The COVID pandemic had disastrous effects on health and economic activity worldwide. In the euro area, mandatory lockdowns contributed to a sharp fall in production and a rapid rise in unemployment, inducing an expansionary fiscal and monetary response. This column examines the effects of the pandemic and the ensuing economic policies on public support for the euro. Public support reached historically high levels during the pandemic in spite of the rise in unemployment. Expansionary fiscal and monetary policies initiated at the EU level significantly contributed to this outcome, which was not seen during previous crises in the euro area.
The coronavirus pandemic that erupted in early 2020 became an urgent policy challenge for the member states of the euro area (Weder di Mauro and Baldwin 2020). They faced a critical policy dilemma: how to dampen the spread of the pandemic by the use of lockdowns (Baldwin 2020) while at the same time reducing the economic damage created by the lockdown policy. In response to the lockdown-induced drop in economic activity and rising unemployment, national and EU policymakers turned to large-scale expansionary fiscal and monetary policy initiatives.
Our previous contributions to Vox exploring Eurobarometer survey data on public support for the euro 1990-2019 found a significant negative impact of unemployment on public support for the euro (Roth et al. 2016, Roth and Jonung 2019). When unemployment increased during the financial and sovereign debt crisis 2008-13, public support for the euro declined (Roth et al. 2016). When unemployment fell during the recovery 2013-19, support for the euro rose (Roth and Jonung 2019).
In a recent paper with Aisada Most (Roth et al. 2024), we examine if the rise in unemployment during the COVID-19 pandemic had a similar negative effect, adopting a model specification from our previous contributions (Roth et al. 2016, Roth and Jonung 2019). Using a uniquely large panel dataset, and applying a tailor-fit FE-DFGLS estimation approach, and a daily-data-frequency research design for a euro area country sample over the period 1999-2022, we answer the question: how did the exceptional fiscal and monetary policy measures initiated during the COVID-19 pandemic influence public support for the euro? This question is a pertinent one as public support for the euro is crucial for its long-term sustainability. In addition, important lessons can be learnt regarding the appropriate policy response to future crises in the euro area.
Determinants of public support for the euro
Figure 1 displays the rate of unemployment and the evolution of net public support for the euro in the euro area (EA19) from the introduction of the euro in 1999 until the summer of 2022.
Figure 1 Unemployment and net public support for the euro in the EA19 countries,1999-2022
Note: As the figure depicts net support, all values above 0 indicate that a majority of the respondents support the euro. The vertical dashed lines represent four milestones in the history of the single currency: the physical introduction of the euro in January 2002, the start of the global financial crisis in September 2008, the start of the recovery at the end of 2013, the start of the COVID-19 crisis at the beginning of 2020 and its end in June 2022.
Source: Standard Eurobarometer data 51-97. See Figure 2a in Roth et al. (2024).
The figure shows that prior to the pandemic, unemployment was a major determinant of support for the euro. The rise in unemployment after the Great Financial Crisis of 2009 is associated with a fall in public support for the euro. When unemployment started to decline from the end of 2013 onwards, there was a pronounced rise in support for the euro. However, during the pandemic the rise in unemployment was accompanied by a rise in support for the euro, reaching its highest level in the winter of 2020/21. This positive correlation during the COVID-19 crisis (2020/2021) between unemployment and support runs counter to the previous negative relationship registered during the crisis of 2008-2013 and the subsequent recovery.
Figure 2 shows how support for the euro has evolved in the 19 individual members of the euro area.
Figure 2 Unemployment and net public support for the euro in EA19 countries, 1999-2022
Note: See Figure 1 for a description.
Source: See Figure 2b in Roth et al. (2024).
The figure leads us to the following conclusion. Net public support for the euro increased in 13 out of the 19 euro area countries during the pandemic. The largest increases occurred in Italy, Greece, and Portugal (by 20 and 19 percentage points, respectively), followed by Lithuania and Belgium (by 15 and 12 percentage points). In Slovenia and Spain, net support for the euro increased by 10 and 9 percentage points, respectively. Overall, public support remained at very high levels in the midst of the COVID-19 pandemic.
The question arising from this pattern is: to what extent do the EU fiscal policy and monetary measures launched in response to the pandemic account for this pronounced increase in net public support for the euro? To answer this question, we first describe the lockdown response to the pandemic and, next the expansionary fiscal and monetary measures taken at the EU level during the pandemic.
The COVID-19 lockdowns
A unique feature of the pandemic was the widespread use of restrictions or lockdowns, inspired by the Chinese case, to arrest the spread of the virus. Figure 3 displays the 14-day moving average of the stringency index, the common measure of the extent of lockdowns and the mortality rate per million people in the EA19 next to the mean unemployment rate. This rate is matched according to the respective bi-annual standard Eurobarometer (EBs 92-97) fieldwork periods considered by us.
The figure demonstrates that the high stringency measures during 2020 and 2021 led to a significant decline in economic activity, strongly reflected in the increase in the mean unemployment rate in the winter of 2020-2021. In response, EU policymakers addressed the economic downturn and the rise in unemployment with rapid large-scale expansionary fiscal and monetary policy initiatives.
The start of the COVID-19 crisis is associated with the rapid increase in the stringency index by the end of February 2020 and its end with the convergence towards pre-crisis levels in June 2022. Changes in the mortality rate are closely connected with the movements in the stringency index. Policymakers felt obliged to respond to an urgent health crisis by introducing far-reaching restrictions on the mobility of the citizens in the euro area. 1
Figure 3 The Stringency Index, mortality rate per million people and mean unemployment rate, EA19, 2020-2022
Note: Values of the left-hand y-scale stringency index are in percent. Values on the right-hand y-scale (showing mean unemployment rates) are in percent. Values on the right-hand y-scale (showing mortality rates) are displayed per million people. X-scale is based upon 14-day moving averages.
Source: Figure 3 resembles Figure 1 in Roth et al. (2024).
Fiscal policy initiatives by the EU
As the introduction of lockdowns induced a sharp fall in economic activity, EU policymakers felt forced into an exceptional response in the form of a package of expansionary fiscal and monetary measures. We briefly list them here.
SURE, a short-term fiscal measure, was an initiative of the European Commission to counteract the increase in unemployment and loss of income due to the impact of the pandemic and lockdowns by providing loans with an overall volume of €100 billion to EU member countries for financing national short-time work schemes (European Commission 2022). Three individual disbursement rates next to the average disbursed SURE loans of EA19 countries took place between October 2020 to March 2022. Italy and Spain received the largest total sums of €27.4 billion and €21.3 billion euro, respectively. Malta received the largest share at 4% as measured in relation to GDP.
The use of the Recovery and Resilience Fund (RRF) stimulus is to be spread over almost seven years until December 2026. With a budget of €724 billion (€338 billion in grants), the RRF is intended to support the economic recovery to build a “greener, more digital and more resilient Europe”.
Figure 4 displays the maximum grants pre-allocation of the RRF in billions of euros and as a percent of GDP. The figure suggests that Italy and Spain are each eligible to receive almost €70 billion in grants from the RRF initiative. The countries that are eligible to receive the largest grants are those in the periphery of the euro area. Overall, this pattern suggests a transfer of resources from the core to the periphery economies of the euro area.
Figure 4 RRF grants pre-allocation, EA19, in billions of euros and measured as a ratio of 2020 GDP
Note: The dashed line represents the EA19 average in percent of 2020 GDP. The left-hand side of the y-axis shows values measured in billion euro. The right-hand side of the y-axis shows values measured in percent of GDP. Source: See Figure 4 in Roth et al. (2024).
Monetary policy initiatives by the ECB
The monetary policy of the euro area turned highly expansionary, supporting the fiscal measures of the EU. The ECB’s Pandemic Emergency Purchase Programme (PEPP), an extension of the Asset Purchase Programme (APP), foresaw asset purchases in the secondary government bond market with a total volume of €1,850 billion. As of the end of March 2022, the ECB had purchased a total of €1,520 billion in assets through the programme. The ECB acted much more quickly and comprehensively during the pandemic than during the economic crisis twelve years earlier.
Conclusions
Following our exploration of the data, we arrive at four major conclusions.
- First, during the COVID-19 pandemic, net public support for the euro increased among a majority of the 19 euro area members and reached historically high levels at the peak of the COVID-19 crisis in the winter of 2020/2021.
- Second, we find a significant positive relationship between the expansionary fiscal initiatives taken by the European Commission and the rise in support for the euro in the euro area.
- Third, the expansionary monetary measures by the ECB are only marginally associated with a positive effect on public support for the euro.
- Fourth, the increase in unemployment and the downturn in economic activity triggered by the COVID-19 pandemic and the subsequent lockdowns did not negatively affect public support for the euro.
Overall, our findings suggest that during a crisis such as a pandemic with sharply rising rates of unemployment, EU fiscal policymakers can improve the support for the common currency through appropriate measures. In contrast, the impact of the expansionary monetary initiatives was limited, with only a slightly significant positive influence on support for the euro in the winter of 2020/2021.
Source : VOXeu
