How can we “freeze” our economies for 3-6 months and ensure that they come out of the freezer where they are now. My full proposal for a European response (forthcoming on Wedn in a VoxEU ebook) and an explanation [Thread] /1 drive.google.com/file/d/1cU3UBw…
Is a European response necessary? Different countries will face crisis of different magnitudes. Europe is as strong as its weakest link. We cannot afford to turn this health and economic crisis into a Euro crisis, as markets worry about increasing debt burdens /2
Time is of the essence. Economists are circulating thoughtful pieces that however involve tools which would take months or years to set up, or ideas that involve the ECB acting outside its mandate. I propose a "European Bazooka" that is feasible and timely. /3
The European Bazooka must attain three aims: help Member States undertake the necessary healthcare spending; provide a financial backstop to companies, particularly SMEs and support employment protection schemes throughout Member States, so that a minimum of jobs are lost. /4
The total size of the Bazooka I propose would be €500bn based on three legs: €50bn for health systems, €275bn in guarantees to be able to support €2.2tr in loans to the private sector, and €175bn for Kurzarbeit programs around the EU. /5
1: Allow countries to increase their healthcare spending as needed. A 5% increase EU-wide would amount to €50bn. This will fund medical supplies, increase medical personnel and turn buildings into hospitals across Europe. /6
2: A protective shield for the private sector. This program would provide loans to ensure liquidity and support for SMEs, at the same level of ambition as Germany’s plans. To do so, we would require €275bn in budget guarantees. /7
3: Protecting jobs is a priority. Firms must maintain their viability without firing workers. We must finance employment protection (Kurzarbeit) schemes so that companies reduce the hours of their workers (by 100% if needed), and the state compensates workers for lost wages. /8
How could European countries pay for this? In my view there are three solutions that
- can be implemented legally in a timely way given legal and political constraints,
- will reassure the markets and
- avoid financial fragmentation. /9
- can be implemented legally in a timely way given legal and political constraints,
- will reassure the markets and
- avoid financial fragmentation. /9
A. Status Quo: Let MS borrow as they need, and hope the ECB will step in if the market crashes. Not great: The ECB's margin is small: a sizable expansion of its purchase program would break its self-imposed limits – legally and politically difficult. /10
B. Sovereign Bond Backed Securities: Our proposal for the market development of a Safe Asset through pooling and tranching is in the Council’s drawers. It would go a long way to stabilize the markets and make fiscal space for MS, and is extremely easy to pass. /11
C-1. Involving ESM in this crisis response: this would allow the ECB to activate its OMT program if needed. ECB would serve as ESM’s backstop by buying unlimited amounts of government bonds and reducing pressure on spreads. How? /12
C-2. A new instrument should be added to ESM toolbox taking into account Coronavirus. Legally necessary conditionality would be linked to investing in healthcare, short-time employment schemes (Kurzarbeit) and support for SMEs. What procedure? /13
C-3. To speed up process, emergency procedure should be triggered by EC/ECB. Qualified majority instead of unanimity would reduce the risk that quarantine measures prevent national parliament’s ability to approve program. /14
I hope you have some time to read the piece, it is just 3,000 words. I believe economists will have more impact if they appreciate better the relevant legal and political constraints. My paper is an effort to do this. /15
