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The uncertainties tied to the United Kingdom’s withdrawal from the European Union were compounded in 2020 by the COVID-19–induced economic downturn. Those topics dominated a conversation among a panel of Chicago Booth experts who considered the economic outlook for Europe in the coming year.

The talk was the third and final of Chicago Booth’s 2021 Economic Outlook events. The panelists, including Booth professors Veronica Guerrieri, Randall S. Kroszner, and Brent Neiman, focused on the role fiscal and monetary policy played in addressing economic problems over the last year, and discussed how policy makers can confront the challenges still to come. Earlier discussions in Chicago and Hong Kong focused on the US economy and Asia, respectively.

Moderator Stephanie Flanders, senior executive editor for economics at Bloomberg and head of Bloomberg Economics, led the conversation, weaving in questions from the session’s nearly 400 attendees. Watch the full video here, or scroll to read highlights below:

European rollout: How is the slow vaccine distribution process affecting the European economy?

The COVID-19 vaccine rollout should take priority over other pandemic policy initiatives because it is essential to truly reviving economic activity, said Kroszner, a former governor of the US Federal Reserve System from 2006 until 2009.

“It doesn't really matter how much fiscal stimulus or monetary stimulus there is if people won’t go out to shop, if people won’t be able to go into the office, if there are policies that don't allow stores to be open. You're never going to get full recovery in these circumstances,” said Kroszner, deputy dean for executive programs and Norman R. Bobins Professor of Economics.

“Some energy should be devoted to and some funds should be used in this path towards fiscal union to reinforce automatic stabilizers.”

— Veronica Guerrieri

Effective recovery: What can be done to ensure that countries use recovery funds in the most productive ways?

Countries have autonomy over how recovery funds can be spent, and that has created political frictions in some countries in the European Union. Automatic stabilizers can be quickly enacted and rolled back if needed, said Guerrieri, a research associate of the National Bureau of Economic Research since 2013 and a consultant at the Federal Reserve Bank of Chicago since 2014.

“Some energy should be devoted to and some funds should be used in this path towards fiscal union to reinforce automatic stabilizers, maybe creating some centralized automatic stabilizers that can index to macroeconomic indicators of different countries,” said Guerrieri, the Ronald E. Tarrson Professor of Economics and Willard Graham Faculty Scholar. “This is something that would make the economy recover better, and respond better to all the uncertainty about how fast we are going to recover.”

Brexit: What do we know about the economic impacts of the UK’s separation from the EU?

It’s difficult to understand Brexit’s recent impact because it is so entangled with COVID-19, but the lack of tariffs and trade quotas has been positive, said Neiman, a former staff economist for international finance on the White House Council of Economic Advisers. Still, there are some unknowns.

“It would be a worse shock if tariffs were included as part of the Brexit package, but that did not materialize,” said Neiman, the Edward Eagle Brown Professor of Economics and William Ladany Faculty Scholar. “On the other hand, there will be increases in what economists would refer to as non-tariff barriers, such as differences in rules on licensing and professional permits, which can be important for services trade. We'll have to see, but those certainly could put a wedge in the flow.”

”Markets often change very quickly, confidence changes quickly, and we don't fully understand exactly what undermines that confidence. A rapid loss of confidence could cause a sharp rise in rates and financial instability.”

— Randall S. Kroszner

Spending sprees: Should we be concerned about the deficits countries are running up to combat the pandemic?

Kroszner said that spending to stimulate economies and facilitate public health necessities, such as vaccines, is important—but so is having a plan for paying back those debts.

“A low cost of borrowing does encourage more borrowing, and it gives a signal that it's OK to do more. But the challenge is that our models tend to suggest that, as the markets become concerned about repayment, things move smoothly and we'll get signals to pull back as interest rates rise,” Kroszner said. “The way the world works, however, markets often change very quickly, confidence changes quickly, and we don't fully understand exactly what undermines that confidence. A rapid loss of confidence could cause a sharp rise in rates and financial instability.”

Fairness: Will the inequalities that played out during the pandemic lead to more calls for universal income?

Some of the stimulus packages have focused on addressing inequalities brought on by the COVID crisis, Neiman said. In particular, those funds are often used to address scarring that could occur for workers in low-wage sectors or from the reduced provision of education.

“Those that are most likely to lose their jobs or to have to risk their health in order to keep going to the job are those that had lower income, less education, less ability to maintain their human capital in other ways,” Neiman said. “Another important example would be education. Children around the world are potentially taking a year off of school, which could have long-run productive implications for everyone. That problem is probably most important to deal with for those families that perhaps don't have the resources to provide forms of education at home.”

Silver lining: Is there anything good the pandemic has done for European economies?

As companies adopt new technologies and offer flexibility in work schedules, that creates opportunities to expand the workforce, especially to those who are primary caregivers for children, Guerrieri said.

“Women are going to be able to participate. To have a more flexible schedule is going to make it easier for women to have a career,” Guerrieri said. “And it makes it easier because maybe they don't have to travel as much as before, maybe they can adjust their hours to their schedule at home with kids. I think this is going to be important for the future of the economy.”


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