Pandemic pushes polarisation: happy to share that our paper on macroeconomic divergence in the €zone in the context of the Corona crisis has just been published in JIBE. Policies implemented and planned so far not enough to counter polarisation. Thread:
link.springer.com/article/10.100…
link.springer.com/article/10.100…
Our short paper discusses the uneven macroeconomic consequences of the Corona crisis by comparing Northern and Southern Eurozone countries against the background of an analysis of longer-term macroeconomic divergence in the Eurozone. /2
The challenge of economic recovery after the Corona health crisis will be most pressing in the Southern parts of the Eurozone, where the crisis will lead to lower GDP growth rates than in Northern Eurozone countries, and unemployment is set to increase more strongly. /3
There is a risk that Italy and other Southern Eurozone countries will be able to finance only the most urgent measures, while Northern Eurozone countries with a better starting position have more fiscal space to support a rapid recovery once the economy is jump-started. /4
Our paper highlights that increased macroeconomic polarisation in pre-Corona years has fuelled political polarisation, which has become visible in recent Corona policy debates concerning the appropriate response to the macroeconomic consequences of the COVID-19 pandemic /5
Due to the cumulative nature of the underlying polarisation processes, existing differences in technological capabilities are to be seen as both driving factor as well as major outcome of long-term divergence within the Eurozone. /6
The macroeconomic impact of the Corona crisis on Northern and Southern Eurozone countries will be asymmetric due to existing differences in production structures and because of the vulnerabilities of the different growth models /7
The available data suggest that the overall recovery challenge is considerably more difficult for countries in the South, as domestic demand takes a bigger hit and exports decline more strongly. /8
While exports of goods are set to decline to a similar extent in Northern and Southern countries, the much stronger drop in exports of services in the South exposes the vulnerability of being more dependent on tourism. /9
In the absence of adequate coordinated European policy interventions – the Corona crisis will contribute to a further deepening of macroeconomic divergence and structural polarisation between Northern and Southern Eurozone countries. /10
As economic polarisation fuels political polarisation, this process puts the survival of the Eurozone as a whole at risk. Our paper also briefly evaluates European economic policy initiatives in response to the Corona shock. /11
We do not only inspect short-run issues but also explore whether and to what extent current policy measures are suitable for addressing the root causes of economic polarisation within the Eurozone. /12
Even if we assume that a sizeable recovery fund including a component of grants for hard hit regions is implemented over a short-term horizon, this would still prove insufficient if the goal is to reverse the underlying path-dependent process of polarisation. /13
Comparing the policy measures currently undertaken or planned with long-term challenges arising from economic polarisation in the Eurozone reveals that the current policy focus is mostly on short-run measures to keep the economy going and/or to jumpstart economic activities. /14
In organising the means for significant public investment in economic recovery it would be urgent to tie these funds to longer-term concerns, such as: reorganisation of global value chains, industrial policies to combat technological divergence, addressing climate change /end
