European governments must quickly absorb the economic shock of the coronavirus crisis, even at the cost of high debt, as the alternative is permanent economic destruction, former European Central Bank (ECB) president Mario Draghi wrote in a newspaper opinion piece on Wednesday.
Considered the savior of the euro amid Europe’s debt crisis, Draghi said that governments must protect jobs and production capacity, taking over and canceling private-sector debt to protect jobs and maintain income to families that are innocent bystanders in the crisis.
“The alternative — a permanent destruction of productive capacity and therefore of the fiscal base — would be much more damaging to the economy and eventually to government credit,” Draghi, who stepped down in October last year, wrote in the Financial Times.
Arguing that the crisis was of “biblical proportions,” Draghi said banks must quickly lend to firms at zero cost and the capital needed for this lending must be provided by governments in the form of guarantees so jobs are maintained.
“The cost of these guarantees should not be based on the credit risk of the company that receives them, but should be zero regardless of the cost of funding of the government that issues them,” said Draghi, who has spoken rarely since leaving office.
Liquidity must also be provided through debt markets or even the postal system, if that reaches people the quickest, he said. “And it has to be done immediately, avoiding bureaucratic delays.”
While some fear the cost of a surge in debt levels, Draghi said that low interest rates are here to stay, so this would not add to government’s debt service costs.
Meanwhile, Germany and the Netherlands were to lead opposition to issuing joint bonds to help revive the EU’s economy from a deep slump caused by the coronavirus when the bloc’s national leaders discuss emergency assistance yesterday.
Nine EU countries, including France, Italy and Spain, have called for mutualized debt as the continent, seeking to limit the spread of the disease, goes into a lockdown that is hammering its economic outlook.
“We need to work on a common debt instrument issued by a European institution to raise funds on the market,” the nine leaders said ahead of a video call of all the bloc’s 27 national leaders yesterday.
Germany, the Netherlands, Austria and Finland — the fiscally conservative “Frugals” — are opposed, although there are signs that the subject may not always be as off-limits for them as it is now, especially if the havoc wrought by the virus deepens.
A draft joint statement prepared ahead of the EU leaders’ conference, seen by reporters, would ask the bloc’s finance ministers to work out details of the latter in a week. It did not mention issuing joint debt.
“A real ‘euro-bond’ is the Loch Ness monster — it has never been seen and is not on the table now,” an EU official preparing the summit said. “Which is not to say we may not get there eventually, but for now we are discussing ESM [European Stability Mechanism] mechanisms.”
Berlin and its “Frugal” allies are at pains to stress that all EU countries can still finance themselves on the debt market — in sharp contrast to the debt crisis.
The ECB has also announced emergency bond purchases intended to put 750 billion euros (US$820 billion) into circulation to help the eurozone through the crisis.
However, ECB President Christine Lagarde has urged the bloc to seriously consider a one-off joint debt issue of “corona bonds.”
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