EU’S RESPONSE TO THE COVID-19
Covid-19. A pandemic that severely hit the world, raised health issues and took many lives. Unfortunately, health was not the only category that has been hit by the pandemic. The economy has taken the damage as much as the health did. It is even mentioned in Eurofound’s Research Report that: “The economic and labor market consequences of the COVID-19 pandemic are likely to be more serious than those of the global financial crisis of 2008–2009, which led the recession in the period 2008–2013.
The article would be talking shortly about how the pandemic hit the economy and the consequences of it and then will be discussing what steps the EU has taken in the scope of Monetary and Budgetary response to mitigate the effects of the pandemic and help remove the threats and risks on businesses, jobs of employees and livelihood of its citizens.
First of all, to start with some facts, forecasts for EU’s GDP Growth have been corrected from +1.5% to -7.5%. The following figure shows the GDP per capita percentage changes of EU 27 and UK.
Moreover, a sharp rise in EU unemployment which is being from 3.7% in 2019 to 9.2% in 2020 was expected in the spring of 2020, and to continue persevering its impact in 2021 as well. It is also indicated that job opportunities for the younger employees are again negatively affected by the economic downturn Covid 19 is causing as in the global financial crisis of 2008–2009. Furthermore, according to the survey conducted by Eurofound, women are more likely to be affected negatively as they are employed more in the sectors that are hit the most by the pandemic shutdowns. The next figure reveals the forecasted rise in unemployment of 27 member states of the EU and the UK compared to the year 2020 to 2019.
EU’s response to Covid 19 was simply with an expansion of monetary and fiscal policy. The major monetary policy consists of assets purchases under the name PEPP which stands for Pandemic Emergency Purchase Programme and the TLTRO which stands for Targeted Longer-Term Refinancing Operations to boost banks to lend businesses and individuals while not violating the independent central banking principle. On the other hand, the major fiscal response is provided by NGEU.
When a crisis hits the economies, central banks usually take action and responsibility against the crisis to protect economies from negative impacts. That was the case in the time of the global financial crisis in 2008–2009 and it is again the case in the EU for the current pandemic. When the pandemic hit, the ECB which stands for European Central Bank was the first body to respond by taking steps to prevent the economy from damage pandemic could create. In this regard, European Central Bank introduced several unconventional monetary policies which are listed below:
1-LTRO
2-PELTRO
3-TLTRO
4-APP
5-PEPP
All these unconventional policy measures whether provide liquidity or boost banks to lend or an asset purchase program. PELTRO and PEPP are the ones newly introduced against the Covid-19 pandemic and the others’ conditions are improved. The main focus of the part of this article will be on PEPP and TLTRO as they are the major monetary response of the monetary union.
-Monetary Policy Response: PEPP
The PEPP (Pandemic Emergency Purchase Programme) is first declared following the Council meeting on the 18th of March. It is a newly introduced temporary program for public and private sector asset purchases with a budget amounting to EUR 750 billion, originally decided to run until the end of 2020. Its main target is to cope with risks to monetary policy transmission in the EU caused by Covid-19.
Later, on 4th June the Council had decided to increase the PEPP budget by EUR 600 billion, which, in total, adds up to EUR 1.35 trillion. The period was prolonged until the end of June 2021. The reinvestment of the maturing principal payments under the PEPP until the end of June 2022 was also decided by the Council.
Furthermore, European Central Bank President Christine Lagarde stated that the Pandemic Emergency Programme (PEPP) prevented “spiral downward in financial markets and reduced any tail risks at the time” and added it brings “more benefits than costs” to the EU’s economy in a press conference of the European Central Bank where she justified the reasons of extending the PEPP.
The responsibility to manage the pace and composition of monthly PEPP purchases has been delegated to the Executive Board of the ECB. Between March and June 2020, the Eurosystem purchased EUR 355 billion of assets under the monetary measure PEPP.
Monetary Policy Response TLTRO
The second major unconventional policy measure is TLTRO which stands for Targeted Longer-Term Refinancing Operations in order to boost banks to lend to businesses and individuals without violating the independent central banking principle. These operations belong to Eurosystem operations which provide financing to credit organizations for up to 4 years. Long-term funding is offered at appealing conditions to banks for purpose of further easing private sector credit conditions and boost banks to lend more to the real economy.
TLTROs are not completely new, actually they have been used by the European Central Bank since 2014 with the main aim being supplying banks with long-term loans with attractive conditions to stimulate them to lend more to the real economy. Throughout the time, TLTRO always evolved and continues to evolve, and that is what happened when the Covid-19 pandemic hit as well. The article will not be discussing the whole evolution of the TLTRO as this is not the main focus of it. Just the part concerning the Covid-19 pandemic will be discussed.
TLTRO 3 conditions were eased further on 12th March 2020, including the decrease in applicable interest rates (not permanently and as low as -0.75%) involving all ongoing operations during the time frame of June 2020 and June 2021. This was not the whole case cause Governing Council decided to further relieve the conditions for operations of TLTRO 3. The council brought forward the beginning of the lending benchmark assessment period by one month and by decreasing applicable interest rates -1% at the lowest for the time frame of June 2020 and June 2021.
Fiscal Policy Response: NGEU
In order to cope with threats and risks of coronavirus pandemic, European Union has advanced its fiscal package by its expansion for the period 2021–2027 which targeted adaptable recovery via public and private investments while pursuing its goals of green and digital transitions. An extensive package of EUR 1,824.3 billion was decided by the European Council in a special meeting that took place on 17–21 July 2020. The agreed package combines the multiannual financial framework (MFF) 2021–2027 and a resilient recovery attempt under the Next Generation EU (NGEU) instrument to construct steady healing.
The EU is supplemented with the required resources by the Recovery Fund NGEU in order to fight the risks and threats caused by the Covid-19 pandemic. The Commission is authorized to borrow up to EUR 750 billion on the markets. EUR 672.5 billion of this money is set aside for the Recovery and Resilience Facility (RFF) which is responsible for supplementing funds to the member states and sectors that have taken the most damage from the crisis for the 2021–2023-time frame requiring countries to adopt national healing plans that contribute to EU’s goals for green and digital transitions. So, as it can be understood, the EU’s fiscal policy places the healing of the European economies from the negative effects of the coronavirus crisis within the framework of the green and digital transformation.
Furthermore, Christine Lagarde who is the president of the European Central Bank highlights the significance of the NGEU for a European Union healing: “not only can it help support demand, but it can also create the structural resilience and growth potential of the entire area. NGEU has the potential to significantly support the regions and sectors hardest hit by the pandemic, strengthen the Single Market and build a lasting and even recovery.” All of these prove that the major fiscal response by the EU plays an important role in the recovery of the EU
In conclusion, the major monetary measures were taken PEPP and TLTRO, while the major fiscal measure being NGEU which complemented the monetary measures crucially.
Arguments About the Measures Taken
All the measures taken showed great success and helped the recovery a lot, but there are also some arguments that have been going around. As the PEPP and TLTRO did a pretty good job injecting the liquidity and adjusting the European Union economies closer to the targeted inflation which is coherent with ECB’s objective. But the injection of this liquidity into the banking system by ECB in order to boost banks to lend to businesses and households which in the case of ECB doing it excessively could cause prices on assets and real estates to rise. Businesses and households will become leveraged more highly which will create a problem of high private debt and high public debt which will require a debt restructuring. The question of if high government debt will across the member states lead to fiscal dominance which will jeopardize the independence of the central bank. The question was raised by Isabel Schnabel who is one of the ECB’s Executive Board. But later she herself stated that both the global financial crisis and the Covid-19 crisis have not prevented the ECB from pursuing price stability so the concerns are groundless. However, the debt burden will be an issue which the EU will need to resolve…
