Europe Steps Up

In July 2012, then-European Central Bank President Mario Draghi helped to prevent the eurozone from collapsing by vowing that the ECB would do “whatever it takes” to save the beleaguered single currency. Eight years on, will European leaders’ agreement on a new COVID-19 rescue fund, Next Generation EU, turn out to be equally consequential?

In this Big Picture, Yale University’s Stephen S. Roach argues that the EU’s approval of the joint recovery package is a pivotal moment in solidifying the bloc and will likely accelerate the euro’s rise and intensify downward pressure on an overvalued US dollar. But Philippe Legrain of the Open Political Economy Network says that while the deal shows, crucially, that the EU is capable of coming to Europeans’ aid in a crisis, it does not resolve the eurozone’s fundamental problems. In particular, as the University of Munich’s Hans-Werner Sinn notes, the new fund cannot correct the distorted relative prices within the eurozone that make its southern member states uncompetitive.

On the other hand, Lucrezia Reichlin of the London Business School argues that Next Generation EU will likely shift the debate in the eurozone regarding risk mutualization and fiscal transfers, thereby setting the stage for genuine progress toward fiscal union. And the Centre for European Reform’s Christian Odendahl believes the scheme gives EU member states an opportunity to accelerate the transition toward carbon neutrality by introducing national green-tax reforms.

Finally, Daniel Gros of the Centre for European Policy Studies compares the EU’s COVID-19 crisis measures to US President Franklin D. Roosevelt’s New Deal of the 1930s, and asks whether they, too, will come to be seen as useful economic stabilization tools when more normal times return.