Fighting the COVID-19 Crisis: Debt Mon\xe9tisation and EU Recovery Bonds

Alberto Botta,Alberto Russo,Eugenio Caverzasi

doi:10.1007/s10272-020-0907-z

Alberto Botta, Alberto Russo + Show 1 more

Open Access

https://doi.org/10.1007/s10272-020-0907-z

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Abstract

This paper highlights some peculiar characteristics of the economic crisis induced by the spread of COVID-19. It suggests two intertwined policy measures in order to tackle the emergency phase of the crisis and to support the economy in the subsequent recovery phase. The proposed short-term policy measures offer policy responses in the event of a second wave of coronavirus infections in the coming months. In the aftermath of the emergency phase, the current proposal puts forward the implementation of a massive EU-wide recovery plan addressing the long-lasting technological and environmental challenges of these years, which will be financed by European institutions through the issuance of European Pandemic Recovery Bonds.

Highlights

This paper highlights some peculiar characteristics of the economic crisis induced by the spread of COVID-19
Concerns over the implications for the European public balance sheets may be justified, but they completely vanish in the face of the major damages that may be incurred by the European real economy
In other words, “[t]he job is maintaining the economy on life support during a period of an artificially induced coma while we address the public health challenge” (Tooze, 2020)

Summary

Coronavirus Crisis

This paper highlights some peculiar characteristics of the economic crisis induced by the spread of COVID-19. A first proposal comes from previous ECB president Mario Draghi (2020), who emphasises the importance of financial institutions accommodating all credit requests from the private business sector in order to avoid firms’ bankruptcies and reductions in the employment level In this sense, Draghi (and many others, e.g. Bénassy-Quéré et al 2020) welcome the ECB’s recent decision to extend long-term refinancing operations, to expand quantitative easing (which may help large corporations to issue corporate bonds at a cheap rate), to reduce the main refinancing rate for banks to below zero (de facto subsidising their activity) and to temporarily slacken banks’ capital requirements. This has the advantage of central banks creating all the needed resources to deal with the emergency but not creating extra debt

An integrated policy package for the emergency and economic recovery

Financing the emergency spending

Relaunching the economy in the aftermath of the emergency

Financing the relaunch of the economy

An outlook on the future of the eurozone