Ethan Ilzetzki's picture
Affiliation: 
London School of Economics

Voting history

The Eurozone COVID-19 Crisis: EU Policy Options

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?

Answer:
Expanded EU budget (with possible borrowing at the EU level)
Confidence level:
Not confident
Comment:
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.

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?

 

 

Answer:
10-20% of GDP
Confidence level:
Very confident
Comment:
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.

Covid-19: Economic Policy Response

Question 1: Which of the following would have the greatest impact in mitigating the economic effects of the coronavirus economic crisis?

Answer:
Government transfers to and bailouts of businesses
Confidence level:
Very confident
Comment:
Perfectly managed, the economic crisis could be short lived with the economy roaring back to its original condition after the health crisis is contained. Poorly managed, this short episode could have scarring effects on the economy that could last years. The latter would occur because of mass unemployment and business failure due to temporary closures of large portions of the economy. Some combination of transfers to (smaller) businesses and credit to (larger) businesses is the most direct way to keep them alive. I would make the transfers conditional on retaining staff at pre-crisis levels, which would also contain the damage to labour markets. Unlike in regular recessions, broad-based fiscal policy (tax cuts or transfers) or monetary policy (QE) won't be effective. Parts of the economy are shut down, so that consumption isn't possible or discouraged for health reasons. A visit to your local supermarket will illustrate that there is no lack of consumer spending in other parts of the economy. The multiplier effect of broad based policies will be very limited at this point and more targeted policies are necessary for this very unusual recession we are approaching. UK government debt was above 80% of GDP at the onset of the crisis. The government’s fiscal package combined with the slowdown of the UK economy may bring public debt to over 100% of GDP. The third question asks you about deficit concerns arising from the size of the fiscal responses currently considered.

Question 2: Which of the following would have the second greatest impact in mitigating the economic effects of the coronavirus economic crisis in the UK?

Answer:
Making unemployment benefits more generous, streamlined, or comprehensive
Confidence level:
Very confident
Comment:
Support to businesses won't help the large number of freelance workers, those in the gig economy, and workers on zero hour contracts. In addition to supporting businesses small and large, it is crucial to support workers directly. This isn't the time to worry about moral hazard problems in unemployment insurance and temporary benefits that are very easy to access should be put in place. The wage replacement policies announced this week are a step in the right direction.

Question 3: Which would be the maximal public debt you would be willing to tolerate if used effectively (as in your answers to 1 and 2 above) to support an economic recovery?

Answer:
140% of GDP (e.g. if fiscal support were trippled)
Confidence level:
Not confident
Comment:
This is a grave and (hopefully) one-off emergency and the UK government should do what it takes to support NHS and the economy over the upcoming months. With 10-year bond yields at 0.6% the public is currently paying the government to borrow from it and I'm not concerned about the UK government's borrowing capacity--at the moment. My answer would be different for emerging market economies that might have to take fiscal space into account. The only reason I didn't choose >140% is my concern about the opportunity cost. There will be social needs and possibly even greater crises in the future (we didn't anticipate this one, did we?) and I do think there may be an eventual day of reckoning on public debt. 60% of GDP is enough for the government to replace all incomes nearly to the end of the year, so should be more than enough for all the measures necessary.

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