A global health and economic crisis like the current one demands a coordinated international response, which is already taking place. However, within Europe, it requires something more: deepening fiscal and monetary integration. The European Central Bank’s response since the start of the pandemic and the recent European Council agreement undoubtedly represent a giant leap forward for the common European project.
The European monetary authority has put all possible monetary mechanisms on the table to combat market instability and fragmentation, while providing banks with the necessary financing to channel toward families and the productive sectors. However, monetary action would be insufficient if it were not accompanied by fiscal measures that offset the cost of the crisis, boost demand, and improve future expectations. The crisis is too intense for an individual response, limited to the existing capacity of those countries hardest hit by the pandemic. The joint fiscal response goes beyond solidarity. It strengthens integration and confidence in the viability of European integration.
The European agreement reached represents several milestones: a greater economic response, common financing (albeit temporary), a larger joint fiscal stimulus on an international scale, and an investment focus on innovation and sustainability. The common response is equivalent to 17% of the Eurozone’s GDP, a percentage higher than the size of the fiscal measures adopted in the United States and China. It could not be otherwise given the deep social and economic scars the crisis will leave behind.
The IMF identifies three areas where fiscal action is vital. First, it advocates for investing in people, education, health, and social protection, and avoiding the sharp increase in inequality that this crisis could trigger. Second, it calls for promoting low-carbon growth and fostering climate resilience. Finally, it urges taking advantage of digital transformation, whether by expanding the use of e-government platforms to improve efficiency and transparency while reducing bureaucracy, or by resorting to remote learning and working.
The fiscal effort required, both individually and collectively, is substantial, as the increase in debt levels could eventually become a concern. However, the cost of a premature adjustment could be much higher than that of continued fiscal support. Naturally, the strategy must be compatible with a clear approach and budgets evaluated in terms of effectiveness and public debt sustainability.
Banks are committed to continuing their collaboration with authorities on the path forward, mobilizing resources and protecting their clients from the effects of the pandemic on activity. Investing in growth and a sustainable economic future improves economic certainty and thus facilitates the management of entities in their objective of driving development and prosperity. The common European fiscal strategy can serve as an incentive to finally complete the monetary union with the creation of a single capital market and the banking union. To boost recovery, it is also necessary for monetary policy to pass the baton to fiscal policy, which does not necessarily imply more restrictive financial conditions in the future. On the contrary, it is about establishing a strategy for a return to monetary normalcy adapted to events that prioritizes financial stability to prevent new, currently non-existent problems from arising.
José Luis Martínez Campuzano, Spokesperson for the Spanish Banking Association
