Marcus Walsh-Führing / Apr 2020
Mário Centeno, President of the Eurogroup. Photo: Shutterstock
The political infighting between EU heads of state in a recent virtual conference call to discuss the idea about introducing “Corona bonds” suggests that the political situation in Europe is tentative at best. This is also demonstrated in the lack of financial maneuverability of Southern European member states by EU member states in their effort to combat the economic impact of the crisis, as stated by Dutch Finance Minister Wopke Hoekstra.
Both instances mirror the political divide and fracture between Northern and Southern European countries during the 2008 financial crisis. In the current political climate as in the 2008 financial crisis, uncertainty and fear have taken control over the economy and markets. While the root causes of the coronavirus crisis and the 2008 financial crisis are different, both instances have placed EU solidarity in the balance.
As in the 2008 crisis, the recovery of the current economic deterioration will depend on an EU stimulus package. What will this package look like? As the economic plan develops, European leaders will judge the success of the stimulus package by its size and the speed by which EU financial institutions mobilise the funds.
In the coming weeks, it is to be expected that the Eurogroup President Mário Centeno will deliver a comprehensive economic plan to fight the coronavirus. As of right now, government leaders have not been able to create a consensus between the Northern and Southern blocs on how the Eurozone should address the economic crisis facing Europe.
This has resulted in government leaders delegating the drafting of the proposal to the Eurogroup with very little guidance. The lack of a coherent policy message has caused confusion in the financial markets, at the same time, it demonstrates where political vested interests of politicians, central bankers and political associations lie in members states and EU institutions. As in the past, the current crisis has produced differing ideological views on how to address budgetary and expenditure issues in the EU.
The policies proposed by EU institutions are as follows: European Stability Mechanism (ESM) credit lines, “Corona bonds”, European Investment Bank Guarantee Fund, a front-loading EU budget, and unemployment insurance. A comprehensive approach will consist of a package to include a variety of policy solutions for the creation of an economic stimulus for members states and economic insurance mechanisms for the EU. The current economic situation in Southern European member states might be easier said than done, placing the financial risk on Northern European countries.
The consensus in Brussels is that the ESM credit lines and European Investment Bank Guarantee Fund are likely to pass. ESM credit lines are heavily backed by Chancellor Angela Merkel with the recommendation that they be used for subsidising health and economic costs associated with the coronavirus and to inject capital into government balance sheets for the long term. ESM credit lines impose strict conditions on recipient countries which has been challenged by French and Italian governments.
Also, the European Investment Bank (EIB) Guarantee Fund has support from European Council President Charles Michel with the aim of the EIB to provide loan guarantees for small and medium-sized enterprises (SMEs), the EU health care sector, and other vulnerable industries.
The EIB Guarantee Fund will likely pass because it limits the risk for Northern European countries, and it has the potential to demonstrate solidarity depending on the reaction of politicians in Southern Europe. As of right now, the outlook does not seem positive.
The Italian and Spanish governments support the issuance of “Corona bonds” due to their potential to generate substantial capital for EU countries to draw on at low borrowing rates and pay back over time. This seems like a non-starter for Northern European countries, such as Germany and the Netherlands, where there is not enough domestic political will from local constituencies to support this policy.
As of right now, the EU has relied on domestic stimulus from member states and a commitment from the European Central Bank (ECB) to buy 1 trillion euros of government and company bonds to reassure investors in volatile financial markets. This poses the question whether the initial ECB stimulus will supply enough capital to calm the markets or will it be just the start of what is needed to reassure markets heading into a recession.
Whatever the policy recommendations of Eurogroup President Centeno will be in his speech two weeks from now, one thing is clear: the bailout package has to be impressive to calm the markets. If international markets perceive the policy recommendations as too little too late, the entire EU project can be in jeopardy.