Debt Hill, EU money, veto – Portfolio.hu

Apparently I’m starting from a distance. Living in extraordinary times and the Covid crisis has brought radical changes to our daily lives. For now, we can’t say when things will go back to the old wheel, but that most likely won’t happen everywhere. In terms of when the level of economic performance (measured by GDP) returns before the Covid crisis, we can expect it approximately in early 2022. In this sense, this is when we will overcome the crisis. Of course, this is not true for everything and everyone. This is because the crisis is causing lasting change in many areas. Think, for example, of the sudden acceleration of digitization developments, the expansion of work from home, or the potential for online content consumption and online commerce. Or think of economic policy.

Individual governments around the world are taking extraordinary economic policy measures to address the crown crisis.

On the spending side, in addition to the direct costs of controlling the epidemic, there is a significant additional burden of helping businesses that lose their orders and people who lose their income through government transfers. The revenue side is already affected by the loss of tax revenue due to the economic recession, complemented by the impact of specific tax cuts and tax cuts. The consequence is a brutal fix of the general government deficit. The magnitude of fiscal expansion in the United States can only be measured for the years of World War II, with a deficit rate exceeding 15% of GDP. After a general government deficit of 0.6% of GDP in 2019 in the euro zone, the OECD expects a deficit of 8.6% this year and 6.5% next. In Hungary, according to the latest indication from the Ministry of Finance, the deficit could be 9% this year.

The deficit will become debt, that is, the public debt / GDP ratio will rise sharply. America’s debt will increase from 108% in 2019 to 134% in 2021, according to the December OECD forecast (as a percentage of GDP). The debt of the euro zone went from 86% to 105%. Hungary’s debt may return to about 80% in early 2010 from 66% at the end of last year. Mountains of debt are inevitably increasing around the world.

So the crisis and dealing with it with public funds will directly lead to huge budget deficits and a mounting mountain of debt. What, in turn, allows previously strict constraints on the state budget to be relaxed and increased debt tolerated is the low interest rate environment and the central bank’s bond buying programs. In fact, neither is new, since both have been taken over by the main central banks to deal with the previous crisis (the Great Financial Crisis of 2008).

The years 2010 (but also the previous decades) were dominated by economic policies that marked a disciplined fiscal policy and the reduction of debt. It was mainstream. Now, however, the attitude has changed. Fiscal stimulus, in addition to low and often negative public debt, can be seen as a recipe for effectively overcoming the crisis. Proponents of modern monetary theory (MMT) say that countries with developed economies and free production capacity that issue their debt in their own currency have practically unlimited opportunities for borrowing. Even in the pre-crisis period, mainstream economists steadfastly refrained from these ideas.

MMT, on the other hand, has been despisedly characterized as

• Contrary to its name, it is not modern (as it originated in the early 20th century),
• it is also not monetary (since it deals mainly with public finances),
• it’s also not a theory (this has only been added, I think, to make the criticism flashy and destructive).

Today, the total rejection of MMT is a thing of the past, the thoughts it proclaims are beginning to infiltrate mainstream economic thinking.

And the practice of economic policy seems to read directly from the MMT score. In the short term, of course, the goal is to overcome the crisis as soon as possible. This will lead to an increase in public spending, an increase in the general government deficit and a jump in the public debt / GDP ratio. This is achieved at lower interest rates than before and in part with direct financing from the central bank. Therefore, the increase in debt is not seen in itself (it is quite scary), it is advisable to examine how much it costs to finance the increase in debt.

The above recipe is followed by European countries, and the European Union has also embarked on this path. Of the total crisis management package of € 750 billion, Next Recovery EU accounts for the largest part of the recovery and resilience mechanism (€ 672.5 billion), of which € 360 billion is planned for the joint loan. . This is 2.6% of the GDP of the 27 member states in 2019, which represents a negligible part of the increase in public debt. but nevertheless They give a big boost to Member States, especially in the areas of digital transition and green projects. I don’t think the importance of the above goals can be overstated. The Covid crisis is accelerating digitization and its quality is becoming a key factor in competitiveness. For member states with below average EU development (Hungary belongs to this group), catching up is the most urgent, partly with the help of EU recovery funds. From an economic point of view, giving this up, vetoing it, does not seem rational.

This article reflects the views of the author and does not necessarily reflect the views of the Portfolio Editorial Committee.

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The Opinion section of the portfolio, On the other hand, has been launched. We wrote about the column here, and the published articles can be read here.

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