The SAFE Pandemic research group of six European and US economists, including UvA professor Arnoud Boot (Finance Group), has published its recommendations for a pan-European Pandemic Equity Fund in a VOX CEPR Policy column and a SAFE Research letter.
The key message is that increasing debt levels at corporations will ultimately undermine the European recovery, cause banks to fail (via loan losses), and ultimately threaten governments. More equity in businesses (in Dutch: eigen vermogen) is needed to improve resilience. For the European and national economic policies combatting the crisis this offers a fundamentally different perspective, as all these measures effectively increase the indebtedness of businesses and countries. Given also the problematic state of banks, and the anticipated higher loan losses, the equity-proposal might offer relief for banks too, as better capitalized businesses (more equity) will reduce banks’ exposures.
The proposal has been supported by major European commentators and newspapers. Wolfgang Münchau writes in his influential Financial Times column (April 27, 2020) about ‘The big attraction of this plan,’ that ‘it improves the strength of corporate balance sheets’, and is the ‘more appropriate instrument’.