EconPol Policy Reports

Sacrificing lives does not save the economy, according to this latest policy report from Panu Poutvaara and Madhinee Valeyatheepillay: countries that fail to suppress the pandemic risk a disastrous overburdening of their health care system and patients who could have been otherwise saved die. Short of an effective vaccine, no single measure is enough to stop the pandemic. Instead, societies need a combination of effective social distancing measures, careful hygiene, use of masks in indoor public spaces and contact tracing.

In this policy report, Hernán D. Seoane (EconPol Europe, Universidad Carlos III de Madrid) analyzes one aspect of the sovereign-bank nexus: the feedback effects between banks and sovereigns derived from the holdings of sovereign debt in domestic banks. He examines how this relationship evolved during the European debt crisis and how it responded to the implementation of ECB monetary policy based on Open Market Operations and Marginal Lending Facilities. He finds evidence of carry trade behavior by banks, with some evidence that this channel may have been boosted by the liquidity provision policies.

The cost of public debt increases more than proportionally with the debt/GDP ratio. This convexity has one immediate implication in the presence of uncertainty about growth: the average social cost of public debt is higher than the contractual debt service cost embedded in the interest rate. In this EconPol policy report, Daniel Gros explains how Common European debt, which is financed by a pro-rata levy on the output of member states, provides an insurance function because countries which grow less have to contribute less (and vice versa). This insurance function becomes more important the longer the horizon and thus the uncertainty about (relative) economic performance.

Recent evidence suggests that individual traits such as social capital are key determinants of how well the Covid-19 pandemic can be contained. It has been widely argued that the success of governments’ policies will be determined by trust and, at the same time, the pandemic itself is likely to affect trust, attitudes towards institutions and solidarity. This experimental study by Cevat Giray Aksoy (European Bank for Reconstruction and Development and King’s College London), Antonio Cabrales (EconPol Europe, Universidad Carlos III de Madrid), Mathias Dolls (EconPol Europe, ifo Institute) and Lisa Windsteiger (Max Planck Institute for Tax Law and Public Finance) into the impact of Covid-19 looks at levels of trust among people and public institutions across Europe. The authors surveyed people in France, Germany, Greece, Hungary, Italy, the Netherlands, Poland, Spain and Sweden to examine the effects of the virus on social trust, reciprocity, solidarity and institutional trust. The results reveal an overall increased sense of solidarity among people, but lower levels of trust in government in countries hit hardest by the virus.

As the economy and our daily life return to a “new-normal” in the midst of Covid-19, the possibility of a second wave leaves lots of uncertainty about future developments. To understand indications about the impact of the pandemic on economic performance in different countries across the world, we conducted a survey among 950 economic experts in 110 countries. This report gives an overview of the most important results of the survey and compares them in different world regions and countries. An extra focus is placed on the European Union’s strategy to combat the crisis and how experts from member states assess the different policy measures.