In the early stages of the Covid-19 crisis, concerns emerged over potential divergence in the euro area (e.g. Boot et al. 2020). These concerns were valid given the unprecedented scale and asymmetric impact of the shock. These concerns were also aggravated by the initial situation of the euro area, with potentially destabilising imbalances between ‘core’ and ‘periphery’ countries.
Calls for coordinated responses – in particular on the fiscal front – appeared quickly (Baldwin and Weder di Mauro 2020). The ECB acted fast in order to provide fiscal space (Bartsch et al. 2020a) by keeping borrowing costs low and by effectively providing a monetary backstop to government debt. The same authors also noted that “correcting current imbalances between investment and saving, could set in a virtuous circle of stronger growth and reduced indebtedness” (Bartsch et al. 2020b). The fiscal response at the national level was strong all over Europe, and the unprecedented fiscal package adopted by the European Council this summer – Next Generation EU – is an important step towards addressing potential divergence in the euro area.
By allocating more funds to countries most affected by the shock, the EU Recovery and Resilience Facility has chosen the right strategy. But two concerns remain. First, there is no explicit objective to reduce euro area current account imbalances. Second, there is no coordination of national fiscal plans and this may actually increase pre-existing current account imbalances.
In a recent report produced by the French Productivity Board (French National Productivity Board 2020), we provide a preliminary (but incomplete) step towards analysing this concern. To do this, we compiled a comprehensive and detailed comparison of all measures announced by the largest six European economies, five euro area countries (Germany, France, Italy, Spain, and the Netherlands), and one outsider (the UK). A summary of our findings is presented here.
A comparison of aggregate amounts of emergency and recovery plans
Our main contribution is to offer a detailed comparison of the nature of fiscal plans for these countries. Other investigations (Bruegel 2020, OECD 2020) offer complementary analysis on a different set of countries. The detailed data on the measures, available for other researchers, can be useful for further analysis. It is important to stress that announcements may ultimately differ with actual spending. But at this early stage we can only analyse announced measures.1 To facilitate comparisons, we begin by distinguishing two categories of schemes. First, there are fiscal measures such as subsidies or tax credits. Second, there are liquidity and guarantee measures, such as deferral of taxes and social contributions, state-guaranteed loans, or public guarantees. This distinction avoids mixing expenditures with immediate effect and guarantees that will have – in all probability – only limited impact on the budget balance in the coming years. Liquidity and guarantee measures are therefore dealt with separately in our report, and the descriptive statistics presented thereafter relate only to immediate fiscal measures in the sense that there are no repayments expected from the economic agents benefiting from them.
The largest fiscal response was announced in Spain, with a global effort (emergency and recovery) equivalent to 11.2% of its GDP. The UK and Germany are second and third, with announced amounts equivalent to 9.1% and 8.4% of their GDP, respectively.
In this context, France’s announced response is large by historical standards, at 7.6% of its GDP (€185 billion). However, its emergency measures are smaller than in other countries in the sample, with 3.8% of its GDP (€93 billion) against 8% in the UK, 5.4% in Spain, 4.8% in Germany, 4.5% in the Netherlands, and 3.8% in Italy. On the other hand, in comparison with Germany, the French recovery plan is slightly larger (3.8% of its GDP compared with 3.6% in Germany), but with a lengthier implementation over time (four years compared with only two in Germany).
Figure 1 Amount of announced immediate fiscal emergency measures and recovery plan by country, excluding liquidity and guarantee measures and excluding automatic stabilisers
Note: the aggregate amounts of the national emergency and recovery packages correspond to the amounts announced on 17 December 2020 for France and on 15 or 20 November for the other countries. The measures announced are more or less spread out over time depending on the country: until the end of 2021 at the most for the emergency measures, until the end of 2023 at the most for the stimulus measures (see details in the annexes).
Source: National sources; authors’ calculations.
Supply, demand, and mixed measures
One question on the impact of national fiscal plans is that if countries target measures differently on the demand- and the supply-sides, this may affect trade imbalances. Hence, we distinguished measures according to whether they support supply, demand, or a third category – ‘mixed’ – whose effects are considered as affecting both simultaneously.
Most of support packages to businesses deployed by the various countries are aimed primarily at small and medium-sized enterprises (SMEs), very small enterprises (VSEs), self-employed workers, and freelancers. These measures support the continuation of the economic activity, but also provide income-replacement for entrepreneurs experiencing a sharp fall in income. These packages are hence included in the ‘mixed’ category. Short-time work schemes were a typical example of these ‘mixed’ measures, as they both reduce costs of firms and alleviate the fall in income for workers who otherwise might have lost their jobs.
Only support and subsidies intended for mid-sized and large companies (or addressed by default to all companies regardless of their size) were included in the ‘supply’ category. ‘Demand’ measures are those designed to support the income of households and vulnerable persons (such as the extension of social benefits), measures to stimulate consumption (such as VAT cuts), or health expenditure (purchase of medical equipment, increased¬ medical staff costs linked to recruitment, and increased working hours, etc.).
As far as emergency measures are concerned, all countries except Spain converge on an immediate effort – mainly focused on partial activity schemes as well as aid to SMEs, VSEs, and the self-employed (included in the ‘mixed’ category). These schemes represent up to 69% of the effort in Germany, 65% in France, 55% in Italy, 52% in the Netherlands, and 51% in the UK. This should not be a surprise. The Covid-19 crisis affected both the demand- and the supply-side of the economy, and the government measures responded accordingly through ‘mixed’ measures that supported both sides.
This is followed by demand mechanisms, which account for 49% of fiscal emergency measures in Spain, and 41% in the UK and the Netherlands. The proportion of emergency measures to support demand is more limited in France (19%) and Italy (22%).
Figure 2 Emergency plan allocation strategy by country
Note: the amounts indicated are spread over 2020 and 2021 for most countries.
Source: National sources; NPB restatements and calculations.
As far as recovery packages are concerned, there are two distinct groups of countries. On the one hand, the UK and the Netherlands, for example, have recovery plans that are overwhelmingly demand-driven (89% of the total amount for the Dutch plan, 69% for the UK plan). On the other hand, Spain, Germany, and France present recovery plans that are more balanced between supply and demand measures. Germany and Spain, for example, are allocating around 49% of their stimulus spending to support demand, followed by France (42%). It is also notable that UK recovery measures (1.1% of GDP) are much smaller than those of its European neighbours. At the time of writing, the details or the Italian recovery plan are not known, therefore it cannot be included in the analysis.
Based on this preliminary analysis, there is no overwhelming evidence that national government fiscal plans strongly diverged on favouring the demand or the supply side of the economy. From that point of view (qualitative rather than quantitative), the concern that they could aggravate trade imbalances may not materialise. However, this also implies that because of the absence of coordination on these plans, they have not been used to reduce imbalances in the euro area. For example, a country with larger trade surplus like Germany has not tilted its fiscal plan towards more support to demand. Another risk we identify in the report is that countries with current account surpluses may be the first to reduce their fiscal stimulus.
Protection and reallocation measures
The distinction between supply and demand measures is standard and useful, but the ‘mixed’ nature of the crisis (and of a large part of the policy response) means it is not clear-cut. For this reason, we compared countries’ fiscal responses in another dimension: we classified the different measures on whether their objective was to ‘protect’ or to ‘reallocate’. The first category contains measures that aim to protect households or firms against the economic and pandemic shock (bankruptcies, income loss, lack of access to healthcare, etc.). The second group contains measures encouraging the reallocation of resources in the economy to promote structurally a more productive and greener recovery, improving the competitiveness or accelerating the energy transition.
Protection measures are generally more short-term. In contrast, reallocation measures are more structural and long term.
In the protection category, we included partial unemployment measures; aid for SMEs, VSEs, and the self-employed; exemptions from social security contributions; and health care expenditure. In the reallocation category, we included measures to support innovation, promote energy transition, as well as investment in infrastructure.
All countries except Spain mainly focused on protection measures. These comprised mostly of support to SMEs, VSEs, and the self-employed; health expenditure; or partial unemployment schemes. This type of measure represents 92% of all emergency and recovery measures announced by the UK (8.4% of GDP) and 71% in Germany (6% of GDP). The vast majority of protection measures are in emergency packages, while reallocation measures are almost exclusively contained in recovery packages.
Spain, France, and the Netherlands present more balanced strategies between protection and reallocation measures, while the UK and Germany focused more on short term protection. Reallocation measures account for 51.5% of the overall effort in Spain (5.7% of GDP), 42% in France (3.2% of GDP), and 40% in the Netherlands (3.1% of GDP). It is therefore interesting to note that these three countries stand out from the others by a strategy that is relatively more focused on long-term reallocation arrangements than short-term protection.
Figure 3 Protection and reallocation measures by country
Source: National sources; NPB restatements and calculations.
Note: The Italian recovery package is not included as the full details of its content are not yet available at the time of writing.
Baldwin, R and B Weder di Mauro (2020), Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, CEPR Press.
Boot, A, E Carletti, H-H Kotz, J P Krahnen, L Pelizzon, M Subrahmanyam (2020), “Coronavirus and financial stability 2.0: Act jointly now, but also think about tomorrow”, VoxEU.org, 25 March.
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Bartsch, E, A Bénassy-Quéré, G Corsetti and X Debrun (2020b), It's all in the Mix: How Monetary and Fiscal Policies Can Work or Fail Together, Geneva Reports on the World Economy 23, CEPR.
Anderson, J, E Bergamini, S Brekelmans, A Cameron, Z Darvas, M Domínguez Jíménez, K Lenaerts and C Midões (2020), “The fiscal response to the economic fallout from the coronavirus”, The Bruegel, 24 November.
French National Productivity Board (2021), “The Covid-19 crisis and its effects on productivity and competitiveness”, NPB Second Report.
1 The aggregated amounts of the national emergency and stimulus packages correspond to the amounts announced on 17 December 2020 for France, and on 15 or 20 November for the other countries. The measures announced are more or less spread out over time depending on the country: until the end of 2021 at the most for the emergency measures, until the end of 2023 at the most for the stimulus measures.