Insight
A proposal for a coronabond: The Pandemic Solidarity Instrument by Christian Odendahl , Sebastian Grund and Lucas Guttenberg 6 April 2020
The economic hit is so severe, and the demands on fiscal policy so high, that the EU needs to share the burden between stronger and weaker countries. The EU has limited authority and few tools at its disposal to fight the COVID-19 pandemic. Economic policies are also largely in the hands of national governments. It is they who decide how to support a struggling economy under lockdown, be it to defer taxes, subsidise lending to companies, increase sick pay, institute schemes to keep workers on the payroll, and the like. National governments will have to foot the bill for these measures. The COVID-19 crisis, however, may be so expensive that some national governments in Europe are overwhelmed by the subsequent increase in public debt. The consequences range from permanently lower growth in high-debt countries to a full-blown sovereign debt crisis that the European Central Bank (ECB) might struggle to contain. Europe needs a common fiscal response, to ensure that all countries can fight the crisis with equal resources. We propose a €440 billion EU scheme which we call a Pandemic Solidarity Instrument. The scheme would be funded by the EU issuing its own bonds based on guarantees by member-states. Each country would repay those bonds in proportion to the strength of their economy’s recovery. The OECD calculates that economic output under lockdown is 25 per cent lower than would otherwise be the case in advanced economies. If we assume a lockdown or similar restrictive measures of three months and a linear recovery over the following three months, output in 2020 would be 8.3 per cent lower than it would otherwise have been. For the EU as a whole, this would mean about €1.2 trillion in lost output. The lockdown has two effects on government balances. First, a hit to GDP reduces tax revenues. Revenues usually move in tandem with output, so a revenue shortfall of 8.3 per cent amounts to €560 billion in lower revenues for EU-27 governments in 2020 (roughly 4 per cent of 2019 EU-27 GDP). Second, governments are scrambling to enact support packages for firms and workers. Germany’s fiscal measures
CER INSIGHT: A proposal for a coronabond: The Pandemic Solidarity Instrument 6 April 2020
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