The Great COVID-19 Divergence: Managing a Sustainable and Equitable Recovery in the EU

Post-Pandemic Recovery DOI: 10.1007/s10272-021-0983-8 Grégory Claeys, Zsolt Darvas, Maria Demertzis and Guntram B. Wolff* The Great COVID-19 Divergence: Managing a Sustainable and Equitable Recovery in the EU The COVID-19 pandemic has led to the biggest global recession since the Second World War. Forecasts show the European Union underperforming economically relative to the United States and China during 2019-2023. Southern European countries have been particularly strongly affected. Some sectors have been hit harder than others. Business insolvencies have, paradoxically, fallen. While total employment has almost recovered, the young and those with low-level qualifications have suffered employment losses. Inequality could rise. The pandemic may lead to lasting changes in the economy, with more teleworking, possibly higher productivity growth and changed consumer behaviour. Policymakers must act to prevent lasting divergence within the EU and scarring due to the fallout from the pandemic. The first priority is tackling the global health emergency. Second, the article warns against premature fiscal tightening but suggests additional short-term support to prevent scarring. Third, the article warns against protectionism and advocates for reforms that boost productivity growth further. The COVID-19 pandemic has led to the biggest global recession since the Second World War. Global GDP in 2020 was 6.7% lower than had been forecast at the end of 2019.1 Developing and advanced countries lost about the © The Author(s) 2021. Open Access: This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (https://creativecommons.org/licenses/by/4.0/). Open Access funding provided by ZBW – Leibniz Information Centre for Economics. * This Paper was prepared for the informal EU Economic and Financial Affairs Council (ECOFIN) meeting in Lisbon on 21-22 May 2021. The authors are grateful to Monika Grzegorczyk, Lionel GuettaJeanrenaud, Mia Hoffmann, Klaas Lenaerts, Ben McWilliams, Tom Schraepen and Pauline Weil for excellent research assistance and to Mario Mariniello, Simone Tagliapietra, André Sapir and Nicolas Véron for their useful comments. All remaining errors are our own. 1 Based on a comparison of the October 2019 and the April 2021 World Economic Outlook forecasts (IMF, 2019, 2021). Grégory Claeys, Bruegel, Brussels, Belgium. Zsolt Darvas, Bruegel, Brussels, Belgium; and Corvinus University of Budapest, Hungary. Maria Demertzis, Bruegel, Brussels, Belgium. Guntram B. Wolff, Bruegel, Brussels, Belgium. ZBW – Leibniz Information Centre for Economics same proportion of output relative to the forecast (6.7% vs 6.3%), yet the actual annual GDP decline was larger in advanced economies: a 4.7% recession in 2020 vs a 2.2% recession in 2020 in emerging and developing countries respectively. Among the big economies, China even grew by 2.3%, though its 2020 level of GDP was 3.6% lower than pre-pandemic forecasts. According to the International Monetary Fund (IMF, 2019, 2021), despite higher-than-usual growth as the global economy recovers from the COVID-19 shock, world output will still be about 4% lower in 2024 than pre-pandemic projections suggested. In other words, the global economy looks set to suffer from longer-lasting scarring effects that could permanently lower the path of output. Within the European Union, some countries have seen greater GDP losses than others. Some sectors have been harder hit than others, and there have been different impacts on the labour market depending on age, gender and education level. These differences are documented in the following section. Some of the intra-EU divergence may become permanent or at least long lasting, as discussed in the subsequent section. For example, GDP forecasts suggest that some countries, such as Italy, will reach their pre-pandemic GDP level only by 2023 while others, such as Poland, will 211 Post-Pandemic Recovery Figure 1 Real GDP forecasts as of April 2021: Cumulative growth for 2019-2023 Figure 2 Change in real GDP growth forecasts between October 2019 and April 2021 for 2019-2023 in % in percentage points <0% 0%-2% 2%-4% 4%-6% 6%-8% 8%-10% >10% 3.3 5.5 -2.5 -2.1 8.2 4.1 4.4 2.5 16.1 6.4 2.8 -0.1 6.1 China 23.4 -4.4 -3.7 -2.8 USA 7.8 -1.8 -1.9 -1.4 -2.6 2.3 Malta: 7.5 -4.5 -3.8 -2.7 -2.3 USA 0.6 -5.7 -3.4 -3.1 -5.1 -4.0 4.7 Malta: -8.2 -6.4 Note: Forecast EU27 cumulative growth for 2019-2023 is 4.1%. Countries in shades of purple are thus below the EU27 average, while those in green are above. Irish GDP numbers reflect the large role of foreign multinationals and should therefore be considered with care. Note: The difference between the October 2019 and the April 2021 forecasts for the 2019-2023 EU27 growth is -2.5 percentage points. Countries in shades of purple are thus below the EU27 average, while those in green are above. Source: Authors’ own calculations based on IMF (2021). Source: Authors’ own calculations based on IMF (2019, 2021). surpass it in 2021 already.2 On a sectoral level, the pandemic might lead to a different economy because of longlasting behavioural changes. gence within the EU. Figure 1 shows expected cumulative growth over this period, highlighting the economic underperformance of large parts of the EU relative to the US and China, and of countries in the Mediterranean and of the United Kingdom. As the EU emerges from the COVID-19 recession, important policy choices need to be made to prevent unnecessary long-term damage, facilitate the necessary sectoral reallocation, address the inequality effects of the pandemic and ensure a sustainable recovery. We analyse these choices in the final section. EU divergence According to current forecasts, from 2019 to 2023, the EU economy is set to underperform relative to that of the United States and China. There will also be diver- 2 212 -4.5 10.8 4.2 China -1.6 -1.4 -1.8 7.6 8.9 1.9 3.3 -2.9 9.0 -2.6 -2.9 9.4 3.5 9.7 2.9 3.1 -3.6 9.4 8.9 1.7 <-6% -6% to -4% -4% to -2.5% -2.5% to -1.5% -1.5% to 0% >0% There are different dates for the return to pre-pandemic level of output depending on whether we use annual or quarterly data. In this article, we mostly rely on the April 2021 IMF forecast of annual data, because that is available up to 2026, while the May 2021 European Commission forecast is available only up to 2022. For 2021-2022, European Commission forecasts are slightly more optimistic than those of the IMF, yet the Commission forecasts reflect similar cross-country differences as the IMF forecasts. The Commission also presents quarterly forecasts. For Italy, the Commission’s quarterly forecast suggests that output will return to its pre-pandemic level by the end of 2022, yet the Commission’s annual forecast indicates that Italian GDP in 2022 will not yet reach the annual 2019 value. The coronavirus pandemic has been one of the main drivers o (...truncated)