Economic and Monetary Union in COVID-19 times

In the annual World Economic Forum Global Risks Report, which outlined the major challenges the world would be facing in 2020, all of the “top long-term risks by likelihood’’ were environmental. Even though a global health pandemic was highlighted as an imminent risk, climate change mitigation dominated every policy discussion leaving no room to even conceptualize the global outbreak of COVID-19 (coronavirus) and its socio-economic impact.

In light of the COVID-19 pandemic and the financial threat it poses to Europe, the structural shortcomings in the setup of the Economic and Monetary Union (EMU) are still here and more evident than ever. In this context, the panel entitled ‘’Delivering the reforms needed to strengthen the Economic and Monetary Union’’ at the Business Europe Day, addressed among other key issues whether Europe is ready to tackle a potential next financial crisis and its effects. Mr Klaus Günter Deutsch, President of BusinessEurope Economic and Financial Affairs Committee and Director for Research Industry and Economic Policy, BDI, held that the answer to this dilemma is complex given that Europe has not yet fully implemented all the necessary institutional improvements concerning risk management.

Mr José Leandro, Director at the Directorate for Economic and Financial Affairs, European Commission and responsible for the preparation of the ‘’Five Presidents Report’’ on the EMU completion indicated that the COVID-19 is already identified as a downsized long-term risk for the European economy which could be translated in a period of low growth inflation and rising inequality in Europe. In this regard, Mr Leandro underlined that the key question for Europe is its reaction towards the existent COVID-19 crisis. Interesting enough, seven days after the Business Europe Day, European institutions following a ‘’whatever it takes’’ policy adopted far reaching measures towards tackling the COVID-19 financial impact ranging from how flexibility state aid rules and prudential requirements to a newly created €750 billion bonds Pandemic Emergency Purchase Programme.

On a more practical level, Mr Leandro highlighted that Europe needs more ground-breaking fiscal reforms which paraphrasing European Commission President Juncker do not win elections. He also stressed the importance of the Capital Markets and Banking Union towards developing integrated EU markets that are open and attractive to international investors and boost investments. In the same line, Mr Boris Kisselevsky, Head of the ECB Representation in Brussels, noted that twelve years after the Lehman Brothers collapse, Europe has still an unfinished agenda on EMU deepening. In particular, in his perspective moving towards a European Deposit Insurance Scheme would be an important step towards EMU through reinforcing financial stability by delivering even greater trust in the safety of retail bank deposits, regardless of a bank’s location in the Union.

On a general note, the current EMU approach, with limited means of enforcement, is not adequate towards addressing market fragmentation in Member States. In addition, the COVID-19 pandemic hits Europe at a moment when monetary policy is already at its limits, while many countries have not yet substantially recovered from the 2008 crisis partially due to the fiscal constraints imposed by the EMU.  Therefore, it is evident that the COVID-19 crisis can serve as opportunity to overhaul EMU by improving its governance architecture and finding the right policy mix to ensure resilience and sustainability.

Sofia Karagianni

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