Deficits and debts are exploding worldwide

It almost sounds like a cry for help: a quick and coordinated response from governments is needed to mitigate the health and economic risks of Covid-19. And the various national budgets must play a crucial role in this.

The call comes from the International Monetary Fund (IMF), which will hold its traditional spring meeting this week, albeit virtually. Earlier this week, the fund put a jet black projection for 2020 on the global economy – the 2008 crisis will seem small compared to the impact of the crown.

In this crisis, much, if not all, comes down to what is called tax response: The extent to which governments pull out their wallets to keep failed parts of the economy afloat. It is mainly about saving lives. The IMF estimates that this will require at least $ 3.3 billion worldwide in direct support for health care and disruption of demand in the economy. An additional $ 4.5 billion is added in loans, equity injections, and guarantees.

Debt jump

That massive support leads to an explosion of sovereign debt. The IMF’s brief conclusion on this is necessary and appropriate. In short, nothing to do. At the same time, aggregate public debt at the end of 2019 was already 83 percent of world GDP. The IMF expects to jump to more than 96 percent in 2020.

This situation is more worrisome for poor and emerging economies, which, in addition to the pandemic, also face an abrupt deterioration in financial conditions and the collapse of exports and demand for raw materials.

Many countries are also worse off than at the start of the previous big crisis, the 2008 crisis, the International Institute of Finance reported last week. Together, governments, individuals, and businesses owe $ 87 billion over twelve years ago. . That makes many countries vulnerable now that there is a sharp increase in public debt.

The implications of the crown crisis for the budgets and sovereign debt of several countries, the IMF calculated on Wednesday in its semester Fiscal monitor. Here, too, the figures do not lie: for all countries in the world, the budget deficit will go from 3.7 percent of GDP in 2019 to 9.9 percent this year. Outliers: United States (15.4 percent) and China (11.2 percent). The eurozone compares relatively modestly with an average deficit of 7.5 percent. This is partly because the starting position was better: in 2019, the average deficit in the eurozone was only 0.7 percent. This was mainly due to budget surpluses in Germany and the Netherlands.

Budget deficits as a result of the crown’s policy are taking government debt far: from 83.3 percent of world GDP to 96.4 percent. The United States is also striking here. According to the IMF definition, the debt of the US government. USA It goes from 109 to 131.1 percent. That is almost a “Italian” percentage.

EU emergency pack

The eurozone sees an increase in government debt from 84.1 percent to 97.4 percent. There are big differences behind that average. Germany rises to less than 69 percent. Italy at 155 percent. This gap between north and south explains why negotiations on a single euro area crown financial plan were so difficult.

After endless diplomatic videoconferences, the European Union was able to come up with an emergency package of € 540 billion, especially for the poorest Member States (read: those with the highest debt). The package included emergency assistance from the European Stability Mechanism, a strengthening of the lending capacity of the European Investment Bank of € 200 billion and new unemployment insurance of € 100 billion.

Are the 540 billion euros now released at the European level sufficient to combat the crown crisis? Mario Centeno, president of the Eurogroup of finance ministers, said in this newspaper on Wednesday that he can imagine that it may be necessary two or three times.

Common solutions

Poul Thomsen, head of the IMF’s European department, said about it on Wednesday morning. The IMF prefers not to go into the medium term in this regard, he said, since everything depends on controlling the pandemic. However, he expressed his preference for common financial solutions. “It must ensure that all countries can take the necessary measures without disrupting financial markets and widening interest rate differentials.” Those 540 billion euros are now enough, says Thomsen. “It is especially important that there is a response at the EU level.”

He also expressed sympathy for the position of the North in the Eurogroup, which had its finances in order before the crown crisis. “We have always said that it is advisable to repair the roof when the sun rises.”

According to Thomsen, this also applies to many Eastern European countries, which have accumulated firmer buffers than just before the 2008 Lehman crisis. But in the end, he said, “the point is that all countries have room for do what they have to do. I repeat that. Otherwise we will jump [het IMF] with “.

After the crown

Critical policies are now being made around the world, while the fog of the crisis has not yet cleared. The magnitude of the crown’s impact on public finances is still highly uncertain. It depends on the duration of the pandemic and whether the economic recovery will come soon or take a long time. The IMF is accompanied by a call for transparency during this period of massive public support, which is crucial to managing fiscal risks.

This is particularly important for the post-crown period. When the blocks, smart or not, come to an end, economies will have to start again. Then the government will step back to accommodate private initiatives. According to the IMF, it is an expensive duty for governments to find their way to sustainable debt: after all, long-term debt through the roof is a recipe for new misery.