European Central Bank warns virus response could renew fears of euro breakup

Updated 27 May, 2020

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The ECB forecasts that eurozone public debt as a share of output will grow by between seven and 22 percentage points in 2020 as governments borrow hundreds of billions to support their economies. — AFP/File
The ECB forecasts that eurozone public debt as a share of output will grow by between seven and 22 percentage points in 2020 as governments borrow hundreds of billions to support their economies. — AFP/File

FRANKFURT MAIN: A vast fiscal fightback to the coronavirus crisis unleashed by eurozone governments could raise questions about capitals’ ability to repay debts and revive the threat of countries exiting the single currency, the European Central Bank warned on Tuesday.

“The increase in public debt comes on top of already higher debt levels in some sovereigns,” ECB Vice-Pre­si­­dent Luis de Guindos said.

“In the medium term we have to pay attention to the fiscal sustainability situation,” de Guindos added, presenting a report that warned of possible increase in fears of “redenomination risk” — the danger of some countries quitting the euro or the single currency collapsing altogether.

Indicators of the risk have surged for Spain and Italy in the first half of 2020, while France’s have picked up slightly. The ECB forecasts that eurozone public debt as a share of output will grow by between seven and 22 percentage points in 2020 as governments borrow hundreds of billions to support their economies, driving the total debt-to-GDP ratio in the region from 86 to almost 103 per cent.

In normal times, eurozone countries target public debt below 60pc, although that boundary has been suspended during the pandemic crisis.

“Different countries have taken fiscal stimuli measures and those are the correct ones in order to address the short-term problems produced by the crisis,” de Guindos said.

Published in Dawn, May 27th, 2020