The Eurozone COVID-19 Crisis: EU Policy Options

Wednesday, May 27, 2020

Question 1: What is the total size of funding that you would advocate at the EU level in support of its members to weather the COVID-19 crisis this year?

Question 2: What is the best mechanism to pay for economic support provided by and to EU member states to combat the COVID-19 crisis?

CfM Survey: The Eurozone COVID-19 Crisis: EU Policy Options

Summary

The COVID-19 virus has already claimed over 100,000 lives in Europe and nearly 200,000 worldwide. The economic consequences have also been dire. EU member states have taken a variety of measures to contain the spread of the virus, support their health care systems, and cope with the economic fallout. In addition, the EU has already committed 5% of Eurozone GDP to support member states. A large majority of panellists would like to see greater support coming from the EU to its members. The panel was split on financing methods, with equal numbers supporting an enlarged EU budget and joint-liability borrowing at the EU level (e.g. Coronabonds).

Background

The April 2020 CfM survey surveyed its panel of top European economists on the financial support that the EU should provide to member states to support their efforts to contain the COVID-19 pandemic and its economic fallout. Panellists were first asked for the amount of support that should come to member states beyond their own budgetary resources. They were then asked about their preferred method of financing.

The EU Response to COVID-19

The COVID-19 virus has already claimed tens of thousands of lives in Europe. The countries of southern Europe were the first and hardest to be hit, with Italy and Spain both reporting more than 20,000 COVID-related deaths to date. The economic fallout has also been large. The IMF estimates that Eurozone GDP will decline by 7.5% in 2020. The Eurozone’s southern members entered the crisis with high public debts (Spain at nearly 100%, Italy and Portugal well over 100%, and Greece nearing 200% of GDP). GDP levels in Italy and Greece were still below those in 2008 when the pandemic hit.

Individual EU member states have responded rapidly to the economic crisis. European leaders have also been planning measures at the EU level to mitigate the economic damage and to support the weaker and more highly indebted southern members. Eurogroup finance ministers have agreed to mobilize the European Stability Mechanism (ESM) to support member states. The ESM was set up as a €500 billion fund to lend to member states facing a crisis at concessional rates, conditional on structural reforms. It appears that conditionality may be relaxed for coronavirus-related funding and at the time of writing it is still unclear whether ESM funding can be used to support economic measures beyond health care costs.

The EU has also announced SURE, a €100 billion unemployment scheme. The European Investment Bank will leverage €200 billion in financing for SMEs. (See summaries of the various facilities by Deutsche Welle and Bénassy-Quéré et al, 2020). This past week, EU member state leaders asked the European Commission to design a recovery fund and to include further measures in the EU’s upcoming multiannual financial framework, so that it is likely that further commitments will follow.

In the first question, panellists were asked to opine on the total size of the package they would want to see coming from EU institutions in support of their member states in 2020. The question referred only to EU budgetary support measures as opposed to actions taken by the ECB.

Question 1: What is the total size of funding that you would advocate at the EU level in support of its members to weather the COVID-19 crisis this year?

Sixty-two panellists responded to this question, of whom 74% supported more funding than the €700 billion (roughly 5% of Eurozone GDP) currently being provided. Half of respondents suggested that the EU would have to provide assistance of 5-10% of GDP, although those proposing even larger assistance expressed greater confidence in their responses. A main theme in the call for greater EU assistance was the limited fiscal capacity of countries in southern Europe to respond to the crisis independently. Further, the unexpected nature of the shock means that “there are few or any direct moral hazard issues involved”, in the words of John Hassler of the University of Stockholm’s Institute for International Economic Studies (IIES). Wendy Carlin of University College London argues that withholding assistance would lead to long-term “scarring effects” on the worst-hit Eurozone economies.

A number of respondents viewed the crisis as an opportunity to mend structural deficiencies or improve the Union’s design. Martin Ellison (Oxford) describes the current crisis as “an opportunity for the EU to step up to the plate and realise its ambitions to be the primary coordinator of the European trading block.” Evi Pappa (European University Institute) goes further, arguing that the “EMU's original scope was to be a Union of transfers” and that “the EU should do everything it takes to weather the COVID-19 crisis in those countries that were… randomly and more severely affected by the pandemic.” Roger Farmer (Warwick) contends that without “a mechanism to allow for permanent fiscal transfers from rich to poor regions… the alternative is the breakup of the EMU.”

The 10% of respondents that view the current level of funding as either sufficient or excessive noted that the worst-hit countries entered the crisis with weak public finances. Harris Dellas (University of Bern) argues that if Italy had entered the crisis with Germany’s levels of debt, it would not have required assistance. Jorge Braga de Macedo, of the Nova School of Business and Economics (Lisbon), argues that excessive transfers from north to south would lead to “higher geopolitical tensions which the pandemic has exacerbated so far.” Robert Kollman of Université Libre Bruxelles notes that the shock itself was symmetric. He sees “a strong case for cross-country risk sharing via the EU institutions” in the case of asymmetric shocks, but that “this logic does not apply” in current circumstances.

A number of respondents rejected the idea of putting a specific price tag on EU assistance. Francesco Giavazzi (Bocconi) cites the “large uncertainty about how this pandemic will develop” as a reason not “to pre-commit to a number”. Instead, “the ‘whatever it takes’ attitude is far superior.” Further, some respondents noted that the size of assistance would depend on its nature. Agnès Bénassy-Quéré states that the “exact number” would depend on “the distribution of loans and grants, and on the maturity of the former.”

Financing mechanisms

On top of the debate on the measures required to support member states, the debate on financing these measures is if anything even more heated. With a limit of approximately 1% of EU GDP, the EU’s budget cannot contribute much to the fiscal costs of the support efforts. A number of alternative financing mechanisms have been put forth to finance national and EU-wide health and economic measures. The proposals differ in their mechanisms, but also in the extent to which they involve transfers (implicit or explicit) across member states.

The ECB has already provided financing through its Pandemic Emergency Purchase Programme (PEPP), in which the ECB has freed itself to buy debts of crisis countries disproportionately. Contrary to Outright Monetary Transactions, losses would not be shared among national central banks. Perotti (2020) has suggested expanding PEPP further to avert future sovereign debt crises, perhaps combined with some commitment to cooperative behaviour by beneficiary states. Others have suggested the ECB could provide more direct or implicit financing (see Gali, 2020).

Additional proposals take the form of debt restructuring to provide additional fiscal space to highly indebted member states (see Vihriälä, 2020). Additional proposals have been put forth to provide direct transfers to weaker countries.

A number of economists have proposed issuing Coronabonds: long-term bonds to be issued at the EU level to support the fiscal costs of combatting COVID-19 and its economic consequences. Member states would be jointly responsible for repaying this debt. Some proponents of this idea insist that this would be distinct from earlier proposals for more permanent mutual borrowing arrangements such as ESBies (see Brunemeier et al, 2016). Bonds linked to GDP growth have also been proposed.

Finally, some proposals call for temporary or longer-term expansions of the EU’s fiscal powers to form a fund or to allow for direct transfers between member states. For example, the Spanish government has proposed a €1.5 trillion European Recovery Fund that would be raised in similar ways to the EU’s budget. These proposals may also be combined with further borrowing, but this repayment would be the mutual responsibility of member states through the expanded EU budget.

In the second question, panel members were asked for the best way to finance the costs of economic support from nation states and at the EU level.

Question 2: What is the best mechanism to pay for economic support provided by and to EU member states to combat the COVID-19 crisis?

Three-quarters of all respondents favoured either joint borrowing by member states in the form of ‘Coronabonds’ or an expanded EU budget, with respondents evenly split between the two. Supporters of Coronabonds expressed higher confidence in their responses. Some supporters of Coronabonds viewed this as a ‘black-swan’ event requiring special one-off financing mechanisms. Thorsten Beck (Cass Business School) writes: “This is a once-in-a-generation or even once-per-century crisis, which demands special funding, which should therefore be outside the regular budget.” Francesca Monti of King’s College London cites COVID Perpetual Eurobonds, suggested by Giavazzi and Tabellini (2020), as “the most effective tool to finance the fiscal measures that should be put in place.” There was, however, an appreciation of the larger challenges such joint borrowing would present. Franck Portier (UCL) contends that the relatively low risk premium on these bonds would be “an implicit transfer from, say, Germany to, say, Italy.” He writes: “I am ready to eventually finance it as a tax payer, but I am doubtful that public opinion in Germany or the Netherlands would agree.” Others viewed Coronabonds as a more permanent solution and the crisis as an opportunity to deepen EU fiscal unity. Nezih Guner (CEMFI) concludes that the crisis is “a critical time to think about the future of the EU as a fiscal union,” with “the very survival of the EU” at stake.

Supporters of an expanded EU budget viewed this as the safer option for an array of reasons. Panicos Demetriades (Leicester) noted that nationally-issued perpetual bonds, such as those proposed by the Spanish government, were “less problematic politically than Coronabonds or direct transfers.” Francesco Giavazzi (Bocconi) saw advantage in keeping the financing within the EU perimeter and to avoid “replicating the ESM model when a new institution was created outside the EU.” Roel Beetsma (Universiteit van Amsterdam) notes that the EU budget “already [has] the infrastructure in place (via the BICC, which also has some conditionality built in).” Here too, a number of respondents viewed this as an opportunity to improve the EU fiscal framework in the long run. Panicos Demetriades suggests that an expanded budget would allow the EU to provide international public goods beyond the crisis, such as transport infrastructure and green technologies. Fabrizio Coricelli (Paris School of Economics) suggests borrowing at the EU level in addition to an expanded EU budget, as a means of “also fixing the original sin of the euro.”

A fifth of respondents were split between other financing options. Evi Pappa calls for debt restructuring because joint borrowing and EU budget expansion are “not politically feasible”, but debt restructuring is necessary when “the countries more severely hit by the COVID-19 at this moment need fiscal space.” Maria Demertzis, in support of monetary finance, argues that “increasing the common budget is difficult in the short term,” whereas monetary finance is “temporary, real-time and effective.” Sweder van Wijnbergen (Universiteit van Amsterdam) calls for expanding the ESM, thus “negating the need for further institutional or legislative initiative.” Several members of the panel opined that member states should shoulder the burden themselves. Harris Dellas (Bern), for example, sees a “moral hazard problem involved in the calls for solidarity,” when “some countries have shown little concern for maintaining fiscal space.” Finally several panellists clarified that they would ideally want to use a portfolio of several of the financing options.

References

Brunnermeier, Markus K., et al. “ESBies: Safety in the Tranches,” ESRB Working Paper Series, no. 21, Sept. 2016, doi:10.2849/5698.

Bénassy-Quéré, Agnès, et al. “COVID-19 Economic Crisis: Europe Needs More Than One Instrument,” VOX, CEPR Policy Portal, Centre for Economic Policy Research, 5 Apr. 2020.

Galí, Jordi. “Helicopter money: The time is now.” Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, in Baldwin, R. and B. Weder di Mauro, Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, VoxEU.org eBook, London: CEPR Press.

Giavazzi, Francesco, and Guido Tabellini. "Covid Perpetual Eurobonds: Jointly guaranteed and supported by the ECB." VOX, CEPR Policy Portal, 24 Mar. 2020, voxeu.org/article/covid-perpetual-eurobonds.

Gros, Daniel. “EU Solidarity in Exceptional Times: Corona Transfers Instead of Coronabonds,” VOX, CEPR Policy Portal, Centre for Economic Policy Research, 5 Apr. 2020.

Perotti, Roberto. “The European response to the Covid-19 crisis: A pragmatic proposal to break the impasse,” VOX, CEPR Policy Portal, Centre for Economic Policy Research, 20 Apr. 2020.

Vihriälä, Vesa. “Make Room for Fiscal Action Through Debt Conversion,” VOX, CEPR Policy Portal, Centre for Economic Policy Research, 15 Apr. 2020.

How the experts responded

Question 1

Participant	Answer	Confidence level	Comment
Ethan Ilzetzki London School of Economics	10-20% of GDP	Very confident	The magnitude of the shock is unprecedented in modern peacetime and was entirely unanticipated. Some EU member states entered the crisis with high levels of public debt and limitted fiscal space to respond to the crisis. Italian debt is on the verge of "junk bond" status even with the ECB's support. The survival of the European Union project requires meanigful action that will entail transfers from north to south. The exact magnitude will depend on whether the funding is the in the form of concessional loans or outright transfers. The sums could be substantially smaller if they are more explicitly targetted to the weakest economies in the EU, but this will be difficult to enact politically.
Volker Wieland Goethe University Frankfurt and IMFS	5% of EZ GDP: No more than current commitments	Confident	I think 5% is rather a lot as EU contribution. Of course, on the national level much more is going to be needed. However, the taxation power and the control over the extent of spending is still on the national level. Further, in this major crisis the EU has rightly allowed member states to exceed deficit limits and forego policies aiming to return to debt limits. If a high-debt member state is in danger of loosing market access the combination of ECB intervention with an ESM program is the best bet to prevent a debt crisis.
Robert Kollmann Université Libre de Bruxelles	5% of EZ GDP: No more than current commitments	Confident	The Covid-19 epidemic is a common shock. While death rates differ across countries, the predicted contraction in real GDP for 2020 is roughly in the same -7% to -9% range for all individual EU member countries, according to the latest IMF WEO (April 2020). The predicted contraction of German GDP (-7%) is only marginally smaller than that of Spain (-8%). (Relative to population size, the Covid mortality has so far been highest in Belgium, not in Italy or Spain!). In macro-economic terms, Covid-19 is a COMMON shock. A strong case for cross-country risk sharing via the EU institutions can be made when there are large asymmetric shock. But this logic does not apply to a common shock. The countries of the Southern periphery (including France) are now paying the price for their long-standing fiscal mismanagement.
Michael McMahon University of Oxford	10-20% of GDP	Confident
Nicholas Oulton London School of Economics	10-20% of GDP	Confident	10-20% of GDP looks a reasonable total to plan for over the first year. So how much of this should be paid for at EU level? In the case of an EU member not in the Eurozone like Denmark or Poland, they could probably afford this by themselves. But they would presumably expect to share in any EU-wide scheme. In the case of Eurozone members like Spain, Italy, or Greece, tthey clearly can't afford this level of support from their own resources since they are heavily indebted and have given up their monetary independence. So they will need a bailout of some sort.
Thorsten Beck Cass Business School	5-10% of GDP	Very confident	This is a global pandemic and the recession/depression resulting from the Great Lockdown is a global. Given high economic interlinkages (supply-chains, demand externalities etc.) national budgetary support within the EU has strong externalities, which implies that the sum of national efforts will be below the optimal effort. This is exacerbated by the limited fiscal space of some of the most affected countries. A large EU-wide budget can reduce this gap. It would also send a strong political signal to European citizens on solidarity and cooperation.
Wendy Carlin University College London	5-10% of GDP	Confident	The worst hit economies have provided too little (national) discretionary fiscal stimulus. Italy is in the worst position (see the IMF Fiscal Monitor on the balance between very small fiscal stimulus and much larger loans and guarantees). This combination is much too little to fill the output gap. The danger if substantial EU funding is not provided is of long-term and very costly scarring effects; and in the shorter term, of a possible sovereign debt crisis threatening the future of the Eurozone.
Martin Ellison University of Oxford	10-20% of GDP	Very confident	This is an opportunity for the EU to step up to the plate and realise its ambitions to be the primary coordinator of the European trading block. In a geographically fragmenting world where tensions and frictions are running high, it is important to cement EU. There is no moral hazard or adverse selection problem with countries borrowing because of the Covid-19 virus, so it is important to support the weakest and help them help themselves. Domestically, we are encouraged to stay at home to “protect the vulnerable” and “protect the NHS”. By analogy, the EU should also “protect the vulnerable” and “protect the institutions”, by distributing resources to countries rather than individuals. Deficit have been in the range 15-20% during times of war in many countries, so there should be no problem raising funding. If this is a 1 in 50 year crisis then we need to pay for it over 50 years, and a significant EU bond issue could help weak fiscal countries to achieve that.
David Cobham Heriot Watt University	10-20% of GDP	Confident
Jagjit Chadha National Institute of Economic and Social Research	5-10% of GDP	Very confident	Growth in the EU seems like to contract by some 6-7% in 2020. The impact of lockdowns in the Euro Area is amplified as there is so much intra-EU trade. We estimate that the domestic shock from a lockdown might be nearly doubled once we account for linkages beyond national boundaries. A larger co-ordinated response is therefore well motivated. We cannot afford to let economies spiral onto a downward path.
Mathias Thoenig DEEP-HEC, University of Lausanne	5-10% of GDP	Confident
Luigi Guiso Einaudi Institute for Economics and Finance (EIEF)	5-10% of GDP	Very confident
Francesco Giavazzi IGIER, Università Bocconi, Milano	No opinion	Extremely confident	I think it is dangerous to pre-commit to a number. The "Whatever it takes" attitude is far superior given the large uncertainty about how this pandemic will develop. f
Franck Portier University College London	5% of EZ GDP: No more than current commitments	Not confident	A- We do not know the cost of the Covid-19 crisis, so that it is hard to assess the amount of many that is necessary. B- I believe that governments should do as much as possible to send on unemployment benefits, transfers to households and firms. C- European institutions are needed if and only if the two following conditions are simultaneously met: C1- some countries are more severely hit that others (which seems to be the case) C2- and those countries cannot borrow as much as they would like to (which also seems to be the case). If C1 and C2 conditions are met, then some transfers between countries via the EU are justified. I don't believe that those transfers should be conditional to structural reforms (let's not aim at two birds with one stone), but the use of the money should be monitored.
Nezih Guner CEMFI	5-10% of GDP	Confident
Sweder van Wijn... Universiteit van Amsterdam	5-10% of GDP	Confident	And more if needed to avoid a US style collapse in employment.
Ricardo Reis London School of Economics	5-10% of GDP	Not confident	There is still so much uncertainty regarding the length of the lockdown, how gradual will be the unfreezing of the economy, or how safety measures will impact our productivity, that it is hard to forecast the future of the private economy let alone what should be the government's response to it. Still, roughly 10% of GGDP was the number put forward by the Eurogroup, and it is important to note that these would complement national policies.
Stefan Gerlach EFG Bank	5-10% of GDP	Not confident	It is very difficult to predict the need since there is a risk of a second wave of infections.
John Hassler Institute for International Economic Studies (IIES), Stockholm University	10-20% of GDP	Very confident	Dealing with the Pandemic is a European public good. This is both because of the borderless nature of Covid-19 and because mitigation of the economic consequences in one country is good for the rest of the union. In contrast to most other crises, there are few or any direct moral hazard issues involved. This speaks strongly in favor of mutualization of costs of dealing with the crisis. To make for a swift agreement on this, countries that are likely to be net donors should accept so and those likely to be net recipients should be willing to accept some conditionality regarding future dealing with excessive public debts.
Peter Bofinger Universität Wurzburg	10-20% of GDP	Very confident
David Miles Imperial College	5-10% of GDP	Not confident	The key issue is not so much how much economic support from the state is needed in EU countries - it is from which states should most of this come (i.e. largely from the national state or largely from the union of states in the form of central EU support). Since moral hazard problems seem largely absent then on risk sharing grounds more than is usual should probably come from the EU budget.
Philippe Martin Sciences Po, Paris	5-10% of GDP	Confident	If the EU is able to provide a bit more than 5% of EZ GDP and this comes on top of the national economic stimulus this would be a huge economic and political sucess and would allow to reduce thhe probability of a prolonged recession
Evi Pappa European University institute	No opinion	Very confident	Given the existing economic and health data is hard to evaluate the costs of the Pandemic crisis. For that reason I cannot evaluate what should be the correct size of funding. Yet, the EMU's original scope was to be a Union of transfers, as a result, the EU should do everything it takes to weather the COVID-19 crisis in those countries that were to some extent, randomly, and more severely affected by the pandemic.
Ugo Panizza The Graduate Institute, Geneva (HEID)	5-10% of GDP	Confident	It would be good to make sure that each country can implement a stimulus of at least 10% of GDP. This would require less than 10% of GDP at the European level as some countries have ample domestic fiscal space and would not require much from the EU.
Philippe Bacchetta Université de Lausanne	5% of EZ GDP: No more than current commitments	Very confident
Sir Charles Bean London School of Economics	5-10% of GDP	Not confident	The size of the fund should really reflect the scale of the need and not be arbitrarily limited. My answer therefore reflects my present expected necessary scale of funding but could rise if there are repeated waves of the pandemic in the future.
Mario Forni Università di Modena	10-20% of GDP	Confident
Camille Landais London School of Economics	5-10% of GDP	Confident
Harris Dellas University of Bern	<€700 billion (~5% of EZ GDP): Current committed EU funding is already excessive.	Very confident	Monetary policy is already super active and I am concerned about further government expansion and public debt build up. Both tend to be permanent with deleterious long run effects. Had Italy Germany's level of public debt, it would have not needed much -if any- help from the EU.
Francesca Monti Kings College London	5-10% of GDP	Confident	The large exogenous shock to the economy caused, throughout Europe and the world, by the pandemic, warrants a large fiscal response with central bank backing. The EU should have joint fiscal instruments as well as joint financial instruments. There are several channels through which this crisis could be amplified, e.g. risks around bank solvency, so interventions to shore up the economy could ultimately be beneficial for all the countries in the EU, not just for the worst hit countries.
Paul De Grauwe London School of Economics	5-10% of GDP	Confident
Pietro Reichlin Università LUISS G. Carli	5-10% of GDP	Confident	There may be variation across EU countries depending on the impact of the COVID-19. I evaluate 10% of GDP for the worst hit countries (France, Italy, Spain).
Nicola Fuchs-Sc... Goethe University Frankfurt	5-10% of GDP	Confident	It is of course still unclear how deep the crisis will be. We will need to make sure, though, that it does not increase inequality across Europe.
Alexander Ludwig Goethe University	10-20% of GDP	Very confident
Michael Wickens Cardiff Business School & University of York	No opinion	Confident	This is not the right question. It presupposes that direct fiscal funding is required which it is not. I explain my reasoning in the next question.
Gino A. Gancia Queen Mary University of London	5-10% of GDP	Not confident
Cédric Tille The Graduate Institute, Geneva	10-20% of GDP	Confident	Given the large degree of uncertainty on the cost, we should remain flexible and adjust the amount as needed.
Antonio Fatás INSEAD, Singapore	5-10% of GDP	Confident
Panicos Demetriades University of Leicester	5-10% of GDP	Very confident	Fiscal support should be at least the same size as the expected contraction in GDP (7.5%). I suspect that IMF projections are already taking into account the 5% stimulus package announced. Going beyond that is therefore essential to prevent such a large drop in GDP, prevent unemployment from spiralling out of control and to protect the productive base of affected economies so that supply can respond to demand when the restrictions are lifted. It is paramount that governments strengthen the capacity of public health systems to deal with a possible second wave of the pandemic in the autumn, without reintroducing new restrictions that will further damage their economies. It is also paramount that governments do not see this as an opportunity to cut public sector wages and salaries, or carry out cuts in other public services. Such short sighted policies could push European economies deeper into recession and will make recovery in 2021 much less likely.
Etienne Wasmer Sciences Po, Paris	<€700 billion (~5% of EZ GDP): Current committed EU funding is already excessive.	Confident
Jorge Braga de ... Nova School of Business and Economics, Lisbon	5-10% of GDP	Confident	in spite of the fascination with twelve zeros in the press, it seems impossible to more than double current commitments for this year not only because of differences between debt levels across member states but also because of higher geopolitical tensions which the pandemic has exacerbated so far. the size of funding should therefore be closer to the lower bound.
Angus Armstrong Rebuilding Macroeconomics, IGP, UCL	10-20% of GDP	Not confident	This would constitute a huge one year budgeted package. However, I have low confidence in my answer because it depends on the form of the package. If this were a full transfer from North to South, this would signal a federal Europe. If instead it is a loan or has implausible conditionality then this may not be enough.
Lucio Sarno Cambridge University	5-10% of GDP	Confident
Wouter Den Haan London School of Economics	5-10% of GDP	Not confident	I have been a good sport and given a number. But what is the right number depends a lot on what it can be spend on and what the conditions are. There could be solidarity gifts for some expenditures. For other types of expenditures it would make more sense to have loans with some conditions. So depending on what these specifics are the right number could be lower or higher.
Gernot Müller Eberhard-Karls-Universität Tübingen	5% of EZ GDP: No more than current commitments	Not confident
Moritz Schularick	<€700 billion (~5% of EZ GDP): Current committed EU funding is already excessive.	Very confident
John VanReenen London School of Economics	10-20% of GDP	Confident
Roger Farmer University of Warwick	>20% of GDP	Extremely confident	The EU desperately needs a mechanism to allow for permanent fiscal transfers from rich to poor regions. No other large monetary union anywhere in the world operates without regional transfers. The alternative more likely outcome is the breakup of EMU. It’s crunch time for the European experiment.
Costas Milas University of Liverpool	5-10% of GDP	Confident	It is likely that we will face a U-shaped recession or, in case there is a second wave of infections, a W-shaped one. The W-shaped scenario appears likely as (some) Eurozone countries appear keen to relax restrictions (too) fast. Consequently, a support around 10% of GDP looks appropriate. Needless to say, if things turn out worse, support can increase further.
Maria Demertzis Bruegel	5-10% of GDP	Confident
Roel Beetsma University of Amsterdam	5-10% of GDP	Confident	Notice that in addition to discretionary expansion there is a dampening effect on the size of about 3.5% coming from the automatic stabilizers. The current discretionary package will obviously not prevent very sharp economic downturn. A recovery fund will be needed to in addition to the measures so far agreed up on. Also the recovery fund will not prevent a very sharp downturn. The size of the recovery fund, and its design (grants versus loan component) will need to take account of the effects on (medium run) debt sustainability. The composition of the recovery fund will also be important. A sufficiently large public investment component or more generally growth-friendly spending component will be important, as these components will generally suffer most from budgetary pressure and the effect is largest for the high debt countries as the experience of the previous crisis has shown. See last autumn's European Fiscal Board review report for a more detailed account.
Linda Yueh London Business School	No opinion	Not confident	Depends on Q2
Agnès Bénassy-Quéré University Paris 1 & Paris School of Economics	5-10% of GDP	Not confident	The exact number will depend on how the pandemic evolves and also, crucially, on the distribution between loans and grants, and on the maturity of the former.
Philip Jung University of Dortmund	<€700 billion (~5% of EZ GDP): Current committed EU funding is already excessive.	Not confident
Ramon Marimon European University institute and UPF-BarcelonaGSE	5-10% of GDP	Confident	The problem is that no matter the number is not significant without knowing that it would be: 1) transfers from EU (enlarged) budget; 2) new EU or EA debt, backed by the budget (i.e. all MS); 3) debt that would be specific countries liabilities (e.g. ESM, SURE), or 4) Credit guarantees (EIB). If it was mostly (1) a much smaller figure would be needed, although (3) and (4) should play their role too.
Jean Imbs Paris School of Economics	10-20% of GDP	Very confident
Fabrizio Coricelli University of Siena and Paris School of Economics	10-20% of GDP	Extremely confident	To be effective, funding should cover the budget deficit induced by the pandemic and, in addition, off budget expenditure linked to local financial institutions, which are not counted in the budget (contingent liabilities): guarantees, state participation in capital of enterprises in essential sectors.
Claudio Michelacci EIEF	5-10% of GDP	Confident
Andrew Mountford Royal Holloway	5-10% of GDP	Confident

Question 2

Participant	Answer	Confidence level	Comment
Ethan Ilzetzki London School of Economics	Expanded EU budget (with possible borrowing at the EU level)	Not confident	My preferred option would be debt restructuring that leads to substantial debt reductions to the most highly indebted member states, combined with greater enforcement of deficit limits in the future. This would avoid the patchwork of having to deal with a similar situation every decade. However, the Greek debt reduction in the previous crisis indicated that debt restructuring realilstically only leads to minor reductions in the country's debt burden. Given this, the EU will need to play a far more direct role. The crisis has shown that the greatest challenges to our civilization know no borders and enhancing the EU budget will be a good precedent for the future as well.
Mirko Wiederholt Science Po	Other or no opinion	Confident	I would favor a structure like the ESM with relaxed conditionality.
Volker Wieland Goethe University Frankfurt and IMFS	Other or no opinion	Confident	I chose "other" because I would favor the combination of national fiscal effort together with an ESM credit line or additional ESM facility if needed. This would involve a minimal degree of conditionality. It is most likely to be necessary for member states that entered this crisis already with high debt levels and low growth. ECB purchases under an OMT like program conditional on the ESM credit line or other facility can help prevent an up-surge in risk premia. EU and EIB can help with funding for targeted projects, especially in the health sector and those sectors needed to perform well to achieve an effective public health strategy. Close collaboration and some direct transfers to struggling member states are likely to be needed in this context. All member states are searching for a way to get out of the lockdowns that allows containing the pandemic in the absence of a vaccine while "re-starting" or accelerating economic activity. There is tremendous need for data and analysis, keeping an open mind and learning from each others strategies. Joint bond issuance under joint and several liability of member states while keeping full control over expenditure, tax and debt policies on the respective member state level is not a good idea. It would be likely to induce conflicts and politically de-stabilizing dynamics in the EU down the road. It would make more sense in a situation where a substantial degree of sovereignty is transfered to an EU federal government. But that's not on the table.
Michael McMahon University of Oxford	Member states themselves (no additional EU support)	Confident	I think the difficulty is that the current crisis requires quick action and there is a need to disperse funds quickly. Most of the other options, while they may be desirable economically are likely to take a long time. As such all countries need to proceed on the assumption that they will fund their relief effort themselves and undertake the necessary supports relying on the ESM and PEPP to reduce pressure on funding costs. Between the other options, it would clearly be useful to have additional support from the EU level so any that could be implemented quickly would be desirable economically (and potentially politically). Although some countries may explore monetary financing, and it may even be somewhat desirable in a one-off, independently-entered-into sense, I see the barriers to such financing as too large in the euro area.
Robert Kollmann Université Libre de Bruxelles	Member states themselves (no additional EU support)	Confident	See previous answer. Covid-19 is a common macroeconomic shock. Basically, countries and and should deal with the macroeconomic fallout of this shock, using their own fiscal resources. However, a very strong case can be made for much more aggressive EU-level support to research on Covid tests, the development of a virus, and the rapid expansion of production of medical equipment. This is an area where there are huge increasing returns and positive externalities! The EU Commission should launch a European 'Manhattan Project' to develop tests and vaccines against Covid and other future health threats, and to build a stronger, more self-sufficient European medical equipment/pharmaceutical industry.
Nicholas Oulton London School of Economics	Debt restructuring or write-off	Confident	Coronabonds will never be accepted by Germany or the Netherlands. Monetary financing by the ECB is illegal under the treaties and probably under the German constitution too. Other options seem infeasible. That leaves do nothing (which I don't support) or debt restructuring (default).
Thorsten Beck Cass Business School	Joint borrowing by member states (e.g. Coronabonds)	Very confident	This is a once-in-a-generation or even once-per-century crisis, which demands special funding, which should therefore be outside the regular budget. There are also practical issues that might funding through the budget more difficult. Funding exclusively by member states would go beyond the fiscal space of several member states and might lead to a smaller budget than optimal or, alternatively, might push these countries into a sovereign debt crisis. Restructuring of debt at this stage would simply create enormous market volatility if not panic and make additional funding even more difficult. Finally, while monetary financing seems the easiest option and the path of least political resistance, it could be a long-term time bomb, as the monetary dominance would be lost, interest rates would have to stay around zero for years to come - with the mid-term risk of financial repression - and the ECB would become politically even more controversial.
Beatrice Weder ...	Expanded EU budget (with possible borrowing at the EU level)	Very confident
Wendy Carlin University College London	Expanded EU budget (with possible borrowing at the EU level)	Not confident
Martin Ellison University of Oxford	Joint borrowing by member states (e.g. Coronabonds)	Confident	See above. There is no moral hazard or adverse selection problem with countries borrowing because of the Covid-19 virus, so it is important to support the weakest and help them help themselves.
David Cobham Heriot Watt University	Joint borrowing by member states (e.g. Coronabonds)	Very confident
Jagjit Chadha National Institute of Economic and Social Research	Member states themselves (no additional EU support)	Very confident	Member states need to be able to plot an appropriate path for their public debt and to target domestic expenditure to limit the size of the impact of lockdowns on the economy. There are though likely to be large positive multipliers from expansionary policies, given the nature of the lockdown, from those countries that do not already have worryingly high levels of public debt. There is not strictly speaking a need for a centralised response providing surplus countries try to inject more demand into the system.
Stefan Gerlach EFG Bank	Other or no opinion	Not confident	I think the proposal of Roberto Perotti, which does not seem to fit under any of your answers, is the right way to go. It will provide plenty of support and but requires no new institutional structures or changes in EU treaties.
Mathias Thoenig DEEP-HEC, University of Lausanne	Joint borrowing by member states (e.g. Coronabonds)	Very confident
Luigi Guiso Einaudi Institute for Economics and Finance (EIEF)	Expanded EU budget (with possible borrowing at the EU level)	Very confident
Francesco Giavazzi IGIER, Università Bocconi, Milano	Expanded EU budget (with possible borrowing at the EU level)	Very confident	my view is that it would be better to keep this financing inside the EU perimeter, that is not replicating the ESM model when a new institution was created outside the EU
Franck Portier University College London	Joint borrowing by member states (e.g. Coronabonds)	Confident	A- Spendings should first be financed by national budgets B- In case some transfers between countries are needed, that could be financed by Coronabonds. But there is no magic. If those bonds can be issued with a low risk premium, that is an implicit transfer from, say, Germany to, say, Italy. I am ready to eventually finance it as a tax payer, but I am doubtful that public opinion in Germany or the Netherlands would agree.
Nezih Guner CEMFI	Joint borrowing by member states (e.g. Coronabonds)	Confident	Once again, as we did during the recent financial crisis, we are discussing whether the policy response of the EU should go beyond the actions of the ECB. This is a critical time to think about the future of the EU as a fiscal union, with its taxes, transfers, unemployment programs, and borrowing mechanisms. The very survival of the EU might hinge on it.
Sweder van Wijn... Universiteit van Amsterdam	Joint borrowing by member states (e.g. Coronabonds)	Extremely confident	I am surprized the ESM is not mentioned. Already exists, so no instituional or legislateive initiative needed, has € 540 billion headroom and can eaily be expanded as needed. Was created after the Greek crisis but still exists for exactly this type of sudden Europe wide problems requiring Europe level intervention.
Ricardo Reis London School of Economics	Expanded EU budget (with possible borrowing at the EU level)	Confident	Having the EU (i) create its own new fiscal space through new EU-wide taxes, (ii) issue its own bonds based on these revenues, (iii) choose how and what to spend it on, seems the option that best aligns incentives, accountability, and economic support. Importantly, this would not be very large, but it is missing at the margin. In spending, it would be smaller than national policies, complementing them. In bond issuance, it would be too small and still leave the need for a large EU-wide safe asset that banks can hold (to prevent sudden stops due to regional flights to safety and break the diabolic loop) and the best option for that would be ESBies.
John Hassler Institute for International Economic Studies (IIES), Stockholm University	Joint borrowing by member states (e.g. Coronabonds)	Confident
Peter Bofinger Universität Wurzburg	Joint borrowing by member states (e.g. Coronabonds)	Very confident
David Miles Imperial College	Expanded EU budget (with possible borrowing at the EU level)	Not confident	see answer to first question
Evi Pappa European University institute	Debt restructuring or write-off	Confident	The institutional weaknesses of the eurozone have been laid bare already twice in the last twenty years. Once with the Sovereign debt crisis and now with the response to the COVID-19 crisis. The proposals on the table do not differ substantially from the ones put forward some years ago during the sovereign crisis. Thus, we need to judge them not only in terms of their substance but also on their feasibility and the willingness of policymakers to adopt them. I believe that Eurobonds and the Recovery Fund are not politically feasible, but whats more is that they will not solve the problem of the periphery countries as they would be enforced under several restrictions on fiscal policy in the periphery and the countries more severely hit by the COVID-19 at this moment need fiscal space. The ECB has the authority, and the capacity to provide financing through its Pandemic Emergency Purchase Programme (PEPP), buying debts of crisis countries disproportionately. For that reason, I view debt restructuring coordinated by the ECB as the most efficient, timely and realistic solution.
Philippe Martin Sciences Po, Paris	Joint borrowing by member states (e.g. Coronabonds)	Very confident	There is a need for a mix of different instruments: joint borrowing + borrowing at the EU level + ECB backstop + increase in national debts. The only instrument to avoid is debt restructuring. We do not need a financial crisis on top of the Covid crisis
Ugo Panizza The Graduate Institute, Geneva (HEID)	Expanded EU budget (with possible borrowing at the EU level)	Confident	If done well an expanded EU budget will promote integration and allow for more risk-sharing down the road and possibly the creation of pan-EU unemployment insurance mechanism
Philippe Bacchetta Université de Lausanne	Joint borrowing by member states (e.g. Coronabonds)	Confident
Sir Charles Bean London School of Economics	Joint borrowing by member states (e.g. Coronabonds)	Confident	As the question implies, it really makes sense to rely on multiple financing sources rather than a single mechanism.
Mario Forni Università di Modena	Joint borrowing by member states (e.g. Coronabonds)	Very confident
Camille Landais London School of Economics	Expanded EU budget (with possible borrowing at the EU level)	Confident
Francesca Monti Kings College London	Joint borrowing by member states (e.g. Coronabonds)	Confident	Covid perpetual eurobonds, such as those proposed by Giavazzi and Tabellini (https://voxeu.org/article/covid-perpetual-eurobonds), are, in my opinion, the most effective tool to finance the fiscal measures that should be put in place.
Harris Dellas University of Bern	Member states themselves (no additional EU support)	Very confident	I am concerned about the moral hazard problem involved in the calls for solidarity. Some countries have shown little concern for maintaining fiscal space, and when a crisis hit, they want Germany to pick up the bill. This is not a good foundation for building a Union.
Paul De Grauwe London School of Economics	Monetary finance	Confident
Pietro Reichlin Università LUISS G. Carli	Monetary finance	Confident	Enlarging the EU budget to a limited extent and deploying a specific credit line within the ESM and EIB is certainly a good idea, but, given the lack of fiscal and political integration, I do not consider these options to be up to the task of providing the amount of financing that is necessary. Southern Europe will end up with large fiscal deficits and a much larger stock of government debt in investors' portfolios. Although I think that there are margins for a further increase in overall public debt in the EU, I think that the ECB should overcome any residual regulatory constraint on the way to absorb a much higher amount of sovereign securities to avoid financial disruptions and speculative attacks.
Nicola Fuchs-Sc... Goethe University Frankfurt	Expanded EU budget (with possible borrowing at the EU level)	Confident	It is important to use fiscal policy more actively in this crisis than in the financial crisis.
Tommaso Monacelli IGIER, Università Bocconi	Expanded EU budget (with possible borrowing at the EU level)	Very confident
Michael Wickens Cardiff Business School & University of York	Other or no opinion	Very confident	I vote "other" because, apart from rejecting the first option, I believe that any of the others could work. In general, as covid-19 is a one-off fiscal problem it should be financed either by bonds or money. In principle a temporary increase in taxes could also be used. Bonds would be financed by the current generation and money would be a temporary inflation tax. General taxation is only appropriate for permanent increases in fiscal deficits. However, in the EU this solution would be difficult to implement due to the single currency. Countries such as Germany and The Netherlands can use bond finance but countries like Italy, Greece and Spain would find this very expensive due to their already high levels of debt. Currently money financing is ruled out for the ECB as they are not allowed to buy government debt directly. As direct fiscal transfers are too small and face strong opposition by the countries that expect to have to pay, and higher temporary taxes would be politically difficult, this only leaves bond financing. This could be done by reducing the cost of debt by debt write-offs and then issuing more debt or by risk sharing through coronabonds. Both face the objection that they are a form of fiscal transfer. In principle any of these or a combination could work. The choice of which to use will be political and not economic. The founding fathers of the EU might take some satisfaction from the situation as whichever solution is adopted it will hasten their ultimate objective of political union. Participants have admitted that monetary union was introduced before it was sensible in order to hasten political union. Now fiscal transfers will break the log jam of fiscal union and be a further push to political union.
Alexander Ludwig Goethe University	Expanded EU budget (with possible borrowing at the EU level)	Very confident	Additional debt restructuring will be needed
Jordi Galí CREI, Universitat Pompeu Fabra and Barcelona GSE	Monetary finance	Confident	This is the only financing approach that would not imply a rise in members' debt ratios, already too high in many cases. The eventual inflationary consequences would be spread gradually over time, and could be detected early and counteracted if needed.
Gino A. Gancia Queen Mary University of London	Expanded EU budget (with possible borrowing at the EU level)	Confident
Cédric Tille The Graduate Institute, Geneva	Expanded EU budget (with possible borrowing at the EU level)	Confident
Antonio Fatás INSEAD, Singapore	Expanded EU budget (with possible borrowing at the EU level)	Confident
Panicos Demetriades University of Leicester	Expanded EU budget (with possible borrowing at the EU level)	Very confident	I like the Spanish governments proposal of issuing perpetual bonds to fund the recovery, as it is less problematic politically than corona bonds or direct transfers. The bonds will not increase public debt levels and will to have to be paid off. The fund can support the countries most affected by the pandemic and could also be used to fund public investments that create spillovers across national boundaries e.g. transport infrastructures that are essential in supply chains, and/or research and innovation, green technologies etc
Jorge Braga de ... Nova School of Business and Economics, Lisbon	Expanded EU budget (with possible borrowing at the EU level)	Confident	this option allows for complementarity between the sources of funds while debt restructuring and joint borrowing by member states require variable geometry solutions within the eurozone which could hurt financial stability in the union, exacerbate the depression in economic activity and the rise of unemployment and thereby failing to address health and climate threats together.
Etienne Wasmer Sciences Po, Paris	Joint borrowing by member states (e.g. Coronabonds)	Confident
Angus Armstrong Rebuilding Macroeconomics, IGP, UCL	Joint borrowing by member states (e.g. Coronabonds)	Confident	This is the logical answer for a monetary union to succeed over the longer term.
Lucio Sarno Cambridge University	Joint borrowing by member states (e.g. Coronabonds)	Very confident
Wouter Den Haan London School of Economics	Expanded EU budget (with possible borrowing at the EU level)	Not confident	Although I can see a bigger role for the ECB, the first line of eurozone action has to be a fiscal one
Gernot Müller Eberhard-Karls-Universität Tübingen	Expanded EU budget (with possible borrowing at the EU level)	Not confident
Moritz Schularick	Joint borrowing by member states (e.g. Coronabonds)	Very confident	One-off, limited for Corona via Article 122
John VanReenen London School of Economics	Joint borrowing by member states (e.g. Coronabonds)	Not confident
Roger Farmer University of Warwick	Joint borrowing by member states (e.g. Coronabonds)	Confident	A number of solutions are possible. All of them involve greater integration and the creation of a US style federal Europe. My point prediction is that this will not happen.
Costas Milas University of Liverpool	Joint borrowing by member states (e.g. Coronabonds)	Confident	This is a genuine emergency. If there was ever an argument in favour of solidarity, now is the right time to proceed with coronabonds. That said, I also have some sympathy for those Eurozone members that object to the idea. If they cannot agree on joint borrowing, can, at least, member states consider issuing GDP-linked bonds? This will give everybody the chance to pay back more when they can afford it and pay back less when they cannot. Countries like Greece or Italy that experienced lower average growth and higher growth volatility (since the launch of the Euro) will face higher GDP-linked borrowing costs than Germany. Nevertheless, countries like Germany or the Netherlands should also benefit from issuing these types of bonds. No country is immune to the coronavirus-related recession. Why not put in place the insurance mechanism on offer by GDP-linked bonds?
Maria Demertzis Bruegel	Monetary finance	Very confident	Debts are piling up and increasing the common budget is difficult in the short term. Monetary financing is temporary, real time and effective
Roel Beetsma University of Amsterdam	Expanded EU budget (with possible borrowing at the EU level)	Confident	The EU budget / multi-annual framework has already the infrastructure in place (via the BICC, which also has some conditionality built in). Increasing the "head room" (difference between maximum revenues that can be raised minus current spending commitments) would provide headroom for guarantees for loans to Member States (the headroom probably allows for lending 8 - 12 times over) as well as grants. An appropriate mix of loans and grants to be decided. The composition of the spending of the funds will be as important, where infrastructure spending with a European / cross-border effect could tilt the composition more towards grants relative to loans to Member States.
Linda Yueh London Business School	Expanded EU budget (with possible borrowing at the EU level)	Confident
Philip Jung University of Dortmund	Joint borrowing by member states (e.g. Coronabonds)	Not confident
Ramon Marimon European University institute and UPF-BarcelonaGSE	Expanded EU budget (with possible borrowing at the EU level)	Confident	As we have argued (A. Bénasy et al. VoxEU 6 & 20/04/20), I will use several instruments, but if I had to signal one I would have a Recovery Fund, based on Expanded EU budget, but managed outside the EC, possibly EIB.
Jean Imbs Paris School of Economics	Monetary finance	Confident
Fabrizio Coricelli University of Siena and Paris School of Economics	Expanded EU budget (with possible borrowing at the EU level)	Very confident	Expanded EU budget WITH borrowing at the EU level. This will help tackling the current crisis but also fixing the original sin of the euro (single money with no central budget). However, highly indebted countries may still be exposed to self-fulfilling crises on their existing stock of debt (Italy in primis). ECB could commit to ensure during the emergency and recovery period (say 5 years) a maximum interest rate on all bonds of eurozone countries. Spreads would not increase and weakest countries may be put on a path of sustainable debt and would thus have the possibility to exit their current economic depression.
Claudio Michelacci EIEF	Monetary finance	Confident
Andrew Mountford Royal Holloway	Joint borrowing by member states (e.g. Coronabonds)	Confident	If the EU had the state capacity to oversee the increased spending then Yanis Varoufakis would be right. An EU bond issue and spending program would be the best way to address the current crisis. However as Economists we know the importance of 'State Capacity' (Besley and Persson AER 2009) and 'Institutions' for economic growth (Acemoglu and Robinson 2012)- particularly legal and fiscal capacity for collecting taxes, upholding property rights and limiting corruption. Besley and Persson show how state capacity can grow with sufficient `common interest public goods' and the current crisis has highlighted plenty of those e.g. huge international and national externalities involved with public health, knowledge creation (Media and R&D), income inequality and the environment (EC101) as well as the benefits of international cooperation and risk sharing. However without the necessary state capacity at the EU level, the trillions of euros borrowed may be used to prop up inefficient banks or diverted into the accounts of reportedly corrupt anti democratic authorities (see e.g. Bloomberg April 2020 https://www.bloomberg.com/opinion/articles/2020-04-07/hungary-s-viktor-orban-profits-from-eu-friends-and-funds ). This would set back the prospect of european cooperation for decades or even centuries. People don't work hard and pay taxes for that. For EU bonds to succeed there has to be an acceptance by the European public of an EU level administrative oversight with the ability and willingness to direct funds to where they are most needed and to deny funds to inefficient and corrupt entities including some states. This can only really occur with a pan EU democratic mandate with the power to overrule individual state's preferences (for this particular tranche of spending). The EU as a whole will benefit from the increased spending and from the reduced prospect of prolonged recessions in highly indebted parts of the EU and so it seems efficient that its costs should also be shared to some extent. Will the EU public be prepared to do this? Will the current crisis highlight enough `common interest public goods' for the State Capacity in the EU to develop? I don't know, but for Yanis Varoufakis' prescription to work he needs this state capacity in place.

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