Fighting the COVID-19 emergency and re-launching the European economy: debt monetization and recovery bonds

In this policy brief, we first highlight some peculiar characteristics, from an economic point of view, of the current Covid-19 crisis. We stress its exogenous and symmetric nature with respect to Eurozone countries, as well as the complex mix of supply and demand shocks it entails. Given these features, we then suggest two intertwined policy measures in order to tackle the emergency phase of the crisis and the subsequent recovery. We first advice the pervasive intervention of Eurozone governments in support of business and households income in the context of the “suspended” economy that measures against the diffusion of Covid-19 have forcefully given rise. We advise the ECB to monetize all public expenditures linked to this emergency plan by purchasing public bonds in the primary market, and to subsequently write them off or exclude these issuances from the computation of public debt-to-GDP ratios. With no signs of inflationary pressures coming, the ECB intervention would avoid Eurozone governments to pile up considerably higher stocks of debts and would help to bypass the current political impasse among Eurozone Member States as to the creation and realise of Eurobonds. In the aftermath of the emergency phase, we suggest the implementation of a massive Europe-wide recovery plan centred on public investment addressing the long-lasting technological and environmental challenges of these years, and financed by the European Investment bank through the issuance of Recovery Bonds.