PARIS – For almost six months, Philippe Boreal and 120 of his colleagues have been paid to stay off their jobs at a luxury hotel in Cannes that had to close due to the pandemic.
Mr Boreal, who has been a caretaker for 20 years, is grateful for the help funded by the French government as part of a comprehensive plan to save people and businesses from economic disasters. But as the Covid-19 crisis drags on, he wonders how long the Largess can last.
“At some point you ask yourself, ‘How are we going to pay for all of this?’” Asked Mr. Boreal, who collects more than 80 percent of his paycheck so he can pay important bills and buy groceries for his wife and teenage daughter. Almost every other hotel on the Cannes coast has employees on government-funded vacations – as do countless companies across Europe.
“The bill just seems so big,” said Mr Boreal. “And it keeps growing.”
For households trying to balance their budget each month, the fact that European countries are running into trillions of euros in debt is staggering. In France alone, national debt has exceeded 2.7 trillion euros (3.2 trillion US dollars) and will soon exceed 120 percent of the economy.
However, governments are far from worrying about the accumulation of debt at the moment as the low interest rates mean they don’t have to cut costs to protect their economies from the pandemic.
And they spend it.
Billions of euros are being used to nationalize payrolls, suppress bankruptcies and prevent mass unemployment. Trillions more are earmarked for future stimulus to fuel a much-needed recovery.
The European Union has changed its large-volume funding policy by breaking decades of strict deficit limits and overcoming German visceral resistance to high debt.
Germany-led austerity measures dominated Europe during the 2010 debt crisis, when lavish spending in Greece, Italy and other countries in the southern eurozone drove the currency bloc towards a breakup.
The pandemic, which killed over 450,000 people in Europe, is viewed as a very different animal – a threat that is devastating all the world’s economies at the same time. While German officials initially warned of spending spiraling out of control for the pandemic, European politicians agree that it would be foolish to cut spending or raise taxes now to pay off the debts that came up to combat the economic impact are.
These debts are rising to levels not seen since World War II. In some European countries, debt is growing so fast that it is larger than the size of national economies.
However, due to years of low inflation, interest rates are zero for many rich nations. While the amount of debt that countries have taken on has increased, the amount that governments pay to service the debt has not increased.
So can there be such a thing as a free lunch? In the currently unusual world without interest, maybe yes.
Governments borrow heavily and issue an ever growing pile of bonds. The European Central Bank is helping by buying large chunks of this debt, lowering the already low interest rates even further, and creating a mountain of cheap money for countries to tap.
In the United States, President Biden is pursuing an aggressive strategy to fight the pandemic with a $ 1.9 trillion economic aid plan. While national debt is now almost as high as the economy, proponents say the benefits of high spending outweigh the costs of higher debt.
In Europe, spending on pandemics has so far mainly focused on propelling people and businesses through the crisis. For Mr Boreal and millions like him across Europe, the support has been critical to surviving a bubbling rebound now threatening to turn into a double-dip recession.
“It would be a lot worse without the help,” said Boreal, who is on vacation on a state-funded after-tax salary of 1,700 euros (about $ 2,050) a month. “It allows us to get out of the pandemic and hopefully get back to work soon.”
Updated
Apr. 17, 2021, 7:58 p.m. ET
Currently, such expenses are affordable. And government debt may never have to be repaid in full if central banks keep buying it. Countries can essentially extend their debt at low interest rates, which is similar to refinancing a mortgage.
The European Central Bank effectively lent around 1.2 trillion euros to the governments of the eurozone last year and pledged to continue the summer. According to the Institut Montaigne, an independent think tank in Paris, national debt in the euro area could rise by up to 4 trillion euros by the end of 2023.
“If there is no risk of inflation returning, the sky’s the limit for debt,” said Nicolas Véron, senior fellow at the Peterson Institute for International Economics in Washington.
And that points to the risk of this strategy. Some economists fear that inflation and interest rates could rise if stimulus investments revive growth too quickly and force central banks to curb simple money policies. When the cost of borrowing increases, weaker countries could fall into a debt trap and find it difficult to repay their debts.
“When inflation returns but there is no growth, the situation becomes much more difficult,” said Simon Tilford, director of Oracle Partnership, a strategic planning firm in London.
And as debt builds up year after year, governments will find it harder to stimulate their economies when the next recession looms.
For those responsible for steering their economies through the pandemic, these problems seem far away.
“Of course we have to repay the debt and work out a strategy to pay off the debt,” said Bruno Le Maire in an interview with a small group of journalists. “But we’re not going to do anything until growth returns – that would be insane.”
For the strategy to work, Europe needs to act quickly to ensure a robust recovery, economists warn. While leaders approved a € 750 billion ($ 857 billion) stimulus agreement last year, countries haven’t sparked stimulus spending nearly as quickly as the United States needs to kickstart a revival and create jobs.
“With interest rates at all-time lows, the smartest thing we can do is to trade big,” new Treasury Secretary Janet L. Yellen told Senators during her confirmation hearing, adding that a failure could mess up a recovery.
In contrast, “most of what has been done in Europe is survival support,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Current policies alone will not bring growth back.”
The International Monetary Fund expects growth this year to rebound to 5.1 percent in the US, where Congress approved a $ 900 billion package in late December. Europe will lag behind with a recovery of 4.2 percent, the fund said.
The more contagious variant of the virus is racing through Europe and triggering new locks. Restores that were expected back in the summer may be delayed and affect national finances. The discontinuation of the introduction of vaccines further complicates hopes of economic expansion.
Thomas Flammang, 28, materials engineer with an aerospace consultancy in Rouen, has no illusions about the weakness of recovery.
During his first few months of vacation, he kept expecting things to go back to normal. Stuck at home, he took long walks and caught up with his reading. With weeks stretching out into months, the company’s order books never took up enough time to get back to work.
Without a full reopening of the economy, things are likely to get worse. “At the moment my company has saved our jobs,” said Flammang. But if things don’t improve, layoffs may be inevitable.
He sees little light at the end of the tunnel.
“Our generation will have to pay for many things: the baby boomers who are going to retire, the costs of the climate crisis,” said Flammang.
“And now we are using the printing press for the pandemic and we have to repay all that help,” he said. “It’s crazy when you think about it.”
Antonella Francini contributed to the reporting.
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