In an article published in the Frankfurter Allgemeine Zeitung, Isabel Schnabel, Member of the Executive Board of the ECB states that governments taking more debt now should not be a concern, and would strengthen the central bank independence in the future.
She claims that “the decisive fiscal policy intervention in the coronavirus (COVID-19) crisis strengthens the effectiveness of monetary policy and mitigates the long-term costs of the pandemic. With targeted, forward-looking investment, not least under the umbrella of the EU Recovery Fund, governments can foster sustainable growth, increase long-term competitiveness and facilitate the necessary reduction of the debt ratio once the crisis has been overcome”.
The problem of Ms Schnabel’s article is that it ignores the facts and bets the future of the central bank independence on a rigorous, profitable and successful level of government investment that has never happened and is even more less likely to occur now.
Ms Schnabel should be, in fact, warning about the enormous risk of malinvestment and excessive debt that may arise from the European Recovery Fund implementation and the massive deficit spending arising throughout the Eurozone. Why? Because she has the empirical evidence of the failure to achieve the virtuous growth and debt reduction she expects with the examples of the Growth and Jobs Plan of 2009, the Juncker plan and the enormous rise in deficit spending between 2009 and 2011 among many European nations. Once growth recovered, three things were evident:
Most Eurozone countries maintained a level of deficit spending that elevated the debt to GDP in growth and recession periods because governments get used to spending more in boom times and even more in recession times. Ms Schnabel expects of the Eurozone governments a level of discipline and fiscal prudence that only Germany and Holland implemented. With the budgets of Spain and Italy soaring without control, the idea that governments will spend money wisely and productively is not just wishful thinking, it is negated by the evidence of the past.
The debt burden created by the “decisive fiscal policies” in recession times not only stays and grows but leads to rising taxes afterwards to “reduce the deficit” that hinder growth and job creation.