Post-covid effects on modern governance and political economy

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The European and the member states efforts towards recovery and resilience are including new approaches to decision-making, governance and political-economy’s components in reforms; the latter are concentrated on three main “transitional components”: a) labour and workforce, b) business and entrepreneurship, and c) regional and national governance, which are analysied in the EII’s research project.  

The “governance’s” issues are important in formulating political and economic guidelines for perspective growth. In the member states, the governance is balancing between the EU-wide and the national political priorities, while both are oriented towards “common goods” reflected in peoples’ wellbeing.

The article, as the last one on the series of research papers on “post-covid effects in growth”, reveals challenges facing both political and economic sides of the national development embedded in a re-designed conceptual reform’s paradigm, i.e. through “transitions” in politics and economics.  

 

Note. Previous article in the EII’s series on “post-covid research” are devoted to employment issues and corporate transformations. See more in:  

• https://www.integrin.dk/2020/10/07/workforce-after-pandemic-the-process-of-continuous-reforms/;
• https://www.integrin.dk/2020/10/09/labour-movement-in-european-integration-facing-modern-challenges/; and
• https://www.integrin.dk/2020/10/14/business-and-entrepreneurship-tackling-post-pandemic-challenges/.

More on the EII’s project in: https://www.integrin.dk/2020/09/11/post-covids-political-economy-facing-inevitable-changes/

Introduction

Traditionally, the term “governance” has been referred to key corporate and entrepreneurship issues, including strategic aspects in businesses, in innovation and risk management, to name a few. However, it has been assumed lately that these “key issues” in entrepreneurship can be effectively used in much large spheres of socio-economic and political decision-making. Hence, some focal elements in managing business can be included into managing the public/state decision-making, the process which has been lately called “governance”, particularly aimed presently towards re-shaping and alternating major items in traditional national political economy issues.

Thus, the main message in modern government is that all organisational structures involved in national socio-economic development shall be managed in a systematic, structured and practically oriented ways at all levels, i.e. through global, national and public governance.

Reference: https://dictionary.cambridge.org/dictionary/english/governance and

https://www.merriam-webster.com/dictionary/governance

 

Such an assumption and an “enlarged” approach to governance is not anything new: i.e. International Finance Corporation (a World Bank Group) issued in 2015 a report on the EU’s corporate governance practice, where the “corporate governance arena” included both new approaches to businesses and changes in the general regulatory requirements. The “global financial gurus” have recognized that the “controversial governance’s topic” shall be presently addressed, analysed and “closely linked with political, economic and social issues”.

Therefore, the World Bank experts conclude, that in order for the European policymakers and national governance systems to find proper ways to recovery and resilience they need to find “better long-term engagement and stronger accountability for delegated decision-making power at all levels”.

Source of reference: https://www.ifc.org/wps/wcm/connect/506d49a2-3763-4fe4-a783-5d58e37b8906/CG_Practices_in_EU_Guide.pdf?MOD=AJPERES&CVID=kNmxTtG 

 

“Transition” in politics  

Alongside already approved by the Commission and the EU Council new guidelines for the member states (called generally “transitions”), like for example green or digital, a new type of transition is on the way, i.e. transition in governance.    

Coronavirus heralded a “perfect storm” of challenges for national and regional political economies: in this regard, the European “strategic governance” has been already concentrating on combining global challenges, the EU political priorities and the member states’ growth patterns. Both the EU institutions and the member states are making re-assessments of their traditional approaches to governance in order to adequately react to “post-covid” aftermath as well as modern challenges and future chocks.

The EU institutions – in cooperation with the member states – have elaborated resilient political-economy’s structures adequate to perspective and sustainable growth. The national elites are fully aware of the “assignment’s” difficulties for governance system, existing public institutions as well the whole nations’ wellbeing: 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: www.sapea.info/making-sense-of-science

 

The COVID-19 crisis accelerated the EU’s policy priorities towards modern challenges, which include, among other directions, three most important: i.e. new industrial strategies, the “SME strategy for a sustainable and digital” transition, and the “European Green Deal”. These priorities have made the national governance re-oriented towards new and perspective guidelines in decision making in view of the following European priorities: a) more enterprises with cross-border operations, b) active start-ups, young entrepreneurs and SMEs, and c) efficient corporate strategies with attention to accounting, VAT procedures, corporate survival, etc. Thus, for example transformations in the European ‘green deal” imply that the following aspects in the SMEs and corporate strategies shall be revised: corporate contingency planning and ethics, sustainability issues and optimal supply-chain structures, as well as cross-border mobility, etc.

People’s quality of life and well-being are increasingly considered as key determinants in politics and socio-economic development as the most fundamental factors in perspective growth; hence, measuring progress only using gross domestic product (GDP) indicators means ignoring both the modern societies’ complexities and transformations in political economy’s role. In search for the multifaceted approaches to long-term recovery and creating resilient societies, modern governance has to take into account all growth factors (i.e. not only economic, but social, cultural, environmental, etc.) that are driving progress and peoples’ well-being. 

More on the modern political economy’s narrative in: Eteris E. Latvia in Europe and the world: growth strategy for a new centennial. 2018. Part II, pp. 64-67 and 139-152.

 

Technology can be used to facilitate citizen’s access to, and interactions with, public governance. With this in mind, The Commission has started “preparatory actions” to set up a network of “local laboratories” to support and develop digitally-enabled innovative solutions for citizens’ engagement in policy- and decision-making, as well as “transfer public services to the local level. On supporting initiatives, in: https://ec.europa.eu/digital-single-market/en/news/call-proposals-smart-local-administrations; more on digital society in: https://ec.europa.eu/digital-single-market/en/news/76032/3521

 

Political component in national governance is under sever changes not only because of the political turnover due to post-pandemic circumstances: “political advice” to governance has become more open to the public through e.g. transparent TV sessions in the parliament and in political groupings. Besides, the political fabric has become more dependent on advances in science, technology and professional scientific community’s recommendations. Hence, rebooting political component is presently a must in national transition to greener, circular and sustainable economies. 

 

“Transition” in economic governance

The main strategic goal of any state is the wellbeing of its citizens, followed by security; hence in the new political economy the dialogue between the two sides of the spectrum –the political block and socio-economic entities (concentrated in governing levels) – becomes an important issue, with an active participation of the third “element”, i.e. social partners.   

The EU’s program on “the next generation” is based on the dialogue between governments and social partners to help the member states recover their economies, support businesses and SMEs, as well as increase employment. The Commission underlined during a recent social summit a vital importance of social partners to be involved in shaping changes as they are crucial to the process of European social market economy and social cohesion.

Therefore an important aspect in modern political economy is to concentrate the states’ efforts on priority’s investments into green and digital transition which will help to revitalise economies and benefit entrepreneurship. Social partners are playing a central role in drafting efficient approaches to recovery: the “tripartite social summit” has underlined the need for active participation of workers and companies in implementing transformation plans and promoting green, digital and sustainable recovery that boosts growth and creates jobs.

The European Trade Union Confederation (ETUC) noticed that presently about 45 million workers in the EU are at risk of unemployment in essential services; therefore states’ recovery plans must involve partnership with unions and employers to ensure a socially just transition to a climate-friendly economy. ETUC’s vision is that the EU emergency measures to save jobs and secure recovery shall include legislation on such issues as, e.g. fair minimum wages, pay transparency, minimum income and due diligence.  

The BusinessEurope’s organisation, representing employers thinks that the EU’s financial package for recovery and resilience “must reach enterprises and workers to create new jobs and support viable businesses”, as workers should be at the core of perspective growth.

Alongside a strong focus on the green and digital transitions, the states’ governance shall strengthen key industrial value chains, essential infrastructures and services of general interest. The European employers’ priority is to make sure that the financial support under the new recovery and resilience programs enables enterprises to invest, grow and create jobs.

More in Commission press release on the summit in:  https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1906

 

Governments’ decision to support business is not only a timely one; it is a highly necessary move in the modern governance: e.g. 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 job 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, and d) € 4,7 bn for retail networks. Besides, the hydrogen sector is allocated € 2bn to push 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.     

More in: https://www.integrin.dk/2020/09/11/post-covids-political-economy-facing-inevitable-changes/

 

The work-from-home (WFH) concept is expected to increase in the states; most evident that it will become the norm in many industries and manufacturing (including the decision-making processes), i.e. spheres with huge bulk of information processing and ICTs. Thus, in political sense, workforce from expensive cities may use their freedom to move to cheaper townships where they can have more space, inside and outside; that would “reallocate” the electorate too! The “movers”, i.e. young and middle-aged, college-educated and white-collar workers from suburban areas might change the electoral results in the next national elections in most EU states.

In case that effective vaccine is globally approved by the end of 2020-early 2021, some of the political trends could quickly revert to the “traditional” governing situations existed before the coronavirus, at least in major aspects.

Even a moderate increase in remote work could lead to fundamental changes in the labor force, economy, and politics. Remote workers will spend more money and time inside their houses, they will spend more time with online communities than with colleagues, and many will communicate across the country, rather than to cluster with optional “locals”.

Such new realities as e-commerce, digital entrepreneurship and WFH are just some of the most vivid examples of the post-pandemic realities. So far, employers technically have discretion on the WFH’s solutions, but in most cases it is not clear the ways the governing elites would regulate the new trends.

Each year, the member states supply the European Commission with detailed information on national economic policies and finances, for example, the eurozone’s states include this information in the so-called “stability programs”, the rest of the EU states – in the “convergence programs” (more can be seen in the Commission’s website on European Semester). On the basis of these data, the Commission makes assessment of the national policies in line with Union’s political priorities and agreed common objectives by the EU-27 states, i.e. economic, social, environmental, energy, technology, etc.). Since January 2011, the Commission publishes “Annual Reviews” with the analysis of the member states’ development trends; the latter are important in the sense that the states have to avoid “excessive government deficits”, i.e. actual government deficit to GDP shall be no more than 60 %. The member states’ governments deliver to the Eurostat office (and the Commission) the data concerning levels of public debt and government expenses twice a year – before 1 April and on 1 October. The general scheme has, of course changed during the pandemic, as the governments are experiencing huge budget deficits with the growth reductions.  

 

European “political economy”

Modern EU legislation (TFEU, art. 119) specifies that European economic policy’s backgrounds is including: a) closer coordination of member states’ economic policies; b) promotion of the internal/single market with European common objectives, and c) principles of an open market economy with free competition. Besides, the EU combines in political economy such features as single currency (so far for 19 states out of 27), single monetary policy and price stability, as well as extensive integration efforts through several “sub-unions” (energy and digital, customs and education, innovation and etc.).  These backgrounds are forming the basics of the EU political economy while supporting the general objectives of the EU’s socio-economic policies. Therefore the EU integration is heading towards compliance with some guiding economic principles: such as stable prices, sound public finances and sustainable balance of payments.

The Treaty (art.3 TEU) describes the following vital points in political economy: internal market, balanced economic growth and price stability, competitive social market economy (aimed at full employment and social progress), environmental quality and promotion of scientific and technological progress. 

Besides, the EU goals in political economy are aimed at: promotion economic, social and territorial cohesion, as well as solidarity among states; taking into consideration and respecting cultural and linguistic diversity, as well as ensuring European cultural heritage; defending and promoting the EMU and common euro-currency. Finally, these goals and objectives shall be pursued by means of division of competence: exclusive, shared and supportive.    

European-wide economic coordination is achieved through annual cycles of economic policy discussions between the member states and the EU institutions, i.e. through broad economic policy guidelines, BEPG which are updated annually and cover three years’ period.

BEPGs are non-binding guidelines for the states; they are aimed at promoting macroeconomic stability, sustainable finances, structural reform and the smooth functioning of EMU.

The BEPGs assist in the European Semester’s economic policy coordination, as they frame the scope and direction for states’ national reform programmes (NRP) and serve as reference for the development in the country’s specific recommendations (CSR). The Commission publishes a full set of macroeconomic forecasts for the member states in spring (May) and autumn (November), as well as publishes two interim forecasts updating GDP and inflation figures in winter (February) and summer (July).

On Semester: https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-correction/european-semester_en

 

The euro-system of 19 member states has had two elements: the European Central Bank (ECB), which is responsible for all monetary policy in the eurozone 19 states (so-called euro area), and the National Central Banks (CBs) of other EU member countries.

All EU countries (except two Denmark and Sweden) are to join –sooner or later- the euro area if they meet the criteria laid down in the EU treaties; the most important criteria include, e.g. that the country has to demonstrate price stability, and that its public finances are well managed; the latter means that the government deficit shall not be higher than 3 percent of GDP, and that the government debt – at least theoretically-  shall not exceed 60 percent of GDP; several countries “successfully” violated the debt criteria.  

More in: http://www.ecb.europa.eu/ecb/orga/escb/html/convergence-criteria.en.html

 

European System of Central Banks, ESCB is maintaining price stability in the member states (art. 127 TFEU); the ESCB’s tasks are: to define and implement EU monetary policy and inflation targets; conduct foreign-exchange operations; hold and manage foreign reserves in the states; and promote smooth operation of payment systems. ESCB shall contribute to the prudential supervision of credit institutions and the stability of the EU financial system. 

 

Science in modern governance

Scientific potentials are the most fruitful source of inspiration in reforming national governance: creating an expert group for modern political economy’s challenges would be step in the right direction. Such national “think-tanks” are important also in the sense that both the political and economic sides of the “twinning governance” need solid and trustworthy recommendations concerning changes’ implementation. And there are numerous perspective directions of concern for the governance, including sustainability, circular and digital economy, green transition and measures towards reduction of emissions and combating climate alterations.

More in: Eteris E. and Sparitis O. Modern European science policy: challenges and opportunities for Latvian perspective growth. -2019. – Medicinas Apgards Publish. Latvia.

  

The EU bodies are active in assisting the member states too: thus the European Commission’s Joint Research Centre has published a report on “Artificial intelligence in public services”. EU states’ governance are already starting to explore the AI’s potential to improve policy design and evaluation, while reorganising the internal management of public administrations at all levels

Together with the analysis of the EU states’ efforts to integrate AI in the governance structures and the public sector, the report suggests some AI’s practical measures in improving public services’ delivery, engagement with citizens, as well as reforming public management structures.  The combination of new and large data sources with advanced machine learning algorithms could radically improve the governments’ operating methods, thus paving the way to pro-active public service delivery models and implementing perspective recovery and resilience policies. Source: https://ec.europa.eu/jrc/en/publication/eur-scientific-and-technical-research-reports/ai-watch-artificial-intelligence-public-services

 

During the pandemic’s months, when many traditional businesses were almost paralyzed, the startups and innovative businesses were the ones that quickly adapted to changing conditions and offered plausible solutions to most pressing social and corporate issues. Innovative business, which is the first to enter uncharted waters, has to be “smart”; hence the startups are having what is most needed presently, i.e. unconventional thinking, courage and enthusiasm to implement their ideas.  

The EU institutions are actively assisting states in recovery and resilience: for example, financial support from EU and national budgets to health services or other public works to tackle the coronavirus falls outside the scope of “state aid” control. The same applies to any public financial support given directly to citizens. Similarly, public support measures that are available to all companies such as for example wage subsidies and suspension of payments of corporate and value added taxes or social contributions do not fall under “state aid” control and do not require the Commission’s approval under state aid rules. When state aid rules are applicable, the member states can support specific companies or sectors suffering from the consequences of the coronavirus outbreak in line with the existing EU’s state aid framework. On 13 March 2020, the Commission adopted a Communication on a “coordinated economic response to the coronavirus outbreak” setting out the following possibilities:

= Member states can compensate specific companies or specific sectors (in the form of schemes) for the damage suffered due and directly caused by exceptional occurrences, such as those caused by the coronavirus outbreak {art. 107(2) (b) TFEU}.

= State aid rules based on art. 107(3)(c) TFEU enable the EU states to help companies cope with liquidity shortages and needing urgent rescue aid.

= This can be complemented by a variety of additional measures, such as under the de minimis Regulation and the General Block Exemption Regulation, which can also be put in place by Member States immediately, without involvement of the Commission.

In case of particularly severe economic situations due to the coronavirus outbreak, EU state aid rules allow the countries to grant support to remedy serious disturbances in economy. More in: https://ec.europa.eu/competition/index_en.html

 

In March 2020, the Commission adopted a “state aid temporary framework” (according to art. 107 TFEU) to enable EU states to use the full flexibility foreseen under the “state aid” rules to support the economy in the context of the coronavirus outbreak. The Temporary Framework, was amended in April and May to provide for the following types of aid, which can be used by national governance: 1) Direct grants, equity injections, selective tax advantages and advance payments; 2) State guarantees for loans taken by companies; 3) Subsidised public loans to companies, including subordinated loans; 4) Safeguards for banks that channel “state aid” to the real economy; 5) Public short-term export credit insurance; 6) Support for coronavirus related research and development (R&D); 7) Support for the construction and up-scaling of testing medical facilities; 8) Support for the production of products relevant to tackle the coronavirus outbreak; 9) Targeted support in the form of deferral of tax payments and/or suspensions of social security contributions; 10) Targeted support in the form of wage subsidies for employees; and 11) Targeted support in the form of equity and/or hybrid capital instruments.

The Temporary Framework will be in place until the end of December 2020. As solvency issues may materialise only at a later stage as this crisis evolves, for recapitalization measures only the Commission has extended this period until the end of June 2021. With a view to ensuring legal certainty, the Commission will assess before that date if it needs to be extended.

See Commission Communication at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.CI.2020.091.01.0001.01.ENG&toc=OJ:C:2020:091I:TOC

 

The EU’s efforts to support recovery also includes: – the European Investment Fund (EIF) is part of the European Investment Bank Group, with the aim of assisting member states’ SMEs in getting access to finances. The EIF designs and develops venture and growth capital, guarantees and microfinance instruments which specifically target this market segment. In this role, the EIF fosters EU objectives in support of innovation, research and development, entrepreneurship, growth, and employment.

– The European Investment Bank (EIB), as the long-term EU’s lending institution owned by the EU states, it makes long-term finance available for sound investment in order to contribute towards EU policy goals.

– The European Fund for Strategic Investments (EFSI) is the main pillar of the Investment Plan for Europe. It provides first-loss guarantees enabling the EIB to invest in more and often riskier projects. The projects and agreements approved for financing under the EFSI are expected to mobilise €535.4 billion in investment, supporting over 1.4 million start-ups and SMEs in the member states.

 

Political economy in “twin transition”  

Every year, the Commission adopts a work programme (WP) setting out the implementation of the EU’s political priorities in the member states. The program for 2021, i.e. WP-2021 is closely linked to the EU’s recovery plan, the NextGenerationEU program and the EU budget for the next seven years.

The member states are already drawing up national recovery and resilience plans that set out reforms and investments aligned with the EU green and digital policy objectives; the latter shall devote a minimum 37 per cent to green transition, and a minimum 20 percent to digital. In order to repay the funds under NextGenerationEU, the Commission proposed new “own resources” in the budget, including a revised Emission Trading System, a Carbon Border Adjustment Mechanism and a digital levy.

Thus, the WP-21 represents some shifts in the EU’s strategy in six political priorities towards twin green and digital transition as vital step in efforts to overcome crisis and create resilient economies in the states.

On “recovery plan” see: https://ec.europa.eu/info/live-work-travel-eu/health/coronavirus-response/recovery-plan-europe_en

 

The mentioned “twin priorities” (green and sustainable) are regarded extremely important for the member states’ perspective growth:

= The “green deal” suggests achieving a climate-neutral Europe by 2050; there are 55 proposals aimed at reducing emissions by at least 55 percent during the next ten years. The “deal” covers numerous measures: from renewables to energy efficiency in general and in optimal energy performance in construction, to land use, energy taxation and emissions trading, etc. Thus, a carbon border adjustment mechanism will help reduce the risk of carbon leakage and ensure a level-playing field by encouraging all states to raise their climate ambition. In addition, the Commission will propose measures to implement European circular economy action plan, the EU biodiversity strategy and the “farm to fork” strategy.

= In the “digital strategy”, the Commission suggested a European digital decade, in order to reach the EU-2030 digital targets, which include increased connectivity, skills, digital public services, free flow of data and cybersecurity. The Commission will legislate in areas covering safety, liability, fundamental rights and data aspects of artificial intelligence, including an European e-ID and updating the new European industrial strategy to take into account improving working conditions.   

More on WP-2021 in: https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1940

 

Modern political economy focuses on the multi-dimensional and interdisciplinary nature of the contemporary socio-economic growth and governance. By analyzing the ways the national governing institutions, sectoral economic politics and the civil society interact and influence each other, modern governance can adapt to new challenges and dimensions in sustainable development. The twin transition’s analysis is important at regional, local and national levels, through the mobilization of resources along the most perspective directions with the participation of scientific community, policy makers and civil society’s representatives.

The EU institutions, e.g. the European Council and the Commission have recognized the dramatic consequences of the pandemic by formulating the guiding principles for the states’ governance in the recovery and resilience facility with € 672,5 billion, which are leading the way out of the crisis and laying foundations for a modern and more sustainable national economies. However, these efforts will only be effective in the medium and long-term if transformations are aligned with the global sustainable development goals, SDGs and EU’s digital economy/society’s requirements; these issues were underlined in the new Annual Sustainable Growth Strategy for 2021. 

These guidelines would have variations in implementations in the countries while preparing their recovery and resilience plans; but they have to be instrumental in providing knowledge, evidence and long-term pathways to governance and policy, while raising awareness of the need of social support for such transformations.

The rebooted state’s institutions will have an increasing role in modern governance; this is going to be the greatest test for a post-covid economics towards new developmental directions in resilient growth. On one side, a new stage of “state capitalism” is under way, often combining liberal market and state regulation with tighter control over the economic cycles; i.e. providing for more efficient state and the private sector’s operations. On another side, the real test is coming to the digital technology’s centered forms of governance with numerous innovations in planning and strategies. Still vital is the issue of “uniting” contemporary diffused decision-making procedures with the so far separated political and economic sides.

One thing is clear in modern governance: it is facing an important period of serious reforms; hence, the governing institutions shall be prepared for a long-contested period of combining traditional values and new challenges in search of an “optimal mix” of political and economic issues with a technology’s dynamism.