PARIS – For almost six months, Philippe Boreal and 120 of his co-workers were paid to stay home from their jobs at a luxury hotel in Cannes that was forced to close because of the pandemic.
Boreal, a caretaker for 20 years, is grateful for the aid, which is funded by the French government under a comprehensive plan to rescue people and companies from economic calamities. But as the Covid-19 crisis continues, he wonders how long that generosity can last.
“At some point, you ask yourself, ‘How are we going to pay for all this?’” Asked Boreal, who is receiving more than 80% of his salary, allowing him to pay essential bills and buy food for his wife and teenage daughter . Almost every other hotel along the Cannes waterfront also retains employees on state-funded licenses – as do countless companies across Europe.
“The bill looks so big,” said Boreal. “And it keeps growing.”
For families trying to balance their budgets each month, the fact that European countries are incurring trillion-euro debts is staggering. In France alone, the national debt reached 2.7 trillion euros (US $ 3.2 trillion) and will soon exceed 120% of the economy.
But governments are far from worrying about increasing debt now, as lower interest rates enable them to spare no expense to protect their pandemic economies.
And they spend.
Billions of euros are being used to nationalize payrolls, suppress bankruptcies and prevent mass unemployment. Trillions more are being set aside for future stimulus to fuel a desperately needed recovery.
The European Union overturned its policies to finance generosity, breaking decades of strict limits on deficits and overcoming Germany’s visceral resistance to high indebtedness.
Germany-led austerity mantras dominated Europe during the 2010 debt crisis, when extravagant spending in Greece, Italy and other southern eurozone countries broke the currency bloc.
The pandemic, which killed more than 450,000 people in Europe, is seen as a completely different animal – a threat that plagues all economies in the world simultaneously. Although German authorities initially warned of excessive spending on the pandemic, European lawmakers agree that it would be crazy to cut spending or raise taxes now to pay off debts incurred to contain the economic effects.
These debts are rising to levels never seen since World War II. In some European countries, debt is growing so fast that it exceeds the size of national economies.
But interest rates for many rich countries are around zero because of years of low inflation. Although the amount of debt that countries have incurred has increased, the amount that governments pay to pay for debt service has not increased.
So, can there be something like free lunch, after all? In the current unusual world of zero interest, perhaps so.
Governments are borrowing heavily, issuing a growing stack of bonds. The European Central Bank is helping by buying large portions of that debt, pushing already low interest rates further and creating a mountain of cheap money for countries to exploit.
In the United States, President Biden is pursuing an aggressive strategy to combat the pandemic toll with a $ 1.9 trillion economic aid plan. While the national debt is now almost as big as the economy, advocates say the benefits of spending a lot now outweigh the costs of higher debt.
In Europe, pandemic spending has so far been mainly focused on people and companies fluctuating during the crisis. For Boreal and millions like him across Europe, support has been vital to survive an explosive recovery that now threatens to turn into a double-dip recession.
“Without the aid, things would be much worse,” said Boreal, who receives a net salary of € 1,700 (about $ 2,050) a month during the leave, financed by the state. “It is allowing us to overcome the pandemic and, hopefully, get back to work soon.”
For now, this expense is affordable. And government debt may never have to be paid in full if central banks continue to buy it. Countries can basically roll over their debts at low interest rates, an operation similar to refinancing a mortgage.
The European Central Bank effectively lent about € 1.2 trillion to eurozone governments last year and promised to continue through the summer. Public debt in the eurozone could increase by up to € 4 trillion by the end of 2023, according to the Institut Montaigne, an independent think tank in Paris.
“If there is no risk of a return to inflation, the sky is the limit for debt,” said Nicolas Véron, a senior researcher 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 may increase if the investment stimulus revives growth too quickly, forcing central banks to curb easy money policies. If borrowing costs rise, weaker countries may fall into the debt trap, struggling to repay what they owe.
“If inflation starts to return, but there is no growth, the situation will be much more complicated,” said Simon Tilford, director of Oracle Partnership, a strategic planning company in London.
And if the debt accumulates year after year, governments will have a harder time stimulating their economy when the next recession arrives.
For people charged with running their savings during the pandemic, these problems seem far away.
“We need to repay the debt, of course, and devise a strategy to repay the debt,” said Bruno Le Maire in an interview with a small group of journalists. “But we will not do anything before growth returns – that would be crazy.”
For the strategy to work, Europe must act quickly to ensure a robust recovery, economists warn. Although leaders approved a € 750 billion ($ 857 billion) stimulus deal last year, countries have not released stimulus spending nearly as quickly as the United States to kick-start a renaissance and create jobs.
“With interest rates at historic lows, the smartest thing we can do is to act grand,” New Treasury Secretary Janet L. Yellen told senators during her confirmation hearing, adding that not doing so can hinder recovery.
In contrast, “most of what has been done in Europe is support for survival,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Current policies alone will not bring growth back.”
The International Monetary Fund expects growth to return to 5.1% this year in the United States, where Congress authorized a $ 900 billion package in late December. Europe will be left behind with a 4.2 percent recovery, the fund said.
As a more contagious variant of the virus runs through Europe, triggering new blockages, the recoveries that were expected in the summer may be delayed, with implications for national finances. The suspension of vaccine distribution adds an additional complication to hopes of economic expansion.
Thomas Flammang, 28, a materials engineer at an aerospace consulting firm in Rouen, has no illusions about the weakness of the recovery.
During the first few months on leave, he expected things to return to normal. Stuck at home, he took long walks and caught up on his reading. But as the weeks turned into months, the company’s order books never increased enough to get him back to work.
Without a complete reopening of the economy, things tend to get worse. “For now, my company has saved our jobs,” said Flammang. But if things don’t get better, he said, 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 retire, the cost of the climate crisis,” said Flammang.
“And now we are using the press for the pandemic and we will have to return all that help,” he said. “It’s maddening when you think about it.”
Antonella Francini contributed reports.