Where the euro area/EU macro economic response must go - a short thread. 1) So far, the EU is engaging in various versions of quarantine/containment/suppression strategies for #covid19, while letting automatic stabilizers work fully and suspending existing fiscal rules. 1/n
This is worth perhaps a couple of % of GDP, and combined with the new ECB measures, at best a temporary band-aid. 2) However, the macro-data from China suggests double-digit declines in GDP growth from #covid19 responses not far from where the EU is now and the new Imperial 2/n
College Virus model imperial.ac.uk/media/imperial… suggests that various forms of mitigation/quarantines will be with us for perhaps 18months or until an effective vaccine is found. This is a far far worse fiscal outlook than what the EU is now planning for and means new thinking 3/n
is needed. 3) The EU and especially euro area will have no choice but to go towards "controlled monetization" of its fiscal response via the ECB + other CBs. It will be the only way to make this both fiscally and fiscally sustainable in Europe. 4) The ECB cannot take the lead 4/n
on this issue, as it entails clear fiscal implications through the ECB balance sheet. It is for EA leaders to do so and the ECB to follow. In that sense, the ECB's sacrosanct independence is over. 5) IT can be done in several ways, but here is one proposal suggesting that the 5/n
eurogroup/EU Council explicitly states that #covid19 "fiscal solidarity" extends to the ECB balance sheet and the ECB follows up by launching an unlimited "Covid Purchase Program" CPP aimed at restoring spreads (and if need be levels) back to near pre-crisis levels for as at 6/n
as long as #covid19 lasts and likely with the aim to "maintain the levels of its CPP holding" constant on the balance sheet for the foreseeable future. Europe must go big! ENDS piie.com/blogs/realtime…
