• Evolución de la desigualdad en tiempo real y efectividad del estado del bienestar para amortiguar el impacto de la crisis


    Oriol Aspachs (CaixaBank Research), Ruben Durante (ICREA-UPF, IPEG y Barcelona GSE), Alberto Graziano (CaixaBank Research), Josep Mestres (CaixaBank Research), Jose G. Montalvo (UPF, IPEG y Barcelona GSE) y Marta Reynal-Querol (ICREA-UPF, IPEG y Barcelona GSE).

    Oriol Aspachs
    Alberto Graziano
    Josep Mestres Domènech
  • Oriol Aspachs
    Ruben Durante
    Alberto Graziano
    Josep Mestres Domènech
    Jose G. Montalvo
    Marta Reynal-Querol
  • The Recovery Plan for Europe: a green wave for the real estate sector


    Europe’s economic response to the COVID-19 crisis took shape in July: the European Council approved the Recovery Plan for Europe, the so-called NGEU, via which the European Union will grant up to 750 billion euros to its member states to stimulate their economic recovery after the shock of the pandemic. This is an unprecedented agreement and it could have a considerable impact on Europe’s real estate sector since one of the EU’s main goals, to which this Recovery Plan aims to contribute significantly, is to reduce greenhouse gas emissions by 55% by 2030 compared with 1990 levels. It is clear that renovating Europe’s buildings, which are responsible for 40% of the continent’s energy consumption, will be key to achieving this climate target.



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    Área geográfica
    How the Recovery Plan works and the climate challenge

    Between 2021 and 2026, the main component of the NGEU, the Recovery and Resilience Facility, will allocate up to 312.5 billion euros via grants and 360 billion in loans to member states, depending on their size and how severely they have been affected by the COVID-19 crisis. According to the European Commission’s own estimates, Spain and Italy may receive around 60 billion euros (4.8% and 3.7% of their GDP, respectively)1 from the Facility; France, approximately 30 billion (1.3% of GDP); Portugal, 13 billion (6.2% of GDP) and Germany around 20 billion (0.6% of GDP). To access these funds, EU countries must draw up National Recovery and Resilience Plans and specify both the investment projects they will finance with the funds and the reforms accompanying them. These projects and reforms should contribute to four general goals: i) Promote economic, social and territorial cohesion in the European Union, ii) Strengthen economic and social resilience, iii) Mitigate the social and economic impact of this crisis, and iv) Support ecological and digital transition. In addition, each recovery and resilience plan should also allocate a minimum of 37% of its expenditure to climate-related aspects.2

    • 1. The 72 billion euros that Spain expects to receive from the EU includes 12.5 billion from the REACT-EU fund.
    • 2. For more details, see the article «Everything you ever wanted to know about the European Recovery Plan but were afraid to ask», available at: https://www.caixabankresearch.com/en/economics-markets/public-sector/everything-you-ever-wanted-know-about-european-recovery-plan-were?987=
    Europe’s NGEU Recovery Fund has a large amount of funding

    and could be an important means of renovating Europe’s buildings, a sine qua non for achieving the agreed emission targets.

    Renovating Europe’s buildings: a key goal

    The European Commission has identified the renovation of Europe’s buildings as one of its priorities for the ecological transition. More than 200 million buildings, representing 85% of Europe’s total, were built before 2001 and most of them are not energy efficient. The following chart shows that in many countries, especially Spain, there is still much work to be done to improve the average energy efficiency of housing. The current renovation rate is too slow to meet the target of reducing emissions by 55% by 2030. According to the Commission, around 90 billion euros per year of European private and public investment is required to achieve the target renovation rate.

    Share of housing by efficiency rating

    Percentage of national housing by EPC efficiency rating (%)

    p 18

    In view of this situation, the European Commission recommends that renovating housing be one of the priorities of the national recovery and resilience plans. Such renovations could simultaneously help to achieve the two European goals of ecological transition and digitalisation of the economy, for instance through "smart" buildings that are more energy efficient and can even produce their own energy.

    p 19

    As a result, Germany, France and Spain have already announced a number of renovation projects which they hope to finance via European funding. In Germany, the government has stated that it would increase funding for its energy renovation programme for buildings from the initial 1.5 billion to 2.5 billion euros, and has also announced the creation of a new 2 billion euro programme to adapt municipal buildings applying climate-friendly criteria. France’s Plan de Relance includes 6.7 billion euros between 2021 and 2022 to renovate private housing, SME premises, public buildings and social housing.

    The following article looks at how Spain will use these European funds to finance a drive to renovate its buildings.

    Destacado Economia y Mercados
    Destacado Analisis Sectorial
    Destacado Área Geográfica
  • NGEU: an opportunity to relaunch Spain’s real estate sector


    The Recovery, Transformation and Resilience Plan (PRTR) for the Spanish economy could be an important catalyst for the real estate sector. With the help of European funds, the government plans to recondition half a million homes between 2021 and 2023, with the aim of improving their energy efficiency and thereby helping to achieve the agreed decarbonisation targets. The General State Budget (PGE) also proposes a notable increase in the funds allocated to increase the amount of rented social housing, a policy that is crucial as rents have become even less affordable for the most vulnerable members of the population.



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    Área geográfica
    Next Generation EU: a historic opportunity for the Spanish economy

    The European Recovery Fund (Next Generation EU) represents a unique opportunity to modernise the Spanish economy and boost its growth potential. Spain will receive 72 billion euros in non-refundable transfers (grants) between 2021 and 2026, equivalent to 5.8% of its GDP in 2019.1 Although the first instalment from the European Commission is not expected until mid-2021,2 the government plans to advance funds to speed up investments and expects to spend over 26 billion euros in 2021, according to the preliminary proposal for the General State Budget. As we shall see, a significant proportion of these funds will be used to support the real estate sector’s ecological and digital transition.

    • 1. This amount could total 140 billion euros if loans are included. For more details, see «Next Generation EU: a golden opportunity for the Spanish economy», available at: https://www.caixabankresearch.com/en/economics-markets/public-sector/next-generation-eu-golden-opportunity-spanish-economy?index=
    • 2. The EU is expected to pay out the first tranche of the funds, 6.4 billion euros, in Q3 2021.
    NGEU and the Spain’s Budget for 2021: a significant amount allocated for housing policies

    In the area of housing, the Recovery, Transformation and Resilience Plan presented by the Spanish government to channel European NGEU3 funds focuses especially on the plan to renovate housing and urban regeneration. This policy is well aligned with the goals set by the Commission as renovating Europe’s buildings is one of its key priorities.4 The PRTR emphasises the importance of improving housing quality and boosting the construction industry both sustainably (by increasing energy efficiency, promoting green infrastructure and deploying solar roofs) and digitally (through smart applications in buildings). Specifically, the PRTR plans to recondition 500,000 homes between 2021 and 2023. This is an ambitious target which, if achieved, would be very positive for the sector as well as for the environment given the current state of housing, as we will see below.

    • 3. In October, the government presented an outline of the Plan with the main proposals. The final plan must be submitted to the European Commission by 30 April 2021 and is expected to be approved by the European Council in June 2021.
    • 4. See the article «The Recovery Plan for Europe: a green wave for the real estate sector»" in this Sector Report.
    About 6% of the European NGEU funds

    will be allocated to renovating housing, tripling public investment in this area.

    According to the Ministry of Territorial Policy, 4.5 billion euros of the NGEU (6.25% of all transfers) will be allocated to renovating housing over the next few years. In 2021, as stated in the PGE, around 1.65 billion euros will be channelled from the NGEU to finance housing and development policies. If this comes about, the amount alone would represent more than three times the housing items included in the country’s budgets on average over the past five years, ranging from 460 to 510 million euros per year. Furthermore, this amount represents 73% of the total allocation in the 2021 Budget for housing policies (2,253 million euros) and 6.2% of the aforementioned 26,634 million euros of the European NGEU funds that are expected to be paid out in 2021.

    The 2021 General State Budget allocates 2,253 million euros for housing,

    of which 1,651 million euros come from the European funds and will be used to recondition housing, while 569 million euros will be invested in social housing policies.

    p 22

    The 1.65 billion euros from the NGEU funds in 2021 will be used by three programmes: one to renovate residential environments (housing and neighbourhoods), managed mainly by the autonomous regions via agreements and totalling 1.55 billion euros; another focusing on the digital and sustainable reconditioning of public buildings, worth 81 million, and another programme with a budget of 20 million to renew the country’s architectural heritage. Consequently, although European funds will not directly finance social housing programmes, they will enable funds to be released and thereby increase the budget for this area in the 2021 General State Budget: the total allocation of 2,253 million euros for housing includes 569 million euros for social housing, 20% more than in previous budgets. This allocation will be used mainly to subsidise rent for vulnerable households and for the plan to provide 20,000 homes under the social rent scheme.

    The PGE includes 500 million euros from the NGEU funds for the circular economy, which should help to improve the efficient use of resources as well as the competitiveness of various strategic sectors. However, details of whether some of this budget will be devoted specifically to the construction industry have not been disclosed.

    The state of housing in Spain: old and not very energy efficient

    The plan to renovate housing is a unique opportunity to promote the decarbonisation of the real estate sector but also to alleviate some of the problems faced by housing at present. Especially, in addition to the age of housing (50% of homes in Spain are 40 years old or more), there is also a great deal of variability regarding their characteristics and performance in terms of energy efficiency, habitability and access.

    Spain’s housing tends to be old

    and much of it was built with little attention paid to energy efficiency

    In some cases these differences are the result of the technical regulations in force at the time they were built. For example, and as the following chart shows, half of Spain’s housing was built before the first basic building regulations came into force in 1980. In other words, around 12.8 million homes were built according to standards that regulated the safety of the structure but did not consider issues related to thermal insulation or energy consumption.5 Likewise, an additional 44% of homes (some 11.4 million) were built between 1981 and 2007, before the First Technical Building Code came into force which established minimum requirements for safety, habitability and energy efficiency.6 The result is that Spanish homes are largely inefficient from an energy point of view and require a thorough renovation to meet the greenhouse gas reduction targets the country has undertaken to achieve.

    • 5. From 1960 onwards, several provincial ordinances were introduced which regulated the thermal insulation of social housing, albeit to a limited extent.
    • 6. However, as they were built after the Basic Building Regulations CT/79, these homes have a certain degree of thermal insulation (façades and roofs), which guarantees a minimum of thermal comfort. In addition, this period saw an increasing use of aluminium and double glazing in both doors and windows, also helping to improve a home’s thermal insulation.

    Segmentation of housing in Spain according to year of construction and technical regulations

    Last actualization: 23 December 2020 - 08:51

    Part of Spain’s housing also suffers from various problems related to its habitability and quality. One of these problems is the small size of some housing. Specifically, 13% of homes in Spain are less than 60 m2 in size, while 46% are between 61 m2 and 90 m2. Renovation aimed at improving the use of space (such as enclosing terraces) can be of great help in increasing the net surface area of such homes.

    Another problem that affects some housing is its poor state of conservation. Specifically, nearly 1.8 million homes in Spain (7% of the total) are in a state of repair that can be classed as dilapidated, bad or deficient,7 placing Spain slightly below the EU average in relative terms: 15% of Spain’s population lives in a property with conservation problems compared with 13% in the EU.8

    Architectural barriers and poor means of access, which affects 13.2% of the residential stock, are other major shortcomings of housing in Spain. About 3.4 million homes are in buildings of four storeys or more without a lift.

    • 7. Data from the last housing census (2011).
    • 8. Eurostat data.
    Energy consumption in the residential sector: we’re not so bad

    Partly due to the climate, the energy demand of Spain’s residential sector is lower than that of the EU, both in absolute9 and relative terms.10 This lower energy consumption necessarily results in a lower savings potential than in other European countries. This is an important aspect, since one of the arguments in favour of energy reconditioning is that future energy savings (especially in HVAC) can be higher than the cost of the investment/work carried out.11

    If we look at how the energy consumed by Spanish households is used, most is for heating (see the chart below). However, Spain’s share of energy consumption is much lower than that of the EU: 42% in Spain compared with 64% in the EU.12

    Lighting and household appliances also account for a large part of the energy consumed by households, but in this case the proportion of energy consumed is higher than in the EU: 14% in the EU compared with 32% in Spain. This is important, since households have more and more equipment and appliances, so these need to be increasingly energy efficient to avoid a parallel increase in electricity consumption.

    • 9. The average annual consumption per household in Spain is 9,224.1 KWh per dwelling, while the average consumption in the EU is 16,526 KWh per dwelling. A similar conclusion is reached when we compare the energy consumption in residential buildings per m2.
    • 10. The residential sector accounts for approximately 17% of energy consumption in Spain compared with 26% in the EU, according to data from IDAE-MITECO (2018).
    • 11. Another aspect that may make it difficult to capitalise on energy savings within a reasonable period of time is the energy tariff structure, which in Spain consists of a high proportion of fixed costs related to the power under contract and taxes.
    • 12. The unit consumption per m2 for heating is also much lower than in the EU.

    Final energy consumption of the Spanish residential sector broken down by use (2018)

    Last actualization: 23 December 2020 - 08:53
    The reconditioning of housing gets a boost from European funds

    As already mentioned, the Recovery, Transformation and Resilience Plan for the Spanish economy proposes to recondition 500,000 homes between 2021 and 2023. This provides a significant boost for the goals set out in the National Integrated Energy and Climate Plan (PNIEC 2021-2030),13 which includes the renovation of the thermal envelope (façades and roofs) of 1,200,000 homes by 2030, starting with 30,000 homes per year in 2021 and ending with 300,000 homes per year in 2030.14

    • 13. The National Integrated Energy and Climate Plan (PNIEC 2021-2030) is a strategic document drawn up by the government (at the request of the EU) which sets out the strategy for decarbonising the Spanish economy.
    • 14. The PNIEC also proposes the renovation of heating and hot water installations in an average of 300,000 homes per year.
    European funds will support the renovation of Spanish housing

    but there are certain limitations that may hinder the rate proposed.

    The European funds should therefore considerably help to speed up the rate at which Spanish housing is renovated. However, there are certain aspects that could hinder the plan’s complete implementation. Firstly, the ambition of the Recovery, Transformation and Resilience Plan contrasts with the current rate of housing renovation (close to 25,000 homes per year); in fact, achieving the target of 500,000 homes in three years entails multiplying the current rate of renovation by six by 2023.

    Secondly, the investment to improve the energy efficiency of housing ranges from 5,000 to 10,000 euros for the building’s envelope and from 12,000 to 40,000 euros for complete projects,15 a high cost for many households. It will be crucial for renovation support to also reach the hardest hit and most vulnerable households, as well as zones with the greatest needs in terms of reconditioning.

    Thirdly, in general the population is relatively unwilling to carry out building work. According to the Housing Barometer (CIS, 2018), 87% of those surveyed did not plan to carry out any improvements or reforms to their homes in the following year (most because they did not think their homes needed them). Moreover, among those who did plan to carry out work, decorative reforms (such as in the kitchen or bathroom) were clearly prioritised over those related to energy efficiency (such as replacing doors and windows).

    We should also note the predominant type of housing in Spain, mostly multi-family buildings of three or more storeys, these accounting for 67% of the total housing. It tends to be more difficult to make decisions in communities of several owners and this can present an additional barrier to some of the work required being carried out.

    And, finally, the extent of public concern or awareness regarding energy efficiency is relatively lower than other housing-related issues. According to the latest housing barometer (CIS, 2018), concern about thermal comfort (35%) is similar to other concerns such as noise and security against burglary, and lower than other issues such as the lack
    of a lift in some buildings.

    • 15. Includes changing HVAC and hot water installations. Estimates from the «Estrategia a largo plazo para la rehabilitación energética en el sector de la edificación en España», Ministry of Economy (2020).

    Percentage of households that are little or not at all satisfied with the following aspects of the building in which their home is located

    Last actualization: 23 December 2020 - 08:54

    In short, the reconditioning of housing is key to reducing energy consumption and thereby greenhouse gas emissions. However, in order to encourage such building works, it is also important to convince people that renovating their dwelling is a great opportunity to improve the comfort and interior habitability of their homes (an issue that lockdown has made even more evident), as well as to increase the property’s value. It is therefore essential to direct the available public resources appropriately in order to address the main problems of Spain’s housing together with its citizens.

    p 27
    Social housing for rent: the big task ahead

    In addition to renovation, another priority for housing policy over the coming years is to increase the amount of public housing aimed at social or affordable rents. Spain is one of the European countries with the highest percentage of tenants who spend more than 40% of their income on rent, a sign of the extra effort many households have to make to meet their housing costs. This extra effort is also disproportionately high for low-income households and young people. Moreover, the coronavirus crisis has aggravated the existing problems of affordable rented accommodation, especially among the most vulnerable people, as pointed out by the International Monetary Fund (IMF) in its latest report on the Spanish economy.16 The IMF recommends increasing the number of homes allocated for social rented accommodation as Spain has one of the lowest figures in Europe: social housing accounts for 2.5% of the total number of primary residences in Spain compared with a European average of 9.3%, according to Eurostat data. To reach the European average, 1.2 million additional social housing units would be needed, a figure that would be difficult to achieve without public-private partnerships.

    • 16. IMF Country Report no. 20/299. Spain. Selected Issues. Available at https://www.imf.org/-/media/Files/Publications/CR/2020/English/ 1ESPEA2020002.ashx
    In the past 4 decades, almost 2.4 million social dwellings have been built in Spain,

    most of them intended for ownership, not rent. As a result, there is very little rented social housing, approximately 290,000 homes.

    This lack of rented social housing is the result of housing policies that have historically been aimed at developing social housing via ownership. Between 1981 and 2019, almost 11 million homes were completed in Spain, 21.6% of which were social housing. During this same period, households grew by just under 8 million, so we can conclude that social housing has covered the accommodation needs of approximately 30% of Spanish households in the past four decades, a highly significant figure. However, most of the social housing built in Spain has been destined for ownership (see the chart below). Consequently, after a few years these properties have now acquired the status of free housing on the market, thereby losing their original social purpose.

    The development of social housing for rent has been very limited in Spain

    Last actualization: 23 December 2020 - 11:36

    Very little social housing has been developed since 2010, affecting rented accommodation to a greater extent. In fact, between 2013 and 2016 the development of this kind of property has been almost zero (368 homes per year on average), increasing the prevalence of social housing under ownership. However, since 2017 rental accommodation seems to have regained some of its relative weight. Specifically, 12,496 social homes were built in Spain in 2019, of which 2,585 (20.7%) were for rent. Nevertheless, these figures are clearly not enough to significantly increase the stock of rented social housing.

    According to recent estimates by the Ministry of Transport, Mobility and Urban Agenda,17 Spain’s stock of publicly-owned social housing for rent totals about 290,000 homes. Of these, around 180,000 are owned by the autonomous region and 110,000 by the local council. These 290,000 rented social homes cover 1.6% of the 18.6 million households in Spain (data from the «Cuestionario sobre vivienda social», 2019).

    • 17. «Boletín especial vivienda social», 2020, Ministry of Transport, Mobility and Urban Agenda.
    Final points

    The European funds represent a historic opportunity to recondition Spain’s old, poorly energy-efficient housing, renovations that will also contribute, simultaneously, to the two European goals of ecological transition and digitalisation of the economy, for instance through more energy-efficient «smart» buildings. Similarly, the strong economic and social impact of the COVID-19 crisis has highlighted the need to create a large amount of public housing available for rent in order to resolve the current shortage and be able to provide a housing solution for the most vulnerable in society. These policies should drive a green, social and digital recovery.

    Destacado Economia y Mercados
    Destacado Analisis Sectorial
    Destacado Área Geográfica

Economic policies in the face of COVID-19: will the boundaries of the impossible be broken?

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Álvaro Leandro
May 15th, 2020

There are two major differences between the current crisis in the euro area and that of 2009-2012. Firstly, the coronavirus and the containment measures implemented by the countries of the euro area represent a much greater economic shock than the previous crisis. In 2009, the GDP of the euro area fell by 4.5% compared to 2008, whereas this year the fall may well be twice as deep. Secondly, the economic impact of the coronavirus is quite symmetrical and will affect all euro area economies to a similar degree. These two characteristics of the current crisis justify both risk-sharing mechanisms between countries and coordination between fiscal policy and monetary policy.

A differing response at the national level

The scale of this crisis has given rise to unprecedented national responses. National governments have adopted a wide variety of measures aimed at cushioning the impact of the crisis on firms and households. The most prominent measures include programmes of guarantees for bank loans and lines of credit through national development banks, temporary employment reduction measures (such as ERTEs in Spain or the Kurzarbeitgeld in Germany), deferrals of tax payments and, in some cases, direct payments to citizens and direct subsidies to companies. These measures will entail a significant increase in European countries’ level of public debt. For this reason, the magnitude of the economic response thus far has been very different between countries depending on the strength of the public accounts. In Spain and Italy, for example, both the guarantee programmes and the direct expenditure have been much more timid than in Germany, which has announced unlimited guarantees for loans to SMEs, among other measures.

Without risk-sharing mechanisms between European countries, this discrepancy between the national responses constitutes a distortion of the single market and could lead to an asymmetric recovery and a deepening of the economic disparities in the euro area, which in turn could put the very existence of the monetary union at risk.

The severity of the situation requires a coordinated response on many levels

The recovery will be weaker and slower if there are no mechanisms that help it occur in a synchronised manner.1 In the absence of synchronisation, the first countries to begin to recover will find themselves with a weak external demand, both within the euro area and worldwide. In addition, firms will continue to be stunted by disruptions in supply chains that are highly highly integrated at the European level. What is more, without a common response there could be financial and economic fragmentation between EU countries, while the differing responses at the national level could compromise the level playing field in the European single market. For instance, a company’s survival or its conditions for accessing credit will depend not only on its creditworthiness and competitiveness, but also on the generosity of the support schemes available in the jurisdiction where it is established. The political effects of a prolonged economic divergence between countries after the crisis could also be harmful to the euro area, with the possibility of a rise in populism in the worst affected countries. In short, a synchronised recovery at the European level is not only a question of solidarity between countries but it is also in each country’s own interest. In other words, all economies would benefit from coordination at the European level.

The current context also requires the coordination to go beyond synchronisation or a common response between states: it requires coordination between the public and private sectors, and between the various flanks of economic policy. On the one hand, if firms and households fund the decline in their income with excessive debt, then the burden of this new debt will curb the recovery in demand and prolong the difficulties. Hence a significant portion of the aid must be direct and not only in the form of debt. Furthermore, the fact that it is the public sector that is absorbing these costs ought to allow for a greater mobilisation of funds, at a lower cost and using debt with longer term maturities.2 On the other hand, faced with the prospect of public debt increasing substantially during the course of the COVID-19 crisis, fiscal policy and monetary policy must also be coordinated in order to dispel any doubts about the sustainability of the debt, to lighten its burden and to ensure that it does not compromise the economy’s future performance.3

A European fiscal response

On 25 March, nine European heads of state (of Belgium, France, Italy, Luxembourg, Spain, Portugal, Greece, Slovenia and Ireland) wrote a letter to the president of the European Council demanding a pooling of the European fiscal response, backed by shared debt. The European response so far has been very different. On 23 April, the Council adopted a series of measures that are not aimed at sharing the costs of combating the coronavirus crisis, but rather at sharing the cost of funding the national measures. In this regard, the Council approved the creation of a new line of credit under the European Stability Mechanism, a fund which would serve to provide loans to national governments in order to finance their various temporary workforce reduction measures (such as furlough schemes, or ERTEs in Spain), and a fund of guarantees so that the European Investment Bank can increase its lending to European companies. These measures are welcome, since they reduce euro area countries’ funding costs. However, they are insufficient because they do not respond to the main problem: the fact that some countries cannot take all the necessary measures for fear of the increase in public debt they will entail.

This is why the European Recovery Fund, on which the European Council has still not been able to reach a consensus, is so crucial. In order for it to be effective, this fund will need to have two essential characteristics: it must be big enough (at least 10% of euro area GDP or a figure of a similar magnitude to the public deficit that most countries will reach this year) and it must incorporate an element of redistribution. The idea would be for this fund, supported by national guarantees, to be able to issue debt and then invest in the countries most affected by the crisis, thus ensuring a symmetrical recovery. Although some of these investments can be implemented in the form of loans to member states (long-term and at low rates), it will be important for a large portion to take the form of direct transfers. This will avoid an excessive rise in the debt of the recipient countries and prevent its sustainability from being called into question.

The creation of a fund with these characteristics would be a huge step forward for the euro area, and that is precisely why it is politically so difficult. The idea of direct transfers and shared European debt is met with fervent rejections in the bloc’s richest countries. Furthermore, if such measures were adopted without taking their opinion into account, there would be a risk of a rise in anti-European populism in the countries of the north, as happened after the last crisis with the creation of parties like the AfD in Germany. Indeed, it seems somewhat politically infeasible to move towards a true fiscal union, with taxation powers for the euro area and a European ministry of finance with a significant budget, and with the possibility of issuing eurobonds. This would require a level of political union which, for now, is non-existent and for which there is no political consensus. But this crisis is demonstrating the need, at the very least, for an element of central fiscal stabilisation which facilitates the sharing of risks, like the Recovery Fund, and a European safe asset, as the debt issued by this Fund would be. This is not just a matter of solidarity; it is also in the self-interest of all the countries involved, as well as being a matter of stability for the monetary union. Moreover, the Recovery Fund could carry out investments that would help achieve progress towards the EU’s objectives: the digitisation of the economy and green and social sustainability. In a world with high national debts, these objectives could be called into question.

If European fiscal policy fails to step up to the plate and establish a mechanism of this nature, monetary policy will have to take the reins. For now, through its asset purchase programmes, the ECB has been the European institution that has reacted the quickest and most decisively to this crisis. As shown in the table, the ECB’s purchases of euro area countries’ sovereign debt in 2020 are expected to be highly significant; in fact, they will be comparable to the increase in the deficit projected for this year. Nevertheless, assuming that these purchases are temporary, their function is once again to contain member states’ financing costs, not to share the expense of combating this crisis. Of course, these purchases could be extended and the ECB could even hold the sovereign bonds on its balance sheet indefinitely, resulting in a de facto pooling and monetisation of the debt purchased.4 In fact, some political leaders may prefer this option, which offers an «implicit» way of pooling the debt that would go more unnoticed by the electorate, rather than an explicit sharing of the debt through the issuing of eurobonds, which could prove more costly from an electoral point of view. But this would be a risky strategy, as there are legal limits to what the ECB can do and the possibility of the European Court of Justice declaring such action to be unconstitutional cannot be ruled out.

Coordination between fiscal and monetary policies: as necessary as the preservation of independence

Central bank independence is one of the cornerstones of the proper functioning of the economy. Episodes of European hyperinflation of the 20th century, as well as more recent cases like that of Venezuela, leave no room for doubt: when institutions are fragile and fiscal policy forces the central bank to monetise public deficits on a recurring basis, the sustained growth in the supply of money ends up causing runaway inflation and, ultimately, economic collapse.5 However, we should not confuse independence with an absence of coordination between fiscal policy and monetary policy.

Rarely is it desirable for fiscal and monetary policy to act in opposite directions: when a central bank wants to combat a scenario of high inflation, it requires the tightening of monetary policy to be accompanied with a certain fiscal restraint (otherwise, the two policies would be counteracting each other). And vice versa: if fiscal policy becomes restrictive during a phase of cyclical weakness (for instance, by trying to contain the rise in public debt), in the end it is exerting a contractionary effect on the economy which counteracts the action of monetary policy.

It is therefore important that the coordination between fiscal and monetary policy is the result of decisions that are taken freely and independently and are guided by the respective mandates of the fiscal and monetary authorities. This is why it is key to have a strong institutional system which is capable of allowing monetary policy to provide coverage for fiscal policy when, as is currently the case, the severity of the economic recession requires a fiscal boost (with the consequent increase in public debt) and which, at the same time, protects the central bank from attacks on its independence when a tightening of monetary policy is required in order to avoid an excessive rise in inflation as activity returns to normal.

The central banks with greater independence lead the coordination

Under the protection of these strong institutions, the Bank of England has gone as far as opening a direct line of credit to finance the needs of the United Kingdom Treasury.6 In principle, this is a temporary measure and the Treasury must repay the full amount of the credit granted by the end of the year. In general, the measures of the Fed, the ECB, the Bank of Japan and the Bank of England have stood out for incorporating a significant increase in purchases of public debt in their jurisdictions.7 Such actions are aimed at anchoring a low interest rate environment and providing coverage for a fiscal expansion without the fear of this generating doubts about the sustainability of the debt.8 Like any other investor, the central bank receives interest payments and, if the bonds reach maturity, repayment of the principal. In addition, when the economic environment improves, the central bank can sell these assets and return them to the market. In this regard, more than monetising debt, asset purchases conducted by the central bank serve to reassure investors and prevent a panic in the market which, by tightening financing conditions, would lead to their fears that the debt is unsustainable becoming self-fulfilled. In other words: they prevent the economy from falling into disarray as a result of the mere fear of it doing so.

ECB: beyond the limits?

Are these purchases sufficient to accommodate the fiscal expansion and the increase in public debt? For example, with the measures announced so far, the ECB will make net purchases of assets amounting to around 9% of the euro area’s GDP: a quantity unprecedented in the history of the euro area. However, throughout April, when the ECB not only had announced the stimulus package but had also begun aggressively implementing it, the sovereign risk premiums of the euro area remained relatively high – an indication of the concern over the absence of greater joint action on the part of the European authorities. The reason for this concern is that the bulk of the fiscal stimulus still falls to national governments and the severity of the declines expected in economic activity require a substantial increase in the levels of public debt, which were already high to begin with. In fact, as shown in the table, the severity of the scenario is such that it has even dwarfed the purchases announced by the ECB: when the restrictions of the programmes in their current configuration are taken into account, we see that even in the best case scenario the ECB’s capacity to absorb public debt of economies such as Italy or Spain will be limited to around 10% of their GDP. This figure would have seemed like more than enough at the beginning of the COVID-19 crisis, but it could prove insufficient if the declines in GDP end up being greater than currently anticipated and if the recovery is more gradual, such that the deficits are not reduced quickly after this exercise.

«Helicopter» money: a worryingly suitable option

As an alternative to asset purchases, a much more direct and profound form of coordination has been proposed: for the central banks to buy as much public debt as is needed to finance the fiscal stimulus to combat the COVID-19 crisis to perpetuity (i.e. its repayment is not required). This option, popularly known as «helicopter money» due to the fact that it effectively involves the central bank «giving away money» to citizens (money that can be distributed by the government), has some major attractions in the current situation, at least theoretically speaking.9 Firstly, it would involve an injection of liquidity to firms and households that would be quick to deploy and could offset their drop in income. Secondly, it is a solution in which neither households, nor firms nor governments are left burdened by debt (and, therefore, the debt does not curb the recovery in demand). Finally, insofar as it is a temporary measure and it is only used in a critical emergency, it is possible that it will not result in unwanted spikes in inflation: the injection would occur at a time of a freeze in economic activity and, when the economy is reactivated, the central bank would retain its independence in order to adjust monetary policy as required to control inflation. However, even if this option were feasible, it should be borne in mind that governing a stimulus of this nature would be very difficult. The monetary financing of a fiscal stimulus would set a precedent and strong political pressure could emerge to gradually lower the bar for such interventions – if they are effective in these circumstances, why not for causes as worthy as the fight against extreme poverty? Such a response could also generate perverse incentives: the incentives to adopt a disciplined fiscal policy in order to build a protective buffer against the onslaught of the next recession (even when the cycle allows it) would be lost. Even with less aggressive coordination, such as public debt purchase programmes (in secondary markets) like those currently in force, the fiscal consequences of the monetary action could affect central banks’ credibility, reputation and independence: the more public debt the central bank holds on its balance sheet, the greater the fiscal consequences of its decisions and, therefore, the greater the temptation to politically influence the course of monetary policy. Hence, before COVID-19 rocked the scenario, the strategies of central banks such as the Fed involved gradually reducing the size of their balance sheets in parallel with very gradual rate rises.

Coordination or tightrope walking

With all these ingredients, it is clear that the COVID-19 crisis puts economic policies at a true crossroads: the blow to the economy is so profound that they are required to act quickly, aggressively and in a coordinated manner. But is it possible to do so while also preserving the credibility of the central banks’ independence? In Europe, greater ambition on the part of fiscal policy at the European level would help to relieve the pressure of having to adopt more extreme solutions. If the film is left with just one actor, the ECB, it will be navigating the biggest drop in GDP since the Great Depression while walking a tightrope.

Álvaro Leandro and Adrià Morron Salmeron

1. According to ECB estimates, the close economic links in Europe mean that a 15% exogenous increase in the production of the main euro area economies is amplified, generating a 20% increase in the production of the euro area as a whole, even in the short term. Fabio Panetta, «Joint response to coronavirus crisis will benefit all EU countries», opinion article from Politico.eu.

2. Taking on longer-term debt facilitates the distribution of the costs across different generations - a necessary strategy for dealing with impacts of a great magnitude and with abundant historical precedents, particularly in relation to the financing of wars.

3. As the euro area already learned in the public debt crisis of 2010-2012, doubts over the sustainability of debt lead to a tightening of financial conditions, which exacerbates the weakness of the economy. On the other hand, the requirement for an excessively fast reduction in debt could lead to a sustained restrictive fiscal policy, which would make the recovery more difficult and restrict future economic performance (even compromising it).

4. Under the PSPP and PEPP asset purchase programmes, there is a pooling of the risk in 20% of the purchases. Specifically, 10% of the purchases of public debt are allocated to debt of supranational European institutions, while another 10% is implemented by the ECB directly. The remaining 80% of purchases are made by each country’s central bank (of their own respective sovereign debt), which would also assume any potential losses themselves (as opposed to the Eurosystem as a whole).

5. The IMF estimates that Venezuela suffered an inflation rate of 65,374% and a budget deficit of 30% in 2018, while in 2019 its GDP would have shrunk by 35%. The supply of money, meanwhile, has grown by some 350,000,000% over the past five years, according to data from the Central Bank of Venezuela.

6. Specifically, it has increased the limit up to which the government can draw down on the «Ways and Means Facility» (the Treasury’s current account with the central bank) by an undisclosed amount.

7. See the details in the Fed and ECB Observatories of 23 and 24 April at www.caixabankresearch.com.

8. A more explicit way to do this is through so-called yield curve control, which consists of announcing that the central bank will purchase whatever volume of public debt is required to keep sovereign rates anchored at a given target rate. The Bank of Japan has been implementing this strategy since 2016 in order to keep 10-year sovereign interest rates at 0%.

9. J. Galí (2020). Helicopter money: the time is now. Column from VoxEU.org.

Álvaro Leandro