There was consensus across panellists that the region has handled the pandemic relatively well, with fewer deaths and less output decline than elsewhere. Charles Enoch, summarizing the discussion, noted the dichotomy between old and new Europe (including Greece in new Europe): the difference in mortality rates so far has been extraordinary, in some cases 10-fold. Panellists attributed this to regional governments’ relatively quick and effective response, with helpful (though often not generous) fiscal packages, and to the valuable tailwinds from ‘innovative and forceful’ ECB and Federal Reserve monetary easing. There has been little politicization of the process. However, the future is far from secure. The impact of lower growth on the real economy will surely manifest itself in higher unemployment than seen so far, and in a resurgence of non-performing loans—reversing the hard-won recovery since the global financial crisis.
Piroska Nagy-Mohacsi commented that Central Europe’s better handling of the crisis was made possible by a delayed impact, which allowed the region to learn from elsewhere, and also because of lower population density. The policy response had been adequate to meet needs, partly through fiscal packages (with an emphasis on fiscal stabilizers) and partly thanks to the spillovers from ECB and Federal Reserve monetary loosening. The outlook for the region is also better than elsewhere, since low debt gives it room to continue fiscal stimulus if necessary. Moreover, Poland and Hungary stand to benefit significantly from EC funding (perhaps as much as 10 percent of GDP each), and from the region’s close economic ties with Germany, which is also recovering well. Nagy-Mohacsi allowed that the good management and more benign outlook may imply some strengthening of incumbent governments, but noted that the process has been relatively ‘unideological’, with no strong calls for more government spending. A main political message may be that CEE nationals would like better intra-European cooperation, to avoid a sense of being treated like second-class EU citizens.
Kori Udovicki’s assessment of Serbia’s performance and outlook mirrored some of Nagy-Mohacsi’s conclusions. Even with a new, more pessimistic economic update which suggests output loss of about 3 percent in 2020, Serbia is getting away relatively lightly. This is partly because tourism is not a big share
of the economy and partly because Serbia has a substantial ICT sector which has been less affected. Small and medium-size firms remain optimistic, with only 25 percent expecting to need debt relief. There have been almost no formal sector lay-offs—because Serbia was growing before the pandemic and the labour market was tight. Serbia’s government package was one of the biggest in the region: a widening of the deficit by 7 percent of GDP, plus additional lending. Measures are untargeted, with minimum wage subsidies to all SMEs, tax deferrals, debt moratoria, and 100 euros to each citizen. Perhaps the government could be faulted for taking long to enact the package, but most companies were anyway weathering the crisis—since most own their space, rent pressures have been less of a problem than elsewhere. And Serbia too has adequate fiscal space for the stimulus to work without macro-pressures: debt is at 52 percent of GDP and still below 60 percent after the package. The central bank states that international reserves are at an all-time peak. But Udovicki anticipates a less benign future. The construction that has kept growth buoyant will probably taper down, except for government projects—in line with dampened foreign investment. Moreover, an irresponsible loosening of health restrictions before the recent election raises the fear of a second wave of cases soon.
Christos Gortsos assessed the EU’s response, focusing on the monetary and financial side. He started by noting much greater unilateralism than in the Global Financial Crisis (GFC): groups such as the G20 and FSB have not been so active in 2020. This is mainly because the roots of the pandemic are not financial—but, since the real economy will need financing, the banking sector will again be vital. Conversely, the role of the EU has been much stronger than in the GFC. Cooperation has been higher, in the sense that coordination of measures led to a more-or-less consistent strategy across countries. And the EU’s response was prompt (unlike in the Greek crisis), because by now it has instruments in place to intervene. On the fiscal side, the Stability and Growth Pact is being interpreted flexibly. The new ECB asset purchase program, alongside other monetary policy measures, will be helpful. The same applies to macro-prudential easing, facilitated by the build-up of buffers under the Basel III framework which now allows capital ratios to be relaxed temporarily. The main cloud on the horizon is that an exit strategy will be complicated. Banking authorities will need to strike a difficult balance between supporting the economy and preserving financial stability. The doubtless unavoidable resurgence of non-performing loans will require a mix of careful credit risk management, effective action by supervisory and resolution authorities, and creative thinking about alternative solutions.
Kaloyan Simeonov considered it too early to judge whether the pandemic will result in more or less Europe. Certainly at the outset, there was less Europe, but developments since then have been positive. Having the financial system as a pillar of support rather than a weak link is important, and better cooperation is emerging across countries, though still mainly among EU member states. Indeed there are positive indicators even on the enlargement agenda. Bulgaria is weathering the crisis as satisfactorily as the other states mentioned—with similarly constructive measures (for instance, forbearance from penalty interest or property seizures). The real sector outlook is mixed: like elsewhere, tourism and manufacturing are suffering most, but the crisis is spotlighting valuable new opportunities for the fintech sector. One lesson worth highlighting from Bulgaria is the value of a single government information portal. E-government has come a long way quickly. A more general lesson is that financial literacy has been important in managing the economic response to the pandemic.
The Q&A session centred on the outlook for the region. All agreed with Gortsos that ‘a tsunami’ of NPLs is coming—but views differed about whether governments could or should play a central role in supporting firms and banks. On the one hand, the EU rules out state aid, and protection of large
commercial deposits may be socially unacceptable; on the other, the extent of government-directed financial support over the last few months makes a hands-off stance look implausible. The outlook for countries’ large service sectors was seen as most precarious. All agreed that countries should continue to use their available fiscal and monetary space—particularly to avoid a second wave: this defensive capacity justifies the painful recent years of building buffers.
Simeonov cautioned that social stability will be a big problem, since the pandemic enlarged differences between social groups and the vulnerable have become more vulnerable. To avoid political and security problems, measures should address social issues—but carefully! Udovicki recalled the continuing legacy from socialism—that health services should be freely available to all. Udovicki also wondered whether the lack of appreciation for experts that has overshadowed the last few years may now be reversed—but other panellists were unconvinced, citing the poor performance of experts, for instance in Sweden. Enoch emphasized the need for better data, to track and learn from countries’ successes and failures.
Finally, panellists concluded that, while there is no appetite for ‘more Brussels’, there is a recognition that consistent policies have helped the region, and countries are in favour of further cooperation across Europe on the journey to recovery.
Adrienne Cheasty (Academic Visitor, St Antony's College, Oxford)
Kori Udovicki’s assessment of Serbia’s performance and outlook mirrored some of Nagy-Mohacsi’s conclusions. Even with a new, more pessimistic economic update which suggests output loss of about 3 percent in 2020, Serbia is getting away relatively lightly. This is partly because tourism is not a big share
of the economy and partly because Serbia has a substantial ICT sector which has been less affected. Small and medium-size firms remain optimistic, with only 25 percent expecting to need debt relief. There have been almost no formal sector lay-offs—because Serbia was growing before the pandemic and the labour market was tight. Serbia’s government package was one of the biggest in the region: a widening of the deficit by 7 percent of GDP, plus additional lending. Measures are untargeted, with minimum wage subsidies to all SMEs, tax deferrals, debt moratoria, and 100 euros to each citizen. Perhaps the government could be faulted for taking long to enact the package, but most companies were anyway weathering the crisis—since most own their space, rent pressures have been less of a problem than elsewhere. And Serbia too has adequate fiscal space for the stimulus to work without macro-pressures: debt is at 52 percent of GDP and still below 60 percent after the package. The central bank states that international reserves are at an all-time peak. But Udovicki anticipates a less benign future. The construction that has kept growth buoyant will probably taper down, except for government projects—in line with dampened foreign investment. Moreover, an irresponsible loosening of health restrictions before the recent election raises the fear of a second wave of cases soon.
Christos Gortsos assessed the EU’s response, focusing on the monetary and financial side. He started by noting much greater unilateralism than in the Global Financial Crisis (GFC): groups such as the G20 and FSB have not been so active in 2020. This is mainly because the roots of the pandemic are not financial—but, since the real economy will need financing, the banking sector will again be vital. Conversely, the role of the EU has been much stronger than in the GFC. Cooperation has been higher, in the sense that coordination of measures led to a more-or-less consistent strategy across countries. And the EU’s response was prompt (unlike in the Greek crisis), because by now it has instruments in place to intervene. On the fiscal side, the Stability and Growth Pact is being interpreted flexibly. The new ECB asset purchase program, alongside other monetary policy measures, will be helpful. The same applies to macro-prudential easing, facilitated by the build-up of buffers under the Basel III framework which now allows capital ratios to be relaxed temporarily. The main cloud on the horizon is that an exit strategy will be complicated. Banking authorities will need to strike a difficult balance between supporting the economy and preserving financial stability. The doubtless unavoidable resurgence of non-performing loans will require a mix of careful credit risk management, effective action by supervisory and resolution authorities, and creative thinking about alternative solutions.
Kaloyan Simeonov considered it too early to judge whether the pandemic will result in more or less Europe. Certainly at the outset, there was less Europe, but developments since then have been positive. Having the financial system as a pillar of support rather than a weak link is important, and better cooperation is emerging across countries, though still mainly among EU member states. Indeed there are positive indicators even on the enlargement agenda. Bulgaria is weathering the crisis as satisfactorily as the other states mentioned—with similarly constructive measures (for instance, forbearance from penalty interest or property seizures). The real sector outlook is mixed: like elsewhere, tourism and manufacturing are suffering most, but the crisis is spotlighting valuable new opportunities for the fintech sector. One lesson worth highlighting from Bulgaria is the value of a single government information portal. E-government has come a long way quickly. A more general lesson is that financial literacy has been important in managing the economic response to the pandemic.
The Q&A session centred on the outlook for the region. All agreed with Gortsos that ‘a tsunami’ of NPLs is coming—but views differed about whether governments could or should play a central role in supporting firms and banks. On the one hand, the EU rules out state aid, and protection of large
commercial deposits may be socially unacceptable; on the other, the extent of government-directed financial support over the last few months makes a hands-off stance look implausible. The outlook for countries’ large service sectors was seen as most precarious. All agreed that countries should continue to use their available fiscal and monetary space—particularly to avoid a second wave: this defensive capacity justifies the painful recent years of building buffers.
Simeonov cautioned that social stability will be a big problem, since the pandemic enlarged differences between social groups and the vulnerable have become more vulnerable. To avoid political and security problems, measures should address social issues—but carefully! Udovicki recalled the continuing legacy from socialism—that health services should be freely available to all. Udovicki also wondered whether the lack of appreciation for experts that has overshadowed the last few years may now be reversed—but other panellists were unconvinced, citing the poor performance of experts, for instance in Sweden. Enoch emphasized the need for better data, to track and learn from countries’ successes and failures.
Finally, panellists concluded that, while there is no appetite for ‘more Brussels’, there is a recognition that consistent policies have helped the region, and countries are in favour of further cooperation across Europe on the journey to recovery.
Adrienne Cheasty (Academic Visitor, St Antony's College, Oxford)
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