EU: A Three-pronged Fiscal Package

Published on April 2, 2020

Eurozone finance ministers will hold a teleconference next Tuesday, April 7, to hash out a package of fiscal measures designed to support an economy that is now fully expected to slide deep into recession this year as a result of the coronavirus crisis.

Under discussion will be three modest Euro-wide fiscal support proposals; two that have been widely debated already, and one that is more recent.

** The first proposal will be to finally set up a new standby credit line from the European Stability Mechanism (ESM) for member states, where discussions to date have stumbled over disagreements on what conditionality should be attached to those lines, if any.

** The second proposal will be to expand the lending capacity of the European Investment Bank (EIB), and measures to leverage off that.

** The third proposal will be for the European Commission to provide EU-backed loans, as needed, to member states for programs set up at the national level to subsidize workers for lost wages due either to negotiated, or forcibly shortened hours.

From what we understand, eurozone finance ministers are likely to adopt all three of these programs as one package next Tuesday, albeit with some tweaks here and there undoubtedly to address individual national sensitives.

ESM Conditionality

The first proposal, and one that has been debated ad nauseum already by eurozone officials, is to extend more broadly the standby credit line of the ESM, the eurozone bailout fund that was established in 2012 in the wake of the European debt crisis.

A proposal under consideration would be to allow member states to draw up to 2% of their national GDP in credit lines under a program that would be available for 12 to 24 months, with a loan maturity of 5-10 years.

Discussions to date have stumbled over what conditionality – if any – should be attached to these lines, and our understanding is that the “new ECCL” (Enhanced Conditions Credit Line) would come with minimal conditions that would be focused on the pandemic, and not on macroeconomic performance (see also SGH 3/22/2020, “EU: More Fiscal Flooding”).

The significance of ESM lines is not in the credit itself, but in its trigger then allowing the European Central Bank to step in with essentially unlimited bond purchases of an affected country should that country’s debt yields surge.

However, for all practical purposes the ECB has, in its massive new 750 billion-euro asset purchase program, already all but abandoned any national “capital key” limitations for where it can purchase bonds, at least for now, making the ESM line in effect a mainly confidence building exercise.

Expanding the EIB

The second proposal under consideration next week will be to expand the resources of the European Investment Bank, the government owned investment arm of the European Union.

As discussed, EU leaders are looking at issuing 25 billion euros worth of guarantees to the EIB, which would then be leveraged with private sector money to provide 200 billion euros in loans to small and medium sized companies across the bloc.

There is consideration to increasing the EIB’s capital base as well, in order to further boost the bank’s lending capacity.

A “Short-time” Work Scheme

The third proposal, which started out as an EU wide emergency unemployment re-insurance scheme, has morphed into a work scheme modeled on Germany’s 2009 recession “Kurzarbeit,” or “short-time” plan, where Berlin subsidized the wages of workers who agreed to or were forced into shortened working hours.

The plan for the European Union is to encourage member states to introduce “short-time work schemes” of their own to subsidize workers’ wages and to keep them whole in the face of severely shortened working hours. These national governments could then ask the European Commission for financial assistance for their plans.

As currently proposed, the Commission would be allowed to borrow up to 100 billion euros on the market against EU government guarantees of 25 billion euros – which the member states have yet to agree to. The idea is for the EU to use its (still) AAA level rating to raise inexpensive funds, which could then be loaned at “favorable terms” to member states that do not themselves have those ratings, or the ability to borrow as easily on the markets.

The pricing of each loan, its maturity, and size would all be determined by the Commission after it verifies what the borrower is spending on the scheme.

Furthermore, the loan terms would have to also get the approval of EU finance ministers, and as such would not be at the discretion of the Commission.

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