Policy Brief - A Tale of Two Crises

Executive Summary

Building on a previous analysis of the trends of convergence and divergence between peripheral and core EA-12 countries after the euro area sovereign debt crisis (Bordignon et al., 2023), this work investigates the long-term evolution of such differences in economic, institutional, and political outcomes, testing whether a pattern of convergence was finally resumed and comparing the effects of this crisis with those induced by the Covid-19 pandemic.

First, we show that the euro crisis led to a persistent divergence between core and peripheral countries in the amount of expenditure on public services such as education, health care, and civil justice.

However, spending cuts in countries affected by the crisis were not associated to a decline in the quality of these fundamental services, which even broadly improved relative to the core, at least in some sectors. This might explain why a process of per capita income convergence between core and peripheral resumed after 2014 and even accelerated after the pandemic.

At the same time, our results document an increase in income inequality – particularly explained by the rising share of total income held by the richest 1% of the population – and in the exposure to the risk of poverty. Yet, reassuringly, in the long run we observe again convergence between the two groups of countries.

In peripheral countries, the outbreak of the euro crisis was also followed by a sharp decrease in citizens’ trust in institutions and participation at elections, combined with rising support for populist parties. The subsequent convergence was due more by collapsing trust and increasing support for populist parties in core countries than to an improvement in peripheral ones.

The effects of Covid-19 were substantially different. The extensive policy measures at both national and EU levels helped mitigate the adverse economic impact of the pandemic, preventing spending cuts and increases in the share of individuals at risk of poverty. As in the case of the euro area sovereign debt crisis, however, also after Covid-19 we report evidence of rising inequality, although driven by a decline in the share of (labor) income held by the bottom 50% of the population rather than by an increase in the share of (capital) income held by the top 1%.

All in all, the combined policies introduced after the pandemic allowed a fast recovery, which was particularly pronounced in the periphery, where a strong process of per capita income convergence with the core resumed. Consistently, we find that the degree of support for the EU and for further integration increased, particularly among young, educated citizens in urban areas of the periphery. Thus, even considering the differences between the two crises, our results stress the importance of effective, coordinated and prompt policy responses in managing large-scale challenges at the EU level. Unfortunately, there is no lack of them. 

IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.

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