Toward a Sustainable Recovery
The conventional narrative about the course of the COVID-19 crisis is easy to understand, but ultimately incorrect. Rather than a cleanly schematic multi-phase process of emergency response and recovery, the crisis demands a comprehensive approach in which short- and long-term goals are aligned from the beginning.
PARIS – With countries in most of Europe progressively easing their COVID-19 lockdowns, it is time not only to chart a course out of the immediate crisis, but also to hold a much-needed debate about designing and funding a long-term plan for sustainable recovery.
As we do so, we first must acknowledge that the intellectual framework with which we first responded to the COVID-19 shock is deeply flawed, even if it did help push governments to action. At the moment, the political debate is still structured around the assumption of a four-phase response: crisis management (for the public-health emergency); exit (rescuing and then “reopening” the economy); recovery; and, finally, a “new normal.”
But reality is never as neat as our intellectual constructs. We are traveling down an extraordinarily bumpy unlit road. Governments are still groping in the dark for policies to navigate the crisis. The European Union and most national governments have introduced massive rescue packages that will have a profound impact on the shape of the recovery, without yet having a clear view of what that recovery should look like.
One might argue that such lack of foresight is unavoidable in the heat of the moment. In fact, it is more important now than ever. As governments look for the fastest route back to normal, they are increasingly running into competing demands on public resources. As businesses, sectors, and political constituencies fight over the spoils of government spending, confusion is setting in.
By mixing up the phases and their respective objectives, we run the risk of never formulating a proper recovery plan. The way things are going, we could instead end up with a series of rescue packages that will consume all available fiscal resources. If these policies ameliorate only the short-term economic losses caused by the lockdown but amplify larger economic, social, and environmental risks, the new normal will merely look like a degraded version of the pre-crisis status quo.
A Rescue Without End?
To be sure, the COVID-19 pandemic required that health be put first at all costs. The lockdowns have been necessary, and their socioeconomic consequences have called for decisive action by governments. The wide divergence in COVID-19 death rates among European countries has revealed differences in how governments fund and organize their health systems (as well as some societies’ apparent social and political preferences). Likewise, the divergence in the pandemic’s socioeconomic effects points to the strengths and weaknesses of each country’s welfare state. There will be a time to consider, debate, and draw lessons from these differences as we emerge from the crisis.
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Nonetheless, there is reason to worry that the exceptional measures taken to deal with the crisis will be captured by organized interest groups defending the status quo, who will use the response to undermine social protections, labor regulations, and environmental rules now and into the future. Indeed, there are signs that this is already happening. But these demands from business groups do not represent a majority viewpoint, as many private-sector leaders have asked that governments align their policies with companies’ long-term strategic priorities in a decarbonizing world.
Defenders of the status quo are exploiting the fact that companies and their employees absolutely need a rescue package. Policies to maintain employment and household incomes are clearly the most effective way to ensure that the temporary shock from the pandemic does not become a prolonged downturn, with all the destruction of human, physical, and financial capital that such a scenario would entail. Moreover, rescue packages had to be non-discriminatory, at least initially, to ensure that no one was left behind, even if it meant that some powerful, entrenched economic players received support in the short term. But after the immediate emergency has passed, policies should become more discriminating. The focus should shift to rebuilding the economy in a way that will protect its participants’ wellbeing in the future.
These issues are most visible in the case of bailouts. Because it will take time to develop and deploy a vaccine, any exit from the lockdown will have to be gradual, which suggests that many companies will need support in order to survive. In Europe, this is especially true for three key sectors: airlines, car manufacturers and their suppliers, and the tourism industry. Given the highly concentrated nature of the car and airline industries and the large number of workers who directly or indirectly depend on them, European governments have been inclined to purchase these companies’ shares directly, with some even pursuing temporary nationalization.
By stepping in as a shareholder of last resort, governments could, in principle, require that companies satisfy certain social- or environmental-policy conditions. But, so far, most governments have refrained from doing so. They intend to sell their shares back in due time, so they do not want to risk lowering the market price in the short term, even if pressing for corporate and industry reforms might lead to larger long-term gains.
There is no tradeoff. Rather, there are underlying tensions between short- and long-term priorities across multiple, equally important, policy domains. And yet, there is no institution better equipped than the state to resolve the tensions that characterize economic, social, public-health, and environmental policies. Obviously, governments should not impose overly burdensome, counterproductive conditions on the private sector at the height of an emergency; but nor should they ignore their strategic roles in developing a long-term vision for the economy and protecting their citizens from the effects of climate change.
The task, then, is to find a middle way, designing bailout conditions that will reliably lead to a sustainable recovery when combined with broader regulatory frameworks and macroeconomic and social measures. Supply-side rescue packages for specific firms or sectors will be effective only if they are supplemented by demand-side policies to maintain employment and incomes.
Clear Funding Options
While bailouts are the most visible part of governments’ rescue packages, they are not the most important. A much larger concern is macroeconomic policy, which must be aligned with longer-term social and environmental objectives. With interest rates already near or below zero long before the pandemic, the space for conventional monetary policy has been limited, and the burden has been on governments to create fiscal space in the event of a crisis. Now that the crisis has arrived, rescue and recovery policies must be designed in such a way as to achieve maximum effect before public money is exhausted. The recovery plan must transform the crisis into an opportunity to address looming structural issues, and it must do so quickly, while avoiding the mistakes of the 2008-09 financial crisis, when banks and corporations were put first.
Early in the current crisis, European leaders once again veered toward the false debt-versus-austerity narrative that prevailed after the last crisis. Fortunately, the debate has shifted somewhat since then, as shown by the proposed Franco-German €500 billion plan for a European recovery fund. The focus is now on the questions of how to finance the recovery, what should be included in it, and who should benefit from it. So far, talks have centered on the financing question. There have been agreements to extend the EU Solidarity Fund, to make the European Solidarity Mechanism’s Enhanced Conditions Credit Line available unconditionally for health expenditures, and to roll out a temporary European Unemployment Reinsurance Scheme.
Meanwhile, options for financing the broader recovery are still being discussed. One major proposal envisions a new “recovery fund,” combining increased budget allocations and capital-market borrowing to finance investments in strategic and sustainable sectors (including through a scaled-up InvestEU program). This would also involve new instruments to help member states fund their recovery programs, and private companies to restore liquidity, supply chains, and capital. Leveraging private co-investment alongside state outlays will be critical.
While the Franco-German proposal is a big step in the right direction, and a potential game changer, it is still far from being a done deal. And there are some important criteria to consider when weighing the options that are now being discussed. The first is scale: hundreds of billions of euros will not do; a European recovery plan must envision spending and investment in the trillions. The second is speed. The current options for increasing the EU’s own resources and budget (which amounts to approximately 1% of GDP) – including proposed taxes on financial transactions or carbon emissions – are welcome and should be pursued. But it is not clear that they pass the urgency test.
While the financial mechanisms are important, the most pressing imperative is to decide on the actual composition of the recovery plan, which is what will actually determine whether the EU can achieve a sustainable and prosperous future. It is important to attend to this first – even before finalizing the details of the financial mechanisms – because it is precisely these discussions that will unlock negotiations among member states over funding sources.
The European Green Deal, unveiled by the European Commission last year, provides a clear investment roadmap for the EU’s post-pandemic recovery. Unlike in 2009, the transition to a resilient, sustainable economy that has achieved net-zero greenhouse-gas (GHG) emissions is now widely understood – by governments and investors alike – to be critical to long-term macroeconomic stability. The Green Deal, if well designed and implemented, can provide short-term economic multipliers and jobs, a clear path toward long-term sustainable growth, the basis for more equal societies, and a framework to strengthen European sovereignty.
The prevailing attitude during the last crisis ensured that the recovery was not clean and green, but rather dirty and brown. With only a few shovel-ready green investment projects on the table, high-carbon energy and transportation systems and other infrastructure were further locked into place. But we have come a long way since then. The need to achieve an equitable and GHG-free economy by 2050 is no longer seen as a marginal cause, nor is it any secret that the transition will require substantial investment.
By focusing on the issue of investment from the start, we can establish more sustainable forms of growth and reduce operational expenditures in the long run. This will require additional upfront expenditures to facilitate a shift to alternative low- and zero-GHG infrastructure and energy, but there is no better time than a recovery to institute such changes. The combination of low interest rates, unavoidable destruction of capital, and massive amounts of cash being injected into the economy creates ideal conditions to lay the foundations of a longer-term agenda.
The taxonomy for sustainable finance that the EU developed soon before the COVID-19 crisis started should now serve as a solid framework for guiding the recovery. Its central principle is straightforward: Serve at least one environmental objective, and do no harm to others. For member states and EU institutions alike, this should be the standard used for screening investment projects.
But playing defense is not enough. EU policies and instruments also must be mobilized and leveraged to accelerate the transition toward zero-GHG energy, construction, transportation, industry, and agriculture. Here, instruments such as green bonds and blended finance structures can help, as can tailoring the rules of the single market, state aid, industrial policies, the Common Agricultural Policy, and trade policy to align with sustainable-development objectives. For its part, the European Investment Bank also is well equipped to execute part of such a comprehensive plan, especially now that it has revised its energy lending policy accordingly.
The Moment of Truth
The EU entered this crisis in a position of relative strength. Unlike the United States, European safety nets can offer genuine protection against the socioeconomic effects of lockdowns and layoffs. But even more to the point, the new European Parliament and Commission already had a clear, widely shared political priority in the form of the European Green Deal. The importance of elevating the Green Deal to the top of the EU’s agenda may have been underestimated at the time, but is now becoming clear. In emerging from this crisis, Europe, for the first time, can put its ends ahead of its means.
In the midst of the crisis, the EU political debate fell into its traditional trap. Several Eastern European countries, such as the Czech Republic, asked to shelve the Green Deal. But the equilibrium of political forces is changing, and those leaders are now reconsidering this stance. The same is happening within large swaths of the European business sector.
More than at any other time in the last 30 years, the EU needs to have its priorities right. The overarching objective – a Green Deal – represents a new social contract. The aim is to ensure social justice and equal opportunities for all. The engine will be a new form of economic growth, built around providing goods and services that contribute positively to wellbeing and reducing those that harm society and the environment. These substantive objectives should guide the design of specific instruments such as fiscal policy and taxes, the single market, or competition, industry, agriculture, and trade policy – all of which will have to be overhauled.
The COVID-19 crisis is a make-or-break moment for the European Green Deal and for EU solidarity more generally. Either the Union will seize the opportunity, or it will demonstrate once and for all that it is incapable of rising to the challenge. Now, more than ever, we Europeans must demonstrate that we are stronger together.