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The Need for Resilience in the EU Economy

The Need for Resilience in the EU Economy Economy Near Us (XLV)

The concept of resilience (lat. risiliere) became frequently used in public discourse in recent years. Originally used by scientists, it has a long history in various disciplines (physics, materials science, engineering, psychology, ecology)[1] before the crises that have emerged worldwide in the last decades led to its appropriation by international organizations (UN, OECD, IMF, World Bank etc.) and various decision-makers. They integrated it into their strategies, guidelines and transformed resilience into a public policy desideratum.

Regarding our topic, more specifically, there are different definitions of the concept of economic resilience. Most commonly, it designates the specific way in which an economy responds to shocks, by neutralizing them[2]. Such shocks can take various forms (financial shocks, technological shocks, wars, natural disasters etc.) and they can manifest themselves in national economies, at the regional level, or even at the level of the world economy, affecting them through different components - financing, production, consumption/revenues, trade. From this perspective, a resilient economy will be less vulnerable to disturbances that may affect its structure, will recover more quickly from their impact when these disturbances will occur, and will not suffer in its functioning [1]. Thus, from a practical view, a state of equilibrium will be ensured, production and other macroeconomic variables being relatively stable and the losses in the economy being lower[3].

A particular perspective, closely related to the challenges of today's world, is to consider the concept of economic resilience as a component of sustainable development and, more broadly, of general security. It is thus seen as a means (but also as a condition) for preserving "gains" in economic development at a certain time or in achieving specific goals, such as reducing carbon emissions (in the context of the fight against climate change), reducing poverty and building the economy on sustainable bases for the long run [7].

A discussion on the need to strengthen the resilience of economies in general is particularly relevant in the context of multiple crises that humanity has been confronted with in the last period. These crises have shown that emerging economies are especially vulnerable, with a high degree of exposure to shocks. They have fragile economic structures, are dependent on certain sectors, have little infrastructure etc.

The economy of the European Union (EU) has faced also multiple such shocks in the recent decade. Some of them have resulted in severe crises, such as the financial crisis of 2008-2009, that of the sovereign debt and, currently, the COVID-19 pandemic crisis. These manifested themselves directly, affecting the economy through the financial channel, respectively through consumption, production and foreign trade. Others, such as the refugee crisis, Brexit and climate change influence it indirectly, with consequences that are felt not necessarily immediately, but in the medium and long term in the Member State economies. With regard to the latter, for example, the sharp rise in the number of such migrants in EU countries is affecting public budgets, requiring higher public spending to improve border security, for rescue operations, to manage political asylum procedures and provide food, housing, social benefits etc. These refugees also have an impact regarding the size, the structure and “the quality” of the labor market, most of them having a lower level of education than the locals [3]. In 2020, about 5.1% (23 million people) of the total population of the European Union was represented by such citizens from outside the EU borders. About 9% of them came from war-torn areas, such as Syria, Afghanistan and Iraq, as political asylum seekers [4]. With regard to Brexit, it is expected that the European Union will feel the effect first of all in terms of investment and financial markets, given that the United Kingdom is one of the most important financial hubs in the world. Another effect of Brexit on the European Union economy is expected to be the reduction in the volume of international trade [6].

Beyond these specific issues, in a more general perspective, in our opinion, there are two categories of factors that make the EU economy vulnerable:

  1. The lack of convergence, the existence of different structures and development gaps between Member States' economies[4];
  2. The lack of adequate risk-sharing mechanisms.

With regard to the first factor, this makes some EU Member States, mainly developing ones, more prone than others to risks, and generating externalities (contagion effects) that can negatively influence the economies of other states as they materialize. One of the most conclusive examples is the case of Greece, Portugal and Ireland which have been at the root of the debt crisis throughout the Community. From the perspective of the second factor, the existence of risk-sharing mechanisms (especially through the market), is important in the context of the EMU as a currency union. Related to this, it must be said that in the post-crisis period, the European Commission has set a number of targets in this regard, revealed in the so-called The Five Presidents' Report (2015) [2] and in other programmatic documents that followed, which considered the achievement of the Banking Union, of the Capital Markets Union and, in the context of a deeper political integration, of the Fiscal Union. Although progress has been made on the first two objectives, they have not been completed, and the whole process has remained a desideratum. The reason for their non-completion was the resumption of economic growth and, in close connection with this, the setting of other priorities by decision makers.

How can the economic resilience in the EU be strengthened? There is no universal model that can be applied. In principle, this can be achieved by setting targets and adopting appropriate policies. From this perspective, a key role in improving the economic resilience is played by policy makers. An important aspect, however, in order to be effective, involves a complex, multi-level approach [1]. Thus, it is necessary to invest in infrastructure (transport, construction, digital infrastructure etc.), consolidate industrial capacities and the private sector, in general, mainly in the less developed countries, diversify production, so that the economy is not dependent only on certain sectors, to develop multilateral relations in terms of foreign trade, but also to strengthen institutional capacities. Integrating objectives and business models (circular economy, for example) specific to sustainable development, as some international organizations (such as the UN) advocate [9], can also be a solution.

Importantly, some of these measures may require a high volume of investment and institutional reforms. The European Union, through its budget, more specific through the Structural and Investment Funds (ESIF), seeks to reduce the gaps in the least developed countries but they have not been integrated into an overall strategy to improve resilience in the Community. Until the current pandemic crisis, resilience has been seen by European Commission, in close connection with the perspective of other international organizations (UN, OECD) and the Global Strategy for Foreign and Security Policy of the European Union (2016), as necessary for its neighboring states or for its trading partners, so that they do not pose risks to the EU. In the context of the need to recover economically after the current pandemic crisis, however, it launched the Recovery and Resilience Facility, as part of the NextGenerationEU program, which means a change in perspective, in the sense of an inward orientation, aimed at strengthening economic resilience in the Member States [8]. It includes incentives worth 724 billion euros, being the largest investment package in the history of the EU. The money provided to each state through the National Plans submitted must be accompanied by reforms. A significant part of this amount would be used to make progress in the field of digitization and reduction of carbon emissions, another part would be the development needs of each Member State [5], including the development of infrastructure, education, health, "solving" the structural problems of economy and an increase in productive capacities etc.

The conclusion that emerges from the above is that strengthening economic resilience in the European Union is a necessity in the context of today's challenges. The European Commission seems to have become aware of this, especially in the wake of the current pandemic crisis, and the EU appears to be making tentative progress in this regard. 

References

[1] Brinkmann, H., Harendt, C., Heinemann, F., Nover, J. (2017), Economic Resilience. A new concept for policy making?, available at: https://www.bertelsmann-stiftung.de/fileadmin/files/BSt/Publikationen/GrauePublikationen/NW_Economic_Resilience.pdf;

[2] European Commission (2015), Completing Europe's Economic and Monetary Union (The Five President's Report), disponibil la: https://ec.europa.eu/info/sites/default/files/5-presidents-report_en.pdf;

[3] European Commission (2016), An Economic Take on the Refugee Crisis, available at: https://ec.europa.eu/info/sites/default/files/file_import/ip033_en_2.pdf;

[4] European Commission (2020), Overall figures of immigrants in European society, available at: https://ec.europa.eu/info/strategy/priorities-2019-2024/promoting-our-european-way-life/statistics-migration-europe_en;

[5] European Commission (2021), The Recovery and Resilience Facility, available at: https://ec.europa.eu/info/business-economy-euro/recovery-coronavirus/recovery-and-resilience-facility_en;

[6] Felbermayr, G., Fuest, C., Gröschl, J.K., Stöhlker, D. (2017), Economic Effects of Brexit on the European Economy, available at: https://www.econstor.eu/bitstream/10419/219507/1/econpol-pol-report-04.pdf;

[7] Pisano, U. (2012), Resilience and Sustainable Development: Theory of resilience, systems thinking and adaptive governance, available at: https://www.esdn.eu/fileadmin/ESDN_Reports/2012-September-Resilience_and_Sustainable_Development.pdf;

[8] Treshchenkov, E. (2019), Resilience in the Discourses of the European Union and International Organisations, available at: https://iorj.hse.ru/data/2019/05/22/1508327489/E.%20Treshchenkov.pdf;

[9], UNCTAD (2018), Building resilience to multiple shocks affecting people and sustainable development, available at: https://unctad.org/system/files/official-document/tdb65_1_d5_en.pdf; 

Notes:

[1] For a history of the concept of resilience see Gößling-Reisemann, S., Hellige, H.D., Their, P., The Resilience Concept: From its historical roots to theoretical framework for critical infrastructure design, available at: https://www.uni-bremen.de/fileadmin/user_upload/sites/artec/Publikationen/artec_Paper/217_paper.pdf.

[2] From this point of view, the notion of economic resilience differs from that of robustness, antifragility, sustainability etc.

[3] Also, as a particular feature, a resilient economic system has a proactive and an adaptive character. The proactive dimension concerns making changes in the economic system. It derives from the ability of the human being, of individuals, as components of the social system (as opposed to natural systems) to consciously influence things. The adaptive character derives from the fact that in case of a shock, the economy will no longer function in the conditions before its manifestation, as if it did not happen, but in the new conditions, influenced by the negative event.

[4] Here we can add other factors specific to the economies of Member States, such as the high level of public debt, which have increased as a result of the crisis caused by the COVID-19 pandemic. They reduce fiscal space and affect the ability of governments to intervene through fiscal policies in case of shocks.

 
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OEconomica No. 1, 2016