The below is an update to our previously published opinion piece titled “A Spectre is Haunting Europe: Debt Mutualisation,” published on April 6th 2020.
The Eurogroup met on the evening of Tuesday, April 7th, and after a night-long negotiation which didn’t lead to an agreement, reconvened on Thursday, April 9th. Eventually, the gridlock was broken and a common position on a comprehensive package of measures was reached.
Here are the four main elements of the package:
1) A temporary loan-based instrument called SURE (Support to mitigate Unemployment Risks in an Emergency) was agreed upon. SURE will seek to support EU member states in protecting employment through favourable-term loans up to €100bn, building on the European Union (EU) budget as much as possible and on guarantees from the member states;
2) The European Investment Bank (EIB) will create a guarantee fund of €25bn to provide guarantees to loans up to €200bn (an 8X multiplier is standard EIB practice) to support companies, particularly Small and Medium Enterprises (SMEs). The EIB programme will complement the wide loan guarantee schemes provided at the national level to ensure liquidity in the economy;
3) On the European Stability Mechanism (ESM), it was decided that, through the so-called Enhanced Conditions Credit Line scheme (ECCL), the ESM will support financing for a benchmark amount of 2% of member states’ current GDP. The only conditionality is that this credit line will be used for “financing of direct and indirect healthcare, cure and prevention related costs due to the COVID-19 crisis”;
4) On the most “mutualistic” proposal related to the creation of common debt instruments, progress was limited. There was somehow agreement to disagree on key elements of an ad hoc “Recovery Fund”, i.e. on its relation to the EU budget, its financing sources, or its innovative financial instruments. The decision on how to proceed is being sent up to European Leaders, who will meet on April
The first two measures of the package, the SURE and the EIB guarantee scheme, were not particularly controversial and were broadly agreed in advance. The focus of the 16-hour negotiations was indeed on the use of the ESM and on the Recovery Fund as well as on their interplay. In our view, the results are an “honest” agreement which helps and moves the posts of the discussion further ahead.
However, we believe some aspects of it are a bit disconcerting: The ESM could become an “Achilles and the tortoise” paradox, in which the southern countries which have been asking for relaxing the conditionality elements of the ESM credit line have broadly obtained what they asked for, but they could end up never using it for reasons of domestic policy. The ESM “stigma” seems at the moment insurmountable; The negotiations on a “Recovery Fund” can be compared to a reverse “Penelope’s web”, in which the gap between those who want a common debt instrument and those who oppose it widens during the day, when Parliaments are working, and narrows at night, during the negotiations. We believe that to construe such an instrument may take time, well beyond the next European Council meeting. Perhaps the upcoming heavyweight EU Presidencies of Germany (second half of 2020) and France (first half of 2021) will help to complete the web. In the meantime, the European Central Bank will continue to guard on the safety of the Eurozone and we believe markets have taken note of that.