April 17, 2021

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Eurozone pandemic aid trumps debt — for now

3 min read
With eurozone debt close to 100 percent of economic output, the figure is only likely to rise.

Eurozone treasuries are set to agree Monday they will only start addressing their countries’ mounting debt piles once the health crisis is over.

According to a draft statement obtained by POLITICO ahead of its discussion at a Eurogroup videoconference, ministers will signal their commitment to keep their budget strategies in lockstep and continue spending for as long as needed to recover from the economic crisis.

Measures intended to cut down the growing debt pile will be applied only once the coronavirus recovery has a strong foothold, ministers will agree.

“We are united in our approach that until the health crisis is over and recovery is firmly underway, we will continue to protect our economy through the deployment of the necessary level of fiscal support,” the three-page document said.

“Once the recovery is firmly underway, euro area Member States should address the increased public debt levels” by implementing “sustainable medium-term fiscal strategies,” it added. The draft statement does not suggest what those debt-reducing measures would be.

Eurozone debt this fall came within touching distance of 100 percent of economic output, with the figure far higher for some Southern countries.

Greece, a country that needed three bailout programs, held the highest level of government debt as of September, at 199.9 percent of GDP. Italy was second at 154.2 percent, followed by Portugal, Cyprus, France, Spain and Belgium — all with debt piles above 100 percent of economic output.

Those numbers will likely get worse as governments continue to spend billions of euros to keep people in work and prevent companies from going under.

The EU’s poor vaccine rollout isn’t helping either. The economy will start picking up only when people start leaving their homes and spending money they’ve saved during the lockdown.

“The best way to reduce debt is growth, and the best way to recover faster growth today is to accelerate on vaccination,” the Organization for Economic Cooperation and Development’s chief economist Laurence Boone said last week. “Europe is not doing well enough on vaccination.”

Debt limits paused

For the time being, treasuries plan to keep spending in the hopes that economic growth will strengthen in the second half of the year. The European Commission won’t stand in their way, but has urged governments to keep an eye on their debt.

Last year, Brussels decided to put the EU’s deficit rules on ice so that governments could tackle the health crisis without fear of reproach. These rules would normally cap budget deficits at 3 percent of GDP and limit debt at 60 percent.

Enforcing them now would have a devastating impact on firms and people’s livelihoods, and the Commission has suggested keeping the rules on ice until 2023 at least. It’s also promised to take a light-touch approach to enforcement when they are reintroduced.

Ministers will also discuss their stance on these plans at Monday’s Eurogroup meeting, as they consider how best to wean themselves off high public spending without leaving vulnerable companies and workers high and dry.

The talks will feed an ongoing debate over a budgetary policy strategy to be signed off this summer, as a guiding principle for this and next year’s budget.

Want more analysis from POLITICO? POLITICO Pro is our premium intelligence service for professionals. From financial services to trade, technology, cybersecurity and more, Pro delivers real time intelligence, deep insight and breaking scoops you need to keep one step ahead. Email pro@politico.eu to request a complimentary trial.

Source: POLITICO https://www.politico.eu/article/coronavirus-economy-eurozone-debt-aid/?utm_source=RSS_Feed&utm_medium=RSS&utm_campaign=RSS_Syndication

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