Opinion & Analysis

Policy Insight | Europe and the Covid-19 crisis – The challenges ahead

The European economy is now recovering briskly, after an unprecedented fall in output during the second quarter of 2020. But this recovery is likely to be incomplete for some time, not least because of the substantial degree of social distancing measures still in place.

The defining feature of the present situation is that the remaining demand and supply obstacles are highly sector specific. Aggregate demand management will thus be less effective. Income replacement measures, such as short-term work schemes, will be needed for some time, but should be applied flexibly to support rather than hinder structural adjustment. This also applies to the funds to be made available under the €750 bn Recovery and Resilience Facility. Money is fungible. This means that the key for success will not be the projects to be financed by the RRF, but whether member states undertake structural reforms that increase their growth potential.


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