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Why euro countries are unlikely to go bankrupt despite the Corona crisis

YANN SCHREIBER / AFP via Getty Images

Countries like Greece and Italy have been in even greater debt since the outbreak of the Corona crisis. This shows the spring forecast of the European Commission.

However, it is unlikely that highly indebted countries will go bankrupt, says economist Jürgen Matthes from the Cologne Institute for Economic Affairs to NewsABC.net.

There are enough mechanisms to keep the system going. The only important thing is that there is no speculation spiral on the secondary market for finance.

In the Corona crisis, the countries of the European Union are spending the economy heavily to at least limit the recession. They grant loans to companies, subsidies for the wages and salaries of employees in short-time work or emergency aid to the self-employed and small entrepreneurs. The states need money for this.

When states need capital, they issue bonds. The European Central Bank (ECB) indirectly supports this with the Pandemic Emergency Purchase Program (PEPP) in the amount of 750 billion euros and acquires government and corporate bonds.

ECB presses interest rates

However, the ECB does not buy the bonds directly from the states if they are issued on the primary market, this would be direct public financing, but if the bonds are traded among investors. So it doesn’t affect their price in advance. As the ECB increases the demand for the paper, the yield, i.e. the interest, falls.

The spring forecast of the European Commission shows how serious the economic consequences of the corona pandemic really are for the European economy. According to her, economic output in the euro area will shrink by 7.75 percent in 2020. “The immediate consequences for the global economy will be far more serious than those of the financial crisis,” said Commission Vice President Valdis Dombrovskis.

The most heavily indebted country in the EU is Greece with a rate of 196.4 percent of gross domestic product (GDP). That was 17,761 euros per capita in 2019. Germany generates 41,342 euros per capita. Italy’s debt has increased the most. There, the rate rose from 134.8 to 158.9 percent in 2020.

“I think the euro is unlikely to break”

“In view of the crisis, it cannot be completely ruled out that the danger of a financial crisis arises,” says Jürgen Matthes NewsABC.net, head of the Competence Area International Economic Order and Business at the Cologne Institute for Economic Affairs (IW). “However, I think it is unlikely that countries will go bankrupt or that the euro will break. There are too many instruments to prevent such situations. And in the event of an impending escalation, further rescue measures would be created, too much is at stake for that. ”

If creditors no longer give money to a state or if states can no longer reduce their debt through tax increases, this means for insolvency. The consequences of a state bankruptcy would be fatal. States could no longer perform public services; there would be no more money for education, infrastructure, pensions or salaries.

“The important thing is that we have to prevent a loss of confidence and a speculation spiral on the secondary market. Investors in the financial market must not panic. Then the demand for government bonds could decrease rapidly and their interest rates could rise sharply, possibly to the point of default. Because expectations are ultimately traded on the financial market, psychology plays a major role in the financial world. ”

This is how high the unemployment rate is in the euro countries

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