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COVID-19 and the precarious ‘normality’ of the EU

The sequence of economic crises since 2008, of which the COVID-19 pandemic is but the most recent, has exposed a ‘trilemma’ in the EU’s response to these crises. Unfortunately, there is no concept for resolving this trilemma and rendering the union more resilient. This could be fatal for the EU.

Politicians all over the EU, responsible as they are for the stability of their economies and the common currency, are in thrall to the unpredictable course of the COVID-19 pandemic and its restrictive effects on the famous four freedoms of the union. The longing for ‘normality’ is the great political goal, but would a return to the former ‘normality’ actually be a desirable strategic goal? It is clear that the EU’s leaders have no conceptualisation of the future of the union once the COVID-19 pandemic is over. This could prove an existential problem for the EU in its present composition, where ‘normality’ is conceived of as the status quo ante.

A recurrent pattern of grit in the machinery

When we look at the short (though very turbulent) history of the EU since the introduction of the common currency in 1999, the lack of any long-term vision is puzzling. Indeed, the euro had 10 good years until 2008, during which the conventional wisdom of pursuing a combination of expanded integration, orthodox monetary and orthodox fiscal policies (following the same path as in decades past) seemed to work in the currency union. However, important elements of this wisdom proved themselves unfit for purpose in the three crises that followed over the next 13 years: the global financial crisis of 2008-2009, the sovereign debt crisis of 2009-2013 and the COVID-19 crisis since 2020. In each case, European policy makers reacted by taking emergency steps – most of them too late and of merely temporary duration. Meanwhile, there is no guarantee that this sequence of crises will be over any time soon.

The crises are interlinked

The first blow fell with the global financial crisis of 2008-2009; it could be parried by temporarily abandoning the constraints on orthodox fiscal policies and by large government rescue packages for the banks. A harsh return to fiscal restrictions then followed in all countries, according to the requirements of the Growth and Stability Pact. This sudden U-turn triggered the sovereign debt crisis in several euro area countries and jeopardised the stability and growth performance of the entire EU. Institutional reforms at the EU level focused on the financial sector: new bank supervision tools for the European Central Bank (ECB), the banking union and the capital markets union – on the assumption that the liberalisation and deregulation of cross-border private financial flows would be the best antidote to any future financial crisis. National fiscal policies remained restrictive, in contrast to 2008-2009. The Fiscal Compact of 2012 tightened even the former restrictions, and a raft of restrictive budgetary rules was implemented at the national level. Fiscal austerity programmes were imposed on high-debt countries. It should be noted that the programmes also included major retrenchment in the healthcare system, with dire consequences for the subsequent COVID-19 pandemic crisis. It remained up to the ECB – following the ‘unconventional’ monetary policies it has pursued since 2015 – to take quasi-fiscal responsibility and forestall the worst of the consequences. Nevertheless, the real economic fallout from the national fiscal austerity manoeuvres had still not been completely absorbed, when concerns about new recessionary tendencies spread across the EU in the fourth quarter of 2019.

It was in this precarious situation that the COVID-19 crisis erupted, making matters worse particularly in those countries that had made deep cuts in their healthcare systems (Germany is no exception). The search for emergency solutions in monetary, fiscal and other policies became ever more desperate. All the new institutions created in recent years – the banking union, the capital markets union, the European Stability Mechanism (ESM) – may be useful in terms of avoiding fresh financial tremors; but the COVID-19 pandemic has directly hit the real economy with supply and demand shockwaves. These have forced the suspension (to all intents and purposes) of the Stability and Growth Pact and the creation of a ‘recovery and resilience facility’ (RRF) at the EU level – but all measures are thought to be merely temporary.

Emergency steps face a trilemma

The poor crisis resilience has exposed the impossibility of preserving more than two of the three cornerstones of the present EU architecture: ‘euro area integrity’, ‘orthodox monetary policies’ and ‘orthodox fiscal policies’. In a study that is well worth reading, Bonatti, Fracassi and Tamborini dub this problem the ‘trilemma’ of European policies.[1] The latter two cornerstones – deactivated for the moment, but likely to be resumed – imperil the first one of euro area integrity. Meanwhile, euro area integrity and monetary orthodoxy reduce the efficacy of orthodox fiscal policies in dealing with asymmetric shocks. And euro area integrity, when coupled with orthodox fiscal policies, forces the central bank to go beyond its remit in a severe crisis (albeit with limited efficacy). It should also be remembered that in May 2019, the German constitutional court questioned the legitimacy of the ECB’s massive asset purchase programme (APP), which was nevertheless continued and then complemented in 2020 by the even more massive pandemic emergency purchase programme (PEPP).

Back to ‘normality’ would mean global marginalisation

When we consider the last 13 years, it is hardly surprising that, of all the big global players, the EU has the weakest economic performance and organisational capabilities. It has also lost some of its (already limited) political relevance, making it harder for it to deal on level terms with the emerging new global order of the United States and the challenger, China – complemented, perhaps, by Russia. A return to the former pre-coronavirus ‘normality’ is scarcely credible as a beneficial strategy for Europe. Either the EU must be prepared to remain in permanent crisis mode, with a further loss of global relevance and increasing centrifugal forces, or it needs to undertake institutional reforms to address the inconsistencies between EU integrity, monetary policies and fiscal policies, and to make the union more resilient to severe shocks in the future.

The need for a new fiscal policy architecture

Of the three cornerstones of the EU architecture, the fiscal policy pillar is the weakest. Once the pandemic is over, most EU member states will be burdened with substantially elevated public debt levels. A return to ‘normality’ would mean reinstatement of the stipulations of the Growth and Stability Pact and the Fiscal Compact for national fiscal policies. In that event, it is as certain that the European economy will be condemned to a sluggish recovery as that tomorrow the sun will rise in the east; and the inherent vulnerability may even set the stage for the next crisis. In order to forestall such a scenario, it is imperative that the present emergency programmes be transformed into a coherent concept, and that their temporariness be converted into permanence. Overcoming fiscal orthodoxy would be a core element in resolving the trilemma. The presently unclear boundary between monetary and fiscal policy competencies should be replaced by coordinated monetary-fiscal responses that also make monetary policies more effective. But how to achieve this?

A steadily growing body of professional commentators advocates a fiscal instrument with risk-sharing properties at the EU level. Indeed, we have seen that private risk sharing in a banking and capital markets union is not capable on its own of avoiding and solving a financial and economic crisis, irrespective of where the initial shock occurs. One can use what is already in place to complement a capital markets or banking union: the establishment of the RRF in response to the coronavirus crisis offers an opportunity to use it as the nucleus of the EU’s own sovereign fiscal risk-sharing instrument. However, the greatest disadvantages to the RRF are its temporariness and modest volume, compared to President Biden’s USD 1.9 trillion anti-coronavirus package. The RRF should be transformed into a permanent facility that is competent to coordinate dealings with the ECB and to issue securities that are attractive to institutional investors and central banks. As matters currently stand, investors will find it more attractive to invest in US bonds, which will strengthen the US economy and the dollar. A permanent and powerful public risk-sharing tool for the European Union would remove one of the EU’s biggest stumbling blocks in global systemic competition.

[1] Luigi Bonatti, Andrea Fracasso and Roberto Tamborini (2020), ‘COVID-19 and the future of quantitative easing in the euro area: Three scenarios with a trilemma’, https://www.europarl.europa.eu/cmsdata/211589/Topic%202%20Compilation.pdf; pages 70-101.

Posted: 25/03/2021

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* JUST PUBLISHED: GARCH Analyses of Risk and Uncertainty in the Theories of the Interest Rate of Keynes and Kalecki *

This study attempts to identify uncertainty in the long-term rate of interest based on the controversial interest rate theories of Keynes and Kalecki. While Keynes stated that the future of the rate of interest is uncertain because it is numerically incalculable, Kalecki was convinced that it could be predicted. The theories are empirically tested using a reduced-form GARCH-in-mean model assigned to six globally leading financial markets. The obtained results support Keynes’s theory – the long-term rate of interest is a nonergodic financial phenomenon. Analyses of the relation between the interest rate and macroeconomic variables without interest uncertainty are thus seriously incomplete.

wiiw Working Paper No. 192, January 2021

25 pages including 7 Tables and 2 Figures


Published: "Elements, origins and future of Great Transformations: Eastern Europe and global capitalism": Economic and Labour Relations Review (ELRR), https://doi.org/10.1177%2F1035304620911123. The article is available as 'Online First'.


The article is fully accessible to all users at libraries and institutions that have purchased a license.

This essay analyses the relationship of two ‘Great Transformations’: the first from socialism to capitalism, more specifically in Eastern Europe in the 1990s, and the second from regulated to unregulated capitalism in the global economy since the 1980s, with respect to their common origins, elements and social results. Applying Karl Polanyi’s double-movement concept, it is concluded that these two, in essence neoliberal, transformations have led to societies being deeply divided economically, socially and culturally. Moreover, the self-protection of transformation losers is generating adverse political outcomes on a global scale. For both reasons, the outcomes of neoliberal transformations are jeopardising also the viability of the European Union, which was initially built on the basis of a regulated capitalism. The future of the global economy and also of the European Union depends on how the conflicts between the deepening of unregulated globalisation, national sovereignty and democratic politics can be solved.

Published: The long-run properties of the Kaldor-Verdoorn law: a bounds test approach to a panel of Central and East European (CEE) countries. Empirica, (), 1-21. DOI: 10.1007/s10663-019-09467-0.The article is available as 'Online First'.


It is fully accessible to all users at libraries and institutions that have purchased a SpringerLink license. An expanded version can be find as .Narodowy Bank Polski, NBP Working Paper No. 318. Download: http://www.nbp.pl/publikacje/materialy_i_studia/318_en.pdf

This study attempts to identify the short- and long-run components of the Kaldor-Verdoorn (KV) law. The law claims that demand dynamics drive productivity dynamics. The claim is tested with a panel of ten Central and Eastern-European countries, where productivity and demand growth have been slowing since 2004/2006 and where fears of an end of convergent growth are spreading. Meanwhile, the gradual slowing of output and productivity growth applies not only to the region considered, but it is also a global phenomenon that is occurring despite remarkable technical progress and that is referred to as the productivity puzzle. However, this puzzle would be solved in light of the KV law. To test for its long-term properties, panel cointegration models with autoregressive distributed lags (ARDL) are applied. Our results confirm the law for the region; slower productivity growth is not due to ‘adverse technological progress’ but to weakening external and domestic demand, which might block the implementation of product and process innovations. A longer and slightly different version can be obtained as NBP Working Paper No. 318 (see below).

Just published: From the socialist command to a capitalist market economy – the case for an active state. In: European Journal of Economics and Economic Policy - Intervention. Special issue on the Economics of Kazimierzmierz Łaski (1921 - 2015), volume 16, issue 3.

Kazimierz Łaski belonged to the group of economists who particularly clearly and convincingly criticized the application of neoliberal doctrines to the transition of socialist countries into market economies. His analysis of the transition agendas was deeply rooted in the Kaleckian tradition of reasoning and brought him much respect but also fierce opposition in the international arena. In answering the why and how of his work, this article will summarize his contributions to the economics and politics of transition.

My current research projects include

  • Actual problems of European integration, chiefly: reforms of the governance system;

  • The role of the intererest rate in Keynesian and Kaleckian investment functions

  • Finance, growth and competitiveness of Central- and East European countries

I am a registered author of Repec - http://econpapers.repec.org/ and in Research Gate - http://www.researchgate.net/profile/Hubert_Gabrisch/info?editInstDialog=true