ifo President Fuest in Favor of European Fund for Economic Recovery

As the report explains, the EU fund will help limit the economic consequences of the coronavirus crisis. This means that, to a certain extent, it has the nature of an insurance policy against economic losses. The pandemic is affecting EU countries to varying degrees, and the extent of the impact cannot yet be fully predicted. Measures to ensure eurozone countries’ access to financial markets, and in particular to the agreed ESM credit line, would also be useful. “The pandemic must not lead to a loss of confidence in the financial markets, as was the case in the debt crisis,” Fuest says. “In countries that have been hit particularly hard by the coronavirus and whose debt levels are already high, a liquidity crunch on the bond markets could have a destabilizing effect and aggravate the crisis.”

With regard to the measures taken so far at the national level, the researchers said that while support for demand is useful, it must not be allowed to hinder structural changes in the medium term. Labor and capital should be deployed where they bring the greatest benefit – even across industries and national borders. The authors advised against entering into bidding wars for state holdings in domestic companies. Open, flexible markets and fair competition are the core elements of European integration.

In the medium term, debt management will come to the fore. High levels of public and private debt present the European Central Bank with a considerable dilemma. If inflation rises, any interest rate hikes that may be necessary could make debts harder to sustain and cause the European debt crisis to flare up again. Even restructuring debt to very long-term debt instruments, such as 100-year government bonds, is not without its problems, the authors argue, because it creates incentives for inflationary policies.

Article: “Europe’s Pandemic Politics,” European Economic Advisory Group (EEAG)