The eurogroup met on Monday March 16, to hammer out its coordinated fiscal response to the massive recession already in progress following the lockdown of much of Europe’s society. The task they faced is enormous: If sales, tourism, services etc. fall by 50% for just one month (which is certain), and then by 25% for only two more months (i.e. the best-case scenario), then annual growth will be -10%. Across Europe!
So, what did the eurogroup announce? An immediate massive fiscal boost, its purpose being to reassure people that they will not be poorer. E.g. the government of Hong Kong that ploughed $10 billion immediately into the economy by ordering the tax office to credit every household’s bank account with $1250 immediately.
Not expecting such swift action from the eurogroup, the fact remains that nothing short of a 5% fiscal injection was needed to reduce the calamity from -10% of GDP to, say, -3% (assuming a very large multiplier effect).
At the very least, the eurogroup should have recommended to the European Council that the European Investment Bank is given the green light to issue EIB bonds worth €600 billion with the stipulation that, as part of its ongoing and recently enhanced quantitative easing program, the European Central Bank will support the value of these bonds in the bond markets. That €600 billion should be spent directly to support national health services and also be invested in sectors of the economy badly hit by the lockdown – while also nudging our economy toward greener forms of transport, energy generation etc. Additionally, the fiscal compact should be immediately side-lined and governments should effect a tax haircut for small and medium sized firms, as well as households.
The above would probably be enough not to avert but to contain the recession to something between -1% and -2% of GDP. In order to avert it completely, the Eurogroup should have decided to mimic Hong Kong and have the European Central Bank mint an emergency fund from which every European household is given between €1000 and €2000.