• 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

The global war against the coronavirus

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Alvaro Leandro
Álvaro Leandro
April 20th, 2020

COVID-19, the disease caused by the new coronavirus that emerged in the Chinese city of Wuhan, started out as a distant threat for the western world. In the last few weeks it has become a reality. As of today, there are at least 100 cases in more than 30 countries in Europe, which now accounts for 75% of all new daily cases in the world. On 26 March, the US surpassed China in the number of confirmed cases.

Faced with this health emergency, a large number of countries have taken drastic containment measures to curb the spread of the virus and ease pressure on national health systems. Schools and non-essential businesses have been closed, large concentrations of people have been banned and, in many cases, citizens have been urged to stay at home.

The economic impact of the containment measures

These measures, which are absolutely necessary to contain the virus and save thousands of lives, will result in a huge and inevitable drop in economic activity. Tourism, leisure, catering and hospitality, trade and transport will be severely affected during the confinement. The manufacturing sector will not be spared either, as there is expected to be a widespread decline in consumption, construction, investment and international trade.

This situation constitutes a very peculiar kind of shock, as it has a detrimental impact on both supply and demand. On the one hand, supply will be affected by the closure of factories, the disruption of global supply chains and the logistical and financial difficulties that the containment of the pandemic will entail for companies. On the other hand, the containment and the reduction in international trade will cause a sharp decline in demand, both domestic and foreign.1

The first economic indicators that we have, such as the PMI (a measure of economic sentiment), have plummeted to all-time lows and point towards a significant contraction of GDP in Q1 2020 in the euro area, which no doubt will be repeated in Q2. In China, where radical containment measures have been in place since January, in the first two months of 2020 industrial production and retail sales were 20% lower than in January and February 2019. Investment plummeted by 25%. Overall, it is estimated that the country’s GDP has fallen by 10% in Q1 compared to the previous quarter.

The new macroeconomic scenarios forecast by CaixaBank Research, which assume that the containment measures will be lifted in the second half of the year, predict growth in 2020 of –3.1% in the euro area, –1.7% in the US and 2.5% in China. These annual figures mask significant declines in economic activity at the quarterly level: in the euro area, GDP is likely to fall by more than 10% in Q2 compared to Q1. At the global level, we estimate that GDP growth will be –0.4% in 2020, which places the impact of the coronavirus on this year’s growth at slightly over 3.5 pps, a figure comparable to that of the Great Recession of 2008-2009. For 2021, we expect a rebound in the global economy and growth in excess of 5%. It is important to emphasise the high degree of uncertainty surrounding these forecasts, since we are dealing with a shock of an unprecedented nature and we do not yet know how effective the containment measures adopted around the world to fight the virus will prove to be, nor whether they will be extended beyond the first half of the year. Each additional month of confinement and reduced economic activity would result in a greater drop in annual GDP.

Governments respond to the crisis

Such significant declines in demand and economic activity will pose major difficulties for many companies, which will have to deal with drastic reductions in their income, at the same time as having to repay loans and cover wage payments. If they do not receive public support, they will inevitably have to reduce their workforce and experience financial difficulties. In the US, there has already been an unprecedented increase in the number of people applying for unemployment benefits for the first time (over 3 million in the third week of March and 6 million in the last, compared with the peak of 665,000 during the Great Recession).

To counteract these devastating effects of the crisis, and to prevent them from having a lasting impact, many countries have announced a series of measures intended to cushion the impact of the crisis on firms and households. Among the wide variety of measures taken throughout the world, some of the most noteworthy include programmes of guarantees for bank loans and lines of credit through national development banks, aimed at avoiding a significant contraction in credit and boosting access to liquidity for all players; temporary workforce reduction measures (such as temporary staff lay-offs – or «ERTEs» as they are known – in Spain, or the scheme of subsidies for reduced working hours – or Kurzarbeitgeld – in Germany) that seek to ensure employees do not lose the connection with their employers that are experiencing difficulties; the deferment of tax payments and, in some cases, direct payments to citizens (such as in the US) and direct subsidies to companies (such as in France and Germany).

In Germany, the government will provide 822 billion (24% of GDP) in lines of guarantees through KfW, a national development bank, and in a new Economic Stabilisation Fund, which will also provide 50 billion euros in direct subsidies to small businesses with fewer than 10 employees. In addition, the authorities have expanded access to – and the generosity of – the Kurzarbeitgeld. Although it is often compared with ERTEs in Spain, the Kurzarbeit system is different in some important ways, as it allows for a reduction in working hours (not just lay-offs) and because the government pays a percentage of the wages of affected workers. Given that these measures entail a significant increase in the deficit, the government requested from Parliament the suspension of the so-called «debt brake» through an emergency clause. The amount and the public coverage of the lines of guarantees announced by Germany (aptly referred to by the government as a bazooka) is vast and will provide much welcomed aid for its companies. Although the measures have focused on providing liquidity to firms for the time being, it will be necessary to increase investment and spending in order to support the recovery when the containment measures are relaxed.

In France, of particular note is an ambitious plan of subsidies for reduced working hours, which is automatic and involves 70% of wages being fully borne by the state, and a compensation fund for companies with a turnover of less than 1 million euros that suffer declines of more than 70% in their turnover. The postponement of the pension reform has also been announced. In addition, the government announced a package of 300 billion euros of guarantees for loans to SMEs (up to 70% of the loan).

Italy, the European country hardest hit by the coronavirus to date, has prohibited objective staff dismissals over the next two months and has announced a total package of 25 billion euros (1.4% of GDP) in the form of subsidies for households, businesses, the health system and civil protection. Italy’s measures have been somewhat restrained, perhaps due to fears over the sustainability of the country’s debt and due to speculative attacks on the sovereign bond market. More support will need to be provided to the Italian economy to prevent it from being permanently damaged by this crisis. The programme of bond purchases announced by the ECB should help to alleviate these fears, but more support may be necessary at the European level.

In the US, an unprecedented economic package of loans, guarantees and subsidies for businesses was approved. In addition, the package will include direct payments to households, up to a maximum of 1,200 dollars per person and 500 per child. It is estimated that the fiscal measures could exceed 1.2 trillion dollars (6% of GDP).

In China, the measures have been more cautious. For the time being, the government has reduced company social security contributions, cut VAT and electricity rates and granted subsidies to firms in order to maintain employment. All these measures will lead to significant increases in public debt in these countries. However, as the former ECB president Mario Draghi said in an opinion article in the Financial Times, we face a war against the coronavirus, and these measures (which no doubt will be expanded during the course of the crisis) are necessary. It is the appropriate role of the state to protect citizens and the economy from shocks for which the private sector is not responsible and which it cannot absorb. Thus, it is important not only to increase aid for those who will lose their jobs, but to do everything possible to prevent them from losing them in the first place. In this regard, the lines of guarantees established for firms and banks are very appropriate. The direct fiscal measures (such as direct payments to citizens in the US, and benefits for unemployment and reduced working hours) also help to prevent a complete collapse in demand, in addition to directly helping citizens who are experiencing financial difficulties. Increased spending and public investment will, most likely, also be crucial in order to relaunch the economy once the containment measures have come to an end.

The European response

The measures taken to deal with the coronavirus crisis also require the support of other institutions, such as central banks and supranational bodies. Thus, the European Commission has decided to suspend its budgetary rules, which in normal times would not authorise such increases in spending. The Fed and the ECB also announced sovereign asset purchase programmes on an unprecedented scale (for more details on the measures taken by central banks, see the Focus «The coronavirus spreads to the markets and monetary policy takes urgent action» in this same Monthly Report). However, the expectation of the unavoidable increases in public debt has also given rise to new fears about the sustainability of some countries’ debt (in particular that of Italy, which at the end of 2019 was as high as 135% of GDP). There has already been an increase in the risk premiums of certain European countries in recent weeks, which only receded after the ECB announced the sovereign debt purchase programme. Although the central bank has proclaimed that it is prepared to purchase large quantities of sovereign debt, it will be difficult to counteract speculative attacks on certain countries’ bonds, since the monetisation of debt is not permitted by the European treaty. Furthermore, even if it has been endowed with flexibility, the ECB is limited in the total amount of debt that it can purchase from certain countries. These speculative attacks could call the integrity of the euro area into question. For this reason, there has been a resurgence of ideas that had already been proposed during the monetary area’s last crisis, in order to share the cost related to the current crisis: the famous eurobonds or, in this case, «coronabonds». At the moment, the discussions among the European heads of state have focused on establishing precautionary credit lines from the European Stability Mechanism (ESM), the institution that provided loans to Greece, Ireland, Portugal and Spain in 2012. This would involve an element of mutualisation, since these credit lines would be backed by ESM capital, which is provided by all euro area countries. The agency’s high credit rating allows it to provide loans at very low rates. However, this measure offers limited added value, since euro area countries can already finance themselves at very low interest rates thanks to the ECB’s purchases of sovereign debt. Moreover, obtaining a loan from the ESM could be politically toxic for many countries that still have the case of Greece fresh in their memories (despite there being talk of reducing the conditions attached to these credit lines). Finally, these loans would add to the debt of the countries that obtain them, and they would not involve a real co-insurance or mutualisation mechanism, unlike a true eurobond.

Álvaro Leandro

1. For these same reasons, the impact on inflation is highly uncertain. On the one hand, the drop in demand will apply downward pressure on prices. On the other, lower supply should affect inflation in the opposite direction. To complicate things further, the dramatic fall in the price of oil will also have an impact on prices.

Alvaro Leandro
Álvaro Leandro