Khor Ho Ee and Rolf Strauch
SINGAPORE/LUXEMBOURG CITY – COVID-19 has claimed more than 700,000 lives, infected over 19 million people, and decimated rich and poor economies alike. But, even as most of the world faces unprecedented recession, policy responses differ sharply. The contrast between Europe and Asia is a case in point.
Both regions are undoubtedly facing serious economic hardship. The European Commission expects the eurozone economy – which grew by 1.3% in 2019 – to contract by 8.7% this year. In the ASEAN+3 – the ten members of the Association of Southeast Asian Nations (Brunei Darussalam, Cambodia, Indonesia, Lao People’s Democratic Republic, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam), plus China, Hong Kong, Japan, and South Korea – GDP growth is expected to plunge to 0% this year, from 4.8% in 2019.
Policymakers in both regions have responded aggressively, with unprecedented monetary and fiscal stimulus, as well as other measures to support the economy. But different economic structures, institutional arrangements, and vulnerabilities mean that the size, content, and distribution of support have been very different.
In the European Union, fiscal rules – particularly the stricture that a budget deficit cannot exceed 3% of GDP – were temporarily suspended, to give countries more space for expansionary fiscal policy. Of course, significant differences in countries’ fiscal and financial space remain, so the size of the stimulus varies widely by country – from about 50% of GDP in Italy to a few percentage points in other countries, like Ireland.
In the ASEAN+3, the range is narrower, but not by much. Japan’s stimulus is the largest, at 40% of GDP, while the other economies come in at around 10% of GDP. All told, fiscal measures, together with indirect financial measures (such as debt moratoriums), amount to nearly 29% of GDP in the eurozone, and 13% of GDP in the ASEAN+3.
Differences in the size of the crisis response can be explained partly by the extent to which guarantees have been used to support firms. In the eurozone, discretionary budgetary measures worth 5.3% of GDP are backed by liquidity facilities totaling almost 21% of GDP. Those facilities consist of public guarantee schemes – which channel liquidity through the banking system into the economy.
The ASEAN+3 economies have pursued discretionary fiscal measures on a similar scale – 5.1% of GDP, on average – but backed by liquidity-support schemes averaging just 5% of GDP (including temporary debt relief and moratoriums). The magnitude of tax and social-contribution deferrals is comparable in the eurozone and the ASEAN+3.
Both regions have also taken steps to support household income, though here, too, structural differences have translated into contrasting approaches. Eurozone economies have favored job-retention schemes, via short-time work compensation – partly a reflection of the region’s robust social security systems. In many ASEAN+3 economies – which despite their economic heterogeneity, tend to have larger informal economies, more flexible labor markets, and weaker social safety nets – direct income-support schemes have proved effective.
Moreover, automatic stabilizers – such as taxation and the extension of unemployment coverage and social benefits – have played a much larger role in the eurozone, where they amount to about 5% of GDP. In most ASEAN+3 economies, such stabilizers are estimated to total 1.1% of GDP.
Another notable difference is institutional: in Europe, unlike in the ASEAN+3, existing structures allowed for complementary policy initiatives at the regional level. Even before the EU launched its unprecedented €750 billion ($886 billion) recovery fund, finance ministers had agreed to three programs worth a total of €540 billion.
First, the European Commission’s Support to mitigate Unemployment Risks in an Emergency (SURE) can provide up to €100 billion of loans under favorable terms to member states. Second, the European Investment Bank is available to support businesses by mobilizing up to €200 billion. Finally, the European Stability Mechanism’s Pandemic Crisis Support credit line supports spending on health care and preventive measures during the COVID-19 crisis, up to €240 billion.
Of course, the eurozone’s integrated structure also creates risks – particularly if the COVID-19 crisis fuels destabilizing divergence among member economies. Some eurozone-wide initiatives – including the recovery fund – aim to mitigate this risk.
There are also notable differences in approach on the monetary-policy front. In emerging and developing economies, central banks have focused on cutting policy rates and injecting liquidity. Key measures among ASEAN+3 economies have included government guarantees on select bank-lending activities, temporary financing lines, and corporate-bond purchases. Moreover, regulatory forbearance encourages well-capitalized banking sectors to provide some relief to borrowers.
By contrast, central banks in advanced economies had little space to lower interest rates, so they have leaned heavily on quantitative easing. The European Central Bank expanded its €120 billion asset-purchase program and created a new temporary €750 billion Pandemic Emergency Purchase Program, which it subsequently increased by €600 billion.
The COVID-19 pandemic has highlighted the way structural differences, institutional frameworks, and the extent to which governments and financial systems have built up buffers shape crisis responses. But short-term emergency action is just the beginning.
It is impossible to say how the COVID-19 crisis will unfold. New waves of infection may necessitate renewed lockdowns, impede or even reverse economic recovery, and intensify fiscal pressures. Additional stimulus measures may be needed.
Even if the virus is brought under control relatively quickly, the road to recovery will be long. In Europe and Asia alike, policymakers must begin considering how to translate emergency measures into more sustainable policies. Their approaches may not be the same, but their objectives – safeguarding their economies’ long-term prospects – should be.
Hoe Ee Khor is Chief Economist at the ASEAN+3 Macroeconomic Research Office. Rolf Strauch is Chief Economist at the European Stability Mechanism.
Copyright: Project Syndicate, 2020.