China is leading, the US is following suit, and Europe has not even started yet. That is the dreary situation. While the other two major economic areas have long since caught up with the corona-induced economic slump, Europe is suffering another round of shutdowns.
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When the tops of the global financial establishment take off Monday For the spring meeting of the International Monetary Fund (IMF) and the World Bank, an interim assessment of the crisis response is due. From a European perspective, the result is sobering, to say the least. We are too slow, too sluggish, too timid. This applies to the fight against pandemics as well as to the economic policy response to the deepest recession in generations.
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Europe’s snail’s pace is no small matter. Whether the vaccinations come a few months earlier or later, whether the economy picks up a few quarters earlier or later, whether children have to study for more months at home, whether support payments for the self-employed and companies are paid out too late and then only in droplets – all that means a huge difference for the health and development opportunities of many millions of citizens.
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The external impact is also disastrous: Europe’s pandemic paralysis throws us back in the competition between systems. The appeal of the European model of society – that really great combination of freedom, security and prosperity – is suffering. The loss of Softpower is likely to harm the EU in other policy areas in the future, from human rights to climate policy.
China is selling itself as absolutely capable of acting. The USA is infinitely flexible. And Europe? Checks, struggles and hesitates.
When it comes to growth, Europe is clearly lagging behind
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Seen in this way, the current economic figures are an expression of the balance of power in global system competition. The Chinese economy will grow by nearly 10 percent this year, the US by at least 7 percent, predicts the Kiel Institute for the World Economy. The euro zone does not even manage 5 percent – although the decline in economic output in 2020 was twice as strong in our country as in the USA and China even achieved a slight plus. (Watch out Tuesday on the new IMF forecasts, Friday on numbers from German exports.)
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Europe should not be satisfied with this poor performance, especially if we consider our social model to be fundamentally superior. So what’s wrong? What should change?
Where Europe is strong
The Corona crisis repeats what was already observed in the euro crisis: the EU is not in a position to react quickly to unexpected developments. As a result, crises drag on and develop in some places chronic ailments, for example in Italy. The financial crisis lengthened into the euro crisis. Now there is a threat of a similar development as a result of the pandemic.
It would be too easy to blame individual politicians. Even strong personalities can ultimately only be as powerful as the institutional framework in which they operate allows them to be.
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Crisis management requires a temporary centralization of state power. The US is currently demonstrating it. Under President Joe Biden, Washington took the reins in hand in rolling out the corona vaccination program – with resounding success. Even the wandering Donald Trump was able to set up a central task force to accelerate vaccine development and procurement (“Operation Warp Speed”) and to provide it with plenty of money. Washington is stabilizing the economy with gigantic central spending programs that amount to 20 percent of economic output – possibly far too much – but at least a strong sign of the will to quickly leave the pandemic and its consequences behind.
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State power is fragmented
In the EU, on the other hand, state power is fragmented. The EU Commission, in a sense the government of Europe, has neither the constitutional powers nor the human and financial resources to react quickly to a crisis. It can only play a powerful role in the core areas of foreign trade, competition and currency that have been centralized for a long time. In other policy areas, long and complex coordination processes are required between the member states and the European institutions. This can be seen in the fight against pandemics as well as in the 750 billion euro corona fund. Started with a lot of verve and great rhetoric, Europe gets tangled up in small pieces.
In order to be able to call up money from the Corona Fund, the member states must have detailed programs approved in Brussels that are intended to serve all possible political goals (climate protection, digitization and much more). This takes a while. It will take years before that jointly funded funds will actually be spent. A quick crisis response looks different.
The impacts are getting closer and more frequent
In quiet times, the lengthy search for broad compromises may have advantages: Arguments can be weighed up, interests can be balanced. But acute crises require rapid action. Being able to react to such uncertainty shocks is one of the core tasks of the state – and the EU.
In an investigation of our research center DoCMA We recently worked out that there have been measurable evidence of seven major uncertainty shocks over the past 20 years: the terrorist attacks of September 11, 2001, the Iraq war, the financial and euro crisis, the Brexit referendum and the election of Donald Trump to the US President, and finally the corona pandemic. The frequency in which surprising developments occur seems to be increasing, as is the force of the impacts.
Three types of uncertainty shocks can be distinguished: purely economic events, originally political developments and those that have their origin outside of economics and politics. The EU can handle it differently. The economic and political uncertainty shocks Brexit and Trump, which were widely noticed and hotly debated in this country, primarily took place in a field where the EU has centralized its forces: trade policy. It was therefore able to take a powerful, credible position vis-à-vis the US and the UK. Precisely for this reason, the negative economic effects were limited. Without these centralized powers, the EU would have been an easy victim of protectionist attacks.
It is progressing – but only painfully slowly
The same applied to the financial crisis of 2008: The European Central Bank (ECB) was ready and able to resolve the tension in the financial markets to the point where a system collapse could be prevented. The communitized monetary and currency policy worked. That changed when, from 2010, the solvency of entire euro countries was on the brink. After all, financial policy was a matter for the Member States, which are only monitored by the Commission and the Council. Whether and how the euro zone could prevent states from going bankrupt has long been a matter of dispute, especially in Germany. The result was a long-term credit crunch in the southern Eurozone: because the banks there hardly lent any money, companies were unable to finance investments. The member states only hesitantly expanded their institutions: created the euro rescue fund ESM, and finally allowed the ECB to buy up bonds on a large scale in order to improve financing conditions. Only recently, a decade after the peak of the euro crisis, has the so-called “banking union” been complete, including financing instruments for winding down ailing banks.
As painfully slow as this process was, its impact can hardly be overestimated: Without the expansion of the common crisis reaction instruments, the corona crisis would have triggered a new euro crisis long ago. Without the experience of a credit crunch, there would be no corona fund now. The fact that some of the common instruments have so far had a weak democratic legitimation at community level – which is why the Federal Constitutional Court recently stopped the German ratification of the Corona Fund for the first time – is a problem. The EU tries to compensate for weak legitimation with the broadest possible consensus. That is what makes Europe slow.
The pandemic hit the EU in a policy area in which the individual member states have the say: health policy. Accordingly, the EU Commission is poorly equipped there in terms of personnel and finances. The fact that President Ursula von der Leyen nevertheless trusted herself to take over the vaccine acquisition for almost half a billion EU citizens has turned out to be overestimating herself. Evil can be foreseen for the future.
We problem cases
It is only a matter of time before further uncertainty shocks will affect Europe. Let me speculate: a series of cyber attacks that paralyze our information networks; an extreme drought summer causing water supplies to collapse in parts of the continent; a concerted provocation by Vladimir Putin and Recep Tayyip Erdogan, who are testing Europe’s resilience by reducing Russian gas supplies and opening the Turkish borders to refugees. A lot is conceivable. The major trends of digitization, climate change and political system competition can be combined into a disturbing panorama of threat scenarios. The EU is ill-prepared for this. The fact that the US remains not only a partner but also a strategic rival under Biden increases the pressure.
At the spring meeting of the IMF and World Bank, the euro zone is likely to be a problem again. The Corona crisis intensified old challenges and created new ones, wrote the IMF in an analysis of the euro zone last autumn. Then follows a list of various problems that have plagued Europe for a long time, including weak productivity growth, slow digitization, the aging of societies, increasing inequality. In addition, there are now other problems, not least the ever-increasing debt. “It is imperative,” ruled the IMF, “to address all of these challenges” so that an economic recovery is possible and the “scars” of the crisis can heal. Let’s see what the verdict is this time.
The main economic events of the week ahead
Monday
Washington – It’s all about the money – Start of the spring meeting of the International Monetary Fund (IMF) and the World Bank (until Sunday), this time mainly online.
Tuesday
Washington – The further prospects – The IMF presents its new forecast for the world economy (World Economic Outlook).
Ankara – Approaching Erdogan – EU Commission President von der Leyen and Council President Michel meet the Turkish President. Brussels wants to get closer again.
Luxembourg – Euro economy – The EU statistical agency Eurostat publishes key figures on unemployment.
Wednesday
Washington – Climate improvement – At the spring meeting of the IMF and the World Bank, IMF boss Georgieva discussed with the US climate commissioner, ex-foreign minister John Kerry.
Thursday
Berlin – Voluminous title – “Economic summit” (via video) by Federal Minister of Economics Altmaier with more than 40 associations on the situation in the corona crisis.
Frankfurt – Exportaufschwung I – The mechanical engineering association VDMA publishes figures on incoming orders in February. The strong recovery in China and the USA is currently pulling Germany’s industry with it.
Friday
Wiesbaden – Exportaufschwung II – The Federal Statistical Office reports on foreign trade.
Peking – Inflation? – China’s statistical office publishes figures on the development of consumer prices in March.
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