EU Covid-19 Fiscal Response Leaves Economists Divided on Best Course


The U.S. economy is set to far outpace the eurozone this year, supported by a generous fiscal response to the economic crisis. This has prompted some European economists and even the International Monetary Fund to push for a stronger fiscal response from the EU, but leaders from the bloc have shrugged off these calls.

“Clearly, the fiscal response in the U.S. has been extraordinary in its size. But this is no reason to underestimate the efforts undertaken by the EU institutions and the member states,” Paschal Donohoe, president of the Eurogroup and minister for finance of Ireland, told The Wall Street Journal.

In its policy advice to European fiscal policy makers released last week, the IMF said there are potential benefits to redeploying a greater share of emergency fiscal support than what is implicit in current plans for European fiscal balances through 2022. If an additional 3% of GDP was put toward transfers to households, subsidies for hiring to reintegrate the unemployed faster, temporary investment tax credits to bring forward investment and equity support schemes for capital-constrained firms, the IMF estimates this would lift GDP by about 2% by the end of 2022. This could “more than halve the medium-term scarring,” it said.

The Biden administration has so far unveiled two fiscal packages totaling more than $4 trillion together, with a third one expected in April. Meanwhile, the EU’s 750 billion euros ($902.81 billion) recovery fund has been halted by Germany’s Constitutional Court. So far, the European recovery plan has only been ratified in 13 of the 27 member states.


“In short, the familiar European folklore is preventing action,” Axel Botte, global strategist at Ostrum Asset Management, told The Wall Street Journal. Therefore, outlays scheduled for the third quarter will be postponed to the fourth quarter in all likelihood, he said.

“Fiscal action must always be timely, temporary and targeted. The EU plan may not tick the boxes,” Mr. Botte said.

For French economist and member of the European Parliament, Aurore Lalucq, the European Recovery Plan was a step in the right direction by allowing European states to contract a common debt, but there is still a long way to go to have “a functioning economic area.”

“The EU still has no proper tax system and therefore no own resources and no real budget,” Mrs. Lalucq said.

Rubén Segura-Cayuela, Europe economist at Bank of America, said the European response wasn’t ambitious from the start. It was smaller and slower than the initial fiscal response in the U.S. Furthermore, the bulk of the 2020 emergency response in Europe was intense in liquidity and loan guarantees, whereas the pandemic created solvency issues, which require cash, Mr. Segura-Cayuela told The Wall Street Journal.

However, what Mr. Segura-Cayuela sees as a mistake in the European response to the crisis, Klaus Regling, managing director of the European Stability Mechanism, sees as an advantage.

Europe is doing a lot more than the U.S. in providing additional liquidity support to firms, through government guarantees, Mr. Regling said. In Europe last year, it was 17% of GDP, while in the US it was only about 6%- 7% of GDP.

“This stimulates bank lending and economic activity, which is particularly relevant for Europe, as the economy is more heavily dependent on bank lending than the U.S.,” Mr. Regling told The Wall Street Journal.

The European response has focused more on strengthening supply, by increasing investments and incentivizing structural reforms, instead of strengthening demand as in the case of the U.S., relying on direct transfer payments. But supply-focused measures at the EU level are complemented by national government measures put in place to strengthen demand, typically aimed at minimizing lasting damage to the economy, supporting companies and enabling workers to keep their jobs, Mr. Regling said.

“I would argue that with the recovery and resilience fund, the EU’s response is more long-term focused on the supply side of the economy, than the U.S. measures so far. This means that fiscal support in the EU will be more even, spread out over several years, and will therefore have a longer-lasting positive impact,” Mr. Regling said.

Mr. Donohoe, president of the Eurogroup, said the Next Generation EU package is designed to not only rebuild, but fundamentally transform European economies through investment and reforms so as to support the green and digital transitions.

“More importantly, the fact that EUR390 billion of this program will be made up of grants funded by temporary common debt demonstrates the unity among member states to ensure that the most economically affected are supported,” Mr. Donohoe said.

Write to Maria Martinez at