With the fallout from the Eurozone crisis still fresh in the minds of European leaders, several figures have emphasised the need to make Eurozone economies more ‘resilient’ to future economic shocks. But what does this mean in practice? Sotiria Theodoropoulou writes that focusing on economic resilience may offer a way forward for future reforms, but there is a danger that in emphasising the vulnerability of individual states, other key factors, such as the institutional shortcomings in the Eurozone that allowed the initial crisis to emerge, will be overlooked.
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The concept of resilience has been gaining influence among policymakers engaged in a variety of policy domains, including the economy. The European Commission has recently characterised resilience as a ‘transversal’ priority for its directorates, and has granted it special focus in its latest Annual Growth Survey. During its last September meeting, the Eurogroup concluded that economic resilience will be used ‘as a general framework for [their] future thematic discussions on growth and jobs’.
‘Convergence to resilient economic structures’ has been presented as a key objective in several European Commission and EU documents which have sought to frame the debate on how the Economic and Monetary Union should be reformed. Reforms to deepen the EMU have been a crucial part of the debate on the future of Europe and deemed as necessary in order to heal the economic and social scars that the recent crisis has left behind and to deliver on the aims of the EU, namely the improvement of the well-being of its people and of promoting economic, social and territorial cohesion.
Originally developed in disciplines as diverse as psychology, engineering and ecology, resilience has over time and across a variety of different contexts been defined in several ways, all of which describe the different responses of a society or a system more generally to uncertain shocks. In its introductory note for stirring debate in the Eurogroup meeting in September, the European Commission proposed to define economic resilience in the context of EMU as ‘the ability of the country to withstand a shock and recover quickly to potential after it falls into recession’. Moreover, the ‘resilient economic structures’ towards which the Eurozone member states should converge should ‘prevent that economic shocks have significant and persistent effects on income and employment levels’, so that they can reduce economic fluctuations, most notably deep and extended recessions.
Economic resilience is often presented as something unambiguously positive: it draws on the lessons learnt from disasters that have preceded it; building resilience emphasises the capabilities of communities and individuals to deal with unexpected adverse shocks and take a pro-active approach to preparing for the worst in an increasingly complex, interdependent and uncertain world.
That does not mean, however, that the notion of resilience and the choice of policy tools to develop it are free from underlying politics, distributional implications or independent of power relations which eventually enable some policy options while excluding others. Moreover, the aforementioned definition of economic resilience does not provide any information on whether ‘the potential’ to which economies are supposed to return to is an optimal one or not. This is why the debate that has now begun on which policies can and should promote economic resilience in the EMU needs close monitoring.
Economic resilience is multi-dimensional and politically contested
Whether an economy is resilient overall depends on the interplay and eventual balance among the three dimensions of resilience, each of which can be supported by different kinds of policy measures. The exposure to risks affects the probability that an adverse shock hits an economy and how strong it will be, in other words, the economy’s vulnerability. Once a shock hits, economic resilience depends on the economy’s absorption capacity, that is, how large (or small) its response is (for example, how much its GDP or employment falls). Last but not least, economic resilience depends on an economy’s capacity of recovery from the shock with the least possible losses in terms of societal welfare.
Different combinations of policy tools can thus result in an economy being resilient in different, non-mutually exclusive ways, and even create trade-offs between different dimensions and levels of resilience. For example, attempting to reduce the vulnerability related to high public debt of an economy during a period of recession by means of restrictive fiscal policies may constrain its absorption capacity and the resilience of individuals by reducing the resources available for adequate unemployment benefits and enabling active labour market policies.
Moreover, the way in which member states may pursue greater economic resilience may also shape how optimal the target situation of resilience is (what the above definition mentions as ‘potential’ to which economies should return after a shock). For example, in the Eurozone, one of the promoted ways of mitigating vulnerability has been to reverse current account deficits and keep them low. Current account deficits mirrored high capital inflows and decisions about investment abroad within the Eurozone. As such they are not by definition malign. Whether reducing vulnerability by avoiding asymmetric capital flows is an option consistent with the promises of launching a single currency is questionable. After all, one of the potential benefits of having a single currency was that savings could find their way to investments with the highest returns and less economically developed member states could benefit from capital flows from other member states.
Crucially, the effectiveness and distributional implications of any policy mix to promote economic resilience in the Eurozone member states will also depend on institutional aspects and policies of the EMU, which are currently also the subject of debate: including the establishment and form of a macroeconomic stabilisation function at the Eurozone level, the reform of fiscal rules to allow for more counter-cyclical policy stances in the member states, the completion of the Banking Union, and the enforcement of more symmetric adjustments to macroeconomic imbalances.
Assessing the emerging context of the debate on economic resilience in the Eurogroup
In view of these considerations, how can we assess the policy options that the European Commission put forward to the Eurogroup for debate in September? A couple of points of concern should be noted.
First, the differences in the depth and intensity of the shocks that certain Eurozone members states faced during the crisis are attributed to their greater vulnerability but more interestingly to their relatively low absorption capacity. This narrative ignores rather conspicuously the institutional shortcomings of the EMU at the beginning of the crisis and the policy errors that were made in response to it, from the early reluctance of the ECB to be a lender of last resort to governments, the burdening of national governments with rescuing banks whose failure would have had Eurozone wide implications, to the inappropriately restrictive stance of monetary and national fiscal policies. Arguably, these factors constrained the absorption capacity of affected member states while they also generated a second recession after 2010.
Secondly, in discussing the policy options for increasing the absorption capacity of member states, the possibilities of either developing some fiscal stabilisation function at the EU/Eurozone level or, alternatively, of changing the fiscal rules in a way that allows for greater scope to national fiscal policies to function counter-cyclically are glaringly absent. Although this is a highly contested topic, discussing what member states could do individually to promote economic resilience without considering it, may lead to unnecessary, if not counterproductive pressures in policy domains such as labour markets.
These points resonate with a narrative of profligate, non-resilient as opposed to virtuous, resilient member states. This narrative has also largely justified the asymmetric manner in which the reversal of macroeconomic imbalances in the Eurozone has taken place at high social and economic cost for the periphery member states even though the core of the Eurozone was as much responsible for the crisis as the periphery. In fact, both the Five Presidents’ Report and the Reflection Paper on Deepening the EMU mention convergence to resilient economic structures as a precondition for member states to be given access to macroeconomic stabilisation. This is a stark reminder that despite their benign connotations, the pursuit of economic resilience and the convergence to resilient economic structures have the potential to lead to further divisions among member states in the Eurozone.
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Note: This article gives the views of the author, not the position of EUROPP – European Politics and Policy or the London School of Economics.
Sotiria Theodoropoulou – European Trade Union Institute
Sotiria Theodoropoulou is a Senior Researcher at the European economic, employment and social policy unit of the European Trade Union Institute in Brussels.