● Strong industrial base
● Supporting SMEs
● Access to finance
● Favorable business environment
● Deepening the Single Market
● Completing our Economic and Monetary Union
● Sound public finances
● Stable financial sector
● Preventing domestic and external imbalances
● Structural reforms to boost productivity
● International role of the euro
The recommendations reflect the activation of the general escape clause, allowing Member States to temporarily depart from budgetary requirements in order to preserve jobs, help companies and support a robust recovery.
A supportive fiscal stance is currently warranted in all Member States to facilitate the recovery of consumption, investment and growth.
Economic stability
lt is of utmost importance to preserve jobs, provide adequate unemployment benefits and income replacement to all workers.
As people return to the ir workplace, ensuring occupational health and safety is also key. Guaranteeing people the right to develop their skills, in particular digital ones, will be a top priority. Our collective efforts must also focus on tackling inequalities and poverty, and protecting vulnerable groups.
Social fairness
lnvesting for the recovery creates the opportun ity to reshape the EU economy and set it firmly on a sustainable footing.
National authorities should identify projects that can boost dimate neutrality, especially in the industrial and transport sectors.
The European Green Deal and the implementat ion of the National Energy and Climate Plans should guide investments.
Green Deal
Stronger productivity growth and a smooth functioning of the Single Market are crucial to securing a robust recovery.
Policies should promote innovation, investment in digitalisation, education, skills and training, a supportive investment environment and well-functioning labour markets.
Productivity
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Unprecedented public aid
↘ Chart 17. Number of country-specific recommendations prepared by European Commission
Source: own elaboration based on European Commission (2020b).
Number
recommdendationsof Countries
2 Germany
3 Belgium, Czechia,
Denmark, Lithuania Slovenia, Sweden, UK
4
Bulgaria, Croatia, Cyprus, Estonia, Finland, France, Greece, Ireland, Italy,
Latvia, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia,
Spain
5 Hungary
European Commission reform recommendations
to be implemented in 2020 and 2021. For Germany there are just two (European Commission, 2020c):
1. In line with the general escape clause, take all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery. When economic con- ditions allow, pursue fiscal policies aimed at achieving prudent medium-term fiscal posi- tions and ensuring debt sustainability, while enhancing investment. Mobilise adequate re- sources and strengthen the resilience of the health system, including by deploying eHealth services.
2. Front-load mature public investment projects and promote private investment to foster the eco- nomic recovery. Focus investment on the green and digital transition, in particular on sustaina- ble transport, clean, efficient and integrated energy systems, digital infrastructure and skills, housing, education and research and innovation. Improve digital public services across all lev- els and foster the digitalisation in small and medium-sized enterprises. Reduce the regulatory and administrative burden for businesses.
22
Unprecedented public aidFor Italy four (European Commission, 2020d):
For Netherlands also four (European Commission, 2020e):
1. In line with the general escape clause, take all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery. When economic conditions allow, pursue fiscal policies aimed at achieving prudent medium-term fiscal positions and en- suring debt sustainability, while enhancing investment. Strengthen the resilience and capacity of the health system, in the areas of health workers, critical medical products and infrastruc- ture. Enhance coordination between national and regional authorities.
2. Provide adequate income replacement and access to social protection, notably for atypical workers. Mitigate the employment impact of the crisis, including through flexible working ar- rangements and active support to employment. Strengthen distance learning and skills, in- cluding digital ones.
3. Ensure effective implementation of measures to provide liquidity to the real economy, includ- ing to small and medium-sized enterprises, innovative firms and the self-employed, and avoid late payments. Front-load mature public investment projects and promote private investment to foster the economic recovery. Focus investment on the green and digital transition, in par- ticular on clean and efficient production and use of energy, research and innovation, sustaina- ble public transport, waste and water management as well as reinforced digital infrastructure to ensure the provision of essential services.
4. Improve the efficiency of the judicial system and the effectiveness of public administration.
1. In line with the general escape clause, take all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery. When economic condi- tions allow, pursue fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Strengthen the resilience of the health system, including by tackling the existing shortages of health workers and stepping up the deployment of relevant e-Health tools.
2. Mitigate the employment and social impact of the crisis and promote adequate social protection for the self-employed.
3. Front-load mature public investment projects and promote private investment to foster the economic recovery. Focus investment on the green and digital transition, in particular on digi- tal skills development, sustainable infrastructure and clean and efficient production and use of energy as well as mission-oriented research and innovation.
4. Take steps to fully address features of the tax system that facilitate aggressive tax plan- ning in particular on outbound payments, notably by implementing the adopted meas- ures and ensuring its effectiveness. Ensure effective supervision and enforcement of the anti-money laundering framework.
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Unprecedented public aid
And for Poland also four (European Commission, 2020f):
1. In line with the general escape clause, take all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery. When economic conditions allow, pursue fiscal policies aimed at achieving prudent medium-term fiscal positions and en- suring debt sustainability, while enhancing investment. Improve resilience, accessibility and ef- fectiveness of the health system, including by providing sufficient resources and accelerating the deployment of e-health services.
2. Mitigate the employment impact of the crisis notably by enhancing flexible and short-time work- ing arrangements. Better target social benefits and ensure access to those in need. Improve dig- ital skills. Further promote the digital transformation of companies and public administration.
3. Continue efforts to secure access to finance and liquidity for companies. Front-load mature public investment projects and promote private investment to foster the economic recovery.
Focus investment on the green and digital transition, in particular on digital infrastructure, clean and efficient production and use of energy, and sustainable transport, contributing to a progres- sive decarbonisation of the economy, including in the coal regions.
4. Enhance the investment climate, in particular by safeguarding judicial independence. Ensure effective public consultations and involvement of social partners in the policy-making process.
Each country has its own reforms to perform for some the EC waits for many years giving the same recommendation each year. Reform packages were a reason that tensions in the EU were higher in 2020. The budget negotiations have highlighted the division between North and South – on one side Netherlands and on the other Italy and Spain. One demanding reforms for aid and the other wanting to survive yet another crisis.
This a dangerous axis for the future of the community. It is mainly this axis that causes the European process and euro area integration to be in a clinch today, and it is very difficult to imagine how to get out of it, because everyone knows exactly what their interests are.
This difference covers many areas: it con- cerns institutional interests, that is, who manages the euro area - whether they are to be Community institutions or intergovernmental institutions - it concerns the fear of the risk of colossal financial transfers between different parts of the euro area. Today it is clear in which direction these transfers will go: from North to South. This causes
an ever-deepening crisis. In the North, there is a political revolt fueled by the belief that no risk of intra-euro transfers can be brought about. This is the revolt of the parties in Finland, Sweden, also in Germany and the Netherlands.
In the South, the political revolt is also closely related to the problems of the Euro zone. All the parties of the rebellion - be it Spain, Portugal, Italy or Greece - feel betrayed and have enourmous social tensions. The southern countries believe that all they have been offered is to make draconian cuts and adopt the so-called recovery programs. That is, de facto loans, the main direct beneficiaries of which were often international institutions from the north of Europe.
Such a mixture is explosive. It is not surprising that some reactions in the southern countries are radical.
Sharp divisions and building mechanisms that destroy solidarity have never ended well in the case of the EU. You cannot have one foot in the Union and the other foot outside it. The example of UK shows that rebates do not work.
24
The next big thing is…
Climate change dominated the public debate before the crisis. The Green recovery may happen, but it has to ensure both growth as well as true process of economic revival. At the beginning of 2020 there were some reports of an unknown virus in China. Mostly in Asian press.
No body took seriously as an economic and geopolitical threat, yet this is what happened.
We do not learn to expect the things that are to be expected.
Epidemics and pandemics haunt societies at intervals of several years. Nassim Nicholas Taleb, author of the best-selling book on "black swans" (Taleb, 2007) made a career after the financial crisis of 2008-2009. He described events that happen suddenly, unexpectedly and drastically change our reality. As he wrote: "the combination of low predictability and significant effects on the surrounding reality makes the black swan a great mystery." The financial crisis of 2008 was a black swan, according to Taleb – only a handful of analysts saw it coming.
The coronavirus pandemic does not match Taleb's definition. Yes, it has a huge impact when it comes to human life, displacement and economic losses. But the appearance of such a dangerous virus was predictable. Taleb himself said that the term he coined was too often
″a cliché for any bad thing that surprises us.″
(Avishai, 2020).
The metaphor of the current crisis may be the "gray rhino", which refers to highly probable but downplayed threats that have a huge impact.
The term was first used by Michele Wucker
(Wucker, 2016), a political analyst who used it for the first time to describe the Greek debt crisis after 2012. Wucker recently wrote about the current crisis that, given what we know about pandemics and their growing probability, outbreaks are highly likely and have a big impact (Biswas, 2020). She coined the term "gray rhinoceros" for exactly such events: visible, approaching you, with high potential impact and highly probable consequences.
Each year the World Economic Forum (known for the forum in Davos) asks many business leaders around the world about the greatest risks for each year as kind of a barometer of things to come and each time. We see the shifts in the global narratives and not the true possibility of something happening.
In 2020 the global business society expected:
Extreme weather, Climate action failure, Natural disasters, Biodiversity loss, Human-made environmental diseases. The biggest impact was seen as that of: Climate action failure, Weapons of mass destruction, Biodiversity loss, Extreme weather and Water crises. The last time infectious diseases were on the list of high impact risk was in 2015 when the Ebola outbreak happened, and in 2007 and 2008 after SARS in 2004 just before H1N1 in 2009.
With the changes in this risks we see what we expect. After the financial crisis, the economy was the main concern. Since 2011 both the economy and climate became the subjects of interest and for some time we see the risk of cyberattacks and technological malfunctions.
