David Thomas / Apr 2020
While euro zone finance ministers finally managed on April 9 to broker a €500 billion deal on an EU-level fiscal response to the COVID-19 crisis, countries agreed to disagree on the need for the Eurobonds advocated by France, Italy and Spain and strongly opposed by Germany, Netherlands and other fiscally hawkish countries.
The deal includes eased access to €240 billion of credit lines from the European bailout fund, around €200 billion in guarantees for EuropeanInvestment Bank lending to crisis-hit businesses and €100 billion in aid for those left temporarily unemployed as a result of the lockdowns. The ministers also gave a nod to a new European recovery fund, but remain cagey about how this will be financed.
Bonds issued jointly by euro zone member states could be one source of funds for the new facility, which will provide much-needed stimulus for euro zone economies once they reopen.
The Eurobond idea, around for years, has enjoyed strong support among academic economists. It has also been actively promoted by France to further its own euro-integration agenda, as well as by big-debt southern countries keen on the lower debt-servicing costs such a safe asset might produce.
But countries like Germany and Netherlands have always been sceptical that such mutualisation schemes would potentially undermine their own stronger credit ratings.
In particular, they remain wary that Italy – the zone’s biggest public sector borrower - may seek to use this latest euro crisis to ‘Europeanise’ its massive 130%-of-GDP debt burden. Northern countries have little confidence in Italy’s commitment to either economic reform or long-term fiscal probity. The country has seen almost zero growth in three decades and has made little progress on public debt reduction or structural reform.
On March 25, the leaders of nine member states, including France and Italy, wrote to EU Council President Charles Michel to demand the issue of joint Eurobonds not just to fight the immediate coronavirus crisis but also to demonstrate long-term European economic solidarity. The zone’s fourth biggest economy, Spain, also joined the eurobond club. Under the leadership of Socialist Jose Sanchez the country has increasingly sided with those seeking to soften Europe’s fiscal regime.
This inevitable clash between south and north on the issue rapidly descended into a slanging match.
French President Emmanuel Macron warned of a “selfish and divided Europe”.
Dutch Finance Minister Wopke Hoekstra called for an EU investigation into Spain’s claims that it lacked the fiscal capacity to address the strains on its health system imposed by COVID-19, a demand the Portuguese Prime Minister Antonio Costa described as “repugnant”.
The exchanges are reminiscent of the worst of the slurs tossed around during the height of the euro sovereign debt crisis of 2009-2011.
Toxic memories of the way in which bailout countries, such as Portugal, Ireland and especially Greece, were treated by the infamous EU Troika, following the euro sovereign debt crisis, when the EU mandated severe cuts in public services and wages, make many southern European countries deeply distrustful of the EU’s bailout fund – the European Stability Mechanism - and its German Managing Director Klaus Regling.
Populist Italian politicians have publicly vowed that they will never allow the country to be put through that kind of humiliation, and their resistance now appears to have succeeded in easing the normally strict conditions which are attached to ESM credit lines.
Along with the rest of the package agreed last week, the Eurogroup may have done enough to plug the dyke – but for long-term economic recovery something much bigger will be required.
So far, euro government bond markets have been relying on a combination of their own massive fiscal rescue efforts and a commitment by the European Central Bank to buy another €750 billion euros in government debt. This is in addition to the €20 billion it is already buying every month under its long-running Asset Purchase Programme.
To date, this formula is working well. Governments can spend what they like – with the Stability and Growth Pact suspended for the duration of the crisis - safe in the knowledge that the ECB will ‘create’ the money needed to buy the resulting bonds they issue.
The big question remains: where is the whole idea of reinforced euro zone economic governance in all of this?
French ECB President Christine Lagarde has weighed in in favour of Eurobonds but European Commission President Ursula von der Leyen has made some exceedingly sceptical German comments about the idea, describing them as “just a popular word right now” in an interview with German newswire DPA.
The ESM’s Regling has also pointed to flaws, noting that setting up a new euro debt management agency to issue the Eurobonds could take a year while the ESM credit line could be immediately accessed.
A French presidency official has been quoted as saying that several euro countries could club together, without Germany and the Netherlands, to issue joint bonds. But opponents dismiss the idea as political posturing. Such a scheme would in any case not solve the interest rate problem that big-debt countries face, they point out.
That threat is therefore unlikely to persuade the Dutch and Germans to withdraw their opposition.
Once again, it looks like the ECB will be called upon to cover up the gaping cracks in the euro’s economic architecture.