This week we are analyzing the half a trillion euros package that the Eurogroup finally approved after an endless week of tough day-and-night negotiations. Is this enough considering the gigantic size of this crisis? Is it the right approach? We have reached out for answers to Joaquín Almunia, former Vice-President of the European Commission and Chairman of CEPS, Raymond Torres, Funcas Europe Director, Marta Domínguez Jiménez, Researcher at Bruegel, and Financial Analyst José Manuel Otero.
As usual, you can find below what readings are capturing our attention these days.
Considering the expectations and the severity of this crisis, it may feel like the decision by the Eurogroup some hours ago arrived late. Actually, this deal has emerged pretty fast, at least for EU standards. “This is unprecedented. We never reacted so quickly to a crisis”, said the Eurogroup leader Mario Centeno when announcing the deal.
Enough?
The deal puts together a package of €540 billion. “It is an important package that adds resources to the fiscal measures that have been approved by Member States.
This represents an answer for the imminent shock, however, the policy response for the huge future economic challenge is still to be decided”, says Joaquín Almunia.
“This is a step in the right direction. It shows that European countries are capable of striking a relevant agreement, for the first time since the start of the pandemic”, says Raymond Torres.
You can access here Torres’ article in El País about this.
We will see in the next months a rise of public debt “in proportions never seen since World War II”, says Otero. “The EC and ECB actions had to be complemented with a strong economic policy response from Member States. It is hard to say if this goal was fully achieved with this Eurogroup deal.”
In the same line, Torres thinks that it's not clear if this agreement on its own “will be enough to reduce the risk of a debt crisis”. “Governments are facing the prospect of escalating budget deficits, resulting from both the loss of revenues associated with the economic paralysis and the costs of emergency plans”, says Torres.
SURE The first of these safety nets is called SURE. Worth €100 billion, SURE will support workers and self-employed around Europe. It will represent an extra layer of social protection on top of the different national layers. “It can be considered as some kind of soft mutualisation where the EC will act as the lender of loans to Member States with the aim of preventing further job destruction”, says Jose Manuel Otero.
Source: Funcas based on Eurostat
“SURE is the Commission’s greatest contribution to the COVID-19 response effort yet. €100 billion represents 0.8% of Eurozone GDP, which is more than many Member State have spent in measures of immediate fiscal impulse to combat the effects of the pandemic. For an actor with reduced competences, this would be an undoubted success”, explains Marta Domínguez.
Boosting the European Investment Bank (EIB) lending powers The second part of the deal tackles the needs of SMEs and establishes a program to inject the liquidity they may need to survive this period of economic hibernation. The Eurogroup endorsed the initiative of the EIB to create a pan-European shield to guarantee up to €200 billion of lending focused on SMEs.
“The EIB has a strong record of managing this type of instruments, as we saw with the so-called Juncker Plan”, says Otero. In total, the EIB will be able to support the financing of European companies for a value equal to 1.5% of the EU's GDP.
The second life of the European Stability Mechanism (ESM) Born in the euro crisis, this rescue fund comes to a new life after the agreement of the Eurogroup. The ESM is now a “safety net” for Member States worth 2% of their GDP, that is €240 billion. The wording of the deal implies soft conditionality, but it requires Member States to use these funds for health related expenses.
The new role for the ESM is “necessary but probably not immediately useful”, according to Otero. “Countries such as Spain and Italy will try to avoid the utilisation of this mechanism if possible.”
Source: Funcas based on Eurostat
“It's not clear how many countries will need to rely on the ESM. It depends on debt markets”, says Almunia. “For now, financing conditions remain favorable, representing a pretty different picture to what we saw in the euro crisis.” However, this could change when public debt levels escalate dramatically, as it will likely happen soon. The ECB has not said its final word yet so it could play an important role to prevent financing costs escalating”, says the former Commission Vice-President.
“The ESM has been satanized by the national Italian political debate. In Spain we don't share that negative view on this instrument and this is why the positions of Italy and Spain have diverged”, says Almunia.
“The precautionary credit line of €240 billion represents around a month of the costs of the crisis. The credit line, moreover, would come with the commitment to respect deficit targets further down the road. It remains to be seen whether this is enough for countries that entered the crisis with a high-debt position and in addition are disproportionately hit by the Covid-19 pandemic”, says Funcas Europe Director.
Where are the coronabonds? “I think that it was clear that eurobonds (or a similar instrument of debt mutualisation) were not an option at this stage”, says Otero. Indeed, coronabonds are not part of the Eurogroup deal.
“The idea of eurobonds is a necessary one but turning them into an obstacle to reach a deal you urgently need is a mistake”, says Almunia.
The French inspired “Recovery Fund”, only announced at this stage, may offer the possibility to issue common debt in the future. In any case, the size and funding of this fund are unclear for now. “The idea of a recovery plan is essential, and the Multiannual Financial Framework could play an important role there”, says Almunia.
European Economy New figures on the magnitude of recession
The Economist Intelligence Unit (EIU) expects that the global economy will contract by 2.5% in 2020 as a result of the coronavirus pandemic. This represents a much deeper global recession than that experienced during the global financial crisis.
Eurozone GDP growth
Source: Eurostat / Ifo Institute
Economic output is likely to have shrunk by 2.3% in the first quarter and will shrink by another 10.5% in the second quarter; for the third quarter of 2020, the researchers are forecasting growth of 8.7%, according to IFO analysts.
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What we’re reading these days
The ESM can finance the COVID fight for now “Using the ESM to provide the funds needed is a reasonable and workable way forward”, argue the scholars Aitor Erce, Antonio Garcia Pascual and Ramon Marimon.
The EU’s shared purpose requires shared financing “For more than six decades, a shared sense that we are stronger by acting together has contributed to the advancement of peace, reconciliation, democracy and human rights. Our achievements rest on that principle”, says Ana Botín, Executive Chairman of Santander.
Bonding over coronabonds? How the financial question divides Europe Interesting podcast chat between Mark Leonard, Director of ECFR, Guntram Wolff, Director of Bruegel, José Ignacio Torreblanca, Head of ECFR in Madrid, and Jonathan Hackenbroich, Policy Fellow at ECFR.
