Central Banks

Stimulus will add to high debt levels but alternative is 'much worse,' ECB vice president says

Key Points
  • Governments for euro area countries have passed major stimulus efforts in a bid to soften the impact of the coronavirus crisis and keep people in work.
  • Fiscal deficits are expected to widen, debt piles will climb and the financial repercussions could be felt for generations.
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Market sentiment improving due to fiscal action: ECB vice president

The vice president of the European Central Bank (ECB) has backed the unprecedented stimulus packages launched in the region, saying there were no alternatives for lawmakers.

Governments from euro area countries have passed major stimulus efforts in a bid to soften the impact of the coronavirus crisis and keep people in work. Fiscal deficits are expected to widen, debt piles will climb and the financial repercussions could be felt for generations.

However, Luis de Guindos, the vice president of the euro zone's central bank, said the issue of lofty debt levels needs to be put into perceptive.

"At the end of the pandemic for sure that we will have higher public debt ratio. But the alternative of doing nothing is much worse," he told CNBC's Annette Weisbach when asked specifically about Italy.

"It would be much worse in terms of the crisis. And it would be much worse in terms of the recovery phase," he added. 

Germany and France — the two largest euro economies — have announced a ground-breaking proposal that could see the EU issuing large amounts of debt to mitigate the crisis. That plan would see the European Commission, the EU's executive arm, raise 500 billion euros ($545 billion) in public markets.

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Expecting a powerful pan-European response to pandemic: ECB's de Guindos

The ECB is already buying government bonds and boosting lending, and European governments have previously agreed to an aid package worth 540 billion euros to help deal with high levels of unemployment, improve business activity and provide loans to governments.

Fitch ratings agency believes that Italy's debt-to-GDP ratio will increase by around 20 percentage points this year to 156% of GDP. Italy is one of the most indebted nations in the world after Japan and Greece. That debt, the need for reforms and the rise of populism in the country has led to some analysts predicting it could even crash out of the euro zone. But the risk of this happening was dismissed by de Guindos.

"Well, I will not put it that way. I think that prior to the corona crisis, well, there were countries with high public debt levels, but I think that the important issue to take into consideration, we have to put in perspective the policy response," he told CNBC.

"Fiscal policy is going to be key ... And you know, in the short term here and there, the pandemics, the crisis that we are suffering, I think that national fiscal policy is going to be totally needed."

The ECB vice chief said that concerns over public finances in the medium term will have to be addressed. But for now, he called for "powerful and strong" fiscal responses at both the national and pan-European level.

—CNBC's Silvia Amaro and Holly Ellyatt contributed to this article.