Europe After the Coronavirus: A Road Map for Economic Recovery

by Daniel Bunn, Martin Gundinger, and Kai Weiss

The Coronavirus has brought our lives to a halt. The International Monetary Fund calculates that the European economy will contract by over 7% in 2020. Millions are affected by lockdowns, suddenly being faced with major financial problems. What are possible ways to tackle this unprecedented economic pause? And what policies could national governments and the EU take for a sustainable economic recovery? What is a road map when it comes to areas such as tax, fiscal, and trade policy?

 

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Executive Summary

The economic shutdown caused by the current pandemic is putting pressure on policymakers to design programs to support businesses and workers. It is currently unclear how long the health crisis will last or what the economies of Europe will look like in the aftermath. Governments should be ready with appropriate policies to answer the circumstances as they shift.

This is clearly a health crisis, first and foremost, and policies should be designed with that in mind. However, the economic effects of the health crisis are substantial and fiscal and monetary programs deployed in response to the crisis need to be well-targeted and designed. Once the health crisis abates, there will be challenges for policymakers in evaluating ways to address new debt burdens, the speed of the post-crisis recovery, and the risks of another wave of infections.

European institutions and individual countries should work to avoid allowing the economic shutdown to turn into a prolonged depression. The business closures and social distancing policies come with costs even if those costs are difficult to compare to a scenario in which the pandemic was allowed to spread further.

This paper evaluates how governments in Europe should be designing economic policies to minimize the economic shock while the health crisis continues, and then shift to policies that will help economies recover and return to a sustainable fiscal footing in the context of growth.

Weathering the Storm

The current economic shutdown calls for significant economic relief. The income that businesses and workers are currently missing will need to be replaced, temporarily, by government support. These policies should not be aimed to stimulate economic activity because that is generally at odds with the health goals of the economic shutdown. These policies should be explicitly designed to be temporary and should be conducive to long-term growth.

  • Individual countries should continue to provide:
    • Delays or deferrals of significant tax payments by businesses and individuals.
    • Targeted tax credits and tax reductions, including accelerated capital allowances for businesses.
    • Direct fiscal support to businesses and workers, including those with reduced hours, to address the costs of the economic shutdown.
  • European institutions should focus efforts on:
    • Supporting necessary cross-border trade and travel, such as by deferring or suspending duties and VAT.
    • Providing flexible, temporary financial support to countries that require resources.

Harnessing the Recovery for Long-term Growth

Once the health crisis is abated and the economy begins to recover, governments will need to support the recovery with policies that promote sustainable growth. Targeted stimulus measures or near-term austerity programs could undermine prospects for a broad recovery. Businesses will need support through well-designed income taxes, and governments should focus revenue-raising efforts on broad-based consumption taxes.

  • Individual countries should:
    • Focus on pro-growth income tax policies that support business investment and hiring by reducing the cost of capital through expanded capital cost allowances and lowering the tax burden on labor.
    • Rely on broad-based consumption taxes as mechanisms to support fiscal sustainability.
  • European institutions will need to:
    • Provide an adjustment period before enforcing fiscal rules until an appropriate growth threshold has been met.
    • Support member countries’ pro-growth tax and spending policies by avoiding adoption of contrary policies at the EU level such as distortionary digital taxes and financial transaction taxes.
    • Ensure countries are not limited in adopting the tax policies they think are most beneficial in the current situation by avoiding centralizing tax policy decisions.

 

Read the paper here: DOWNLOAD

Join our webinar based on this work on Tuesday, April 21, 4.00pm CEST (1.00pm): More Information

Daniel Bunn is Vice President of Global Projects at the Tax Foundation, where he researches international tax issues with a focus on tax policy in Europe.

Martin Gundinger is a Research Fellow at both the Austrian Economics Center and Friedrich A. v. Hayek Institute.

Kai Weiss is the Research and Outreach Coordinator at the Austrian Economics Center and a board member of the Friedrich A. v. Hayek Institute.

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