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Eurozone coronabonds: Kicking the can down the road again

15 Apr 2020
Amid the alphabet soup of Fed measures that have come our way over the past few weeks, the Eurozone has similarly cranked up their fiscal toolbox, unveiling new and old stimulus measures to alleviate the unrest and shock of the global pandemic.

However, the ‘topic du jour’, the Eurobond or a ‘coronabond’, which has bitterly divided the bloc for so long, has not been unveiled leaving the question of debt sharing open once more.

Stepping up to the plate

Prior to the Eurogroup meeting last week, national governments had announced their own national rescue packages which differed in size. The EU had agreed to waiver fiscal rules by relaxing limits on state aid to public spending in order to help individual states restart growth. Additionally, the ECB had announced a new €750 billion QE programme (PEPP) with barely any limits, to keep credit cheap.

North v South

All eyes then switched to last Thursday’s Eurogroup meeting which lined up classic Eurozone divisions – the northern countries traditionally opposed to the idea of joint debt issuance and unwilling to back the debt of the southerners, countries like Italy, Spain and France who wanted some concrete form of fiscal integration and debt mutualisation. Late into the night, the group ended with a pan-Eurozone agreement on a package of measures worth over half a trillion euros.

This includes (almost) unconditional use of the eurozone’s European Stability Mechanism (ESM) bailout fund for loans to governments, previously unimaginable, which can now be used for ‘corona-related’ costs related to health care. This broad definition seems like a typical European solution, with additional funds available via loans coming with ‘conditionality’ of fiscal reforms, which has been strongly opposed by Italy in particular. Other proposed safety nets include a plan for the European Investment Bank to step up lending to companies and a temporary Recovery Fund.

However, the language ambiguity has left all sides able to claim victory, with many of these measures leaving longer-term questions – either this is not enough burden sharing, or there is too much. Indeed, one of the key issues of how to pay for the Recovery Fund goes to the heart of the disagreement over jointly issued debt. This has been the stumbling block for many years now as the financially ailing south battles against the fiscally conservative north. Covid-19 is only going to expose this chasm more, with unemployment surging in Spain and Italy to 20%, while Germany remains much less fluid with the jobless rate expected to stay just above 5%.

Long-term squabble

The next bout of arm-wrestling will be when national leaders meet on April 23 where they will thrash out the scope and sources of funding for the recovery fund. A possible solution is using the bloc’s joint budget, although this is another area of serious disagreement between member states struggling for a compromise by year-end.

The pandemic crisis has caused central banks and governments to move the needles on policies unthinkable only a few months ago, and the history of Eurozone decision-making points to the hard part being the initial deal as a roadmap to the next steps. But it seems that Eurozone debt sharing and future debt sustainability are still issues which are a bridge too far.

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