As the coronavirus crisis continues to decimate the European economy, an increasing number of countries are finding themselves in significant amounts of debt due to their emergency expansionary fiscal policies. However, according to one top Italian government official, that debt should eventually be wiped out in order to help the hardest-hit nations recover and restructure their economies.
As noted by Bloomberg, the Italian Prime Minister’s closest aide, Riccardo Fraccaro, has said in an interview that the European Central Bank should consider wiping out or even holding all government debt it has thus far purchased amid the pandemic crisis. This, according to Fraccaro, would be the ideal step forward in helping struggling European countries recover from the economic devastation left behind by the pandemic. He suggested that the ECB should either cancel any sovereign bonds that were purchased during the pandemic, or extend their maturity.
The demand being made by Fraccaro points to a grim fiscal hole that Italy and many other EU member nations now faces amid the pandemic. However the coronavirus crisis only broadened the debt burden that countries such as Italy were already facing. Italy has thus far spent more than $119 billion in fiscal measures to combat the pandemic, and as a result the country’s debt load is expected to surpass 160% of GDP – after GDP levels already plunged by 13% in the second quarter.
On the contrary though, the ECB’s bond-buying program is already biased in favour of stressed nations, which in turn has driven yields on Italian bonds to record lows. Currently, the country is able to borrow funds for a duration of ten years with an interest rate of approximately 0.6% – which is even cheaper than the US rate. However, the generous program is only a temporary response to the pandemic crisis, and investor pressure will likely arise in the recovery phase.
Fraccaro’s suggestion likely will not be welcomed with the ECB though, given that such a scenario would be be against the EU law that bans the central bank from partaking in such monetary financing. Although ECB President Christine Lagard was made aware of Fraccaro’s proposition and asked whether or not she would consider it, she responded that “I don’t even ask myself the question — it’s as simple as that — because anything along those lines would simply be a violation [of the law].” Italy’s Finance Minister Roberto Gualtieri also shot down the idea.
However, Fraccaro argued that his proposed scenario is justifiable if only the ECB would take into consideration a separate part of the EU law that compels it to support general EU policies. Those policies though, cannot conflict with the ECB’s primary objective of establishing price stability. He also pointed out that the central bank has not achieved its inflation target of 2% over the past several years, and now will be even further diverged from its goal as a result of the pandemic.
Information for this briefing was found via Bloomberg. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.