Europe’s recovery plan: Watch out for inconsistency!

in Covid 19 crisis, Europe (en), Monetary policy

by Jérôme Creel (OFCE & ESCP Business School) [1]

On 27 May, the European Commission proposed the creation of a new financial instrument, Next Generation EU, endowed with 750 billion euros. The plan rests on several pillars, and will notably be accompanied by a new scheme to promote the revival of activity in the countries hit hardest by the coronavirus crisis. It comes on top of the Pandemic Crisis Support adopted by the European Council in April 2020. A new programme called the Recovery and Resilience Facility will have firepower of 560 billion euros, roughly the same amount as the Pandemic Crisis Support. The Recovery and Resilience Facility stands out, however, for two reasons: first, by the fact that part of its budget will go to grants rather than loans; and second, by its much longer time horizon.

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Sweden and Covid-19: No lockdown doesn’t mean no recession

in Covid 19 crisis, Economic growth, Sweden

By Magali Dauvin and Raul Sampognaro, DAP OFCE

Since the Covid-19 pandemic’s arrival on the old continent, a number of countries have taken strict measures to limit outbreaks of contamination. Italy, Spain, France and the United Kingdom belatedly stood out with especially strict measures, including lockdowns of the population not working in key sectors. Sweden, in contrast, has distinguished itself by the absence of any lockdown. While public events have been banned, as in the other major European countries, there were no administrative orders to close shops or to impose legal constraints on domestic travel[1].

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Germany on the slippery slope of the research tax credit

in Covid 19 crisis, Germany, Investment, R&D

by Evens Salies and Sarah Guillou

After years of hesitation, the German parliament has just introduced a tax scheme to promote investment in R&D. The decision precedes the Covid-19 crisis, but it may well be heaven-sent for German business.

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How to spend it: A proposal for a European Covid-19 recovery programme

in Covid 19 crisis, Europe (en), Investment, Monetary policy

Jérôme Creel, Mario Holzner, Francesco Saraceno, Andrew Watt and Jérôme Wittwer[1]

The Recovery Fund recently proposed by the EU Commission marks a sea-change in European integration. Yet it will not be enough to meet the challenges Europe faces. There has been much public debate about financing, but little about the sort of concrete projects that the EU should be putting public money into. We propose in Policy Brief n°72 a 10-year, €2tn investment programme focusing on public health, transport infrastructure and energy/decarbonisation.

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The COVID-19 crisis and the US labour market: Rising inequality and precariousness in perspective

in Covid 19 crisis, Uemployment, United States

By Christophe Blot

In the United States as in France, the COVID-19 crisis has led to numerous measures restricting economic activities intended to limit the spread of the virus. The result will be a fall in GDP, which is already showing up in figures for the first quarter of 2020, and which will be much steeper in the second quarter. In a country noted for its weak employment protection, this unprecedented recession is quickly having repercussions on the labour market, as reflected in the rise in the unemployment rate from a low point of 3.5% in February to 14.7% in April, a level not seen since 1948. As Bruno Ducoudré and Pierre Madec have recently demonstrated in the case of France, the current crisis in the United States should also result in heightened inequalities and insecurity. And the shock will be all the greater in the US since the social safety net is less extensive there.

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What can we learn from the Finnish experiment with a universal income?

in Social inequality, Uemployment

By Guillaume Allègre

Between 2017 and 2018, Finland conducted an experiment with universal income that gave rise to significant media coverage. 2,000 unemployed people receiving the basic unemployment benefit (560 euros per month) received the same amount in the form of unconditional income, which could be combined with income from work for the duration of the experiment (2 years, not renewable). On 6 May 2020, the final report evaluating the experiment was published (here is a summary of the results). The evaluators concluded that the experimental universal income had moderate positive effects on employment and positive effects on economic security and mental health. According to the final report, on average individuals in the treatment group worked approximately 6 additional working days (they worked 78 days). They experienced significantly less mental stress, depression and loneliness, and their cognitive functioning was perceived as better. Life satisfaction was also significantly higher. The results of the experiment therefore seem to argue in favour of a universal income. But is it really possible to draw lessons from the experiment with a view to generalizing the system? In 2018, I wrote that experimenting with universal income was “impossible“. Does the Finnish experience contradict this claim? It turns out that it is indeed difficult to draw lessons.

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It seems like it’s raining billions

in Covid 19 crisis, Economic growth, Euro area, Fiscal policy, Monetary policy

Jérôme Creel, Xavier Ragot, and Francesco Saraceno

The second meeting of the Eurogroup did the trick. The Ministers of Finance, after having once again laid out their divisions on the issue of solidarity between euro area Member States on Tuesday 7 April 2020, reached an agreement two days later on a fiscal support plan that can be put in place fairly quickly. The health measures taken by the Member States to limit the spread of the Covid-19 pandemic will enjoy better short-term financing, which is good news. The additions to Europe’s tools for dealing with the crisis will be on the order of 500 billion euros – this is certainly not negligible, and note that this comes on top of the efforts already put in place by governments – but this corresponds mainly to a new accumulation of debt by the Member States. The net gain for each of them, as we shall see, is actually quite marginal.

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Does the fall in the stock market risk amplifying the crisis?

in Covid 19 crisis, Economic growth, Finance

By Christophe Blot and Paul Hubert

The Covid-19 crisis will inevitably plunge the global economy into recession in 2020. The first available indicators – an increase in the unemployment rolls and in partial unemployment – already reveal an unprecedented collapse in activity. In France, the OFCE’s assessment suggests a 32% cut in GDP during the lockdown. This fall is due mainly to stopping non-essential activities and to lower consumption. The shock could, however, be amplified by other factors (including rises in some sovereign rates, falling oil prices, and capital and foreign exchange movements) and in particular by the financial panic that has spread to the world’s stock exchanges since the end of February.

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The Covid-19 passport and the risk of voluntary infection

in Covid 19 crisis, Inequalities

By Gregory Verdugo

Covid-19 has made it risky to have a job that cannot be done remotely and requires contact with the public. Given the danger of infection facing frontline workers, employers confront the risk of legal consequences in the event of insufficient protection. This new risk could lead to changes in the characteristics of the workers being hired, as the threat of lawsuits creates an incentive to discriminate by choosing workers who are least at risk for these positions. As long as the Covid-19 virus is in circulation, we could therefore witness the rise of a powerful new source of discrimination in the labour market based on the risk of serious infection. But according to some epidemiologists, the virus could be circulating and creating episodic outbreaks for 18 to 24 months [1], with the result that Covid-19 could leave a lasting imprint on the job market.

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The essential, the useless and the harmful (part 3)

in Climate change, OFCE blog

By Éloi Laurent

Is humanity a pest? For the other beings of Nature who find it increasingly difficult to coexist with humans on the planet, the answer is unambiguous: without a doubt.

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