“Post-covid’s” political economy: facing inevitable changes

Most complicated for central and local governance in the EU states are the issues of the so-called “new normal” and changing economy’s patterns: i.e. already visible and those only slightly seen in the transitional post-pandemic period. Shortly, these changes could be formulated in a fundamental line of changes – drafting new national political economy structures and revising the existing ones. The reassessment shall follow along the three main directions: a) employment and labour market, b) entrepreneurship and SMEs, and c) national governance system.

This article is a first one in the Institute’s “post-Covid agenda” series of research, the direction that has been previously announced in the EEI’s publications; more in: https://www.integrin.dk/post-covids/.

Post-Covid economics

  Although the pandemic crisis has hit mostly, at least on the initial phase, the national health structures and servicers, the socio-economic issues are definitely the second in line; the more advanced are the medicines’ achievements the quicker are becoming vital the need for socio-economic transformations in the national agendas.

  Some focal features in the national “post-COVID” perspective growth have become obvious: a) the pandemic additionally signified an extraordinary importance of sustainability growth as a means for national resilience; b) massive shift to “remote ways” in working, education and teaching have shown the need for improved existing human experiences towards new realities in the workforce and work places; c) dramatic shifts in entrepreneurship have led to massive companies’ closures and huge layoffs, with an already recognized fact that in most European states about half of the personnel would never came back to previous places.   

  For example, retail’s future is definitely in “online”: that means, people would rather “work from home” than sit in offices, and that they’d like to move out of crowded city centers… However, it’s not going to be the picture everywhere: the Davos World Forum’s survey found that most people have a strong affinity with the workplace and would like to return to working in their offices/companies (once it’s safe), albeit with increased flexibility to work from home one or two days per week. Thus, for example, human interaction and professional support are cherished most (by 75% of respondents) in employees’ corporate affiliation, with more focus on supporting learning and development, creativity and collaboration.

  Of course, the “post-pandemic” period and the states’ efforts to eradicate its consequences is a long-term strategy; that is why the present EU’s plans to assist the member states are divided roughly into two parts: the EU-27 seven-year-budget and the “new generation” rescue package (the later would last “for a generation”, i.e. until 2058).

  In shaping national resilient strategy, the following three “transitional measures” are going to affect policies in the European states leading to assistance in drafting new national development strategies and changing political-economy’s traditional patterns.

1. Transitions in entrepreneurship  

  SMEs and start-ups are crucial for the economic recovery in the states: they have been particularly affected by the liquidity shortage caused by the coronavirus outbreak, and face greater difficulties to access financing. While acknowledging the fact, the EU’s officials recognized that the shutdown of cross-border commerce and travel would cause the global GDP to shrink by about 8 percent in 2020, and over 10 percent in the 19 eurozone states. The crisis has demonstrated that economic connectivity is vital and that the EU states can only rebuild their economic prosperity by working together.

Source: https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1221

 

  The pandemic has sent shocks in entrepreneurship: apart from exceptions in sectors like e-commerce and insurance, social distancing and stay-at-home orders have significantly lowered consumers’ demand. Energy and metal, which are hard commodities, as well as agricultural products, which are soft commodities, have not escaped this downturn, have shown diminishing investment and falling prices in these markets.

More in: https://www.csis.org/analysis/filled-brim-importance-flexible-and-innovative-storage-commodities-markets.  

 

  Many developing economies (including those in Eastern and Central Europe) have not yet diversified into more resilient industries, such as e-commerce and e-trade that are currently benefiting from significant consumption and shifting consumers’ behavior. This lack of diversification makes these countries dependent on commodities’ market conditions which provide certain limits to a sustained, job-intensive and inclusive growth.

  The commodity-driven economies must face high costs to develop additional storage or reduce production with the resulting revenue loss, strained public finances and driving away foreign investors. On top of the harm from demand shocks and lower prices, the commodity-driven economies are lowering businesses’ ability to recoup their losses by storing until prices rise or selling to third parties; many more businesses are likely to fail, even when governments provide substantial assistance.

  Some economy sectors “coordinated” by life sciences, logistics and online retail (most visible at present) have been coping well through the pandemic, with a visual growth: for example the real estate activity will continue and stimulate demand, while logistics space, science parks and transport hubs will all provide out-of-town employment and investment opportunities.

  Hospitals, care homes and assisted-living facilities will also be another major area of focus for real estate development and investment. While offices will evolve, they will remain the beating hearts of the central business districts in the major European metropolitan cities, supporting a lively hinterland of retail, leisure and cultural attractions. This, in turn, will sustain the attractiveness of urban living while shaping the future of real estate.

  Another major direction is supporting SMEs and start-ups; in this regard, the purpose of the EU’s “temporary framework” is to provide targeted support to viable companies that have experienced liquidity problems as a result of the coronavirus outbreak. Thus, initially it was envisaged that companies that were in difficulties before the end of 2019 would not be eligible for aid under the “temporary framework” (TF) but may benefit from aid under existing state aid rules, in particular through the EU’s “rescue and restructuring guidelines”. The latter set conditions according to which such companies must define sound restructuring plans that will allow them to achieve long-term viability. Present EU’s amendment extended the TF to enable the states to provide public support under the TF conditions to all SMEs, even if they were already in financial difficulty on 31 December 2019.

  At the same time, SMEs (i.e. undertakings with less than 50 employees and less than € 10 million of annual turnover and/or annual balance sheet total) have been particularly affected by the liquidity shortage caused by the economic impact of the current coronavirus outbreak, exacerbating their existing difficulties to access financing compared to larger enterprises. If left unaddressed, these difficulties could lead to a large number of bankruptcies of micro and small companies, causing serious disturbances for the entire EU economy.

  Anyway, the support is rendered unless companies are in insolvency proceedings, have received rescue aid that has not been repaid, or are subject to restructuring plans under state aid rules. Given their limited size and involvement in cross-border transactions, temporary state aid to SMEs is less likely to distort competition in the EU internal market than state aid to larger companies. Reference to:

 https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1221

 

2. Labour market’s transformations  

  In the middle of the coronavirus’ pandemic, some trends in the future labor market’s situation have appeared, accommodating the old and the new ones, showing the need e.g. for a wide-ranged education, attention to the artificial intelligence (AI) means, changing corporate strategies, demographic changes, etc. There are the following seven trends that are expected to change the labour market in the years to come. 

  First trend is about personal and social values: young graduates have been in growing pace looking for employment in companies and organisations delivering on innovative, social responsible and sustainable guidelines with the respect for stable social values. In this regard the two ends are matching: personal carrier and corporate values. Hence in future, most young scientists will concentrate on occupations connected to sustainable growth.

  Second trend follows demographic changes’ effect on the labour market: e.g. in the Nordic countries presently life expectancy reached 79 for men and 83 for women; the fact that brings more seniors into employment. Although a retirement age is increasing, e.g. in Denmark it is at 64, making it a period of about 25 years for taking part in the workforce; hence, a flexible employment strategy enters national labour market policy.

  Third trend is about changes from a “fixed-for-life” employment to a kind of “non-typical” working conditions: e.g. combining several occupations and a freelance employment (pro bono type) as part of “lose-structured” workforce. The long-term isolation only signified the fact that not only part of citizens would never return to their previous jobs, but they would rather be “their own masters” and work from home…

  Fourth trend shows the increasing need for contemporary and digital skills; some researchers say that modern “functional competence” can be actively practical for about a decade. Thus, if an employment career would last for about 40-45years, a successful worker shall be re-trained four-fife times. Besides, corona-epidemics have shown that the main direction in such re-training shall de along the digital science and technology.     

  Fifth trend is dealing with the corporate environment and management, including corporate social responsibility’s principles, CSRs and agile methodologies. The latter are generally seen as a management process using algorithms and other software means finding solutions through closer cooperation cross-functional teams with the customers. Stemming from the known agile’s values and principles (as a response to the inadequacies of traditional decision-making methods), the software industry has become a highly competitive market due to the fact that software can be continuously upgraded. This means that developers need to constantly improve their products to keep competitive, which the previous linear and sequential approaches couldn’t deliver. Thus, agile’s approach helps to provide better ways of developing and updating software by providing clear structures that promote iterative development, team collaboration, and constant changes coped with flexibility and high quality.

 Sixth trend heads towards young elites top-educated “meritocracy” demanding bigger share in politics and economics, as well as combating for a more prestigious and welfare place in modern transformations. Meritocracy is a social system in which people’s success is related to their abilities and extensive work rather than other personal capabilities. Thus a country is regarded meritocratic if it is operating through principles of selecting educational elites in the national governance.

  Seventh trend concerns greater role of artificial intelligence (AI) and robotics; both are already entering the entrepreneurship culture and business technology. The ideal AI’s characteristic is its ability to rationalize and take actions that have the best chance of achieving a specific goal. The term may also be applied to any machine that exhibits traits associated with a human mind such as learning and problem-solving. As AIs advance, algorithms and machines can calculate basic corporate functions or recognize text through optimal character recognition; often the latter are becoming an inherent computer function. Presently, the AIs include a number of “human-business abilities”, such as learning, reasoning, perception, behavior and decision-making, etc. being successfully employed in different industries including finance and healthcare.

  Besides, another labour issue has become of utmost importance in the “post-pandemic” area: as the Economist (28.05.2020, Bartleby) pointed out, the “working life has entered a new era”, which signified a historic-type transformation from a “farewell BC” (before coronavirus) to a “welcome AD” (after domestication).

Source: https://www.economist.com/business/2020/05/28/working-life-has-entered-a-new-era

 

3. Transitions in governance structures

  Present coronavirus has produced a number of important challenges for the European national and regional political economy. In its turn, the European “strategic governance” shall concentrate on combining the EU priorities with that of the member states’ growth patterns. To make that happen, both the EU institutions and the member states have to re-assess their traditional growth patterns to adequately react to the present and possible future chocks. Therefore the whole EU, as well as the member states, has to elaborate resilient political-economy’s structures adequate to perspective and sustainable growth. The national elites are, of course, fully aware of the “assignment’s” difficulties for governance system, existing public institutions as well the whole nations: the tasks are really extraordinary and complex.

More in: Science Advice for Policy by European Academies. “Making sense of science for policy under conditions of complexity and uncertainty”. In: https://doi.org/10.26356/MASOS

The full report can be seen in: www.sapea.info/making-sense-of-science

 

  Many negative COVID-issues are connected to financial services, including derivatives: most will be borne by banks; hence the financial panic is inevitable with threats to the whole financial and economic system. Governments, being forced to generate rapid inflation, will be facing the perspectives of nationalizing the whole financial sector followed by restructuring the existing system with banking licenses sold by governments (through national fiancés authorities) to new “good banks”. Under the EU’s advice that neither banks nor taxpayers should be hit by credit losses, so savers will be hit through other means. Just like in the corporate sector (where the main idea was to “save workers not jobs”), in the banking sector the approach shall be to save clients not the banks. In this regard, the Nordic-style measures can be emulated.     

  Governments’ decision to support business is not only a timely one; it is a highly necessary move in the modern governance: France created in September 2020 a € 100 bn stimulus package for the two-year duration in spite of the fact that the coronavirus already ravaged 11percent of GDP with about 800.000 lob losses. The package’s main ideas were: a) supporting companies’ transition to green technologies and tax cuts (with € 35 bn for corporate sector), b) encouraging corporate “greener” policies towards energy efficient buildings and renovation in private sector (with € 30 bn), c) about € 11 bn for transport castor, and d) € 4,7 bn for retail networks. Besides, the hydrogen sector has allocated € 2bn to push economy away from fossil fuels; these measures are planned to create 160.00 jobs by 2021. The French governance is strongly committed to increasing employment, especially for young people with no tax increases; such kind of measures during the 2008-crisis were regarded a mistake.     

  The governance strictures shall be aware of the fact that the “pandemic is still accelerating”, as the total of global cases approached 25 million at the end of August 2020.

 

European resilience’s efforts

  Rebooting national economies has become an integral part of the EU’s integration efforts: European financing under the “Recovery and Resilience Facility, RRF”, as the main “new generation EU” (NGEU) pact’s component of € 750 billion: with € 390 billion for loans (reduced to 350) and € 312.5 billion for grants (later increased to 360). The financial support is included in such additional EU programs as ReactEU, Horizon Europe, InvestEU, Rural Development, Just Transition Fund and RescEU. About 70 percent of the grants provided by the RRF shall be committed during the first ten years 2021-22; remaining 30 percent shall be fully committed by the end of 2023.

Source: https://www.consilium.europa.eu/media/45109/210720-euco-final-conclusions-en.pdf

 

  The amounts under the NGEU’s package are divided among the following programs: = Recovery and Resilience Facility (RRF) as the major component with € 672.5 billion: of which loans € 360 billion and grants € 312.5 billion; plus additional programs: = ReactEU: € 47.5 billion; = Horizon Europe: € 5 billion; = InvestEU: € 5.6 billion; = Rural Development: € 7.5 billion; = Just Transition Fund (JTF): € 10 billion; = RescEU: € 1.9 billion. Total: € 750 billion.

Source: https://www.consilium.europa.eu/media/45109/210720-euco-final-conclusions-en.pdf

  Thus, governing elites in the EU member states –while relying on the Union’s financial support from a “great rescue package” – have to keep in mind that the EU funds are inherently for perspective development of science, research, education and innovation in the sectors that are dealing with climate change, sustainability, digitalisation, health programs and circular economy. Therefore, the main attention shall be given to a more efficient use of existing national resources: human, natural and others… 

  Some preliminary components of the states’ post-pandemic socio-economic development could include the following directions:  

  1. Resilient growth shall become a strategic perspective with new attention to research on the “COVID-economics”;
  2. Scientific analysis of modern national political economy in the states shall be resumed with a particular attention to the welfare society’s vision and priorities; 
  3. Assistance shell be rendered to national entrepreneurs in all possible ways: e.g. by researching in the “business technology” directions;   
  4. New approaches to labour/trade union shall be revealed, in association with the tripartite representatives: government, as well as employees and employers’ associations; 
  5. Analysing potentials of the perspective education trends and “getting new skills” programs shall be prioritized.  
  6. Mathematical methods should support the studies of “real life” and wellbeing.

 

There are as well some financial issues in the states’ growth agenda:  

  1. Making known for a wide public the approved financial “packages”: the MFF for 2027 and a rescue package to assist the states in need;
  2. Showing in the social media the exact financial resources allocated to the member states;   
  3. Defining present challenges for all walks of life in the countries affected by the pandemic: e.g. in consumption, energy, transport, culture, education, etc.
  4. Correlating the EU and the states’ national investment strategies and priorities. 

 

Bottom-line. The severity of the pandemic crisis justifies extraordinary and ambitious common responses towards research and innovation in modern political economies. Hence, the states have to draft both the new strategies and priorities: i.e. to re-orient national growth patterns and to create additional opportunities for investments into needed numerous reforms and actions.

  The EU member states supported generally the two most important dimensions – green and digital – in the “next generation” priorities, and regarded them as the main driving elements in the countries’ modernisation efforts.

  In the recovery in the states the EU’s assistance is important indeed: the Commission’s long-term rescue plan – the Next Generation EU- together with the multi-annual budget, has increased the total investment into perspective socio-economic transition for the next seven years to about € 1.8 trillion, almost double the amount of the previous financial period. These investments are aimed, of course first of all at tackling the pandemic crises’ damages on social and economic growth with a focus on “green, digital and resilient recovery”. But secondly, they shall be used for an effective and efficient transition to sustainable growth in the member states, which cannot be done properly without innovative scientific approaches; besides, these measures are supposed to affect businesses and streamline entrepreneurship environment.

  The uncertainty surrounding the pandemic and tensions in European and global trade highlight the need for flexible and innovative approaches to weather unpredictable shocks. Moving forward through the COVID-19 aftermath, the states’ political economies must be ready to use the pandemic period to re-assess the role of labour, business and governance to withstand the challenges and create resilient societies.

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