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Fiscal Stimulus: Lessons From the US to the EU?

With the American Rescue Plan, the US government has put in place a fiscal stimulus package worth 10% of GDP, to be followed by an equally large infrastructure package. In the EU, although the fiscal policy response has also been unprecedented, it is much smaller. As the effects of the pandemic on society and the economy are still fluid, economists and policymakers weigh their options and attempt to learn from previous recessions while looking forward to creating a coordinated response to the pandemic and beyond. On 3 June 2021, as part of the Centre for European Policy Studies’ annual flagship conference, the CEPS Ideas Lab, Intereconomics and the European Network for Economic and Fiscal Policy Research (EconPol) asked experts from both sides of the Atlantic to offer their insights on the potential lessons that could be learned for Europe. This Forum is the result of the session participants’ comments and continued discussion.

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Reducing the Mobility of SARS-CoV-2 Variants

Escape variants can cause new waves of COVID-19 outbreaks and put vaccination strategies at risk. To prevent or delay the global spread of these waves, virus mobility needs to be minimised through screening and testing strategies, which should also cover vaccinated people. Martin Hellwig, Viola Priesemann and Guntram B. Wolff write that the costs of these strategies are minimal compared to the costs to health, society and the economy from another wave.


The Great COVID-19 Divergence

The COVID-19 pandemic has led to the biggest global recession since the Second World War. Forecasts show the EU underperforming economically relative to the US and China during 2019-2023. Southern European countries have been particularly strongly affected. Some sectors have been hit harder than others. Inequality could rise. The pandemic may lead to lasting changes in the economy. Policymakers must act to prevent lasting divergence within the EU and scarring due to the fallout from the pandemic, write Grégory Claeys, Zsolt Darvas, Maria Demertzis and Guntram Wolff. The first priority is tackling the global health emergency. Second, the article warns against premature fiscal tightening but suggests additional short-term support to prevent scarring. Third, the article warns against protectionism and advocates for reforms that boost productivity growth further.


Fiscal Success During COVID-19 Says Believe the Good New

Too much blood in terms of unemployment and sweat in terms of intellectual effort have been spent trying to determine the amount of fiscal space that economies have. Our policy focus instead, writes Adam S. Posen, should be on what to do with the fiscal space that almost all advanced economies (and a surprising number of emerging market economies) actually have. The priority should be establishing a means to sustain and evaluate longer-term infrastructure (green) investment and to expand automatic stabilizers rather than spending more effort on fiscal rules and sustainability.


Inflation Risk?

Inflation is on the rise again in the industrialised world. This has led to fears of a sustained surge in inflation. Paul de Grauwe argues that while such fears may make sense in the US, they do not in the eurozone, where the monetary-fiscal policy mix has been much less expansionary than in the US. The fear expressed by some that the monetary overhang from the large injections of liquidity through quantitative easing might lead to inflation in the eurozone does not stand up to scrutiny either.