Debt sustainability and a sustainable COVID recovery

The EU must adopt a pragmatic approach to budgetary rules – including the preference for European recovery funds to be issued as grants rather than loans – in order to reconcile environmental sustainability with public debt sustainability, said Finance Watch, the public interest association dedicated to making finance serve society.

As EU heads of state and government prepare to discuss a Covid recovery package later this week, Finance Watch today published a briefing note calling for a coherent economic approach that promotes a green recovery and avoids budget orthodoxies that could be self-defeating in today’s circumstances.

• Download «Debt sustainability and a sustainable COVID recovery»

The sustainability of public debt created to fund the Covid recovery will depend ultimately on whether the funds are used to make the EU’s economy more sustainable. With national budgets already under strain, this will require flexibility in the rules and the choice of instruments; applying budget rules too rigidly could be self-defeating and lead to financial instability if it prevents the investments needed for a sustainable economic transition.

The briefing note warns that without proper guidance and limits, stimulus measures directed at corporates and financial markets could institutionalise moral hazard, leading to waste and resource misallocation. It calls for green and social conditions to promote sustainable activities and support citizens and businesses to move away from unsustainable activities.

Thierry Philipponnat, Finance Watch’s Head of Research and Advocacy and author of the briefing note, said:«Today’s cocktail of Covid, economic and environmental crises calls for a pragmatic and coherent economic approach, with new thinking on public debt and monetary policy in particular. It is clear that without investing into environmental sustainability in the short term there can be no debt sustainability in the longer term.»

Benoît Lallemand, Secretary General of Finance Watch, said:«This is the moment for leaders to point the economy in a sustainable direction and press the accelerator. So-called budget orthodoxies must not get in the way of investment that will make our economies – and through them also our public debt – sustainable.»

The briefing note argues that:

• Recovery and support packages must avoid institutionalising moral hazard and creating zombie companies and windfall profits that blur the boundaries between market and state.
• Support for financial markets must avoid socialising risk and undermining financial markets’ ability to allocate resources effectively.
• Recovery measures must be tied to green and social conditions that promote sustainable activities and fund the transition away from unsustainable activities.
• Stability and Growth Pact rules must be relaxed for well-specified and targeted sustainability-oriented investments coordinated at EU level.
• High levels of public debt must be managed pragmatically, without artificial constraints on potential monetary solutions.