EU debt as insurance: key questions and some answers
European Union debt can provide comprehensive insurance against the Covid-19 pandemic and can enable a macroeconomic response, even though EU debt is a liability for taxpayers in EU countries and therefore indirectly for national budgets, writes Guntram B. Wolff for Bruegel
Introduction
The idea of a European Covid-19 pandemic recovery fund (discussed by EU heads of state on 23 April) has triggered a heated debate on joint borrowing. This blog post clarifies some of the concepts at the heart of this debate, concluding that EU debt to cope with the consequences of this crisis would tremendously increase the stability of the euro area. EU debt for the temporary catastrophic shock would provide effective insurance but multiple issues need to be solved. EU leaders should agree on multiple European Council meetings to solve them.
A key quote from the article:
EU debt to cope with the consequences of this crisis is highly desirable. However, it can only be delivered in a framework in which joint borrowing is not separated from control over spending and revenues. Establishing such control via intergovernmental mechanisms will likely be politically unsustainable for such a health shock. Failing to put in place any control mechanisms would likely be equally unsustainable. The right road is towards some temporary EU debt for the temporary catastrophic shock. Catastrophic shock insurance increases the stability of the system and is therefore in the interest of all members of the system.
Agreeing on a good system will likely require several European Councils as it requires establishing acceptable mechanisms of control, accountability, spending design, and the right legal base. It may very well be that limits of the EU Treaty are too tight and that treaty reform becomes unavoidable or that new treaties outside the EU Treaty need to be established. But for the time being, Art 122(2) offers at least some options. And the fact that institutions such as the Commission, the European Parliament and the European Court of Auditors exist is a good starting point.
The full original article first appeared on Bruegel here.
Download
Download opinion5 May 2020
New Horizons Hub: a green recovery for the post-Covid world? This bundle contains {bundle_entries}{/bundle_entries} articles"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).