Beyond the pandemic: opportunity for a better tomorrow?
Post epidemic recovery and lessons of 2020 experience for future shocks
/ By Odile Renaud-Basso, President of the European Bank for Reconstruction and Development (EBRD)
This article was originally published as part of the 2021 edition of Bled Strategic Times, the official gazette of the Bled Strategic Forum (BSF) international conference. You can access the full version of this and other BSF publications by visiting our official website.
It is quickly becoming a cliché to talk about the severe drop in economic activity during Covid-19. What is almost equally remarkable to the scale of the 2020 disaster is the speed of recovery in most countries and in many sectors of the economy. Average GDP growth in the EU is likely to be just below 5 per cent. Industry and international trade have already recovered to above pre-crisis levels in a number of countries. The construction sector is starting to show signs of overheating in Hungary, Poland or Slovakia.
Swift and decisive policy reaction has been the key reason behind this recovery. It happened both at the national and the EU level. Liquidity support, employment protection, outright public investment have all contributed to the resilience in the face of this unprecedented crisis. Increased health care spending, especially the vaccine rollout was even more important. All this was fiscally costly but ensured that 2020 output losses will likely fully recover in 2021 in most of the EU countries.
The MDBs and EBRD amongst them have also responded rapidly and decisively to the coronavirus pandemic in 2020. The Bank was the first international financial institution to approve a “Solidarity Package” which was quickly followed by a “Resilience Framework” combining additional financial resources, streamlined procedures and enhanced policy engagement. The Bank also intervened with a Vital Infrastructure Support Programme to keep the vital infrastructure going. The EBRD delivered on its commitments with a record 11 billion EUR new investments in 2020 through 411 projects. Perhaps more importantly, EBRD rolled out the Rapid Advisory Response framework, streamlining policy support. With record-high public support packages being rolled out, the question of “how” the money is spent was often more important than additional funds injected as financial support. Better policies, improved administrative capacity or more advanced digitalisation was often necessary to ensure public support was efficiently and effectively utilised. The experience of 2020 brings important lessons for future shocks as well as important significance for the recovery effort.
First, we need policy margins of manoeuver to react to shocks of this kind. Public support worked in the crisis. Monetary policy supported fiscal space, while fiscal expansion supported the price stability mandate of the European central banks in 2020; the priorities of both policy strands were perfectly aligned in Europe. The EU-wide instruments, such as SURE also contributed to lifting the budget constraints. These stabilising circumstances cannot always be taken for granted. A number of EBRD countries of operation did struggle with sovereign financing, while their policy freedom was significantly constrained. Lebanon, Tajikistan, Tunisia, and more recently Belarus and Montenegro are among the economies that saw significant increases in the cost of borrowing. Higher inflation could break the strategic complementarity of monetary and fiscal policies; we already see central bank rate hikes in Central Europe. Future shocks could be more country-specific, calling for a different setup of the EU financial instruments. This also means national public debt cannot keep on increasing.
Second, even though recovery looks healthy overall, the risk of public investment being hampered by the efforts to stabilise and reduce excessive public debt is high in some countries. We have seen this during the previous crisis as the overall level of public investment remained very low. This creates the need for investment incentives — either in the revised fiscal rules or directly through EU-wide instruments. The Recovery and Resilience Facility is an important step in the right direction.
We need a concentrated strategic action in green, digital and inclusion space. Without private sector participation, the progress there will never be sufficient.
Third, since the recovery is so pronounced in many areas, the post-Covid policy action must be far more selective than in early 2020. The risk of overheating is not theoretical as some sectors are already overheated: annual Producer Price Inflation in the EU was already in double-digit area in mid-2021. The healthy state of some sectors allows us to concentrate the recovery effort and put more resources on the European (and indeed, global!) common good.
Green transition, inclusion and digitalisation are the priorities we should concentrate on. They constitute the core of the EBRD Strategic and Capital Framework. They are also, fully in line with the priorities of the EU. Progress on all three grounds is urgent and with global consequences. At the same time, concentrating on any of the three priorities on its own would not suffice. Pushing the green agenda, while ignoring the social consequences of changed relative prices of fuels or water would quickly create a political backlash. Ignoring the digital revolution would endanger competitiveness and make some green solutions unfeasible. Finally, putting all the effort locally would not be sufficient to address global climate or migration challenges. The EBRD works in Central and South Eastern EU countries as well as the EU Neighbourhood and Central Asia. A multilateral institution with a European core plays an important role in the delivery of projects and EU policy goals. The EBRD can be a vector for European priority projects.
Finally, making use of the ample private savings has never been more important. Private sector participation is almost a requirement for the financial sanity of the investment projects. It is a way to multiply the financial firepower and truly create a push in greening and digitising the European economy. It is also a way to make the recovery self-sustaining, rather than reliant on public funds drip-feed. Fortunately, so far, financial sector sustainability does not look systemically threatened in Europe. Banks remaining in good shape support financial intermediation, but further progress on capital market development will be necessary to unlock the true potential and resilience of private sector financing.
Multinational development banks play a crucial role in addressing the huge global challenges we are facing. One example: in climate financing alone the MDBs raised USD 66 billion in 2020, up from USD 61 in 2019. However, to address the Sustainable Development Goals by 2030 we need to move from “billions to trillions”. This is only possible with mobilising the private sector: here the EBRD has the ambitious goal to achieve a private sector share of 75% in its investments by 2025.
EBRD applies a commercial focus that supports the development of sustainable markets by complementing, not supplanting, private finance. It has an approach of market-based pricing, with a strong mandate to crowd in private investors by investing alongside them on comparable terms and conditions, while ensuring no distortion of the market. This approach facilitates the mobilisation of external financing and is supported by the disciplined use of concessional and blended finance to make investments in challenging environments and to reduce risk. The Bank’s policy advice can play an important role in helping the state to facilitate private sector development, creating a favourable environment for businesses and attracting private investors.
The Covid-19 crisis was special in both the scale of economic fallout and in the speed of recovery. It would be unwise to take too much comfort in the latter. We need to ensure we have the tools and policy space to act when another crisis hits. We must not repeat the mistakes of slow, “investment-challenged” fiscal stabilisation of mid-2010s. Finally, we need a concentrated strategic action in green, digital and inclusion space. Without private sector participation, the progress there will never be sufficient.
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