Debt: the urgent need for a global recovery initiative

Source: European Union External Action

The growing indebtedness of many poor and middle-income countries is worrying. Developed countries have been hit very hard by the COVID-19 pandemic, but the developing and emerging world have much less fiscal space to deal with its consequences and a much more difficult access to funding. Some of them have already defaulted on their external debt. If we are not able to deal rapidly with this debt issue, poverty and global instability are likely to increase. It could even fuel a new global financial crisis.

For our discussion with Commissioner Jutta Urpilainen and Development Ministers on the debt issue, we were joined by Ms Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), Mr Werner Hoyer, President of the European Investment Bank (EIB), Ms Odile Renaud-Basso, the new President of the European Bank for Reconstruction and Development (EBRD) and Mr Emmanuel Moulin, The Paris Club Chair (The Paris Club is in charge of coordinating the treatment of the debt of over-indebted countries). We benefited also from the insights of Paolo Gentiloni, Commissioner for Economy, who represents the EU at the G20 Finance Ministers meetings.

A dire global economic outlook

 Kristalina Georgieva presented us a dire global economic outlook: we now know for sure that we are facing the worst recession since the great depression. The IMF projects global GDP to contract by 4.4% in 2020. A partial recovery is expected in 2021, assuming that the prospects of the vaccine will materialise. But this recovery will be uneven, prone to setbacks, and probably particularly harsh for developing countries.

“We are experiencing a reversal in the decline in poverty for the first time in decades, with 90 million people falling back into extreme poverty.”


GDP in low-income developing countries (LIDCs) is estimated to shrink by more than 1% this year, whereas average growth in this group has been above 5.5% per year in the last twenty years. The impact will be a reversal in the decline in poverty for the first time in decades, with 90 million people falling back into extreme poverty. In terms of fiscal support to the economy, advanced economies have deployed 20% of GDP this year, including loans and guaranties, emerging markets 6% of GDP, and poor countries only 2% of GDP.

Throughout this year 2020, the IMF has provided financial support to 82 countries, 47 of those being LIDCs. The Fund has in particular increased by 10 what it lends on average to Africa. However, according to IMF estimates, Africa will still face a $345 billion financing needs gap, of which $295 billion for sub-Saharan Africa. We need to close this gap with the support from institutions but also to create conditions for the private sector to step up.

“Africa will face a $345 billion financing needs gap, of which $295 billion for sub-Saharan Africa”

The IMF will expand its lending capacity. The EU has contributed €183 million to the IMF’s Catastrophe Containment and Relief Trust (CCRT), which provides debt relief for the 29 poorest and most vulnerable countries, However the IMF still counts on EU Members States to give more resources to the Poverty Reduction and Growth Trust Fund. The IMF has limited capacity to lend to countries that are most in need. In such cases, capacity development matters as much as financial assistance and Kristalina Georgieva suggested that the EU prioritises this particular aspect. The EU and its associated development banks are committed to work closely on this issue with the IMF.

Breathing space for the poorest countries

The pre-pandemic debt levels for many low-income developing countries were already worrying. The G20 Debt Service Suspension Initiative (DSSI), launched last April, has provided some breathing space to the poorest countries. The DSSI was initially foreseen to run until the end of the year. As of November, 46 countries have requested to participate, resulting in about $5.7 billion in deferred payments this year.

“Argentina has again defaulted on its external debt last May and Zambia on 13 November, aggravating the risks of a spiral of sovereign defaults, especially in Africa.”

However it is obviously not sufficient and there has been so far no significant participation by the private sector. Argentina has again defaulted on its external debt last May and Zambia on 13 November, aggravating the risks of a spiral of sovereign defaults, especially in Africa. This could eventually lead to another global financial crisis.

The G20 has taken additional action

Therefore, the G20 has taken additional action at the request in particular of the Union and its Member States. First, by extending DSSI until June 2021, with a possibility to extend it by another six months – something to be decided at the next IMF’s Spring Meeting. Second, the G20 and the Paris Club have agreed on a ‘Common framework for debt treatment beyond DSSI’, enabling the debt restructuring process to be initiated.

“China agreed to the new G20 debt treatment principles, an important step forward. We count now on the same motivation and level of commitment from all partners in this area.”

In recent years, China has become a very important creditor for many developing countries, particularly in Africa. However, it is not a Paris Club member and has not been very proactive on the debt issue until now. China agreed to the new G20 debt treatment principles: this is an important step forward. We count now on the same motivation and level of commitment from all partners in this area.

The EU wants to go further globally

However, we would like to go further: the EU is advocating to extend the G20 debt treatment framework to middle-income countries in need. We also support a new general Special Drawing Rights (SDRs) allocation, an international money issued by the IMF, to cope with the needs generated by the crisis.

To increase Europe’s global weight on this crucial issue, we need also to act more as Team Europe that can harness the strengths of our Member States and of the Union. EU Member States cannot have any real influence if they choose to go alone. In Senegal for example, Team Europe as a whole owns 9% of external debt, similar to the share of China alone.

“While we need to prioritise low-income countries, especially in Africa, some middle-income countries that face serious challenges also deserve close attention.”


All Member States have agreed in our meeting that these issues are of high priority. Several highlighted the need to move fast from providing ‘breathing space’ through the Debt Service Suspension Initiative, to deeper restructuring for some countries, and further financial support in many cases. While we need to prioritise low-income countries, especially in Africa, some middle-income countries that face serious challenges also deserve close attention, particularly in Latin America.

As I have said often before, I am deeply convinced of the urgent need for a debt relief initiative at multilateral level (mainly through the G20/Paris Club), accompanied by a concerted diplomatic and economic push to prevent a full-fledged debt crisis. However, debt relief alone is not enough: it has to be part of a renewed model of sustainable financing, especially in Africa.

“Debt relief has to be part of a renewed model of sustainable financing. The EU’s call for a Global Recovery Initiative that links debt relief with investments is key.”

To avoid expanding the gap between those who are ahead and those falling behind, it is crucial to ensure that the future will be green and inclusive, and that everyone can surf on the digital wave. The EU’s earlier call for a Global Recovery Initiative that links debt relief with investments is key here.

The debt problem is here to stay

The subject of debt sustainability for many low and middle-income countries will probably continue to be on our agenda for months. Despite our important internal difficulties, the way we handle this matter, in close coordination with our Member States, will have a decisive influence on Europe’s future role in the world and in particular on its relations with Africa.

UfM: Joint statement by the Jordanian and EU co-presidency on the Fifth Regional Forum of the Union for the Mediterranean

Source: European Union External Action

The 5th Regional Forum gathered Ministers of Foreign Affairs of the Euro-Mediterranean region on the occasion of the 25th Anniversary of the Barcelona Declaration to reaffirm their strong commitment to its values and principles and renew their commitment to enhance cooperation in the region in the interest of peace, stability, development, and shared prosperity.

The Union for the Mediterranean (UfM) in 2008 gave a new impulse to the Process through the establishment of an institutionalized framework with a unique governance model to promote regional cooperation, integration and dialogue in key areas. The Barcelona Process’ original baskets of “Political and security partnership”, “Economic and financial partnership” and “Partnership in social, cultural and human affairs” remain a valuable basis for cooperation in the Mediterranean region. The 2017 Roadmap for Action remains the comprehensive strategic framework for the work of the UfM.

This milestone Anniversary of this year has provided the opportunity to reflect on the past 25 years and look into the future with a renewed vision. The Ministers recognized the scale and nature of the current regional challenges and reaffirmed their support to the work of the UfM to find joint responses to the difficult situations we are confronted with in these days and age.

Peace and stability continue to be main objectives for the UfM members. The UfM can contribute to these goals in the Mediterranean region by creating, through dialogue and cooperation, a political environment that is conducive to the solution, in relevant fora and on the basis of agreed parameters, of the conflicts and the political tensions affecting members  of the UfM. The need to strengthen efforts to solve conflicts and crises that are depriving the region from its right to peace and stability was emphasised.

In this context, all steps were encouraged that contribute to creating political horizons to achieve just and comprehensive Middle East peace and to relaunch effective negotiations to solve the Palestinian Israeli conflict on the basis of the two-state solution and in accordance with international law. It is important that both parties avoid decisions that can undermine trust, including the building of new settlements. The importance of upholding the historical status quo for the Holy Sites in Jerusalem, including with regard to the Hashemite custodianship, was recalled. The indispensable role of UNRWA and the need to support it politically and financially in order to allow it to continue to fulfil its UN mandate was also reaffirmed.

There was also expression of support for the UN efforts in the search of a political solution to the Libyan crisis on the basis of relevant UN resolutions and welcoming of the regional initiatives contributing to these efforts. The objective is to preserve the unity, sovereignty and

territorial integrity of Libya, to stop all foreign interference and achieve national  reconciliation, sustainable peace and stability. In this regard, recent progress within the framework of the Joint Security Commission and the Libyan Political Dialogue Forum is encouraging and welcome.

The need to find a political solution to the Syrian crisis that preserves the territorial integrity  of the country, restores peace and stability, and creates conditions for the safe, voluntary and dignified return of refugees, in accordance with UNSC resolution 2254, was also emphasised. Full support was expressed for United Nations Special Envoy Geir Pedersen and his efforts to facilitate progress within the Syrian-led Constitutional Committee under UN auspices. There were calls on all parties to engage in good faith in its work, and welcomed the convening of the fourth round in Geneva on 30 November 2020.

Concern is also high about the multiple consequences of the COVID-19 pandemic. There is therefore general agreement on the need to intensify our efforts to contain the pandemic by strengthening cooperation on research and innovation, and exchanging information and scientific knowledge, notably with a view to ensure a global access to vaccines as well as to mitigate the impact on economic growth, employment and social cohesion. It is important to show solidarity and mobilize resources and capacities towards a sustainable post-pandemic recovery paving the way for the creation of more resilient societies and economies in the region.

This year’s Regional Forum highlighted the role that the civil society has been playing over 25 years of Euro-Mediterranean partnership. In this respect, the Anna Lindh Foundation, the only Euro-Mediterranean organisation gathering civil society actors of the whole Mediterranean Basin, is playing an important role for the promotion of intercultural dialogue. The Parliamentary Assembly of the UfM and ARLEM also have to continue to play their role respectively to reinforce inter-parliamentary cooperation and to amplify the voices of local and regional authorities and to promote the territorialisation of the Euro-Mediterranean sectoral policies.

Citizens of the region are increasingly exposed to large-scale disinformation, including misleading, and outright false information. It is important to raise awareness and enhance cooperation with relevant stakeholders in this field, including industry and online platforms,  to fight disinformation and improve tolerance and strategic communication. Ministers also stressed the importance of fighting against terrorism, extremism and the culture of hate that seeks to divide us, and expressed solidarity against all acts feeding  hatred. Ministers called  for additional efforts in combating negative stereotyping, intolerance, culture of hate, stigmatization, discrimination and use of violence based on religion or belief and promote instead harmony and respect for the other.

Building on the experience of the past 25 years, the Ministers have recognised the need to prioritise the areas of action where the UfM can play a crucial role and provide for a comparative advantages and agreed to focus the UfM’s work in the coming years on the following specific areas:

1. Environmental and climate action:

We need to step up our efforts to tackle root causes of climate change promoting sustainable, green, low-carbon and circular resource-efficient economies, and reverse the dramatic loss of biodiversity in the Mediterranean region. Therefore, we  welcomed the initiative for an Action plan to make the Mediterranean a model sea by 2030 to be launched at the One Planet Summit.


2. Sustainable and inclusive economic and human development:

Fragmentation in the region has grown in the past year and the gap has been increasing between the countries in the Northern and the Southern shores. Efforts must be focused on the crucial employment challenges, mainly for young people, as well as on the important issue of investment, in order to tackle the very important challenges in this specific domain. We need to tap on the important human capital  and the vast natural resources of our region to deploy its full potential. We need to increase trade exchanges, which will be key for the future of our countries, especially now that the COVID-19 pandemic has harshly hit us. Blue economy can also be an important driver as it has the capacity to encompass growth and sustainability in the Mediterranean basin. Thus, the UfM will intensify regional dialogue in this area and organise a 2nd UfM Ministerial on Blue Economy in Malta in 2021.


3. Social inclusiveness and equality as an essential element in the socio-economic development of the region:

In this regard, the importance to fully involve the younger generations, to empower women and promote gender equality, in terms of rights and opportunities, and to create space for civil society were particularly stressed.


4. Digital transformation:

Digitalisation is a crucial vehicle towards a smart, innovative and sustainable economic development, which will also facilitate trade interlinkages in the region and could become an essential tool to tackle youth unemployment.


5. Civil Protection:

The UfM Platform on Civil Protection should play a key role in the discussion of the common challenges and the concrete actions to develop within the Civil Protection Action Plan for strengthened Euro-Mediterranean cooperation on prevention campaigns, emergency response and crisis management.

Ministerial conferences will take place in the coming months on environment and climate action, sustainable blue economy and energy.

With these objectives in mind, the Ministers reaffirmed the importance to mobilise sufficient financial resources to enable the implementation of UfM labelled projects and  reiterated  their commitment to support the UfM Secretariat, including through more balanced and predictable contributions to its budget.

With the objective to foster a common Mediterranean identity and increase the visibility and ownership of regional cooperation, we declared the 28th of November as the Day of the Mediterranean. Coinciding with the date of the Barcelona Declaration, the Day of the Mediterranean will provide the opportunity to hold cultural events across the region with a view to strengthening ties, promoting intercultural exchanges and dialogue and embracing  the diversity of the region.

Iran: Statement by the Spokesperson on the killing of a government official in Absard

Source: European Union External Action

On 27 November 2020 in Absard, Iran, an Iranian government official and, according to reports, 1 of his bodyguards, were killed in a series of violent attacks. This is a criminal act and runs counter to the principle of respect for human rights the EU stands for.

The High Representative expresses his condolences to the family members of the individuals who were killed, while wishing a prompt recovery to any other individuals who may have been injured.

In these uncertain times, it is more important than ever for all parties to remain calm and exercise maximum restraint in order to avoid escalation which cannot be in anyone’s interest.

254 / Cham: 18-Jähriger ohne Führerausweis flüchtet vor Polizei

Source: Swiss Canton Zug – news in German

Zug, 29. November 2020, 11:00 Uhr


Cham: 18-Jähriger ohne Führerausweis flüchtet vor Polizei

Ein junger Mann unternahm ohne gültigen Führerausweis eine Spritztour mit dem Auto eines Familienmitglieds. Als er im Chamer Dorfzentrum eine Polizeipatrouille erblickte drückte er aufs Gas, um sich einer Polizeikontrolle zu entziehen.

Am späten Freitagabend (27. November 2020), um 22:30 Uhr, wollte eine Patrouille der Zuger Polizei in Cham den Lenker eines Kleinwagens anhalten und kontrollieren. Als dieser die Polizei, die die Frontmatrix “Stopp Polizei” aktiviert hatte, bemerkte, erhöhte er die Geschwindigkeit und fuhr innerorts mit deutlich übersetzter Geschwindigkeit in Richtung Hünenberg See und Rotkreuz. Während der Fahrt schaltete der Mann im dichten Nebel mehrmals das Licht aus. Auf der Strecke von Honau/LU über Gisikon/LU bis Root D4/LU verlor die Patrouille, die dem Flüchtenden mit Sondersignalen und einem Abstand von rund 200 Metern folgte, fast aus den Augen, da dieser die signalisierte Höchstgeschwindigkeit derart massiv überschritt. Im Kreisverkehr in Buchrain/LU verlor der fehlbare Lenker die Herrschaft über sein Fahrzeug und kollidierte mit der Skulptur. Trotzdem setzte er seine Fahrt fort. Durch den Unfall konnte die Patrouille erneut aufschliessen. Rund 200 Meter nach der Unfallstelle hielt der Lenker mit dem stark beschädigten und rauchenden Fahrzeug an und konnte von den Einsatzkräften festgenommen werden.

Der Unfallverursacher wurde zur Kontrolle ins Spital überführt. Die Staatsanwaltschaft des Kantons Zug hat eine Blut- und Urinprobe angeordnet. Das Fahrzeug wurde sichergestellt.

Es stellte sich heraus, dass der Beschuldigte, ein 18-jähriger Serbe, über keinen gültigen Führerausweis verfügt und das Auto von einem Familienmitglied ohne dessen Wissen “ausgeliehen” hatte. Er muss sich bei der zuständigen Staatsanwaltschaft verantworten.

Im Einsatz standen Mitarbeitende der Luzerner Polizei für die Unfallaufnahme, des Rettungsdienstes Luzern, der Staatsanwaltschaften Luzern und Zug und der Zuger Polizei.

Prime Minister of Ukraine discussed trade and economic issues with the Minister of Industry and Technology of Turkey

Source: Government of Ukraine

During a working visit to the Republic of Turkey on November 29, the Prime Minister of Ukraine Denys Shmyhal met with the Minister of Industry and Technology of Turkey Mustafa Varank.

Deputy Prime Minister Oleh Urusky, Infrastructure Minister Vladyslav Kryklii and other government officials visited the meeting as well.

The Prime Minister stressed that Ukraine and Turkey have a strong potential in the field of trade cooperation: “I believe that with the signing of the Free Trade Agreement between our countries, we will double this potential from $ 5 billion in annual turnover today to $ 10 billion that we can reach together”.

Denys Shmyhal offered to Mr. Mustafa Varank to resume regular meetings of the Joint Ukrainian-Turkish Group for Coordination of Strategic Cooperation in the Field of Military-Industrial Complex. According to the Head of the Government of Ukraine, this will allow to effectively implement the agreements reached at the level of the Presidents of Ukraine and the Republic of Turkey.

According to the Prime Minister, Ukraine is interested in collaboration with Turkey in the trade, economic, scientific and technical spheres.

For his part, the Minister of Industry and Technology of the Republic of Turkey commended the significant investment and resource potential of Ukraine. Mr. Mustafa Varank stressed that the Agreement between Ukraine and the EU opens up new opportunities for Ukrainian products in European markets.

Prime Minister met with Turkish investors

Source: Government of Ukraine

During a working visit to the Republic of Turkey on November 29, the Prime Minister of Ukraine Denys Shmyhal held a roundtable with top Turkish companies with a total investment portfolio of $ 5 billion. The meeting was attended by Deputy Prime Minister – Minister of Strategic Industries Oleh Uruskyy, Minister of Infrastructure Vladyslav Kryklii, representatives of the Turkey-Ukraine Business Council within the Foreign Economic Relations Board of Turkey and others.

The participants of the roundtable discussed topical issues of doing business in Ukraine.

The Prime Minister stressed that despite the COVID-19 pandemic, Ukraine and Turkey are actively developing bilateral relations.

“As the President of Ukraine noted during his meeting with Turkish entrepreneurs almost a year ago, Ukraine and Turkey have a huge potential for cooperation and economic growth,” said Denys Shmyhal.

According to the Head of Government, Ukraine has recently taken a number of concrete steps towards investors. “This is the liberalization of the agricultural land market, reform of the healthcare sector, the development of e-government, as well as the facilitation of conditions for doing business and investing, including the development of public-private partnership,” stressed the Prime Minister.

Denys Shmyhal accentuated that Ukraine has ambitious plans for the construction and reconstruction of Ukrainian infrastructure: roads, bridges, energy and medical infrastructure, as well as infrastructure in the field of water supply and recycling.

“The tools that will enable us to develop these areas are public-private partnerships and state guarantees. We are currently working and have already made significant progress in the legislative plane towards promoting such instruments in Ukraine,” said the Prime Minister.

The Prime Minister informed Turkish entrepreneurs that the most promising areas for investment in Ukraine are the agro-industrial complex, processing industry, energy, infrastructure, tourism, as well as those areas in which Ukraine demonstrates a competitive advantage, including IT sector.

“I assure you that the time has come for new, even larger success stories between our states. Ukraine has a wide range of proposals for investment and implementation of modern projects,” emphasized Denys Shmyhal.

The Prime Minister also stressed that Ukraine and Turkey should not slow down their cooperation: “One of the significant steps aimed to promote the development of our bilateral relations should be the signing of a Free Trade Agreement”.

Minister of Infrastructure of Ukraine Vladyslav Kryklii, for his part, told representatives of Turkish companies that a law on concessions had been adopted in Ukraine previous year, thus giving a positive signal to investors. He also called on those present to participate in concession tenders and privatization auctions in Ukraine.

France is standing up against extremism, without compromising its values.

Source: France-Diplomatie – Ministry of Foreign Affairs and International Development

Published on November 28, 2020

Opinion by Ambassador of France to the United States Philippe Etienne, published in The Washington Post (November 28, 2020)

When I first I arrived in Washington in June 2019, I discovered that many people had a lingering misunderstanding about the relationship between the state and religions in France — what we call laïcité (which cannot really be accurately translated just by the word “secularism”).

But recent events, including the horrible murders of Samuel Paty, a teacher in Conflans-Sainte-Honorine, and of three Catholic worshipers — Vincent Loquès, Simone Barreto Silva and Nadine Devillers — at a church in Nice, have generated reactions in social media and in the U.S. press that have been met with resentment in my country for being totally unfair and sometimes based on false information.

First, let me note that my country enjoys extraordinary religious and spiritual diversity. France has the largest Muslim population in Europe, but also the world’s third-largest Jewish population, after Israel and the United States. It was among the first countries, for instance, to create a Muslim army chaplaincy. The French Council of the Muslim Faith (CFCM) has condemned the recent attacks on our country in the strongest possible terms and testified about the situation of French Muslims, who are completely free to practice their religion, like all other French citizens, since this freedom is protected under our laws (laïcité). This being said, we refuse to allow certain foreign countries to exert undue influence through the exercise of any religion. Hence our latest efforts to begin training our own imams and to establish oversight of foreign financing of mosques.

With respect to freedom of speech, which is enshrined in our Constitution, we believe it includes the freedom to publish critical comments and caricatures. The only limit to free speech is incitement to hatred, such as Holocaust denial, which is a criminal offense in France. We look forward to working further with other democratic countries and with tech platforms to combat terrorist content online, especially since New Zealand Prime Minister Jacinda Ardern and French President Emmanuel Macron launched the Christchurch Call to Action last year in Paris. Our law is giving tools to our justice system to act against people who post videos on the Internet calling for retaliatory actions against teachers and other civil servants, including now the security forces (A number of police and gendarmerie officers have died in terrorist attacks in recent years).

Measures recently proposed by our government and submitted as draft legislation to our Parliament pursue two other major intertwined goals.

We are combating the terrorist threat represented by the networks that attack France and other countries (see the most recent attack in Austria). My country may be targeted to a greater extent because we are at the forefront of this war, in the Middle East and the Sahel, but the threat is universal, and its hundreds of victims in France in past years remind us of the toll paid in so many other parts of the world (the greatest number of victims of such attacks being Muslim themselves). These networks act both on the Internet, where they spread propaganda, and through direct attacks such as the one in Paris on November 13, 2015.

We are combating radicalization in our country — never a religion or a community. We are aware of the shortcomings of our own policies in areas including education and housing, and the need to improve them. But it is unacceptable for certain groups to conceal activities aimed at radicalizing their members. Schools lie at the heart of this challenge. It is unacceptable to see some young children, particularly girls, prevented from attending our schools and raised separately from the rest of society.

It is also unacceptable to see in 21st-century France some practices, such as forced marriages, that are contradictory to basic women’s rights. A new bill, which does not contain any mention of any religion, will oppose that. Applicable to all, it will also implement a core, universal principle of our republic: the right of every child to go to school and the duty of families not to prevent their children from exercising this right.

It is really important for us to explain here in the United States that these measures, at their core, are trying to efficiently oppose those who actually want to divide us, those who promote hatred between communities and those who, in the end, wish to destroy such fundamental values as the equality between men and women.

We share these values of freedom and equality with the United States. We are struggling in both countries to get it right. But while it is the United States’ oldest ally, France has quite a different history. We must obtain accurate information, check the facts and talk to each other before commenting on each other’s practices. And then, indeed, let us disagree, let us debate, let us discuss those practices — but on the basis of facts and on the commitment to build and perfect our democracy and freedom.

Statement by Foreign Minister Ine Eriksen Søreide on the situation in Tigray

Source: Government of Norway
Statement by Foreign Minister Ine Eriksen Søreide on the situation in Tigray –

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‘Reports on fighting in Mekelle are of grave concern. Together with the international community, not least the African Union, we urge the parties to show restraint and protect civilians’, says Foreign Minister Ine Eriksen Søreide.

‘Respect for international humanitarian law is critically important. The conflict must end and peace be restored in Tigray’, says the minister.

Luis de Guindos: Interview with Helsingin Sanomat

Source: European Central Bank


Interview with Luis de Guindos, Vice-President of the ECB, conducted by Petri Sajari on 24 November 2020

28 November 2020

What are the key risks for the euro area recovery at the moment?

The fourth quarter of 2020 will be marked by the measures taken by euro area governments to deal with the new wave of coronavirus (COVID-19) infections that started after the summer. While these containment measures are generally not on the same scale as those taken in March or April, they will have an impact on the economy. We had a welcome surprise in the third quarter, but our quarter-on-quarter growth projection for the fourth, which was slightly above 3%, will not be met. Looking at leading indicators such as the purchasing managers’ index, negative quarter-on-quarter growth is now the most realistic scenario for the end of the year.

The main issue in the near future will be the availability of the vaccine and the precise details of how and when it is to be rolled out. The news is having a positive impact on market sentiment, but the implementation of the vaccine warrants our attention. Hopefully, a very high percentage of the population will soon be vaccinated and the nightmare of this pandemic will begin to draw to a close.

According to the International Monetary Fund, the pandemic will have the largest impact on the eurozone economy. What do you think the long-term damage of this crisis will be?

There are indeed factors that cause concern. The first long-term consequence of the pandemic is that public debt-to-GDP ratios will increase by between 15 and 20 percentage points. Similarly, leverage in the private, mainly corporate, sector will also increase. And there is a risk, which we need to avoid, of long-term scars in the labour market. Currently we see a decoupling between the drop in economic activity and the evolution of the labour market, i.e. unemployment levels have not risen by as much as you would expect with such a deep decline in activity. This is because the temporary work schemes implemented by governments across Europe are avoiding a sharp increase in unemployment.

We believe the economy will start to recover in 2021 and continue its revival in 2022. It will be essential that those who are currently on furlough schemes continue to belong to the labour force, and that those who have lost their jobs can rejoin the labour market. We can then not only recover the level of economic activity we had before the pandemic, but also the level of employment.

If the crisis gets worse, which now seems inevitable, what more will the ECB be able to do?

As I’ve mentioned, the fourth quarter will be worse than forecast, but the medium-term outlook – mainly because of the ray of hope brought by news of the vaccine – looks brighter. However, when we assess our instruments we do not only look at economic output. We also look at the evolution of inflation, which is our primary mandate. Inflation will be negative until the end of the year and we expect that it will turn positive next year because some drivers of this negative inflation will be reverted, for instance the reductions in value added tax or the sharp decline in oil prices caused by the lack of economic activity. All in all, we expect inflation to be close to 1% in 2021 and to see it moving up towards 1.2% or 1.3% in 2022.

As President Lagarde indicated after the last Governing Council meeting, we will recalibrate our instruments in December and this recalibration mainly involves our targeted longer-term refinancing operations (TLTRO), which is an instrument to inject liquidity into the banking sector, and the pandemic emergency purchase programme (PEPP), which right now comprises an envelope of €1.35 trillion to be implemented until mid-2021.These are the two main tools if the situation gets darker, although the arrival of the vaccines brings hope regarding the medium-term outlook.

Is there a risk that low interest rates, combined with the asset purchase program and the PEPP, are creating zombie companies that would not have survived under normal financial conditions and are therefore an obstacle to creative destruction?

The interest rate environment is not only a consequence of monetary policy decisions. It is also the consequence of a combination of other factors, such as globalisation, digitalisation and demographics. These have made the natural interest rate, which is a real variable rather than a monetary variable, decline over time. This, combined with very low inflation expectations, has created a situation where nominal interest rates, which are the ones we observe in the markets, are very low. But this is not only a result of monetary policy – it also reflects a decline in the natural interest rate.

Furthermore, low rates have been very useful in sustaining economic activity. Without them, the process would most likely not just have been one of creative destruction but one of simple destruction of companies and a decline in GDP.

Some might also say that the high debt levels in the economy will lead to zombie banks and zombie companies that constrain growth because of extraordinary debt burdens. What is your assessment of this?

As I mentioned earlier, there will be a legacy of debt after this crisis, in both the public and the private sector, and we will have to take this into consideration. But there is no alternative in the short term. The first line of defence against the consequences of the pandemic has been, and had to be, fiscal policy. The alternative – doing nothing – would have had much worse consequences in the short term and also in the medium and long term.

Regarding private debt, when you experience a decline in revenues as substantial as that experienced by many European companies, you need to try to bridge the gap and survive until the pandemic is over. And to do that you need to take on debt. There’s no alternative. Once the pandemic is over, issues such as fiscal sustainability and private lending will come to the fore, but in the short term there is no alternative.

Let’s move to the banking system. What are the main vulnerabilities in the eurozone banking system?

European banks have more capital and are more liquid and resilient than before the global financial crisis. But their weak point is very low profitability, which is reflected in very low valuations. This is not trivial, as it has an impact on their capacity to raise capital in the markets or generate it organically. It also makes it challenging to achieve an adequate level of provisioning that is in line with developments in the economy. Profitability was already the key weak point before the pandemic, and the crisis has aggravated it. Banks will also suffer a decline in revenues and the level of non-performing loans (NPLs) will go up. We expect the bulk of the NPL wave to come in the first half of next year.

Do you believe there will be consolidation via mergers and acquisitions in the eurozone banking sector?

We have started to see some consolidation, for instance in Italy and Spain. So far it’s domestic consolidation. It would be good if we also saw some cross-border consolidation. Consolidation is not a target in itself, but it could be a way to reduce excess capacity and costs.

The ECB started its asset purchase programme in early 2015 and abandoned it in late 2018. In autumn 2019, it was started again, but inflation remains very low. What are the key factors behind this extraordinarily low inflation?

Both headline and core inflation have been low over the last ten years and, as I mentioned, there are some structural factors, such as digitalisation, globalisation and demographics, that help explain why. In 2015 and 2016, there was a clear risk of deflation and the ECB acted to avoid it and to anchor inflation expectations. It remains to be seen what will happen with some of these factors. For instance, globalisation will likely not be as intense as it has been in recent decades, as the pandemic could make value chains more regional, which might have an impact on inflation. However, according to our projections inflation will remain low, and we will therefore keep monetary policy accommodative so that inflation can converge to our medium term aim.

In July 2020 the European Union introduced a recovery plan worth €750 billion. What is your take on that? Is there a risk that States may use it in a manner that does not promote structural changes?

The Next Generation EU fund is a very positive response, not only because of its size but also because it sends a very clear signal of the common willingness to defend Europe and the euro area. And regarding the funds, indeed, it’s not about spending but about spending properly, through programmes that can transform the European economy and accompany the structural reforms needed to improve productivity and enhance competitiveness. The European Commission will monitor this spending. If this money is not spent properly, we will be missing a great opportunity to make the European economy greener, more digital and more competitive.

Since introducing the PEPP in March, the ECB has definitely been able to calm the markets, but many people might still wonder how the programme has supported the real economy and households. What is your answer?

Calming the situation in the sovereign debt markets also brought reassurance to other markets, which has had a positive impact on the financing conditions that banks offer to their clients, households and companies. By avoiding fragmentation in the sovereign debt markets, we also avoided a credit crunch. Furthermore, PEPP also includes corporate sector purchases such as bonds or commercial paper.

Do you believe the attitude towards public debt has changed for good? Or is this change temporary, based on the fact that extraordinary times require extraordinary actions to support the economy?

Fiscal policy has to be the first line of defence, and fiscal deficits will be the consequence of the measures that governments have taken and will continue to take to address the impact of the pandemic. Public expenditure has to focus on the pandemic, for instance on furlough or public guarantee schemes, healthcare, etc. As a result, we will see larger public debt ratios. But in the medium term, once the pandemic is over, the situation will need to be addressed to ensure the sustainability of public finances.

So, basically, your answer is that you don’t believe that there has been a major shift in attitude towards public debt?

The big change is that the pandemic has caused a public health crisis which demanded a fiscal response. There was no alternative and, in the medium term, we will see higher public debt ratios. We will have to deal with that once the pandemic is over.

The response to this crisis has been quite different from what it was ten years ago, when the eurozone crisis began, because then the constant narrative was that we cannot allow public debt to increase.

This time is different. This crisis hasn’t been triggered by banks or financial stability troubles, as was the case in 2008. This is an exogenous shock of a magnitude we have not seen since the end of the Second World War. The policy response was the only one available: fiscal measures as the first line of defence, accompanied by monetary policy. Not acting rapidly on the fiscal side would have provoked an even deeper decline in GDP, and fiscal policy would also have had to react to that.