Europe’s pandemic debt is staggering. Who will pay?


PARIS – For nearly six months, Philippe Boréal and 120 of his co-workers were paid to stay at home after their work in a luxury hotel in Cannes which was forced to close because of the pandemic.

Mr Boréal, a concierge for 20 years, is grateful for the aid, which is funded by the French government as part of a vast plan to save people and businesses from economic disaster. But as the Covid-19 crisis drags on, he wonders how long the largesse can last.

“At one point you ask yourself, ‘How are we going to pay for all of this? teenage girl. Most of the other hotels along the Cannes waterfront also keep their staff on state-funded leave, as do countless businesses across Europe.

“The bill seems so large,” said Mr. Boréal. “And it keeps growing. “

For households trying to balance their budgets every month, the fact that European countries are going into debt of a trillion euros is dizzying. In France alone, the national finance debt has exceeded 2.7 trillion euros (32 trillion dollars) and will soon exceed 120% of the economy.

But governments are far from worried about going into debt right now, as the lowest interest rates allow them to spare no expense to protect their economies from the pandemic.

And spend they do.

Billions of euros are deployed to nationalize the wage bill, eliminate bankruptcies and avoid mass unemployment. Trillions more are earmarked for future stimulus measures to fuel a desperately needed recovery.

The European Union has changed its policies for financing largesse, breaking decades of tight deficit limits and overcoming visceral German resistance to high debt.

German-led austerity mantras dominated Europe during the 2010 debt crisis, when reckless spending in Greece, Italy and other southern eurozone countries pushed the currency bloc towards a break.

The pandemic, which has killed more than 450,000 people in Europe, is seen as a whole different animal – a threat that is ravaging all of the world’s economies simultaneously. While German officials initially warned of the pandemic’s out-of-control spending, EU policymakers agree it would be foolish to cut spending or raise taxes now to pay off debts incurred to counter the economic fallout.

These debts are reaching levels not seen since World War II. In some European countries, debt is growing so rapidly that it exceeds the size of national economies.

But interest rates for many rich countries are around zero due to years of low inflation. While the amount of debt incurred by countries has increased, the amount that governments pay to service the debt has not increased.

So, can there be such a thing as a free lunch after all? In today’s unusual world of zero interest, maybe it does.

Governments are borrowing heavily and issuing an ever-growing pile of bonds. The European Central Bank is helping by buying up big chunks of that debt, pushing already low interest rates even lower, and creating a mountain of cheap money for countries to tap into.

In the United States, President Biden is pursuing an aggressive strategy to tackle the pandemic’s toll with a $ 1.9 trillion economic aid package. While the national debt is now almost as big as the economy, proponents say the benefits of spending big now outweigh the costs of higher debt.

In Europe, pandemic-related spending has so far largely focused on people and floating businesses during the crisis. For Mr. Boréal and millions of people like him in Europe, support has been vital in surviving a meteoric recovery that now threatens to turn into a double-dip recession.

“Without the help, things would be much worse,” said Boreal, who receives an after-tax salary of € 1,700 (about $ 2,050) per month during his state-funded leave. “It allows us to weather the pandemic and hopefully get back to work soon. “

For now, these expenses are affordable. And public debt may never have to be fully repaid if central banks keep buying it. Countries can essentially refinance their debt at low interest rates, a transaction akin to refinancing a mortgage.

The European Central Bank actually lent eurozone governments around € 1.2 trillion last year and has pledged to continue until the summer. Public debt in the euro area could reach 4 trillion euros by the end of 2023, according to the Institut Montaigne, an independent think tank in Paris.

“If there is no risk of inflation returning, then the sky is the debt limit,” said Nicolas Véron, senior researcher at the Peterson Institute for International Economics in Washington.

And that underlines the risk of this strategy. Some economists fear that inflation and interest rates could rise if stimulus investments kickstart growth too quickly, forcing central banks to curb easy money policies. If borrowing costs rise, weaker countries could fall into the debt trap, struggling to repay what they owe.

“If inflation starts to come back but there is no growth, then the situation becomes much more difficult,” said Simon Tilford, director of Oracle Partnership, a strategic planning firm in London.

And if debt accumulates year after year, governments will have a harder time stimulating their economies in the next recession.

For those charged with running their economies during the pandemic, these problems seem far away.

“We must of course repay the debt and develop a debt repayment strategy,” said Bruno Le Maire in an interview with a small group of journalists. “But we won’t do anything until the growth returns – that would be crazy.”

For the strategy to work, Europe must act quickly to ensure a solid recovery, economists warn. While leaders approved a 750 billion euros ($ 857 billion) stimulus deal last year, countries failed to trigger stimulus spending nearly as quickly as the United States needs to revive and create. jobs.

“With interest rates at historically low levels, the smartest thing we can do is act big,” new Treasury Secretary Janet L. Yellen told Senators at her hearing. confirmation, adding that failure to do so would risk blurring the recovery.

In contrast, “most of what has been done in Europe is a survival aid,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Current policies alone will not bring growth back. “

The International Monetary Fund expects growth to rebound this year to 5.1% in the United States, where Congress authorized a $ 900 billion program in late December. Europe will lag behind with a 4.2% rebound, the fund said.

As a more contagious variant of the virus crosses Europe, triggering further lockdowns, recoveries that were expected as early as the summer could be delayed, with implications for national finances. Stopping the rollout of vaccines adds a further complication to hopes for economic expansion.

Thomas Flammang, 28, materials engineer in an aerospace consulting company in Rouen, has no illusions about the weakness of the recovery.

During his first few months off he expected things to return to normal. Stuck at home, he takes long walks and catches up with his reading. But as weeks turned into months, the company’s order books were never full enough to allow it to return to work.

Without a complete reopening of the economy, things are likely to get worse. “So far, my company has saved our jobs,” Mr. Flammang said. But if things don’t improve, he said, layoffs could be inevitable.

He sees little light at the end of the tunnel.

“Our generation will have to pay for a lot of things: the retiring baby boomers, the cost of the climate crisis,” Flammang said.

“And now we are using the printing press for the pandemic, and we will have to pay back all that aid,” he said. “It’s maddening when you think about it.”

Antonella Francini contributed report.

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