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Covidonomics: Macro policy and the coronavirus

In this essay I review the wide ranging macroeconomic policy discussion about the Coronavirus (Covid-19) pandemic. The containment measures in response to the virus are putting a substantial portion of the economy on freeze, constituting a combination of severe supply and demand shocks, with the potential to enter into a negative feedback loop and cause long term damage to our growth potential. Macroeconomic policy must respond by providing liquidity in order to keep affected firms and households afloat, but mainly by protecting their jobs and incomes, and spreading the economic costs of containment across wider society as an “insurer of last resort”. This calls for a large increase in fiscal deficits and public debt, for which central banks must provide a backstop. This kind of monetary-fiscal coordination could enable the necessary government borrowing. In the euro area, recognizing that the fight against the virus is in every member’s interest, fiscal risk-sharing must be intensified. At the minimum, this must happen through central bank money (via the ECB acting as lender of last resort to governments), but ideally through an explicit debt mutualisation in the form of eurobonds, as Europe pools its fiscal resources in tackling the common crisis. Displaying solidarity and unity at this challenging time is crucial for European integration to work.

What is the economic impact of the Covid-19 pandemic?

In fighting the Covid-19 pandemic the world’s governments are resorting to drastic containment measures in a bid to “flatten the epidemic curve” and ease the burden on an overloading health system. While these health policy objectives undoubtedly take priority in order to save lives, the corresponding social distancing measures have a massive economic impact as they basically involve shutting down a significant portion of our economies. Covid-19 constitutes a shock of immense proportions, potentially on a scale beyond anything we have experienced since the second world war, rivalling or even surpassing the 2008 financial crisis. For macroeconomic policymakers to be able to address this shock in an adequate way, first it needs to be understood exactly what channels it operates through. Here I propose three main effects:

  1. Direct effect of containment measures – supply and demand shock: Quarantines constitute a combination of an abrupt supply disruption and a negative demand shock. As several workers cannot go to work, factories are shut down, hotels, bars and restaurants are ordered to close, production nosedives. In a globalized world of integrated supply chains, this causes a severe disruption down the line for producers who will be short of inputs even if they themselves are not directly subject to the containment measures. Together with this adverse supply shock, we also witness a fall in demand for particular sectors, as people reduce their “social consumption” and cut spending on travel and tourism. The result of this combined supply and demand shock for output is unambiguously negative, while it is in principle uncertain for inflation. However, it is surely not the classic inflationary supply shock of the 1970s oil crisis, and more signs point to deflationary demand effects dominating this time.

  2. Indirect effect – adverse demand amplification: The massive fall in economic output caused by the direct effect of Covid-19 containment measures leads to a severe disruption in the income streams of households and companies. As workers become unemployed (or sent to leave without pay), and self-employed entrepreneurs are left without orders, they reduce spending by over and above the amount of what they would have done solely due to the quarantine measures. This is the classic Keynesian Cross demand multiplicator working in reverse. In addition to this, rising uncertainty and higher unemployment risk could prompt households to increase their precautionary savings, amplifying the fall in aggregate demand further. As firms face weak demand and falling revenues, they postpone investment plans, aggravating the demand shortfall. Small and medium sized enterprises in sectors particularly exposed to the shock (e.g. tourism) could even be pushed into bankruptcy, which leads to losses for their suppliers and to rising non-performing loan ratios for the banking system, thereby jeopardizing financial stability and discouraging lending – another factor constraining aggregate demand. A cascade of bankruptcies could potentially sweep the economy and pile a financial crisis on top of the existing troubles.

  3. Long term scarring effect – hysteresis: If the scenario of massive and persistent unemployment, a prolonged slump, and mass bankruptcies were to be realized, that would also cause damage to the long-run growth potential of the economy. Skills erode during unemployment, delinked workers and firms take time to rematch with each other, and disbanded bankrupt companies are not rebuilt instantly. Foregone investment and R&D spending could impair the productivity of the economy.

Looking at these channels together, we can grasp just what an enormous economic disruption Covid-19 could potentially turn out to be.

What should macroeconomic policy do? Fiscal and liquidity support

Within a surprisingly short period of time the outlines of numerous macro policy proposals have been put forward by leading economists such as Olivier Blanchard, Paul Krugman or Ricardo Reis, several of them collected in this voxEU e-book, from which I would particularly highlight Pierre-Olivier Gourinchas’s contribution, or that written by Luis Garicano, as well as a joint piece by Agnès Bénassy-Quéré, Ramon Marimon, Jean Pisani-Ferry and others, or another one by Kurt Mitman and Alexandre Kohlhas – just to name a few of the long list of contributors. These proposals display a rarely seen consensus among macroeconomists about the main directions of how policy should handle this crisis in general, and in Europe in particular. How would this crisis management look like?

As Gourinchas nicely illustrated, just like health policy, economic policy also faces a “flatten the curve problem” regarding the severity of the recession. In terms of the framework outlined in the previous section, the a) direct economic effect of the lockdown cannot (and should not) be mitigated by economic policy: demand stimulus can’t and shouldn’t offset the supply disruption caused by citizens observing quarantine rules. The part of the “recession curve” which is due to this channel, unfortunately cannot be avoided. However, the remaining effects due to b) adverse demand amplification and c) long-term damage to the growth potential are not necessary for the containment measures to work, and as such, can and should be avoided.

The first main pillar of the policy package is fiscal policy, which should aim to protect jobs and wages. By preserving the revenues of troubled firms and the incomes of households, governments can guard against the adverse demand amplification effects explained above. With revenues still flowing, firms can keep paying their workers and their loans, and with their jobs and income secure, households need not constrain their spending by more than necessary. In order to stave off long-term scarring to the supply side of the economy, it is also imperative that firm bankruptcies are prevented, and that firms and workers are not separated even if production needs to stop temporarily.

How can all this be achieved? The proposals include a variety of measures starting with the recalibration of already existing automatic stabilizers, such as more generous and longer lasting unemployment benefits or payroll tax rebates. Some also suggest outright cash transfers to households to cover not just those with a (previous) job, but also the self-employed, and to prevent the most vulnerable from sliding into poverty. Several commentators point to the good example of the German “Kurzarbeit” program, which is basically a conditional wage subsidy to firms: instead of firing them, the company can reduce the hours of its workers (potentially by 100%), while the state keeps paying a significant portion of their wages, but only on the condition that the employees maintain their relation to the firm, and their employment contract remains active. This helps not only in protecting the income stream of households and reducing the expenses of firms, but also in avoiding the costly search and rematching of job seekers to vacancies after the crisis, and facilitates a faster recovery. State bailouts of companies in particularly troubled sectors (e.g. tourism) might still be necessary if we are to avoid a cascading series of bankruptcies, non-performing loans and financial system troubles. In less serious cases credit guarantees by the state for small enterprises can also help a lot. Another radical proposal is by Emmanual Saez and Gabriel Zucman who argue that rather than trying to intervene at a myriad of points in the economy, governments should attack the problem at its root and temporarily become “Buyers of Last Resort” for companies in need, thereby ensuring that money keeps flowing to workers, owners and creditors alike – basically substituting lost revenues with public money. The details of practical implementation across these proposals might differ, but these seem of second order importance relative to the shared objective of protecting jobs and incomes in order to avoid a negative feedback loop for the economy.

The second main pillar of the policy package involves liquidity improving measures. First and foremost this is the domain of monetary policy, which must ensure that financing conditions remain favourable for all economic actors, including the banking system, companies as well as the government (more on the latter in the next section). Since most advanced economies are still in the liquidity trap, i.e. near the zero lower bound (ZLB) on nominal interest rates, central banks don’t have much firepower left in terms of conventional rate cuts. But they can still do plenty with their unconventional arsenal. The European Central Bank (ECB) for example expanded its asset purchase program (Quantitative Easing, QE) with a focus on corporate bonds, and made the terms of its TLTRO program (basically a Funding for Lending scheme) more favourable to incentivize commercial bank lending to small and medium enterprises. To further encourage lending by the banking sector, the central bank can relax collateral requirements during its normal refinancing operations (as done by the Hungarian central bank), and macroprudential policy can loosen countercyclical capital requirements to enhance lending capacity for banks (as done by the Bank of England). 

All these measures rely on private financial markets and banking to provide liquidity to firms under stress, but governments can also choose to “sidestep the middle-man” and provide direct state credit lines to companies. An example of this is the recently announced German “bazooka” which provides loans to firms through the state’s development bank (KfW), but the European Investment Bank (EIB) also engages in similar activity. With more accessible and cheaper credit, several firms could survive the lockdown despite collapsing revenues without having to file for bankruptcy, and they can keep paying their employees, suppliers or refinance their existing loans. This is also crucial in mitigating the b) adverse demand amplification, and c) long term damage to the growth potential.

Note, however, that a large fraction of the lost output due to the covid-19 lockdown will never be recovered: hotels will not be able to rent rooms at twice the rate, and people will not make up for all the missed restaurant dinners. In these cases, liquidity support can only buy time, since the fundamental issue is with the solvency of the affected firms, which sooner or later warrants a fiscal intervention in the form of some kind of bailout or budgetary support. This is why I believe that, while liquidity easing measures are certainly vital at the moment, ultimately most of the burden of this macroeconomic stabilization package should fall on fiscal policy.

Coincidentally, the usual justification for a larger role of fiscal policy in aggregate demand management at the ZLB is usually that in a liquidity trap monetary policy runs out of ammunition and loses its traction on the economy. However, in the case of the covid-19 shock this is NOT the reason: extra liquidity could still be very useful to keep cash-strapped companies afloat, even if it doesn’t directly provide much extra stimulus to aggregate demand. The main reason instead is the one outlined above: permanent output loss impairs solvency, not liquidity, and that can only be addressed via fiscal means.

Stimulus vs insurance

Related to this, observe that this macroeconomic policy package does not really aim for aggregate demand stimulus in the conventional sense. Granted, it tries to avoid the adverse demand amplification loop, to keep spending from falling lower than necessary, and to prevent long term damage, but it is not trying to eliminate the recession altogether by offsetting the initial supply disruption. Instead it can be thought of more like “insurance” which tries to ensure that the economy survives intact being shut down during the lockdown period.

By providing this insurance function, the government in effect steps in for missing and incomplete financial markets, as if hard-hit groups of society held an insurance contract for a covid-19 shock. The state can borrow and provide funding at more favourable conditions than affected individuals, it can basically borrow on behalf of those individuals. Of course, by definition there can be no insurance against an aggregate shock which affects everybody, but the effects of covid-19 are asymmetric across different groups, and it is this idiosyncratic component, these distributional effects (as opposed to the average direct effect) which can be insured against. The state just intermediates between different groups and potentially between generations over time. But by avoiding second round negative feedback loops, this insurance provision indirectly also improves aggregate outcomes.

To the extent that the state does not only provide liquidity to get through the crisis, but also substantial solvency support, the resulting fiscal package embodies a kind of risk-sharing which spreads the pain of the most severely affected groups across the wider society not just at a given point in time, but also in net present value terms. Meaning that some of the public debt financing bailout measures and cash transfers will be repaid via taxes on everybody, not just on the bailed out entities. Or that the extra inflation due to monetary financing will later erode the purchasing power of everyone, not just those receiving fiscal support during the covid-19 crisis. As economists from Toulouse put it, the nature of the covid-19 shock requires solidarity in society:

“The containment strategy is a necessary collective sacrifice for the common good. This effort must be shared fairly from an economic and financial point of view. It is as much a moral imperative as it is an economic one. Under the veil of ignorance, not knowing whether we are civil servants or restorers, we would all like to see this happen. Ex-post solidarity is ex-ante insurance. Only the State can set up such an insurance mechanism as a last resort. It calls for a systematic socialization of economic and financial losses due to containment.”

With state intervention on such a massive scale, moral hazard concerns instinctively arise. Bailing out weak companies which couldn’t survive on their own, surely incentivizes irresponsible behaviour, the usual argument goes. However, we must realize that covid-19 is a truly exogenous shock, which is most obviously not the result of any past irresponsible action by affected firms. Granted, economic actors can prepare better or worse even to exogenous events (e.g. by engaging in self-insurance), but in the face of a shock of such scale and abruptness, with our economies potentially on the brink of collapse, this is certainly not the time to worry about it. “When a patient is having a heart attack, the priority is not to make them go on a diet, but to first resuscitate them.” [reference missing]

How to finance the policy package? Fiscal deficits

The above outlined fiscal package represents a massive chunk of the economy, and by most estimates it needs to be huge as a proportion of GDP. Given that, as discussed above, the main function of the package is insurance and risk-sharing as opposed to pure stimulus, in principle these measures could be financed under balanced budgets, by taxing less affected groups and redistributing towards those harder hit by the crisis. However, the adverse effect of higher taxes is certainly something which would not help the economy at this fragile time. The more the government can sustain aggregate demand, the better: even if its main goal is not to stimulate the economy beyond the direct supply effects of the shock during the lockdown period, generally weak aggregate demand and potential second round feedback loops mean that the economy still needs demand stimulus, especially in the immediately-post-lockdown phase of the crisis. Therefore, instead of balanced budgets, this implies radically rising fiscal deficits and big increases in public debt.

(Sidenote: even a balanced budget redistribution can have stimulatory effects on aggregate demand, if it redistributes income from those who rather save it, to those who rather spend it, i.e. who have higher marginal propensity to consume (MPC). The required pattern of redistribution in response to the covid-19 shock, however, might not coincide with MPC-distribution, and relying only on this channel as means of stimulus might not be enough.)

The amount of the increase in government borrowing might at first seem radical, but it is meant to be used precisely in these kinds of emergencies. When are we supposed to borrow against future growth if not when our economies are at the brink of collapse, if not in order to avoid a catastrophic rise in unemployment and immense loss of welfare? Olivier Blanchard compares the fight against the virus to being at war, and reminds us that during the second world war the US had as large budget deficits as 26% of GDP. Gourinchas rightly points out that the question is not whether we can afford it, but rather if we can afford not to do it. Moreover, if we look at the counterfactual of not doing anything, even the fiscal situation might be worse: as GDP collapses and the tax base deteriorates, a more prudent government can actually end up saving less, not more (aka self-defeating austerity). Taking into account this growth effect of fiscal stimulus, it is clear that budget deficits can (at least partly) pay for themselves – especially at the zero-lower bound, where fiscal multipliers are much larger due to the absence of crowding out via higher interest rates. 

What about jittery public debt markets? What if the dreaded “bond vigilantes” start to have doubts about debt-sustainability and refuse to lend to the government at reasonable rates, further weakening the fiscal situation (in a somewhat self-fulfilling way), leading to a debt crisis, and potentially forcing the sovereign to default? This does not seem to be a valid concern in the current environment of ultra-low interest rates. Since the financial crisis most of the advanced economies seem to have entered the era of “secular stagnation”, whereby persistently weak aggregate demand and a large saving desire lead to sustained demand for safe assets, thereby pushing equilibrium interest rates low. Which also leaves plenty of room for governments to issue more of those safe assets (government bonds), and to stimulate aggregate demand without fearing runaway inflation. In fact, most sovereigns can lock in negative real interest rates for 30 years! As Olivier Blanchard recently reintroduced it to the the macro policy debate at his widely-cited AEA presidential address, with real interest rates below GDP-growth (r-g<0), the fiscal costs of higher budget deficits are very low, since they don’t necessarily require tax increases later: in such a case, a country could run primary deficits forever, without exploding debt-to-GDP ratios and worrying about debt-sustainability, since it “grows out” newly issued debt at a faster rate than the accumulation of interest.

Of course, market sentiment can change rapidly, and even if it currently seems unlikely, we can never be sure, especially in response to such a radical and unprecedented fiscal package. And this is where a monetary backstop to sovereign debt markets becomes essential.

Monetary-fiscal coordination

As I have written about it before multiple times, a country who issues debt in its own fiat currency need never default, since its central bank can be a buyer of last resort in the government bond market in times of stress through its unlimited ability to create fiat money, ensuring that creditors always get back the face value of their bonds in legal tender. While this may add some inflation premium, default risk should therefore not feature in the nominal bond yield. As it is pointed out by Paul de Grauwe, or by Corsetti, Dedola and coauthors, or by Athanasios Orphanides, in order to rule out unsubstantiated, self-validating default concerns (“sunspots”) and multiple equilibria in bond markets, a central bank needs to provide a monetary backstop to sovereign debt, essentially making public debt non-defaultable by acting as a lender of last resort for governments.

It is not just unfounded, sentiment-driven confidence crises which can be avoided though, but large and necessary fiscal stimuli can also be supported by the central bank. Normally this is not needed as aggregate demand management is the responsibility of “active monetary policy” which guards price stability, while “fiscal policy passively” stabilizes government debt given the interest rate set by an independent central bank. However, in exceptional circumstances this might need to change, like for instance in a liquidity trap where monetary policy loses its ability to stimulate demand and to determine inflation due to the zero-lower-bound constraint, so fiscal policy needs to take over the role of aggregate demand management. Or in response to a drastic covid-19 pandemic, where monetary policy cannot stimulate due to the very nature of the problem: lower interest rates cannot encourage more consumption when firms are shut down and people are forced to stay in quarantines, but fiscal policy can provide insurance by protecting jobs and incomes. 

In such situations the monetary-fiscal policy mix needs to switch to “active fiscal policy”, which is not primarily focused on debt stabilisation but is instead free to borrow and spend, while “monetary policy passively” accommodates rising budget deficits by keeping interest rates low. Ensuring this might very well involve buying up government bonds with freshly printed money (Quantitative Easing). This way monetary policy can enable the necessary fiscal deficits and prevent financial markets from constraining otherwise necessary and justified government borrowing. In short, whenever monetary policy cannot directly fulfil its role, and fiscal policy needs to take over, the job of the central bank becomes to support the government in doing so.

Of course, if the rise in budget deficits is so really large as to justify debt-sustainability concerns (meaning that the present value of future primary budget surpluses cannot reasonably be as high as to cover the outstanding debt), then the central bank’s monetary backstop is not just about ruling out unsubstantiated and self-fulfilling bond market panic, but also about monetizing the debt and inflating away its real value. However, if not done on a continued basis this should not mean runaway hyperinflation, just a one-off increase in the price level. In this case it wouldn’t be about enabling irresponsible fiscal behaviour but rather about a legitimate macroeconomic policy mix which instead of being narrowly focused on price stability alone, reasonably trades off temporarily higher inflation against catastrophic collapse in economic activity and a damage to the long run growth potential. 

That said, in the current low-inflation environment, not even this reasonable trade-off seems to exist, as even with ballooning central bank balance sheets monetary policy missed their inflation targets: if anything, in the advanced economies a dangerous deflationary spiral is the concern, and a bit stronger inflationary pressure would in fact be a welcome development. In any case, once inflation starts to speed up to worrying rates, independent central bankers can still reverse course, tighten monetary policy, and force the government to moderate fiscal deficits (switching back to the active monetary-passive fiscal policy mix).

In sum, to facilitate the macroeconomic policy response to the covid-19 crisis, a kind of monetary-fiscal coordination is necessary, whereby the central bank provides a backstop to sovereign debt markets, enabling the necessary government borrowing.

European dimension

How does all the above apply to Europe? How will euro member state governments finance their fiscal deficits? In a monetary union with decentralized fiscal policies and a low level of fiscal risk-sharing, it is not entirely obvious whether the common central bank provides a monetary backstop to the government of an individual member state. (This is mainly due to moral hazard concerns, since anticipating its debt being guaranteed by the ECB, a member state could be encouraged to run excessive deficits without having to bear alone the full inflationary cost of having to fire up the common euro printing press.) In such a setup individual euro countries are like being indebted in a foreign currency which they cannot control, being at the mercy of jittery bond markets which can halt fiscal stimulus (just look at Italy), and potentially force a country into default, even if the European Commission relaxes the EU’s strict budgetary rules. 

I have argued before that despite moral hazard concerns a well functioning monetary union cannot avoid some degree of fiscal risk-sharing: without the ECB being ready to backstop euro sovereign bond markets, the single currency can face the risk of fragmentation. Of course, moral hazard issues must be disciplined to the best possible extent, e.g. by applying conditionality, and limiting access to the printing press to situations when it is actually needed. But that doesn’t mean access must be ruled out completely, the possibility must be there, and the important thing is that the conditions are decided by policymakers/politicians, and not by the sentiment of financial markets.

In this respect, the covid-19 crisis caught the euro area in a somewhat mixed and incomplete state. The EU Treaty explicitly forbids any sort of monetary financing, but the ECB is testing the boundaries of this rule by its quantitative easing (QE) program which was ruled legal if necessary for the central bank to achieve its price stability mandate. The QE program was meant to serve monetary policy needs and not to be a sovereign debt backstop, so the ECB decided to conduct bond purchases proportional to each member state’s weight, and to impose on itself an upper limit of buying at most 33% of a single bond issue. On another front, in an explicit bid to fight off bond market panic and preserve the singleness of the euro, Mario Draghi’s famous 2012 “whatever it takes” speech and the following OMT program was meant to provide precisely the kind of monetary backstop we talked about (ruled legal as long as the ECB does not purchase the entirety of a particular bond issue), but with conditionality attached that the member state in question must apply for a European Stability Mechanism (ESM) program. The ESM is supposed to act as a sort of “European IMF” providing emergency liquidity to stressed governments through a bailout program, but its resources are not unlimited.

Apart from a finite ESM fund, and an ECB balance sheet with its uncertain OMT program and self-constrained QE, the euro area met covid-19 with no meaningful fiscal risk sharing to speak of, no common budget, and no common debt liabilities (“eurobonds”). While not completely defenseless, from this respect it is certainly in a more difficult position than governments with their own central banks like the United Kingdom or the United States, and questions have arisen how euro member states can pull off running the huge fiscal deficits to fight the economic impact of the epidemic, without creating a sovereign debt crisis.

One proposal by Ricardo Reis, Markus Brunnermeir, Philip Lane and coauthors is about creating synthetic eurobonds, “ESBies”, composed of euro area government bonds, which could mitigate market stress for certain eurozone sovereigns, by channelling investor demand for safe assets also in their direction (and not just towards German Bunds). But the ultimate backstop for sovereign debt markets can only be the ECB, which is why several economists from Paul de Grauwe, through Olivier Blanchard to Gregory Claeys and many others have been urging the central bank to step up and signal its clear willingness to act as lender of last resort for governments, in order to prevent the fragmentation of the euro area, to eliminate redenomination risk, and to enable the necessary fiscal measures. These calls especially intensified after Christine Lagarde, the ECB president said “closing spreads is not the job of the ECB”. Recommendations included the ECB relaxing its self-imposed limits on QE bond purchases, or abandoning the ESM-conditionality attached to the activation of OMT program, but at the very least for Lagarde to backtrack her comments.

Not only did she do that, but one week later the ECB announced a giant Pandemic Emergency Purchase Programme (PEPP), which interprets the bank’s self-imposed limits on QE flexibly, and, unlike the OMT, does not require prior ESM involvement. The general sentiment is that the ECB came through in providing a monetary backstop to public debt markets, and now it’s governments’ turn to ramp up their fiscal programmes to fight the covid-19 emergency. 

Even though the ECB guarantee entails some degree of fiscal risk sharing, certain economists argue that instead of this “stealth” risk sharing through the balance sheet of the Eurosystem, it should be done more explicitly and openly. One way would be through the ESM, which could lend to troubled governments financed by issuing eurobonds, which in turn are guaranteed by the ECB, or commonly by national governments (themselves backstopped by the ECB). Although it’s ultimately still the ECB which stands at the end of the road, politically it can be much more palatable and feasible if democratically elected finance ministers decide about the cross-country allocation of lending, while independent central bankers support the aggregate ESM balance sheet.

Others go even further, like this proposal by seven German economists, for pooling Europe’s fiscal resources to fight the common crisis. Issuing joint eurobonds (“Corona bonds”) to finance the necessary measures would mean that euro governments would not be solely liable for their part of the spending, by owing to the ESM, the ECB or whoever bought their public debt, or by having to raise taxes on their own citizens. Instead, these Corona bonds would be a joint liability of all the euro members, constituting debt mutualisation in a great display of European solidarity and in recognition of the fact that the covid-19 crisis affects the entire Union. With the containment measures taken by, for instance, Italy also benefiting German citizens (positive externalities), there’s no reason why only Italians should shoulder the resulting debt. 

This kind of argument is analogous to our discussion above about the necessary economic policy package within a single country, but this time within a union of countries. Just like avoiding firm bankruptcies will require some solvency support instead of liquidity provision only, in the same way, European countries should not only help each other by providing liquidity through the ECB/ESM, but also by spreading the fiscal burden among each other – similarly to how within country measures spread the cost to the hardest hit groups across wider society in the spirit of risk sharing and solidarity.

As before within a single country, moral hazard worries also arise in the case of the union. However, the counterarguments are the same, if even more compelling: in addition to recognizing that covid-19 is an exogenous shock which is certainly not a result of past irresponsible behaviour, between countries there are also positive externalities and spillovers,  which justify some cross-country help without having to call it a bail-out. 

The pandemic is a common shock affecting all European countries, and even if this effect is not fully symmetric, more risk sharing and solidarity is inevitable if the European integration is to work. If Jean Monnet was right about Europe being forged in crises, then the coronavirus can be the ultimate test which decides whether Europe falls apart or grows together. We must be up for the task.

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