The economic impact of COVID-19 has been tremendous. What are your thoughts on the global response, a second wave of the virus and the next steps for Europe?
Firstly, the necessary confinement measures have brought the economy to a halt. But, at the same time, the economic policy response has been unprecedented. It has been fast, comprehensive and consensual. It is hard to overstate the importance of state support and intervention, which has certainly staved off what could have been an economic collapse.
State-backed income support schemes, central bank liquidity provision and lending support to companies have been successful so far, but the strength of the recovery remains quite uncertain. Clearly, the risk of a second out break remains a significant threat, and for a genuine normalisation to return, one will have to wait for better therapies and a vaccine. While a second wave will likely be better managed, the economic consequences would be considerable, given the fragile state of the economy.
As for Europe, the next steps, beyond deconfinement, must focus on a successful and sustainable recovery. It is essential that governments seize the opportunity to reform and modernise vast swathes of the economy. Public money should now be mobilised to this end.
What do you think Europe should be focusing on with its EUR 750 billion Next Generation EU fund?
There are very few positives that can be drawn from this deadly pandemic: it has created an environment whereby Europe can accelerate change towards carbon neutrality, refocus on revitalising the single market and invest heavily in infrastructure and digitalisation. This is the objective of the Next Generation EU fund, as the European Union has set out.
The majority of the investment vehicle will be allocated to helping member states transition to a green and digital future. There are a number of initiatives the Next Generation EU fund will target, but the investment in European infrastructure, including the refurbishment of our existing buildings to make them more carbon-neutral, and the digitalisation of our economy will sit at the heart of it. This investment, if done properly, can have a huge positive impact on the property sector through advancement in green tech and renovations.
Only time will tell how successful the implementation of the Next Generation EU fund will be and how aligned all member states are, but the message appears to strike the right chords, for the time being at least.
Beyond this investment fund, what reforms do you think the EU can undertake?
The EU needs to complete the Capital Markets Union (CMU). It is clear to me that the public sector will not have the resources to respond to the unprecedented need for investments. Today, the fragmented capital markets in the EU and insufficient equity financing put the EU at a disadvantage at a time when structural changes are indispensable.
Capital will likely become increasingly stretched in the coming years and reforming the capital markets will provide access to much-needed capital for many companies. It is well known that the EU is nowhere near the United States when comparing capital market structures. This crisis has presented the EU with the perfect opportunity to usher in changes that can help spur innovation and help companies digitalise and invest in the industries of the future.
The CMU reform has been underway since 2015 and is not something that we can bring in overnight, but an enduring political will and need for access to capital due to the pandemic certainly presents us with the opportunity to accelerate its adoption. The time is ripe to re-shore capital markets onto the continent and revamp them for the twenty-first century.
Europe needs to urgently tackle obstacles to an efficient allocation of savings. It needs to simplify existing rules, reduce legal uncertainty from the different application and enforcement of rules, improve access to information and incentivise the use of new digital technologies. I also think that a targeted review of existing legislation and high compliance costs is needed.
What do you think the legacy of the virus will be in the coming years?
The pandemic has made us collectively poorer. GDP is not set to recover to pre-COVID levels for at least two years. Public debt will increase by at least 20 percentage points of GDP, and there will be increased competition for scarce resources, creating a challenging social and political environment.
On the other hand, in a context of weak inflationary pressures, monetary policy is expected to remain very accommodative, facilitating the management of public debts. The main issue then will be how best to channel public resources efficiently to support the needed structural changes.
One does not experience an economic shock such as this one without scars. But if managed properly, this crisis too shall pass. And hopefully, with it, we will witness a more forward-looking Europe that has mobilised its energy in creating a more resilient and climate-friendly future for all.
