EconPol Policy Reports

The cost of public debt increases more than proportionally with the debt/GDP ratio. This convexity has one immediate implication in the presence of uncertainty about growth: the average social cost of public debt is higher than the contractual debt service cost embedded in the interest rate. In this EconPol policy report, Daniel Gros explains how Common European debt, which is financed by a pro-rata levy on the output of member states, provides an insurance function because countries which grow less have to contribute less (and vice versa). This insurance function becomes more important the longer the horizon and thus the uncertainty about (relative) economic performance.

Recent evidence suggests that individual traits such as social capital are key determinants of how well the Covid-19 pandemic can be contained. It has been widely argued that the success of governments’ policies will be determined by trust and, at the same time, the pandemic itself is likely to affect trust, attitudes towards institutions and solidarity. This experimental study by Cevat Giray Aksoy (European Bank for Reconstruction and Development and King’s College London), Antonio Cabrales (EconPol Europe, Universidad Carlos III de Madrid), Mathias Dolls (EconPol Europe, ifo Institute) and Lisa Windsteiger (Max Planck Institute for Tax Law and Public Finance) into the impact of Covid-19 looks at levels of trust among people and public institutions across Europe. The authors surveyed people in France, Germany, Greece, Hungary, Italy, the Netherlands, Poland, Spain and Sweden to examine the effects of the virus on social trust, reciprocity, solidarity and institutional trust. The results reveal an overall increased sense of solidarity among people, but lower levels of trust in government in countries hit hardest by the virus.

As the economy and our daily life return to a “new-normal” in the midst of Covid-19, the possibility of a second wave leaves lots of uncertainty about future developments. To understand indications about the impact of the pandemic on economic performance in different countries across the world, we conducted a survey among 950 economic experts in 110 countries. This report gives an overview of the most important results of the survey and compares them in different world regions and countries. An extra focus is placed on the European Union’s strategy to combat the crisis and how experts from member states assess the different policy measures.

The functioning of the Eurozone was irreversibly transformed by the European debt crisis and now, as a consequence of the Covid-19 pandemic, a new and even more devastating crisis has hit the EU. German Chancellor Angela Merkel has abandoned her opposition to substantial intercountry transfers and any form of debt mutualization, a turnaround motivated by the exceptional circumstances brought about by the pandemic. The risk that Italy’s fragile financial, economic and political situation, exacerbated by the current crisis, could destabilize the entire Eurozone in the absence of sizeable external assistance was probably one of the main determinants of the German government’s policy shift. In this policy report, Luigi Bonatti and Andrea Fracasso argue that this move will be insufficient to drive Italy into a sustainable and satisfactory growth path, and it will need further financial support from EU institutions and member states. Should they agree to provide financial assistance to the Eurozone's most vulnerable countries and make permanent what was supposed to be temporary, or expose the zone to a possible implosion?

This paper discusses the introduction of new own resources to finance the EU budget. Currently roughly two thirds of the budget is financed from GNI-based own resources, which are essentially contributions made by the member states out of national tax revenues. While GNI resources are transparent, fair and in line with the principle of subsidiarity, they are criticised for leading to political debates that emphasise the cost of EU spending rather than on the benefits, and for contributing to the framing of discussions on the EU budget in terms of net balances, rather than value added through common policies and the provision of European public goods. Clemens Fuest and Jean Pisani-Ferry propose that the EU should receive a new source of funding in the form of revenue from the European emissions trading system (ETS). They recommend that revenue from the ETS be used to finance the EU fund for economic recovery (Next Generation EU), which was adopted in July.