Paolo Gentiloni will be late for the interview on Monday afternoon. The EU Commissioner for Economic Affairs has just presented his authority’s current economic forecast. It was not a nice task this time: Growth cut in half with high inflation – Europe is heading towards a recession and possibly the stagflation feared by economists: economic stagnation with rapidly rising prices. In an interview with WELT and other European media, Gentiloni warns national governments to adjust their spending to the changed conditions.
WORLD: In the EU countries, government debt has risen sharply during the pandemic and is likely to remain high. How dangerous is that in the current difficult economic situation?
Paolo Gentiloni: Of course, the high debt levels in Europe worry us. But we also see them declining, although not particularly quickly. For this reason, countries with high levels of debt should not commit themselves now to long-term spending that permanently burdens the national budget. You can already hear it: Yes, the debt worries us.
WORLD: What does it mean for the heavily indebted euro countries if the European Central Bank raises interest rates in the summer, as currently announced? Is there a risk of a new debt crisis?
Gentiloni: No, I can reassure you. The banking system in the euro zone is much more robust than it was ten or twelve years ago. We also expect that governments in the euro zone will be able to borrow on favorable terms well into the coming year. Real interest rates for governments will remain negative on both short and long-term debt.
And the particularly highly indebted countries in particular have a high proportion of long-term bonds, so they will only feel the consequences of higher interest rates in a few years. But of course, higher interest rates will make debt servicing more expensive. This applies to everyone, consumers, businesses and governments. That’s why we recommend all governments not to take on any new debt next year. Instead, they should use money from the EU recovery fund for investments.
WORLD: Is the recovery fund 2.0 coming soon? In view of the economic strain caused by the Ukraine war and the increasing military spending, some member states are already demanding a new pot of money worth hundreds of billions of euros at EU level, which is also to be financed through joint debt.
Gentiloni: The Corona reconstruction fund has been a success so far. We have already disbursed EUR 100 billion to Member States and to date national governments have delivered on all commitments and agreed targets. We will continue to monitor very closely that the countries handle the money responsibly. The reconstruction fund is therefore a good model for future spending. I don’t want to make the Corona reconstruction fund a permanent institution. But common EU debt is a model for the future.
WORLD: The commission is said to be considering financing the reconstruction of Ukraine with such new joint debts.
Gentiloni: The EU could incur new joint debts for the reconstruction of Ukraine. That’s an option that leaders can opt for. But the Commission will not specifically propose that. We will outline a number of ways in which Ukraine’s reconstruction can be funded, but we will not be binding on any of these options.
WORLD: It’s probably too early for that.
Gentiloni: Exactly. At the moment, the main focus is on supporting Ukraine with its current expenditure. We must prevent Ukraine from going bankrupt. The EU has therefore already transferred 600 million euros to the Ukrainian government and another 600 million will follow this week. The International Monetary Fund estimates that Ukraine is short of €5 billion a month to cover current government spending.
The EU must therefore provide additional funds for the Ukrainian government in addition to the 1.2 billion euros already pledged so that it can cover its current expenses. We will discuss this with the finance ministers of the G7 in Bonn on Thursday. And at the same time we are thinking about how long-term the reconstruction of Ukraine should look like.
WORLD: What role can and must the EU play when the country’s reconstruction becomes an issue?
Gentiloni: The reconstruction must be well coordinated between the EU member states. The European Commission and the Ukrainian government must therefore steer the efforts of the EU countries together. Ukraine’s reconstruction will run parallel to its accession to the EU. Coordination is also needed worldwide. We are not yet deciding how the reconstruction is to be financed. That could be an issue at the EU summit later this month. But there will be nothing about that in the proposal that we will present on Wednesday.
WORLD: What will you propose to the member states instead?
Gentiloni: We drew up a concept for the reconstruction of Ukraine. We will present a legal construction for the reconstruction to the member states and make suggestions on how the work should be prioritized and coordinated. Rebuilding Ukraine will be the task of a generation. Together with the government in Kyiv, we made an initial estimate of how extensive the reconstruction could be and how expensive it would be. But we don’t break anything over the knee. It will take a while before it is clear what the amounts are, but it is an important signal that we are already starting these considerations.
“Everything on shares” is the daily stock exchange shot from the WELT business editorial team. Every morning from 7 a.m. with our financial journalists. For stock market experts and beginners. Subscribe to the podcast on Spotify, Apple Podcast, Amazon Music and Deezer. Or directly via RSS feed.