Thread by @DEhnts

Our brand-new article is available online now:

Ehnts, D., Paetz, M. COVID-19 and its economic consequences for the Euro Area. Eurasian Economic Review (2021).
rdcu.be/cdH5c

doi.org/10.1007/s40822…

While in the short-run national governments are able to do whatever is necessary, there is the risk of a quick return to pre-crisis austerity policies that would lead to yet another lost .. decade. Hence, .. policy makers should .. bring forward the following reform proposals:

1. Most importantly, government bonds need to be generally risk-free in the EA. The PEPP should be made permanent and the ECB should get a mandate to equalize interest rates on government bonds across EA member states and guarantee solvency of member state governments.

2. National governments should .. increase their investments in the ecological reconstruction .. in the form of a #GND. [@gndforeurope] suggest using the @EIB to channel the money towards .. governments, which would have the advantage that current fiscal rules are not broken.

3. The SGP and the Maastricht Treaty need to be reformed. Increasing debt-to-GDP ratios are no problem, if the ECB secures the solvency ... Moreover, deficits are not controlled by national governments and the existing rules bear the risk of a pro-cyclical fiscal policy.

Instead, the size of national deficits should be replaced by measures of economic activity, for example, unemployment rates. As long as unemployment is high, national government expenditures should not be restricted.