Of recovery, sustainability and scarring in a Eurogroup setting

by Antonis D. Papagiannidis

“Steady as you go” was the prevailing mood at the Eco/Fin – Eurogroup meeting in Lisbon, where Finance Ministers debated the policy mix expected to guide the next steps in the post-pandemic era in Europe. The fact that Central Bank Governors joined the meeting later on shows the lesson has been learned, that monetary and fiscal policies have to go hand in hand – just as they did ever since the consequences of the coronavirus outbreak were fully realized, mid-2020. Christine Lagarde’s emphatic caveat that support measures should in no way be withdrawn too early for fear of seeing less resilient economies tank under, but also calls that fiscal policy/Finance Ministers assume their part and not rely excessively on the relaxation of monetary policy – such warnings were on everybody’s mind in Lisbon.

Eurogroup chairman Paschal Donohoe, summing up the debate of the ministers was “positive with the progress we have made” in facing the coronavirus situation, since “we can see a recovery taking hold”. But in the very next step of his comments he talked of “great challenges”, which mainly consist in the “risk of scarring, the risk of damage from the pandemic in our societies – and on the balance sheets of employers”. The real challenge is for the recovery to be sustainable – and for this to be convincing, the next semester would have to bring about a consensus on the “right budgetary policies”, which translates in getting the balance right between continuing support (to businesses and to individuals), but all the while shifting from an across-the-board approach to support measures through more targeted policies.

Shifting our focus to the positions taken in the Eurogroup session by Greek Finance Minister Christos Staikouras, much was made of the fact that the 2021-22 forecasts of the European Commission are turning more positive (especially since the impact of NGEU-funded investments and reforms are factored in). Which entails that, the quality of public investment to be undertaken and the pace of innovation in the private sector will be of major importance. Furthermore, the earnest debate over the overhaul of the Stability and Growth Pact of the EU should take place in the very next months, so as to set up a system better suited to face shocks and ensure the long-term sustainability of public finances.