Social Europe

politics, economy and employment & labour

  • Themes
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

The ‘frugal four’ should save the European project

Peter Bofinger 4th May 2020

Peter Bofinger argues that additional loans of inadequate amount do not add up to a rescue package which can save Europe from the coronavirus crisis.

rescue package save Europe
Peter Bofinger

The World Economic Outlook of the International Monetary Fund provides a first systematic assessment of the economic consequences of the coronavirus pandemic: it has triggered the worst economic downturn since the Great Depression.

In Europe, the southern countries are suffering particularly badly. Greece (-10.0 per cent), Italy (-9.1), Portugal (-8.0) and Spain (-8.0) are among the advanced economies anticipating the most severe slump in 2020. On average, the IMF expects a decline of 6.1 per cent for this group. In addition to very high exposure to the virus, southern Europe will be negatively affected by its high dependency on tourism, likely to be largely absent this year.

Debt ratios

The slump and high budget deficits caused by ‘automatic stabilisers’ and government support programmes inevitably lead to a massive increase in debt ratios (Figure 1). The increase is particularly pronounced in the same countries: in 2020, the ratio of debt to gross domestic product will likely exceed 200 per cent in Greece, 150 per cent in Italy and (by some way) 100 per cent in Spain, Belgium, France and Portugal.

Figure 1: gross debt to GDP ratio—forecast year-on-year increase and 2020 level

Increase of gross debt/GDP, 2019-20 (percentage points)Gross debt/GDP in 2020 (percentage)
Netherlands10.058.3
Ireland4.763.3
Germany8.968.7
Finland10.370.0
Slovenia6.473.2
Austria13.984.6
Spain18.0113.4
Belgium15.8114.8
France16.9115.4
Portugal17.4135.0
Italy20.8155.5
Greece21.6200.8
 
Japan14.5251.9
United Kingdom10.395.7
United States22.1131.1
 
Euro area13.397.4
G719.0137.7
 Source: IMF

The high level of debt already appears to be putting a brake on fiscal policy. According to IMF calculations, fiscal loosening—additional public expenditure and tax relief—is much less extensive in France, Italy and Spain than in Germany and large countries outside the euro area (Figure 2).


Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content. We will never send you spam and you can unsubscribe anytime.

Sign up here

Figure 2: revenue and expenditure measures (percentage of GDP)

rescue package
Source: IMF

There is thus a risk that the fiscal stabilisation measures in the countries particularly affected will be insufficiently dosed. At the same time, these countries are pushing fiscally strong states, such as Germany, to reduce their aid, because they fear that this would put their own companies at a competitive disadvantage. This could result in the stronger countries also stabilising less than necessary.

In addition, the even higher debt ratios of southern-European countries could lead to the risk of sovereign-debt crises coming to the fore again on the markets—which could trigger another euro crisis.

Hot air

How have the member states so far reacted to this epochal crisis, which threatens the very existence of the European Union and the euro area? At first glance, one might be impressed by the fact that they have been able to mobilise a sum of €540 billion in a short time to combat the crisis. But on closer inspection, one can see this is a lot of hot air.

An amount of €240 billion is to be made available through the European Stability Mechanism. In contrast to before, these funds can be drawn on without an economic conditionality. As the financing framework of the ESM remains unchanged, however, they are not additional funds—so every euro used for Covid-19 measures will reduce the ESM’s available funds in the event of an emerging euro crisis.

An amount of €200 billion is to be made available as loans to companies from the European Investment Bank. To this end, the states are providing the EIB with a €25 billion pan-European guarantee fund—very optimistically assuming that a leverage of eight can be achieved.

Finally, as a new instrument, SURE (Support to mitigate Unemployment Risks in an Emergency) was created. It will allow for financial assistance of up to €100 billion in loans from the EU to affected member states.

In sum, the additional public funds comprise only €125 billion, which corresponds to 1 per cent of euro area GDP. Moreover, all are to be made available only as loans, which does not fundamentally address rising debt in southern Europe. If, in an epochal crisis, European solidarity is limited to raising such a small amount of funds and then not even providing it as transfers, it should come as no surprise if parties critical of Europe gain even more political influence.

Optimal solution

What would be the optimal solution? As much as possible of the additional debt should be transferred to the European level. A new fund should raise an amount of 10-15 per cent of EU GDP (€1.4-2.1 trillion) in the form of bonds. The funds would then be allocated to the member states as transfers, so that national debt would not be affected.


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

It would be conceivable to allocate the funds to all states according to their GDP shares, so that this would not involve transfers between the member states. Or there could be a mix, so that part of the funds would be allocated according to the extent to which the coronavirus crisis affected them.

As with the SURE mechanism, Article 122 of the Treaty on the Functioning of the European Union could serve as the legal basis. The funds could be perpetual bonds. The interest payments would have to be made from the EU budget.

Assuming that such bonds could currently be placed on the market at an interest rate of 2 per cent, this would result in an annual burden of 0.2 to 0.3 per cent of GDP. The member states would have to raise this amount through higher EU contributions.

‘Coronabonds’

So far, EU finance ministers have rejected ‘coronabonds’. But they have been positive about the possibility of a recovery fund. If it were structured according to the principles outlined here, that would be a big step forward. If the ‘frugal four’—Austria, Denmark, Sweden and the Netherlands—are not willing to change their position, however, nothing good can be expected for Europe.

Solutions such as restructuring the public debt in southern-European countries would be a recipe for disaster—this would destroy the savings of broad sections of the population. Debt reduction via a wealth tax would only make an effective contribution if it covered not only the super-rich but also the upper middle class. Reducing their wealth would destroy loan collateral and thus the scope for investment, which is urgently needed for the period after the crisis.

Some relief of the pressure on southern Europeans could be achieved by finally abandoning the completely obsolete 60 per cent debt/GDP target of the Maastricht treaty. It lacks any scientific foundation and if economic policy were to be evidence-based it would have been discarded long ago. If we look at the debt levels of the major economies (Figure 1), it becomes clear that much higher ratios are unproblematic—Japan’s is more than four times the Maastricht threshold.

ECB as saviour

In the end, it will probably boil down to the finance ministers betting on the European Central Bank as saviour, as they did during the euro crisis. With its pandemic emergency purchase programme (PEPP), which has an overall envelope of €750 billion, the ECB has sent a strong signal. Its president, Christine Lagarde, reiterated this on April 30th: ‘These purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions.’

Nevertheless, it is dangerous if governments shirk their responsibility in this way. Critics of the ECB can then rightly question the democratic legitimacy of such comprehensive aid programmes and call for their review by constitutional courts.

It is therefore crucial that the frugal four abandon their opposition to a joint financing facility at EU level. Only in this way will the European project be able to survive and Europe respond to this terrible crisis in a manner as effective as in the United States. For, as the US economist Paul Krugman has put it, paraphrasing Franklin Roosevelt, ‘The only fiscal thing to fear is deficit fear itself.’

This article is a joint publication by Social Europe and IPS-Journal.

Peter Bofinger
Peter Bofinger

Peter Bofinger is professor of economics at Würzburg University and a former member of the German Council of Economic Experts.

You are here: Home / Economy / The ‘frugal four’ should save the European project

Most Popular Posts

Russian soldiers' mothers,war,Ukraine The Ukraine war and Russian soldiers’ mothersJennifer Mathers and Natasha Danilova
IGU,documents,International Gas Union,lobby,lobbying,sustainable finance taxonomy,green gas,EU,COP ‘Gaslighting’ Europe on fossil fuelsFaye Holder
Schengen,Fortress Europe,Romania,Bulgaria Romania and Bulgaria stuck in EU’s second tierMagdalena Ulceluse
income inequality,inequality,Gini,1 per cent,elephant chart,elephant Global income inequality: time to revise the elephantBranko Milanovic
Orbán,Hungary,Russia,Putin,sanctions,European Union,EU,European Parliament,commission,funds,funding Time to confront Europe’s rogue state—HungaryStephen Pogány

Most Recent Posts

reality check,EU foreign policy,Russia Russia’s invasion of Ukraine—a reality check for the EUHeidi Mauer, Richard Whitman and Nicholas Wright
permanent EU investment fund,Recovery and Resilience Facility,public investment,RRF Towards a permanent EU investment fundPhilipp Heimberger and Andreas Lichtenberger
sustainability,SDGs,Finland Embedding sustainability in a government programmeJohanna Juselius
social dialogue,social partners Social dialogue must be at the heart of Europe’s futureClaes-Mikael Ståhl
Jacinda Ardern,women,leadership,New Zealand What it means when Jacinda Ardern calls timePeter Davis

Other Social Europe Publications

front cover scaled Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship
Women Corona e1631700896969 500 Women and the coronavirus crisis
sere12 1 RE No. 12: Why No Economic Democracy in Sweden?

Hans Böckler Stiftung Advertisement

The macroeconomic effects of re-applying the EU fiscal rules

Against the background of the European Commission's reform plans for the Stability and Growth Pact (SGP), this policy brief uses the macroeconometric multi-country model NiGEM to simulate the macroeconomic implications of the most relevant reform options from 2024 onwards. Next to a return to the existing and unreformed rules, the most prominent options include an expenditure rule linked to a debt anchor.

Our results for the euro area and its four biggest economies—France, Italy, Germany and Spain—indicate that returning to the rules of the SGP would lead to severe cuts in public spending, particularly if the SGP rules were interpreted as in the past. A more flexible interpretation would only somewhat ease the fiscal-adjustment burden. An expenditure rule along the lines of the European Fiscal Board would, however, not necessarily alleviate that burden in and of itself.

Our simulations show great care must be taken to specify the expenditure rule, such that fiscal consolidation is achieved in a growth-friendly way. Raising the debt ceiling to 90 per cent of gross domestic product and applying less demanding fiscal adjustments, as proposed by the IMK, would go a long way.


DOWNLOAD HERE

ILO advertisement

Global Wage Report 2022-23: The impact of inflation and COVID-19 on wages and purchasing power

The International Labour Organization's Global Wage Report is a key reference on wages and wage inequality for the academic community and policy-makers around the world.

This eighth edition of the report, The Impact of inflation and COVID-19 on wages and purchasing power, examines the evolution of real wages, giving a unique picture of wage trends globally and by region. The report includes evidence on how wages have evolved through the COVID-19 crisis as well as how the current inflationary context is biting into real wage growth in most regions of the world. The report shows that for the first time in the 21st century real wage growth has fallen to negative values while, at the same time, the gap between real productivity growth and real wage growth continues to widen.

The report analysis the evolution of the real total wage bill from 2019 to 2022 to show how its different components—employment, nominal wages and inflation—have changed during the COVID-19 crisis and, more recently, during the cost-of-living crisis. The decomposition of the total wage bill, and its evolution, is shown for all wage employees and distinguishes between women and men. The report also looks at changes in wage inequality and the gender pay gap to reveal how COVID-19 may have contributed to increasing income inequality in different regions of the world. Together, the empirical evidence in the report becomes the backbone of a policy discussion that could play a key role in a human-centred recovery from the different ongoing crises.


DOWNLOAD HERE

ETUI advertisement

The EU recovery strategy: a blueprint for a more Social Europe or a house of cards?

This new ETUI paper explores the European Union recovery strategy, with a focus on its potentially transformative aspects vis-à-vis European integration and its implications for the social dimension of the EU’s socio-economic governance. In particular, it reflects on whether the agreed measures provide sufficient safeguards against the spectre of austerity and whether these constitute steps away from treating social and labour policies as mere ‘variables’ of economic growth.


DOWNLOAD HERE

Eurofound advertisement

Eurofound webinar: Making telework work for everyone

Since 2020 more European workers and managers have enjoyed greater flexibility and autonomy in work and are reporting their preference for hybrid working. Also driven by technological developments and structural changes in employment, organisations are now integrating telework more permanently into their workplace.

To reflect on these shifts, on 6 December Eurofound researchers Oscar Vargas and John Hurley explored the challenges and opportunities of the surge in telework, as well as the overall growth of telework and teleworkable jobs in the EU and what this means for workers, managers, companies and policymakers.


WATCH THE WEBINAR HERE

Foundation for European Progressive Studies Advertisement

The winter issue of the Progressive Post magazine from FEPS is out!

The sequence of recent catastrophes has thrust new words into our vocabulary—'polycrisis', for example, even 'permacrisis'. These challenges have multiple origins, reinforce each other and cannot be tackled individually. But could they also be opportunities for the EU?

This issue offers compelling analyses on the European health union, multilateralism and international co-operation, the state of the union, political alternatives to the narrative imposed by the right and much more!


DOWNLOAD HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube