Cover of EconPol opinion

One Europe, One Future

António Afonso, ISEG (EconPol Europe; Lisbon School of Economics and Management, Universidade de Lisboa)

In the current context of difficult times across Europe, and in the World, there are relevant issues in Europe, and perhaps matters on which many people might agree, regardless of their political, ideological or theoretical views.

1. One might end up with a very important decline in World GDP in real terms in 2020, and with a recession, which seems already obvious this year, plus an important spike in the unemployment rates.

2. Therefore, governments will have a key role in the current context, with an expected increase in final consumption expenditure (public consumption), and citizens and firms will look at governments and ask for that course of action to be taken. At the same time, there will be obvious decreases in government revenues from taxes on production and on income.

3. This will necessarily imply additional sovereign funding typically raised in capital markets. Is it obvious that governments will be able to sell such big amounts of (medium- and long-term) sovereign debt, when essentially most countries will be trying to go to the market at the same time?

4. If the answer to the previous point is not an obvious yes, even with low sovereign funding costs, another question would be, are the Central Banks then in a position to buy sufficient sovereign debt in the secondary market (as the ECB already flagged with the €750 billion of the Pandemic Emergency Purchase Programme (PEPP))?

5. Moreover, could governments and institutions feasibly address such endeavour either through the ESM or via another innovative way, which they would see as possible and acceptable, from a legal and political perspective, such as some sort of joint sovereign funding, notably in the Euro area?

6. Most likely, there are different answers to some of the abovementioned questions, but perhaps a consensual view, with some necessary compromising, might be useful and needed for the sake of society in this very strenuous context. Indeed, in popular movie sagas, sometimes when facing a common “phantom” menace, different people, cultures, and worlds, regardless of being big, small, blue or green, end up joining forces to prevail.


António Afonso: One Europe One Future, EconPol Opinion 30, March 2020