Fighting the COVID-19 emergency and relaunching the European economy: debt monetization and recovery bonds Alberto Botta (University of Greenwich)
Outline Peculiar aspects of the Covid-19 economic shock A review of some policy measures Measures for the emergency and recovery phases Institutional challenges and final discussion
Peculiar features of the Covid-19 crisis Three aspects are worth stressing as to the economic implications of the Covid-19 crisis (at least when looking at the EU and to the eurozone more specifically) (1) Exogenous shock: mostly unrelated to “unwise” behaviours of private sectors of the economy (ex: finance), national governments, or in-built eurozone fragilities (2) Symmetric shock: EU economies all affected in the same way (deep contractions) even though with different degrees of intensity (3) Mix of supply and demand shocks: • Supply side: due to lockdown, firms cannot produce goods, deliver services or provide them on a reduced scale (effective reduction in supply) • Demand side: households cut consumptions (due to reduction in income impediments to mobility) and companies do not invest (due to radical uncertainly!)
Forecasted economic consequences of Covid-19 Real GDP growth rate 4 2 0 -2 -4 -6 -8 -10 -12 Austria Belgium Germany Greece Finland France Italy Netherlands Spain
Forecasted economic consequences of Covid-19 Debt-to-GDP ratio 220 196.4 200 176.6 180 158.9 160 134.8 140 116.5 115.6 113.8 120 98.1 98.6 95.5 100 78.8 75.6 2019-2020 variation in the debt-to-GDP ratio 70.4 69.4 80 62.1 59.8 59.4 48.6 60 30 40 20 25 0 20 15 Debt-to-GDP ratio 2019 Debt-to-GDP ratio 2020 10 5 0
How to deal with such harsh economic consequences? There is widespread consensus that governments and central banks need to massively intervene in the context of a “ suspended ” economy. What has been done so far: (1) At EU/Eurozone level: • ECB extended quantitative easing: PEPP (750 billion euros) • SURE + redirection of EU commission leftover + expanded EIB loans guarantees + extraordinary ESM plan with “light” conditionality • Suspension of the SGP (2) At national level: • Extended unemployment subsidies/employment support schemes (ex: Cassa Integrazione) or income support for self-employed • Easier liquidity provided to firms (provision of public guarantees)
How to deal with such harsh economic consequences? The underlying principle of the above measures is that both private actors and public institutions should deal with the crisis by mainly relying upon the well functioning of financial markets and credit mechanisms Most of the support of national governments to private actors comes in the form of public guarantees backing the concession of “emergency” loans Most of the support from EU institutions to national governments comes in the form of (cheaper) loans All this, even though keeping the economy temporary alive, may impinge upon subsequent recovery given higher burdens of private and public debts
How to deal with such harsh economic consequences? Some alternatives The emergency phase of a “suspended” economy: (1) National governments transfer resources to firms (ex: covering their unavoidable fixed costs) and households (income protection) (2) ECB finances (directly or indirectly – via a EU level SPV) national governments’ “emergency” expenditures by purchasing government bonds on primary markets with the commitment of no redemption of the principal (3) ECB holding of public bonds not accounted in the computation of debt-to-GDP ratios This is a de-facto monetization of public deficits/public debt avoiding piling up much larger debt stocks
How to deal with such harsh economic consequences? Some alternatives The recovery phase: (1) EU level investment plan carried out by EU institutions (EIB?) issuing “recovery bonds” (2) Collected funds both spent at EU level for EU wide projects dealing with long- lasting challenges (EU Green New Deal; digitalization of EU economies) and transferred to member countries for local investment (3) ECB purchases “recovery bonds” as part of ECB quantitative easing and as EU safe asset This is a de-fact move towards the creation of a centralized fiscal budget
Institutional challenges These proposals could help to by-pass complex and apparently endless discussions at EU level (this is particularly true for the emergency phase). But: (1) They would imply a (perhaps temporary) change in the statute and behaviour of the ECB Maastricht treaty must be amended) (2) They would imply the creation of some sort of fiscal capacity at EU level in order to back the issuance of “recovery bonds” : EU commission’s own fiscal revenues (or larger contributions by member states) -> chance for the creation of a common EU level tax rate challenging unfair tax competition among member states? Very ambitious reforms. However, without them and with the status quo (austerity) back after being temporary lifted, there is a reasonable fear for to EU to eventually break down.
References and next PEGFA/GPERC webinar • Botta, A., Caverzasi, E., and A. Russo (2020) – “ Debt Monetization and EU Recovery Bonds: Fighting the COVID-19 emergency and re-launching the European economy ”, FEPS Covid-19 response paper no.1 Available at: https://www.feps-europe.eu/resources/publications/721-debt- monetization-and-eu-recovery-bonds.html • 28th May, 3pm – Professor Ozlem Onaran: Rebuilding an economy for all in the aftermath of the Covid-19 crisis: Tax wealth to fund public investment in social and physical infrastructure Get registered here: https://www.eventbrite.co.uk/e/webinar-what-do-economists- have-to-say-about-the-challenges-of-our-time-tickets-104304194654
Thank you
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