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Draghi says stimulus can aid recovery after Covid but warns on 'bad' debt

 

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Warning: Former ECB chief Mario Draghi

Warning: Former ECB chief Mario Draghi

Warning: Former ECB chief Mario Draghi

Former European Central Bank (ECB) president Mario Draghi has warned governments to use the massive stimulus they've deployed in the coronavirus pandemic to upgrade their economies or face the risk of another debt crisis.

In his first high-profile appearance since leaving his post in October, Mr Draghi called for "credible" economic policies to avoid disillusionment among the young, who will have to repay the cost of fighting the coronavirus. He also praised the European Union's deal to issue joint debt to fund the recovery.

He compared the need to rebuild the economy after the pandemic to the aftermath of the Second World War.

"We should take inspiration from those who were involved in rebuilding the world, Europe and Italy after World War II," he said.

"The debt created by the pandemic is unprecedented and will have to be repaid mainly by those who are young today," he said. "It is therefore our duty to equip them with the means to service that debt."

European institutions, savers and financial markets will only fund "good debt" if it's being used for investment in human capital, crucial infrastructure or research, he said at a Catholic convention in Rimini, Italy yesterday.

"If, however, debt is used for unproductive purposes, it will be seen as 'bad' debt and its sustainability will be eroded," he said.

"Low interest rates are not in themselves a guarantee of sustainability."

Mr Draghi's comments come as governments globally - concerned about their rising debt burdens - debate whether to extend their crisis support. They're trying to strike a balance between preventing mass unemployment that could cause lasting damage, and restructuring their economies for the post-pandemic world.

Mr Draghi has recently been appointed to a Vatican body advising Pope Francis on social and economic affairs.

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While the former ECB chief has kept a low profile since returning to Italy, he is routinely mentioned in the press as a potential prime minister or president should the country fall into one of its recurrent political crises.

Italy was already headed for recession before the coronavirus hit, and its large public debt is set to balloon in the wake of the pandemic.

Italian Premier Giuseppe Conte has promised to use future European funds to overhaul the country's under-performing economy. But so far the government has focused on supporting incomes and protecting jobs in the short term.

"For years, a form of collective selfishness has led governments to divert attention and resources toward initiatives that generated guaranteed and immediate political returns," Mr Draghi said. "This is no longer acceptable."

Bloomberg


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