EU: The Fiscal Fortress Crumbles

Published on March 17, 2020

In a deliberate echo of the “whatever it takes” pledge in July 2012 by former European Central Bank President Mario Draghi that pulled the Eurozone from the brink of disintegration in the sovereign debt crisis raging at the time, Eurozone finance ministers vowed after a call yesterday that fiscal authorities would, for their part, also do whatever it took to address the challenges now faced by the COVID-19 pandemic.

With Europe now tragically ravaged by the pandemic, Portugal’s Finance Minister Mario Centeno, in his capacity as Eurogroup President, stressed the “unlimited” commitment by EU governments to provide support, and their determination to use “everything we’ve got.”

While the Eurozone fiscal fortress is indeed crumbling, as always, the specifics are a bit more nuanced than the announcements.

** According to the European Commission calculations presented to the finance ministers, the total fiscal stimulus measures decided by Eurozone governments for 2020 as of yesterday – and the numbers are growing fast — were worth 1% of the zone’s GDP, or some 120 billion euros. Ministers made clear more would come if, or more likely when, necessary.

** Another 10% of GDP, or approximately 1.2 trillion euros, has been deployed in liquidity support measures aimed at support for the sectors and regions hardest hit by the pandemic. These include tax measures, public guarantees to help companies borrow, export guarantees, and the waiving of delay penalties in public procurement contracts.

** The Eurozone-wide guarantee scheme appears to be modeled after Germany, which on Friday promised almost unlimited state guarantees for companies, as well as measures including easier access to a state-subsidized shorter hours work scheme that has proven successful in the past. France has made similar pledges of support for its firms.

** New measures discussed on Monday came mainly through the European Investment Bank – the massive government-owned investment arm of the European Union – which came up with 40 billion euros that could be immediately deployed to help small and medium companies stay afloat, and refrain from laying off workers.

** The EIB money comes on top of 37 billion euros proposed by the European Commission last Friday for a “Coronavirus Response Investment Initiative” directed at health care systems, small and medium-size enterprises (SMEs), labor markets, and other vulnerable sectors of the member states’ economies, with another 28 billion euros coming from the EU structural funds budget for such expenditures.

** Completing the package, for now, is an explicit declaration of what has been widely hinted at already — that EU budget rules limiting government borrowing and spending are suspended for now, with a serious loosening of state aid restrictions (see SGH 3/9/19, “EU Fiscal: Plan A, and a Plan B”).

** Eurozone ministers are also looking for ways to put their debt crisis era bailout fund, the European Stability Mechanism (ESM), to work. The ESM currently has an unused lending capacity of 410 billion euros, a sum that could come in handy if – or rather, as — the COVID-19 crisis turns into a full-blow economic crisis.

** Tapping the ESM, however, is not without complications. The ESM was created during the debt crisis as a lender of last resort (with conditionality attached), to sovereign Eurozone member states stressed or fully cut off from financial markets. With even the highly indebted and recession-struck Italy able now to borrow at negative rates, that stated objective is not at issue.

** The role for the ESM, it appears, will be more as a confidence building backstop tool, perhaps never to be really drawn down, with an eye to stemming any potential stigma and negative response to any sovereign if it were, in fact, to be triggered.

Going forward, Eurozone finance ministers have agreed to hold weekly conference calls in order to be able to react in a timely fashion to further pandemic and economic developments.

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