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Funding the Response to the COVID-19 Crisis

April 9, 2020


Erik Jones
, Director of European and Eurasian Studies, Professor of European Studies and International Political Economy, Johns Hopkins SAIS
Filippo Taddei, Associate Professor of the Practice of International Economics; Director of the Bologna Institute for Policy Research; Academic Director, Master of Arts in Global Risk
Europe and the US are two of the epicenters of the COVID-19 crisis. Although it appears the health crisis may be approaching a peak, the economic crisis remains a concern as national governments extend their lockdown restrictions into May. The Bologna Institute for Policy Research (BIPR) hosted a webinar featuring professors Erik Jones and Filippo Taddei who evaluated the latest fiscal and monetary policy responses to the crisis by the US and European governments. 
Taddei opened with a diagnosis of the current crisis. Disruption to global supply chains has caused a widespread supply shock and liquidity crunch. In Europe, the problem is acute, he said, because fiscal policy coordination is weak and the European Central Bank’s (ECB) balance sheet is already overextended. Furthermore, the bloc’s existing crisis response facilities, such as the European Stability Mechanism, are inadequate for meeting the demands of a common shock with asymmetric effects. What can we expect to see as the economic crisis intensifies? Taddei warned that, since advanced economies will take on unprecedented levels of debt beyond the level experienced at the end of World War II, the recovery can only be prepared if we understand how we will deal with legacy debt.     
Jones compared the US response to that of the governments of Europe. In the US, the federal government has mobilized almost $2.5 trillion in emergency funding for individuals and businesses. Europe’s fiscal response, by comparison, is underpowered, totaling $500 billion if the stimulus packages of the EU’s largest economies are combined. Raising new sources of funding is imperative for Europe, Jones said, because allowing one country’s economy to fail would have a devastating ripple effect in Europe’s integrated economy. The solution is for both stronger and weaker economies to mutualize their debt, which would enable weaker countries to borrow at rates they can afford to continue propping up their private sectors. But political and structural roadblocks to this solution abound. Euro area policymakers must find consensus or risk worsening the crisis.

Professors Erik Jones and Filippo Taddei analyze national policy responses to the economic fallout of the coronavirus pandemic.