Policy brief: Debt sustainability and a sustainable Covid recovery

13 July 2020

Policy brief

Overcoming the dilemma between debt and environmental sustainability in the discussions over a post Covid-19 recovery package.

As EU heads of state and government discuss a Covid recovery package, Finance Watch publishes a briefing note calling for a coherent economic approach that promotes a green recovery and avoids budget orthodoxies that could be self-defeating in today’s circumstances.

The sustainability of public debt created to fund the Covid recovery will depend ultimately on whether the funds are used to make the EU’s economy more sustainable. With national budgets already under strain, this will require flexibility in the rules and the choice of instruments; applying budget rules too rigidly could be self-defeating and lead to financial instability if it prevents the investments needed for a sustainable economic transition.

The briefing note warns that without proper guidance and limits, stimulus measures directed at corporates and financial markets could institutionalise moral hazard, leading to waste and resource misallocation. It calls for green and social conditions to promote sustainable activities and support citizens and businesses to move away from unsustainable activities.

Key points:

  • Recovery and support packages must avoid institutionalising moral hazard and creating zombie companies and windfall profits that blur the boundaries between market and state.
  • Support for financial markets must avoid socialising risk and undermining financial markets’ ability to allocate resources effectively.
  • Recovery measures must be tied to green and social conditions that promote sustainable activities and fund the transition away from unsustainable activities.
  • Stability and Growth Pact rules must be relaxed for well-specified and targeted sustainability-oriented investments coordinated at EU level.
  • High levels of public debt must be managed pragmatically, without artificial constraints on potential monetary solutions.