In association with
Logo Logo Logo

The End of the Economic Consensus
By Jean Pisani-Ferry

Whereas the shock of the COVID-19 pandemic initially prompted unity and convergence in Europe, the current phase of the crisis is much more delicate economically and politically. If mismanaged, it may reopen old wounds and shatter policymakers’ newly acquired legitimacy.

Crises pose demanding tests for governments. In 2008, most were found wanting when financial mayhem engulfed the developed world. And within a few years, most of their leaders had been voted out of office as public anger reached its peak. So far, governments have responded much better to the economic fallout of the COVID-19 shock. But will electorates reward them, or will popular fury once again consume democratic systems? Our political future will depend on how voters assess national leaders’ performance.

First, rewind to September 15, 2008, when the US investment bank Lehman Brothers filed for bankruptcy. Financial chaos ensued, and the economy fell into recession. Governments scrambled to limit further damage. Their initial economic response was skillful, but to no avail politically: they were accused of bailing out the greedy bankers they had previously failed to supervise.

Then came major mistakes. In Europe, the errors started with a remarkably incompetent response to the sudden stop of capital inflows to Greece, Ireland, and Portugal, which transformed minor troubles into a near-disaster for the eurozone. Then came premature fiscal consolidation, which derailed the recovery. Europe suffered a double-dip recession, unemployment soared, and support for governments dwindled. They had been successively found asleep at the wheel, complacent and clueless.

The result was that, between spring 2008 and the low point of autumn 2013, the legitimacy of economic and political elites suffered massively. Trust in the European Union declined by 20 percentage points. Support for fringe parties climbed, while some mainstream parties were wiped out.

Fast-forward to 2021, and the contrast is striking. Despite initial mishaps with face masks and COVID-19 tests, governments overall have not lost their publics’ trust. Voters generally credit them for having responded swiftly to the health crisis, and even more so on the economic front. Life-saving lockdowns, income-preserving furlough schemes, the tacit but often flawless coordination between governments and central banks, and competent vaccination campaigns have elicited significant public support.

Despite renewed fear, hardships, and inequality, a majority of people globally are now satisfied with the pandemic response. Trust in the EU is back to pre-financial-crisis levels. These findings are reassuring, because they suggest that governments are punished for bad policies and rewarded for good ones. For all the sound and fury of political debate, it seems that what political scientists call output legitimacy is alive and well.

But there are caveats. The first is that in all 13 advanced economies surveyed by the Pew Research Center in both 2020 and 2021, citizens – including no less than 83% of Dutch and 77% of German respondents – say that the pandemic has made their society more divided.

The polarization between pro- and anti-vaccine camps is traumatic, because it makes people feel like strangers to each other when solidarity should prevail. The fact that these dividing lines often coincide with partisan political identification, as in the United States, and to some degree in Germany, is deeply disturbing, because it indicates an inability to agree on scientific evidence. Recent violent clashes in the Netherlands are a reminder that such divisions can quickly turn sour. Equally troubling is that in France, trust in scientists has declined significantly.

The second caveat is that economic-policy controversies have resurfaced. There was initially a robust consensus about what to do. In Europe, agreement to suspend the fiscal and state-aid rules was reached without much debate, while the European Central Bank’s decision to launch a dedicated asset-purchase program was swift and neat.

Moreover, France and Germany agreed in May 2020 to propose an unprecedented fiscal initiative whereby the EU would issue bonds to finance transfers to its most affected, most vulnerable, and least affluent member countries. A process that normally would have taken months and ended in failure instead took only a few weeks and produced an agreement.

But this harmony is ending. Inflation is in the spotlight. Middle-class households in northern Europe are increasingly concerned that the ECB is putting their savings at risk, with the popular German tabloid Bildcalling the bank’s French president, Christine Lagarde, “Madame Inflation.”

The ECB remains confident that inflationary pressures will abate in the course of 2022. There are good arguments for this view, but many in Germany worry – and sometimes panic – about their country’s current 4.5% annual inflation rate. Bundesbank President Jens Weidmann recently warned that “it could well be that inflation rates will not fall below [the ECB’s 2%] target over the medium term.”

If the current inflationary burst proves temporary, it will make up for past shortfalls in inflation relative to the ECB’s target and help correct remaining competitiveness imbalances between northern and southern Europe, where prices are rising more slowly. But if inflationary overruns persist, the pandemic policy consensus will fall apart and anger toward the euro will resurface in the north.

On the fiscal front, too, the pandemic consensus is being eroded amid growing differences between those warning against premature consolidation and those worried by rising public debt. This is a perfectly legitimate discussion to have. But, again, the question is whether policy debates will end up fueling polarizing disputes, precisely at a time when Europe needs an agreement on the reform of its fiscal pact.

The legacy of shared trauma, persistent fear, and sharpened divisions within European societies make the current phase perilously delicate economically and politically. If mismanaged, it may reopen old wounds and shatter policymakers’ newly acquired legitimacy.

In crises, as in military conflicts, victory must never be declared too soon. After all, winning battles means little if one ends up on the losing side of the war.

Jean Pisani-Ferry, a senior fellow at Brussels-based think tank Bruegel and a senior non-resident fellow at the Peterson Institute for International Economics, holds the Tommaso Padoa-Schioppa chair at the European University Institute.
For Indian tourists travelling by land:- 72 hours (-ve) C-19 report, CCMC form and Antigen Test at entry point

For Indian tourists travelling by land:- 72 hours (-ve) C-19 report, CCMC form and Antigen Test at entry point

Comment here !
Related News

In 2008, as the global financial crisis was ravaging economies everywhere, Queen Elizabeth II, visiting the London School of Economics,

With cities facing disastrous climate stresses and shocks in the coming years, one would think they would be rushing to

Diane Coyle, an economist and professor of public policy at the University of Cambridge, has set a daunting task for

The coronavirus is everywhere: in the air, on surfaces, in our respiratory tracts, and, over the past week, at the