State equity support runs risk of moral hazard

One of the arguments deployed by advocates of the EU’s landmark €750bn recovery package agreed last week was that some governments, particularly in Europe’s highly indebted south, had less fiscal leeway to support their businesses and workers than others. This could create severe competitive distortions in the single market and accentuate economic divergence in the eurozone, imperilling the stability of the single currency.

“We need to make sure that we protect the functioning of the internal market,” Spain’s finance minister Nadia Calviño told the FT in April. “It cannot be that some countries are able to support their economies in a more generous manner than others.”

Early responses to the pandemic supported the contention. Liquidity support to businesses and in some cases direct government purchases of corporate bonds account for the majority of public aid in all of Europe’s big economies. By late March Germany had earmarked a whopping €756bn in credit guarantees for its companies, nearly eight times as much as Spain or Italy, although they have since doubled their commitments. 

In May, the European Commission said Germany alone accounted for just over half of overall state aid in the EU. German government support for air carrier Lufthansa is nine times…

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