The coronavirus pandemic is the biggest economic shock to hit the EU since its foundation in 1957. Some member states will suffer more deeply than others, but none will escape unharmed. This is truly a common shock, and one that is nobody’s fault. Failure to show solidarity in helping those less able to respond risks doing immeasurable harm to the European project.
Supporting the EU economy through a necessary suspension of activity requires an immense fiscal effort. It is a particular challenge in the eurozone, where the strength of members’ public finances varies widely; some already have debt to GDP ratios of 100 per cent or more. Even the most stretched should be able to borrow the additional 10-20 per cent of GDP the economic fallout necessitates, provided borrowing costs stay low. The danger is that investors take fright and set off the self-fulfilling spiral into default.
The ECB’s pledge last week to buy another €750bn of bonds this year has helped, containing bond spreads that had started to widen. But financial markets’ concern about the limits to what the ECB can do have not entirely dissipated. The eurozone must prove definitively it can deliver the fiscal policy response this disaster calls for.
Leaders of France, Italy, Spain and six other countries called on Wednesday for the radical step of creating a dedicated mutualised debt instrument, or “coronabond”, to finance capitals’ spending on health and economic support measures. Such a bond would be the most potent way to dispel doubts that not just the ECB but eurozone governments will do whatever is needed.
As well as delivering the necessary unified European response, it would tap the full fiscal potential of the Eurozone. It would also be a powerful display of solidarity. Given the risk of an anti-euro backlash in some countries, the political message could prove as important for the eurozone’s survival as taking the right economic steps.
Yet strong resistance from Germany, the Netherlands and Austria, where debt mutualisation is anathema, means the bloc is unlikely to embrace coronabonds for now. Nobody has come up with a precise plan to implement them. Opinion in northern European countries, where coronabonds risk promoting Eurosceptic nationalism, will need time to accept that they have as much to lose from a eurozone break-up as their southern partners.
That is no reason to drop the idea. But eurozone leaders should in the meantime use a tool they already have: the bloc’s rescue fund. The European Stability Mechanism still has €410bn of remaining financing capacity — sizeable, if not inexhaustible. Most importantly, lining countries up for ESM funding leaves the ECB free to unleash unlimited purchases of its bonds, the substance behind Mario Draghi’s 2012 pledge to do “whatever it takes”.
Going to the ESM, however, carries a stigma, especially in Italy, where Eurosceptic opposition parties have spread lies that ESM loans would mean harsh austerity and restructuring of Italian debt. While the rationale for strict conditionality when the ESM was set up was clear, it does not apply to the Covid-19 crisis. ESM access should be made as straightforward as possible.
The best approach would be to issue an ESM credit line to every eurozone government, dispensing with any application process, with ultra-long repayment terms and conditions limited to the funds being spent on immediate crisis-related measures. This would let markets know the ECB can use all its firepower when needed. That in turn would give the best chance that no country would ever need to tap into the credit line in the first place.
Source: Economy - ft.com
