Opinion

A European approach to fund the coronavirus cost is in the interest of all

We had not seen a common challenge as clear as this pandemic. The sum of national actions and programs is likely to be insufficient.

By: , , , , , , , and Date: April 6, 2020 Topic: Macroeconomic policy

This opinion piece was originally published in El País and Corriere della Sera.

El País logo

Corriere della Sera logo

 

To reduce the economic fallout from the coronavirus crisis, massive fiscal support will be needed. Without sufficient support, GDP will fall much further and the recovery will be slower, as many more companies and productive structures will have been destroyed. Lower than necessary GDP resulting from a lack of fiscal support would lead to long-term unemployment and even to higher debt ratios.

There has hardly been a clearer common challenge than the coronavirus pandemic. The sum of actions taken by individual countries is likely to be insufficient. Solidarity and a joint European response are needed.

The health of every country depends directly on public health in surrounding countries. No country can remain virus-free for long when its neighbours have infected people. And cross-border contact is vital for our highly-integrated economies. The greatest share of trade for European Union countries is with other EU countries, via the internal market. The economic vitality of our partner countries therefore matters hugely for all of us.

Most fiscal measures so far, however, have been national, and the extent to which northern EU countries are able to spend more money than their southern neighbours is striking. Germany announced an aid package in excess of 4% of its GDP and hundreds of billions of guarantees. France is taking major measures and the Dutch economy has quite rightly been propped up with a package that could reach €65 billion. But Italy produced a rather small package — much less than required to fend off lasting damage. Also the Spanish response is smaller than the size of the health crisis would suggest it should be. Market pressure and fear of a new euro-area crisis might be behind more muted fiscal responses.

Pan-European backing for a strong and joint crisis response is crucial now. The fight against COVID-19 must not force the euro area into crisis. Doubts about the creditworthiness of individual countries can, in financial markets, lead to self-fulfilling prophecies. Investors demand higher returns because of the perceived risks, raising interest on government debt. This increases financing problems for countries, leading in turn to even higher risk premiums, and the spiral starts again.

We need strong political commitment so that self-fulfilling prophecies don’t materialise. The European Central Bank is doing the right thing and should receive full and explicit political support. But politicians cannot leave the job of handling this crisis only to the ECB. Democratic legitimacy and direction are needed for the European Union. Government leaders and parliaments must now agree on a strong programme for all of Europe. In particular, they must provide support to the most vulnerable and boost investment across Europe, to ensure recovery from this crisis.

The first steps have already been taken. The European Commission has found tens of billions of euros within its current budget, and budgetary requirements have been relaxed. The ECB has announced it will stimulate the economy by, among other measures, buying up more than €1 trillion of debt. Recent ECB decisions have been particularly weighty and appropriate, notably the creation of the Pandemic Emergency Purchase Programme.

A solution is feasible for this specific, unique crisis. No permanent debt guarantee mechanism is needed, nor is the mutualisation of existing debt. But joint financing to tackle COVID-19 and manage the recovery phase is necessary. The precise vehicle is a secondary question, even though it is a politically charged one. Whatever the approach, the ECB should provide backing. But it is up to government leaders to take charge and provide the necessary legitimacy for a crisis response that will shape our common future.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article
 

External Publication

European Parliament

Tailoring prudential policy to bank size: the application of proportionality in the US and euro area

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Alexander Lehmann and Nicolas Véron Topic: Banking and capital markets, European Parliament, Macroeconomic policy Date: October 14, 2021
Read about event More on this topic
 

Upcoming Event

Nov
4
14:00

European monetary policy: lessons from the past two decades

This event will feature the presentation of “Monetary Policy in Times of Crisis – A Tale of Two Decades of the European Central Bank."

Speakers: Grégory Claeys and Wolfgang Lemke Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More by this author
 

Blog Post

European governance

Pandemic prevention: avoiding another cycle of ‘panic and neglect’

Agreement is needed at international level on mechanisms to ensure better preparedness for the next pandemic.

By: Anne Bucher Topic: European governance, Global economy and trade Date: October 7, 2021
Read article More on this topic More by this author
 

Opinion

Letter: Declining investment may explain why rates are low

Perhaps an analysis of the causes of the declining investment rate would bring us closer to explaining why real interest rates are so low.

By: Marek Dabrowski Topic: Macroeconomic policy Date: October 1, 2021
Read article More on this topic More by this author
 

Opinion

What Evergrande signals about China's economic future

Under Xi Jinping's new economic agenda 'common prosperity', China is cracking down on indebted real estate developers like Evergrande.

By: Alicia García-Herrero Topic: Global economy and trade Date: September 30, 2021
Read article More on this topic More by this author
 

Blog Post

Monetary arithmetic and inflation risk

Between 2007 and 2020, the balance sheets of the European Central Bank, the Bank of Japan, and the Fed have all increased about sevenfold. But inflation stayed low throughout the 2010s. This was possible due to decreasing money velocity and the money multiplier. However, a continuation of asset purchasing programs by central banks involves the risk of higher inflation and fiscal dominance.

By: Marek Dabrowski Topic: Macroeconomic policy Date: September 28, 2021
Read article More on this topic More by this author
 

Opinion

The pandemic’s uncertain impact on productivity

The pandemic has certainly permanently affected our way of working. Whether this is for the better remains to be seen.

By: Maria Demertzis Topic: Macroeconomic policy Date: September 28, 2021
Read article Download PDF
 

External Publication

Building the Road to Greener Pastures

How the G20 can support the recovery with sustainable local infrastructure investment.

By: Mia Hoffmann, Ben McWilliams and Niclas Poitiers Topic: Global economy and trade, Testimonies Date: July 15, 2021
Read about event
 

Past Event

Past Event

Financing for Pandemic Preparedness and Response

How can we better prepare for future pandemics? In this event, co-hosted by the Center for Global Development and Bruegel think tanks, speakers will present "A Global Deal for Our Pandemic Age", a report of the G20 High Level Independent Panel on Financing the Global Commons for Pandemic Preparedness and Response.

Speakers: Masood Ahmed, Victor J. Dzau, Amanda Glassman and Lawrence H. Summers Topic: Banking and capital markets, Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 14, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

What should public spending look like?

What should we do about the increase in public spending due to COVID-19? Bruegel Director Guntram Wolff and Former Deputy Secretary-General of OECD Ludger Schuknecht discuss.

By: The Sound of Economics Topic: Global economy and trade Date: July 14, 2021
Read article More on this topic
 

Blog Post

Fair vaccine access is a goal Europe cannot afford to miss – July update

European countries must do more to tackle the vaccine uptake gap. Vaccination data should be published at the maximum granularity level so researchers and local decision-makers can monitor progress.

By: Lionel Guetta-Jeanrenaud and Mario Mariniello Topic: Macroeconomic policy Date: July 14, 2021
Read article More on this topic
 

External Publication

A Global Deal for Our Pandemic Age

Report of the G20 High Level Independent Panel on Financing the Global Commons for Pandemic Preparedness and Response.

By: Tharman Shanmugaratnam, Lawrence H. Summers, Ngozi Okonjo-Iweala, Ana Botin, Mohamed El-Erian, Jacob Frenkel, Rebeca Grynspan, Naoko Ishii, Michael Kremer, Kiran Mazumdar-Shaw, Luis Alberto Moreno, Lucrezia Reichlin, John-Arne Røttingen, Vera Songwe, Mark Suzman, Tidjane Thiam, Jean-Claude Trichet, Ngaire Woods, ZHU Min, Masood Ahmed, Guntram B. Wolff, Victor J. Dzau and Jeremy Farrar Topic: Global economy and trade Date: July 9, 2021
Load more posts