Eurozone governments have racked up close to €1 trillion of budget deficits on emergency measures to combat the economic pain caused by Covid-19. The Financial Times calculated the 19-country block’s fiscal deficit will increase to an aggregate €976 billion, equivalent to almost 9% of GDP this year.

This represents a staggering 10-fold increase from 2019 levels and dwarfs the previous peak in 2010 when budget shortfalls hit 6.6% of GDP according to the European Central Bank (ECB).

Moreover, governments estimate deficits will remain high even if economies rebound in 2021, with the shortfall only shrinking to an estimated 6% of GDP.

There appears to have been a sea-change in thinking about the best way to deal with today’s health crisis compared with the financial crisis of 2008 with Carmen Reinhart, chief economist at the World Bank, saying: ‘First you worry about fighting the war, then you figure out how to pay for it.’ A decade ago, she was advocating austerity to prevent public debt undermining economic performance.

Today’s narrative is that with borrowing costs near zero, countries can service increased debts without posing any threats, so long as economies grow faster than interest costs.

Investors meanwhile seem sanguine about the risks with borrowing costs in Italy and Greece falling to record lows last week amid the ECB’s bond buying policy.

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