Mario Draghi's Warning to Europe Is Right On
The EU’s 750 billion-euro stimulus plan is a big deal. But
with so much lost ground to recover, more ambition is needed.
By Lionel Laurent
June 25, 2021, 6:45 AM GMT+1
Italy's Prime Minister Draghi issuing his warning on June 18
in Barcelona
As the European Union’s leaders gather in Brussels this week
to take stock of the bloc’s response to the Covid-19 pandemic, the feel-good
narrative is gathering steam.
The shambolic start to vaccine distribution is a distant
memory, with about half the EU’s population having received at least one dose.
Cafes, restaurants and retailers are filling up again in Paris, Berlin and Rome
as lockdowns are lifted — albeit with a wary eye on the Delta variant. And an
unprecedented 750 billion-euro ($895 billion) coordinated stimulus package
proposed a year ago is now reality, with European Commission boss Ursula von
der Leyen embarking on a victory lap of the region’s capitals as national
spending plans get approved.
Yet for all the confidence in the rebound that’s underway,
Italian Prime Minister Mario Draghi’s warning last week that Europe needs to be
even more ambitious on future spending — calling for all-in stimulus in the
face of “protracted uncertainty” — is one that should be heeded as the euros
start to flow.
Europe Lags Behind
Estimated number of years (from Q4 2019) to return to
pre-pandemic GDP
The focus so far has understandably been on pulling out all
the stops to stabilize the economy and preserve jobs as much as possible. The
scale of the pain has been huge, with the EU hit by a record 6.1% gross
domestic product contraction last year. Hence the “whatever-it-takes” mentality
that’s slain a lot of sacred political cows, from the suspension of
deficit-limit rules to the launch of jointly-issued EU recovery bonds.
Yet now the pandemic’s longer-term economic effects are
hovering into view, from the heavy
burden on younger generations to the urgent need to prepare for the disruptive
pace of technological change — and that’s where Europe’s lag in terms of
growth potential and investment is worrying.
OECD data suggests that while the U.S. economy is now back
to pre-pandemic levels, as is China, it’s a different picture across the
Atlantic. Germany is six months away from pre-pandemic GDP, Italy and France
about a year away, and tourism-reliant Spain about two years away.
This matters for the strength of the recovery. As a whole,
the euro area will likely still be below its pre-Covid growth trend in 2023-24,
according to Bank of America economists. That will have an impact on
confidence, employment and demand. It also stores up some future fights: While
Draghi is trying to keep complacency at bay with calls to keep spending to
create a “self-sustaining” rebound, Germany’s Armin Laschet — the front-runner
to succeed Angela Merkel as chancellor — is calling for a reinstatement of
deficit rules as soon as the pandemic is over.
The emphasis should be on doing more, not less. Incoming EU
stimulus plans are certainly a big deal in terms of confidence and investment:
Bloomberg Economics estimates the program will deploy funding equivalent to
almost 1% of euro-area GDP every year from 2022 to 2024. But we don’t know how
much of what’s on offer will be spent fast. That’s dependent on countries’
ability to launch projects and get approval, or whether the end economic effect
will undershoot expectations. Time is of the essence, given it’s taken the EU a
year to get to this point.
On top of the risk of a widening gap between the EU and the
U.S. — whose economy is deemed to be “on fire” — there’s the need for
massive reallocation of resources to protect workers left behind by a shift
away from fossil fuels and an acceleration of automation and technology.
The EU has plenty of Airbuses but not so many Amazons or ARM Holdings.
The bloc has also regularly failed to hit its own targets for research and development, set at
3% of GDP. It will need to invest more to compete globally, Pictet Asset
Management economist Sabrina Khanniche has warned.
One example is digital infrastructure like superfast and
mobile networks. A Deloitte review of 20 EU countries’ stimulus plans published
this week estimates only about 46% of funding needs through 2025 is currently
covered, or just under 100 billion euros. This doesn’t include private-sector
spending, nor does it cover all countries’ spending plans. But as a
back-of-the-envelope estimate, it suggests in theory there’s room left over to double current spending plans in tech
infrastructure alone. Another is the need to re-train workers: The study
also warns that the spending plans are estimated to miss the EU’s target of
having 80% of adults with basic digital skills by 2030, ending up closer to
58%.
These may seem like far-off issues. But Draghi’s warning
comes from experience: It took a decade for Italian GDP to recover from the
2008 debt crisis. The past combination of underinvestment, pressure to cut
public spending and rising debt levels serves as a cautionary tale.
The EU deserves credit for its pandemic action. But when
leaders return home from Brussels, they’ll need to keep channeling that
“whatever-it-takes” spirit for some time.
This column does not necessarily reflect the opinion of the
editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Lionel Laurent at llaurent2@bloomberg.net
No comments:
Post a Comment