Union Economic Policy response due to the covid19 crisis. Well also catch up on the European Union, European Commissions broader Economic Policy agenda as we hopefully recover from the crisis, its evolving fiscal institutions and its management of the european macro economy. So it should be an interesting conversation, particularly of particular importance given the worldwide economic crisis weve suddenly found ourselves in. Let me introduce my guest today. As i said, director general for Economic Affairs in the European Commission prior to his current job, he was for reform support and well touch on that as well, i imagine and prior to that he was Deputy Director general for economic and financial affairs. And did work extensively on the funds which well talk about as well. And anyway, with that introduction out of the way, i wanted to start out by just talking about the pay in which the crisis has unfolded over the past few months in europe and especially what actions have been taken to deal with the crisis both if you wanted it on the Public Health side and especially on the Economic Policy side of things to deal with the crisis or since the beginning of the year, january, february, up until now and then afterwards, we can talk to the we can turn to the policy response and the outlook today, the economic for the european economy. So please, go ahead if you want. Set the stage for us. Yes, okay. Well, thank you very much for having me with you. And good, i suppose its good more no, good afternoon, what is it in new york . Good morning, 9 a. M. In washington d. C. Speaking with you in brussels where martin is calling in from. Sorry about that. No, let me indeed start by saying a few words on the economy and the response to the eu response to it. Like i would say almost every other part of the globe, that the eu has been hit hard by the crisis. I think we were a bit ahead in many ways of the u. S. And so, in our case the crisis started in ernest towards the end of february with very severe lockdowns from early march, march onward. Now, clearly, this had a major impact on the economy of the eu and on the Economic Outlook. So weve seen major, major drop like elsewhere in production, in services. In particular in the end of the First Quarter and in the second quarter. Now, in early may we came out with the spring our spring forecast for this year where we projected a decline of the eu economy of around 7 1 2 , which is far, far more severe than weve seen actually in the Global Financial crisis. And to be followed by relatively strong rebound in next year, but even so, we would anticipate an incomplete recovery. Now, already at the time of t the our spring forecast, we noted a number of key downward risks and we said look to the risks, they are tilted toward the down side and as a matter of fact, some of these risks we have seen materializing since then. So for starters, the external environment turned worse than we had expected in spring and you can see that also that notably weve seen that emerging emerging economies stronger hit by the pandemic than we anticipated at that point in time, but also very importantly, the lockdown period lasted in the end longer than we had anticipated, so in our baseline scenario, we expected 6 of a lockdown period of around six weeks. In reality closer to eight weeks, on the Positive Side and that brings me in the policy response, we have seen an eu policy response stronger than we anticipated for the spring forecast. Let me say a few words on that. To the global crisis, one can say the policy response in the eu at all levels has been much faster and much bolder than we had seen before. Thats started with actions by the ecb, but to be followed very, very quickly by also bold action at the level of the Member States. So by now, we have seen discretionary fiscal measures to the tune of about 4 of gdp at the level of the Member States and Member States have taken liquidity measures to the tune of 27 of gdp and these measures were actually very rapidly complemented, also, by a number of quick reactions at the eu level. So in a few weeks time we flex the existing eu budget which freed up, i think, around 60 billion in underutilized resources which could be used instantly for the crisis. We reached relatively quickly an agreement on a different use of our then the european facility, mechanism facility and also on the guarantee fund managed by the eib. And this was done all quickly and then i should mention one instrument that we have proposed ourselves, its ability to support Member States in the financing of their shortterm work. So it was a ens instrument to the tune of 100 billion, too. This we did relatively quickly, and then, im sure, were going to talk about that. That was actually before the commission put on the table its proposals for Recovery Plans for europe. So all in all so before we go down that route i wanted to go back to something you said about fiscal policy makers and the Member States which have been significant, not quite as large as a share of gdp is here in the u. S. , but same order of magnitude, basically. So there, normally, of course, Member States of the European Union are constrained in what they are allowed to do on fiscal policy side of things under the civility and growth class crystal compact rules. Can you talk a little about how those rules have been adjusted for the Current Crisis . Because i think, you know, here in the u. S. A lot of states, for example, have balanced budget requirements and dont have much leeway to respond to a crisis, those are constitutionally mandated within the states. The states dont have this kind of leeway at all i think within the European Union context they normally dont either, but in this extraordinary moment a lot of the usual rules have been waived. As i mentioned on the fiscal policy front, in terms of the legality of state aid and restriction of Free Movement that normally would not fly, can you talk a little about that side of the policy response in way basically its deregulation in some sense. Well, thanks for bringing it up and happy to do so. Let me also first, first before i go there, make one point that compared to the u. S. , the automatic stabilizers in the eu are actually bigger. So i think if you will probably add up the two, i doubt that the difference would be actually that is is aside. But youre absolutely right, under normal circumstances Member States would not be allowed first to support on this their enterprises because they would fall on the state regime, but different the given the severity of the situation and the emergency, we have very quickly flexiblized on a temporary basis our state rules and the ability for Member States to provide to corporate and this actually has been very important because its allowed, for example, to provide support in the form of these shortterm work which in a way support to corporate and that has a very, very mitigating impact on employment numbers so that one, it allowed for the liquidity facilities that ive just mentioned, which helped corporate survive over this period. Similarly, we have indeed under we had rules in place for that con strain Member States in their fiscal policy, not effect on the balance in the states, but normally there is a constraint and we have triggered something thats called the general escape clause, which is actually meant for situations like this, that if we are in a generallylized economic and severe down turn, then the council and the proposal of the commission can decide to at least suspend some of a part of the of these rules. Which in practice means that Member States have a greater degree of freedom in terms of responding to that situation so thats where we have been over the past few months. You mentioned briefly your spring outlook for gdp. Obviously obviously what were seeing around the world and then i think the 2021 rebound will probably be some of that, but obviously, thats more uncertain even than this years development. I wanted to ask you if you can give a broader sense of the macroeconomic situation as it is now. Sort of union wide. One big difference and you alluded to it with the u. S. Is that employment is significantly lower than it is in the u. S. Because of various labor market institutions that many European Countries have, that the u. S. Just doesnt really have. I think that it really is a key difference, i think, between the two economies and then i was also wondering if you could maybe go into a little more detail and obviously, still currently to know where things are going to go, if we can talk a little about the situation in spain and italy that were hit hardest at first and then perhaps also about the situation in sweden which received a lot of attention in the u. S. Because of its sort of looser approach to the lockdowns and to the Public Health situation. And again, maybe its too early to really issue a clear verdict on how that washed out, but i was wondering if you could talk a little about the situation and the labor markets and then about the three countries. Okay. Yeah, a few points on this. Youre right that the impact so far on the labor market has been rather benign. Compared to the u. S. , but more generally and certainly, also, if you consider the drop of t the of gdp or of production. Now, there are a number of there are a number of explanations for that. One i alluded to already, the shortterm work teams which, well, which existed already in quite a few Member States, but in the crisis new ones have been created. Social distance is now becoming a dominant model in the eu. There are, however, also a number of statistical issues and regulatory issues that play into this. So in order to be an employee you need to be available for the labor market, which is a problem in the lockdown situation so there is a bit of a distortion probably coming, also coming from there and a number of countries, i think, have introduced sort of a moratorium on the forced job losses. So if you look at the number of the reduction in the hours worked, actually, clearly you see a much bigger impact than if you look at simply i see, so a big chunk of the people are unemployed in the u. S. Are people on temporary layoffs. So they would in many cases not be counted as unemployed in so you need to take that into account. Now clearly a policy choice thats been made here, which i think in a different policy choice thats probably being made in the u. S. , is to maintain the connection between as much as possible between the people and their company or institution where they work. Now, having said all this, we would expect unemployment to go up further in as we go, as we go along, and so, we would anticipate a bit of delayed effect, but not to the expect that weve seen unemployment in the u. S. Now, also, on the shortterm of the work coming up tomorrow, actually, with a new forecast and interim forecast, i cannot tell you what that will be, but i was explaining these different downward risks that partially have materialized and i think you can deduct from that, the picture doesnt look better. And so, we will not surprise on the upside with this forecast. And as a matter of fact, most institutions that have come after our spring forecast have come in with worse figures than and now turning to spain and italy. Both spain and italy, they have been particularly hard hit by the crisis, by the pandemic. This is partially maybe bad luck, but this is also to a large extent has something to do also with the structure of the economy, with the very large part of it dependent on tourism and tourism measure which are clearly particularly hard hit by the pandemic. And again, in our spring forecast we anticipated a drop in gdp of bigger than 9 for both countries and again, im afraid that we will not on the upside there, too. Clearly with very big impact on our resulting in the big impact also on the government finances, which we see across the board in the eu, but given the size of the drop of gdp in spain and italy, its more pronounced there than elsewhere. That said, and this is a bit true for all countries, also for them, it is most of the measures that they have taken, they are one off and we would expect with dd with the return to growth that also the we would expect their positions quickly. And clearly, the debt levels, notably for italy, a bit more than for spain. This is clearly not not good news. So on that point, how do you how does the how does the union transition back into its fiscal rules . How does that work . Because obviously theres a shock to the is there a time when they come with full force or subject to the no timeline has been fixed for that also for a very good reason. Because still at this point in time you will recognize that from the situation in the u. S. Theres an extremely high level of urgency and that is completely linked to the trajectory of the virus. So we seem to be on our way out, which is things look definitely much better today in europe than they did, lets say six weeks ago. But sadly, one can the virus has been around so one cannot rule out the reemergence of the virus which can lead to reime position of lockdown measures or partially locked down. So as long as given the fact that this uncertainty about the recovery is so big, it would also be very difficult for us to make recommendations on what would be the right fiscal trajectory in the current circumstances. So the commission has decided to wait a bit longer to see what the developments will look like. At the same time, what is also very, very clear that given t the given the shock to the system and given the fact that also next year and for certainly for spain and italy, also, the years thereafter we will still be below the 2019 levels, suggest that may not be the best time to impose austerity. So, we, from the commission side, we would see continued need for fiscal for fiscal support in the time to come, but in a prudent way and taking into account, clearly, the at that point in time and last point i want to emphasize again is given the fact that most of these measures are of a temporary nature, we will have in a way, sort of an automatic reversal of fiscal policy simply by not if Member States do not extend these temporary measures. Over to you. All right, i had a brief interruption here on my internet connection. As we joked preconversation, perhaps time for a stimulus package for Rural Broadband here in the district of columbia. Right. Its worse every day. So the before we go to the current global discussion about the Recovery Fund, i wanted to did you talk about credence no. I missed a few seconds and then go to the Recovery Fund. Sweden chose slightly different approach than some of the other Member States, even though i think one should also say its not, not black and white. I think the also the, i would say the geographical circumstances in sweden you cannot compare to the geographical circumstances in lets say cities like paris. So there you need to take these, also these differences into account and in reality, there have been differences in approach between all between all Member States, also depending on the, yeah, on actually the severity of the of the pandemic, but the overall impression is that sweden has followed a lightly more loose approach than some of the other Member States. Now, i think it would not be for me, i think, to pass judgment on that. I think that i want to i mean, one can see, i think, but i need to be a bit careful. I have not looked very specifically at the numbers, but the number of seems to be somewhat higher in sweden than the neighboring countries which has attracted discussion. And i think its too soon to tell, to see how that will play out in the end. Some of the neighboring countries, they have been able to relax quicker. They were more severe in first instance and were able to relax a bit quicker. For sweden, its a bit longer, now, that has helped them, i think, a bit in the initial Economic Impact, which has been relatively mild, i think, in sweden compared to some other countries. At the same time, one can only pass judgment on that or, well, at the end, at the end of the day, if all costs are being counted and i think that simply too early for that. So one last when you mentioned external risk earlier in your assessment of the Economic Outlook for the eu and obviously, the u. S. Is now on a very different trajectory in terms of the threat of the disease. Is that something that feeds into our concern there as well that the u. S. Will just not recover as fast as i think people were hoping three months ago . Yeah, no, but that clearly if that were to be the case, the u. S. Being a big market, that would have an impact as i was mentioning the overall our assumptions around the external side and the u. S. Is part of that. Even though, we already at the time of the spring forecast we could see that the u. S. Was trailing behind. So, i think we have captured quite a bit of that already in our spring forecast and, but clearly, if the u. S. Would follow a completely different trajectory than europe and china have done so far, then that would be bad news for the World Economy and also for europe. All right so now lets go from the current situation, really, to the future. The first thing i want to talk about, obviously, is the proposed Recovery Fund with that would be financed in some way or another through the issuance of that the union as a whole is responsible for. Its been presented, really, as a watershed moment in some of the press conference here in the u. S. That is of course also encountered a lot of opposition from the European Union especially from the four which are shared homeland of the netherlands is one. Can you talk about what the current proposal is, given the size and where you think that process is going . And with the understanding that, obviously no, what the commission has proposed and has asked for is essentially, an authorization to borrow up to 750 euros to channel 500 billion of that to eu Expenditure Program and channel another 250 billion of that into a long facility for Member States. And now that is in many respects a novel proposal and now just to make one thing clear, its not the case that is new for the eu to borrow. We were doing that on a regular basis, but what is new is that we borrow to spend and thats something that has not been done before. Normally if we borrow, then we unlend it back to back to Member States for certain purpo purpose. Now. I think that this is the key novelty, not so much of the issuance itself, but through the Expenditure Programs. Now, the bulk of this money sorry to disrupt. So youre not saying that its novel because there are bsm in place and but even borrowing against the eu budget we have done before, but what is new is the side is and that really is important to give people a sense, 750 billion is five times the annual budget of the eu. Yes. Yeah, so, its yeah, so it is massive in terms of size and so its about twice that of dppd which is a lot, actually. And so its the size and its the fact that we incur debt at the union level to pay for it and to be precise, what do we want to do with this money . Its mostly to use it to Fund Investments and the central not the only program, but the Central Program in this, the socalled recovery resilience facility which would provide 310 billion in investment grants and 250 billion in investment loans to Member States to finance programs of reforms and investment and this is what were trying to do. Were trying to look for combinations of reforms and investments that well, first of all, help us to speed up the recovery. Thats very important, but also to transform the structure of the economy and to make the economy greener, smarter, as we say, more digitalized and also resilient. Now, why this, why did this package, was this package put forward . And i think one very important reason for this is that we saw that and in a way, you touched on it by pointing to italy and spain, that even though this crisis is almost by definition of a symmetric nature, the implication are not symmetric at all. So some countries are hit harder than other countries and the sad reality is actually that a number of the countries that have been hit the hardest are also the countries that probably have either least resiliency so we need something at the central level, but it needs to be big to make sure that these divergences that were already there before the crisis, that they will not widen, that they will be that they will be reduced and that, and thats the last point that i would say, that that is also very important for the functioning of our internal market and then maybe also to our shared home country. I mean, the country that likes to export had a lot, but clearly, its a part of the market, if theres no demand, theres nothing to export. So we very much believe that we have a common interest to emerge together from this crisis. So there are theres obviously, theres a number of concerns that people expressed about this, this kind of development and i guess the first one would be that it will be difficult to restrict this effort just to the response, as you mentioned, theres divergence in growth across Member States that predates the crisis and theres no reason why that would disappear after the crisis. And so if you start trying to massage that away with large money flows from the union, youre going to end up in a situation where those flows will become permanent and theyll just be an additional layer on top of Structural Reforms or structural funds or whatever people, you know, dont like about the sort of distributional functions of the union. What would you and so, i dont know, maybe the commissions view is that there should be more of a permanent flow of Investment Funds for, you know, for italy and spain and other countries, but to the extent that countries are concerned, and Member States are concerned about that, what do you tell them . And obviously you know well, i know perfectly well these concerns and ive spent actually the best part of my career in fans, finance and probably know better than anybody these concerns. Now, what would i tell. Well, first of all that the proposal that we have made for the its a bit technical, but to change the resources decision. So the authorization to borrow comes from there, but the way this proposal is formulated and drafted, the option that we ask for is of a temporary nature and that will be assured by the process, because this decision will have to be rectified by all parliament in europe. So even if people in the commission were to say, well, we want to extend this beyond this is simply not possible because parliaments, in the first one, in the country that you mentioned, they would not go along with an extension for no purpose. So, there is a very strong legal lock on the door that can in no way be broken by the commission against the will of all Member States. So it doesnt get any stronger than that. Now, and the reason, again, that we have come forward, and i think also, the reason why generally this time around is supporting it is in recognition and the realization that this is really a unique situation and we have learned from previous crisis that if you try the problems dont go away by themselves. And the approach during the Global Financial crisis and during the europe crisis in europe has often been too little too late. Now, i think its bad luck that were again in a crisis, but i think the good luck is that there are still sufficient people around that actually remember and very vividly the previous crisis. I think certainly here in the u. S. , the fiscal and monetary policies have been kwaul qualitatively different because people recognize what went wrong. Exactly. And i think we i can see its also here. I mean, i was around at the time of the Global Financial crisis and i see the difference now and in the nation now to act quickly. On top of that, also, the entire external environment is much more negative than before so the idea that we can export our way out of this, it aint going to happen and i think this is also well understood by germany and i think that changes the whole dynamics in this discussion. So two other things we hear and i think said very openly last week is that this significant amount of money, whats it going to be spent on and i think he said we dont want this money to be used to implement the party platform, which obviously, you know, the country can do what it wants with its money in some respects. But i think it is something that exists, what are we going to do with this money. To what extent directed to National Priorities versus common priorities set by the Member States as a group . And the second, i think, sentiment that you hear expressed is that this kind of support should come with a certain level of condition conditionality, precisely because the goal should be to limit divergence after this crisis goes away and make sure that different parts of the union can grow at similar rates. What do you say to those two things . So i think the i think actually if you look at the proposal now and i may be a bit biased, but i recognize that, i think its actually a very balanced proposal. So, but let me just explain and i think, again, this recovery and the resilient since this is by far the biggest part of the package, i think, its a good indication as to the thinking of this. Its almost half. Its more, its more than half. So half of direct spending. Or even more more than half of direct spending. With the Loan Facility and its really the biggest part. Yeah, go ahead, sorry. So the way this is going to work is that Member States, they will need to draw up their own recovery and resilience plan. So that is, lets say the country so that the start of all of this lies with the country and this is important because we have also learned that for reforms to stick, you need to have its important to have country ownership. Now, that said, these plans, they need to be consistent with Certain Union priorities, and thats where your points come in. So they need to be consistent with the countrys specific recommendations that the europe, the council, so the ministers, all the ministers together give on an annual basis to the Member States on what type of reform, what type of investments are important to undertake for a specific country. So, this is and this is exactly to make sure that the reforms and investments that are done, that they also correspond to the common view or the shared view of what is important to do for the union to function better. So thats the best part. The second part is in a very explicit way, these programs, they need to contribute to greening on one end, the greening of the economy and on the other hand also on a digitalization of the economy, so modernization of the economy. So you will horizontal requirements that will be put on these programs. And only so only programs that meet these various criteria which will be assessed by us, they will be for finance. So then how do the Member States in the end get the finance that they have asked for . We define together with Member States targets and both in relation to reforms and in relation to the Eu Investment and only if these milestones are being achieved, then that unlocks a payment from under the recovery the. So i think the my answer actually to those would be, well, if you look at the biggest Expenditure Program in there there is this youll find actually this, that it will have the reform, it will have the investment and it will not just be given for nothing. No, it will be provided if and only if Member States actually do what they say theyre going to do. We have about a little over 10 minutes left. Theres a few topics i want to touch on that are a little less directly related to the covid19 crisis. The first one i guess is somewhat related to these Investment Priorities. Here in the u. S. We now have gone through years and years of discussion about a potential infrastructure package to be passed by the federal government that could include things from highways to Rural Broadband and hopefully here for the district of columbia, you know, refurbishing school buildings. A wide range of things. I was wondering if you could just briefly talk about your experience with the plan and how thats been formed and maybe some of the Investment Priorities that are now being realized. Yeah, okay. So maybe for those that are not aware with what the plan is and i can imagine there are many. For sure. But basically this was a plan drawn up and designed by the previous president of the commission and this was in response to the crisis. Now, the plan was composed of a number of pillars. One pillar was targeted on basically eliminating bottle necks to investments. The other so it can be the regulatory planning environment. Another part was about building the pipeline of investorable projects and the third, a third pillar, even though i do it in the wrong order, was a Financing Facility which in a way is what one could call a blending facility. So we from the community budget, we provided a bugetary guarantee to the eib. This was a European Investment fund which allows them to provide more risky finance to the type of projects that you mentioned. So by now, i mean, we have more or less come or were coming to the end of the investment period of the plan. I dont know, i havent, do not have the exact number of projects, but what i can say is that i think we reached basically last week, if i remember correctly, the milestone of that, around 500 billion in the investment had been in cofinanced by this facility. So it has a pretty good impact and i think it certainly is a help to finance the kind of projects that you mentioned. Now, were going to have a Successor Program of this, called invest eu, of an even bigger size. We think this is important, but were trying to target it a bit more to a specific policy area so where 2013 when we started the plan, or 2014, the main goal was investment. It didnt really matter which investment the the way we have cess up the invest program now is more related to specific target areas, also, to avoid that were crowding out too much private finances. Here, there are areas that immediately come to mind and which will be very important is again the green, but when were joking, the rule is in the cities not much that you have to do that would normally the markets will take care of that. In rural area or in rural areas it may be more difficult so you may need different types of finance and i think what we have been experimenting with here is more and more the blending of different facilities. We can have publicly financed and partially financed and risk fans through the eib and yes, and so thats a bit of the approach. So then, again, this is really a mixed amount of topics. So the commission a few years ago proposed a Digital Services tax that hasnt been implemented at the union level yet, but a lot of individual members states have either implemented or are in the process of implementing such. Obviously the United States i think for good reason has been unhappy with some of these proposals. Can you talk to us briefly on where the where these taxes stand on the sort of euwide level and what the commission foresees there. Okay. Now the now, look, there weres will discussions jn going in the oecd and as you know, on the topic, let me be very clear, from, on two points. First of all, we prefer by far a global approach and then we thought we were working towards that in the context of the oecd. Now, recently the u. S. Pulled out of that discussion, but clearly we hope that the u. S. Will come back to that. Now, at the same time, we have indicated that if its not possible to come forward on the to agree on a global approach, then we the commission will come forward with own initiatives because we even though we support the Member States that have introduced these taxes, we do not consider it optimal from the Union Perspective that it will come with their own different taxes or it is an area where we would like to move as one. And one last question of course, the United Kingdom has left the European Union. Negotiations are ongoing about the future relationship, but perhaps more importantly, more important for you, the negotiations are ongoing tore the eu budget without the u. K. As part of the union. How is that hole of contributions being field . Is there a shift in prioritization now that are they delayed until the crisis is over . How should we think about that . Quite the contrary, but, okay, now, clearly with the u. K. Leaving that leaves a hole in the budget that needs to be dealt with. Now, but i have to say that the whole u. K. Issue has been overtaken in a way by the corona crisis. So, what is now in the making is its end is a process, so the Crisis Response and the negotiation of the budget, they have collapsed in one. So they have collapsed, but they are were folded into one. Theyre golded into o theyre folded into one. So the Recovery Plan that i was talking about, or that as we call it here next generation eu, that is one part and the other part of the negotiations is the are the negotiations on the multiannual financial frame work and they will be concluded together. So we have a plan for the 17th, 18th of of july. Where both topics are on the table and where the president of the European Council will try to force a compromise on both elements at the same time and, yeah, that sends the i would say that the u. K. Was never, i mean, close to us, but its a bit less in the forefront of our thoughts than it was some time ago. I think thats probably true for all of us. And with that, martin, thank you very much for doing this and thanks to our audience for attending, thank you for the questions you sent. Im sorry i didnt get to each one of them. So thank you very much and have a good rest of your day. Thank you very much. During the summer months, reach out to your elected officials with cspans congressional directory. It contains the Contact Information you need to stay in touch with members of congress, federal agencies and state governors. Order your copy online today at cspan store. Org. The Brookings Institution hosts a discussion on the longterm Economic Impact of the coronavirus pandemic. Live coverage begins today at 1 p. M. Eastern on cspan2. To provide adequate resources, the funds that will be necessary to equip the broadband infrastructure debate behind us and close the divide once a prospurk u. S. Telecom president and ceo Jonathan Salter tonight at eight eastern on the communicators on
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