February 2023

Inspecting the European armour

Tanya Vatsa  examines Europe’s post-Covid economic challenges and strategies, considering how, in an ever more globablised world, uncertainty has a far-reaching impact

Post-pandemic, the world is steadily moving towards recession as most economies struggle to attain pre-Covid growth rates. The disruption of the globally interconnected and well-integrated supply chain has severely damaged trade balances, leading to affordability and accessibility issues. In the aftermath of major lockdowns, demand saw a steep rise, further challenging the recovery of stressed supply channels. The atmosphere of uncertainty continued to loom large with climatic catastrophes and the descent of Eastern Europe into war after Russia’s invasion of Ukraine, while pre-existing conflicts only intensified. The combined impact dealt a massive blow to the economic recovery processes, prolonging and even stagnating it in several cases.

The EU foresight to enable recoveryhas set a spectacular model worth replicating among large trade blocs

Europe’s economy had strengthened its institutions after the financial crisis of 2008 for a robust recovery. It was expected of the bloc that all its members would act in solidarity in the recent time of crisis. In the aftermath of Covid, the European Union’s foresight to enable recovery, as well as to leverage the disruption in order to aid an environmental and digital transformation, has set a spectacular model worth replicating among large trade blocs.

European Central Bank HQ in Frankfurt
The European Central Bank’s Pandemic Emergency Purchase Program (PEPP) was launched in 2020
Union to the rescue

The goals of the European economic recovery post-Covid have been stated as recovery, renewal and resilience. The EU, the European Commission and the European Central Bank have unleashed a slew of measures for the revival and reinvigoration of the major slump witnessed during the pandemic. While fiscal assistance was necessary to provide the budget, adjustment to interest rates and measures for monetary policy transmission were enacted to counter the resulting inflation, assisting the growth. Big businesses and high net worth transactions were heavily impacted. Medium and small businesses, particularly in the hospitality and tourism sector, had largely shut down for absolute lack of income during restricted travel and severe lockdowns.

Launched in the second half of 2020 and called Next Generation EU, the EU’s grand fiscal stimulus package is the largest economic recovery plan after the US’s post World War II Marshall Plan. The recovery package, amounting to almost 800 billion euros, is carefully designed, taking into consideration the variable needs of the differently placed economies within the Union. Its largest component is the Recovery and Resilience Facility (RRF), which is mostly debt funded and does not burden the existing budgets of the members. The money is disbursed out as grants and cheap loans in return for certain specified reforms and investments, mostly aimed at a greener and more digitised Europe. This is a commendable attempt at utilising the restructuring process to re-orient the economies towards a forward-looking futuristic model.

The European Central Bank’s Pandemic Emergency Purchase Program (PEPP) was launched in 2020 to mop up the excess liquidity with the temporary asset purchase programme of private and public sector securities. Another relevant scheme for countering unemployment and the risk of recession was Support to mitigate Unemployment Risks in an Emergency (SURE), enabling members to mobilise financial means for the provision of employment. The foresight of the grouping was evident with the extension of its Next Generation EU recovery package in the form of REACT-EU. The Recovery Assistance for Cohesion and the Territories of Europe (REACT-EU) is a 50 billion-euro addition to the existing fiscal stimulus in order to bridge the gap between the immediate recovery after Covid and a long term road map required to stabilise the economies in transition.

European Commission president Ursula von der Leyen
European Commission president Ursula vonder Leyen said the aim of the recovery packages was to ‘repair the social fabric, protect the single market and rebalance the balance sheets across Europe’

There were disagreements within the bloc regarding the sanctions on Russian oil and gas

Diverging politics of economics

EU policies were specifically designed for the member states in the aftermath of the pandemic-induced lockdown. It barely considered the possibility of a prolonged rupture to the global trade and supply chain pipelines. The Russian invasion of Ukraine, which was concurrent with the second wave of Covid, combined with extreme climate conditions, added to the initial necessary resources calculated by the implementing and assisting organisations, including the EU.

There were disagreements within the bloc regarding the sanctions on Russian oil and gas. The comparatively less prosperous East European countries like Poland, the Czech Republic, Latvia, Serbia, Moldova and Bosnia and Herzegovina, with a large chunk of Russian import in their energy mix, would incur huge costs as the shift from the traditional energy to greener energy is effected. Despite the provisions made by the EU, the convergence of the Central and East European countries with their more prosperous counterparts will be invariably delayed.

The cascading effects of consecutive catastrophes have left the eurozone with double digit inflation, driven by rising energy and food prices and an aging demography burdening the state’s ability to ensure respectable pensions for the retired workforce. It is speculated that the ratio of working to retired population is rapidly declining, forcing governments to extend the retirement age. French Premier Macron’s increment of the retirement age saw a massive public backlash, the largest protests witnessed during his regime after the yellow vest protests.

Another challenge to the recovery package and its novel intent to rewire Europe’s future economic course could be changes of governments. The Italian elections might witness a change of guard with the next party in power seemingly unwilling to abide by the transitional pre-conditions set forth in the Next Generation EU fiscal assistance.

The worst may not have passed

Most countries seem to have done away with Covid precautions but another wave of Covid is looming large over its Asian epicentre. Despite China’s recent loosening of its zero Covid policy,previous pervasive lockdowns continue to wreak economic havoc. The threat of severe recession in China is already resonating globally, with supply chain shortages and major economies looking for permanent trade alternatives. The Chinese real estate sector has been in dire need of government intervention since the inception of Covid. Beijing’s economic slowdown threatens the global economy, especially the US and eurozone. Recession in the US and a severe decline in demand in Europe will meddle with their fiscal and monetary recovery programs. The trade imbalance, coupled with Vladimir Putin’s perpetuation of the war on Ukraine, has added to the funds Europe (and NATO) assigns to its national defence, taking away the additional money needed to stabilise an overdrawn financial sector.

The financial crisis of 2008 saw a domino effect of failure of large banks across borders stemming from the globalisation of the banking sector. The rate of dependence today is higher compared to 2008 and severe recession in one large economy will reflect in major downturns across the globe. While European solidarity is commendable, all the nations in the eurozone are not on the same page politically, economically or financially. Income inequity, unemployment, falling demand with soaring prices, inventory and supply shortages impact different countries in the bloc differently. The European Commission president Ursula vonder Leyen said that the aim of the recovery packages was to ‘repair the social fabric, protect the single market and rebalance the balance sheets across Europe’. The objective was to patch minor wounds in an otherwise coherent group of like-minded nations.

It is, however, difficult to determine whether the grouping remains aligned in the face of larger geopolitical decision-making, while domestic politics continue to rupture the fragile fabric of financial and economic unity. Uncertain times call for unexpected measures and it is yet to be seen who wins the tussle between national interests and supra national harmony.

Tanya Vatsa, a law graduate from National Law University, Lucknow and an incoming LLM candidate at the University of Edinburgh, is a former assistant advocate. She is currently a geopolitical analyst with The Synergia Foundation, an India-based think tank. Her writing on international relations has been published by the Diplomatist, International Policy Digest and The Kootneeti