Thorsten Beck's picture
Affiliation: 
Cass Business School
Credentials: 
Professor of Banking and Finance

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:
Joint borrowing by member states (e.g. Coronabonds)
Confidence level:
Very confident
Comment:
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.

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:
5-10% of GDP
Confidence level:
Very confident
Comment:
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.

Covid-19: Economic Policy Response

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:
Confident
Comment:
This question gets us back to the fiscal policy debate of the 2010s in the UK, where government ignored the advice of national and international "experts" in their mis-guided austerity drive. I do not think that there is a magic fixed debt threshold above which public debt in the UK with its own currency and flexible exchange rate becomes unsustainable. To the contrary, a big fiscal recovery package now can stimulate the economy and help reduce debt/GDP in long-run. It might also help reduce the shock to be expected from the UK exiting from the Single Market and Customs Union at the end of this or (more likely) next year.

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:
Government transfers to and bailouts of businesses
Confidence level:
Very confident
Comment:
The question refers to economic growth, not to economic equity or fairness. In this sense, supporting businesses to recover from the Corona-recession as quickly as possible will be critical. While providing credit (guarantees) might them help through the recession, losses will still be there and firms might have to thin an equity buffer (to be able to roll over or attract new debt funding) to continue functioning. Recapitalisation of firms in certain industries (such as transportation) might be therefore necessary. Obviously, this should come with strings. While nationalisation might not be the best way to go, recapitalising in the form of preferred shares and restrictions on executive pay and dividend payments might work. In some industries (e.g., rail services) this might also be a good moment to restructure ownership and management of service provision.

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

Answer:
Government credit support for businesses
Confidence level:
Very confident
Comment:
Support for businesses (possibly best done through credit guarantees), ideally at low or zero interest rates, allows firms to continue paying their employees and fulfil their other financial commitments, as revenues fall towards zero in many sectors. Such credit (guarantees) should have a grace period of six months (to be extended if necessary) and a reasonably long maturity. This allows economic activity to be frozen (mostly for health reasons) while preserving the plumbing of the modern market economy.

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