An unprecedented shock to the EU economy

By Marc Puig, Economic Director 

In addition to the political and social impact, the Covid-19 outbreak caused an unprecedented shock to the EU economy. The recession broke negative GDP growth rate records in almost all countries during the second quarter of 2020. It is forecasted to have a catastrophic effect by the end of 2020. With the uncertainty of the pace of the recovery, the decisions of governments are more crucial than ever in order to stimulate the economy and safeguard businesses.

After focusing on containing the expansion of the virus, the response from different EU capitals had the clear target of minimising the effects of the shock while trying to keep the different sectors of the economy alive. To that end, measures such as guarantee plans for SMEs, temporary unemployment benefits or tax deferrals have been commonly used by national governments.

Moreover, at supranational level, the joint response has been direct and far-reaching, with the European Commission proposing an ambitious economic stimulus plan that includes reconstruction funds based on transfers and loans on favorable terms, avoiding costly financing for those countries where their public finances are under severe stress and favoring the flow of money to the real economy. Furthermore, the European Central Bank has also been a basic pillar in this process by injecting liquidity into the system through open market operations and keeping risk premiums low.

Looking at the future, this global crisis can lead to local solutions and help rethink the world’s economic future. The current system has been badly hit by the total closure of the economy, which has in turn demonstrated how interdependent countries are in a time of close globalization. One of the consequences of the pandemic could be increased protectionist demands because of the fear of having to depend on external markets. In addition, a redesign of the global production system is possible, with the relocation of production centers to places closer to the point of sale or final consumption.

Moreover, the European Commission, in its target to a more sustainable economy, already announced that the conditionality of its recovery funds will be linked to the outlined priorities of its presidency, namely a transition to a greener economy and the digitization. Countries like Spain should take this as an opportunity to consider the transition to a more sustainable economy and take advantage of the inflow of recovery funds by increasing the provision of funds for R & D & I, digitizing the economy further, progressing the technological and energy transition, or developing a circular economy model. These are all pending challenges for the country and they are included in the first draft of the Economic Recovery Plan presented by the government.

In this context, governments and businesses find themselves at a key juncture. They need to evolve and to adapt to the new economic environment while understanding each other’s concerns and priorities. Governments should be aware of what businesses need when designing future policies while businesses need to rethink their models and make the most of the new opportunities that markets will bring in line with governments ́ priorities and investment plans.

Public Affairs Experts - November 24th, 2020

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