Abstract
This article argues that the incomplete economic and institutional integration of the euro area has exposed the monetary union to increasing economic divergence, which could be deepened by the COVID‐19 crisis. We discuss how monetary and fiscal measures implemented at the onset of the pandemic have contributed to mitigate the economic consequences of lockdowns, but provided limited insurance to narrow economic gaps across member countries. However, EU countries agreed on July 21, 2020 to develop, for the first time, countercyclical fiscal transfers financed by common debt issuance. We discuss the potential of this instrument to contribute to improve the resilience of the eurozone.
Highlights
A decade after the eurozone sovereign debt crisis that almost led to the break-up of the monetary union, the euro area is facing another threat, with the COVID-19 pandemic leading to the most severe contraction of output ever recorded
The severity of the recession and the strength of the recovery could differ across euro area countries for three main reasons: Some countries were affected by the pandemic earlier than others; some countries rely more on sectors that have been heavily affected by the pandemic; and some countries have more policy space to react to the crisis
The European Central Bank (ECB) has been the main European institution providing countercyclical economic stimulus and maintaining the integrity of the monetary union over the last decade. This contradicts the optimum currency area literature which generally points to the irrelevance of monetary policy to address idiosyncratic shocks in a currency area, but the ECB managed to adapt its toolkit to make up for the lack of effective risk-sharing mechanisms in the euro area
Summary
A decade after the eurozone sovereign debt crisis that almost led to the break-up of the monetary union, the euro area is facing another threat, with the COVID-19 pandemic leading to the most severe contraction of output ever recorded. There is much debate about the nature and pace of the recovery that may ensue. The ECB has been the main European institution providing countercyclical economic stimulus and maintaining the integrity of the monetary union over the last decade This contradicts the optimum currency area literature which generally points to the irrelevance of monetary policy to address idiosyncratic shocks in a currency area, but the ECB managed to adapt its toolkit to make up for the lack of effective risk-sharing mechanisms (both public and private) in the euro area. Anchoring the facility under a suitable democratic mechanism could empower the European Parliament and could provide the required legitimacy to monitor the effective allocation of the funds under this facility Overall, this initiative might not be the swift instrument to lift economies out of the recession and to restore a level playing field in the single market, but it still represents a critical commitment to economic integration and cross-country solidarity in the EU
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