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