An FDR-style 'New Deal' would combat Covid's second wave

Giles Merritt warns that with the EU’s coronavirus recovery fund being overtaken by the second wave, only an unprecedentedly massive strategic response can confront another ‘Great Depression’.

The ink was scarcely dry on the EU’s Covid recovery plan before it was overtaken by the second wave. Now, with the virus again sweeping through Europe, it’s time for more creative and far-sighted strategic thinking.

Policymakers were forced onto the back foot by a pandemic they hadn’t prepared for. Now it’s threatening to become endemic, so playing catch-up won’t be good enough.

Key elements of European society are under pressure and may collapse unless strengthened. The threatened pillars of our social economy range from jobs and pensions to whole industries and the services they rely on.

Europe looks set to be plunged into a Great Depression once redundancies and bankruptcies start to cascade. If we don’t respond boldly and collectively, our well-being and political stability is at risk. The possible longer-term effects of the Covid crisis are so alarming that Europe’s national governments are loath to warn of them.

Analyses of international organisations, however, leave no room for complacency. IMF chief Kristalina Georgieva has said “it is truly a crisis like no other,” while the OECD warned in June that if a second wave were to hit, the “world economy would be on a tightrope.”

Now that second wave is upon us. Nobody knows how deep the depression will be, or how long it will last, but the signs point to a domino effect of corporate bankruptcies, mass unemployment, slow growth or no-growth, and mountainous debt, both public and private.

The counter-cyclical measures usually deployed against recessions will plainly be inadequate. Responses to the Covid-19 outbreak were predicated on the idea that once contained by lockdowns, the virus would dissipate and that job furloughs would avoid widespread unemployment. But with the pandemic perhaps lasting into 2022 or beyond, these short-term policies won’t suffice.

National responses will also be inadequate, and mostly unaffordable. The European Union has the advantage, however, of possessing mechanisms for collective actions if it can decide what these should be. So what strategy should it develop and will member states accept the need for an EU-wide response?

A month ago, this column urged the creation of a centralised European planning agency to implement post-corona policies. but that won’t be enough. The speed and scale of Covid’s return mean we need greater and more immediate measures. Europe must contemplate defences radical enough to resemble US president Franklin Delano Roosevelt’s ‘New Deal’.

FDR transformed 1930s America through massive state-funded job creation schemes. His strengthening of trade unions was counter-balanced by a slew of measures to encourage business start-ups. The huge cost saw US federal debt rise sky-high, while new wealth taxes amounted to three-quarters of top earners’ incomes and pay-as-you-go taxes were introduced for everyone.

To this day, Roosevelt’s New Deal dwarfs the EU’s €750 billion coronavirus recovery fund. It was needed to stave off imminent economic and social disaster, whereas the more modest EU plan responded only to the initial Covid wave. How EU countries should enlarge it is an open question; it might be tailored to fit with the EU’s recently unveiled €1 trillion ‘Green New Deal’ aiming to eliminate all greenhouse gas emissions by mid-century. Perhaps FDR-style public works projects could be harnessed to environmental targets, to create employment and investment while combatting climate change.

Europe’s Covid counter-attack will need to do more than scratch the surface. The damage to our market economy will call for a re-think of the present balance of capitalism versus social protection; that’s why the EU single market rules governing competition policy and state aid are already slated for reform.

Whether we like it or not, the regeneration of collapsed businesses will also herald a new epoch of ‘Big Government’. The bailing out of corona’s casualties by national authorities should mean more Europe, not less. The commission in Brussels must lose no time in spelling this out with a follow-up to the increasingly inadequate recovery fund.

Only a common recovery strategy can ensure that when EU member governments are plunged into economic and political turmoil, they will cooperate with one another, and not compete. Failing that, they may succumb to the temptation of beggar-thy-neighbour subsidies and races to the bottom. A first step might be to dust off FDR’s New Deal to see what is still relevant.

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