Eurogroup Preview : A compromise of compromises

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  Tomorrow's Eurogroup videconference will be a major solidarity test for Europe. As the Union is not facing a life-or-death crisis, it is likely that coronabonds will be out of the discussion. We expect the potential EU fiscal package will include ESM precautionary credit line, increase in EIB guarantees, European unemployment scheme (SURE), and a political assurance that more will come if needed.


Quote of the day : “A good compromise, a good piece of legislation, is like a good sentence; or a good piece of music. Everybody can recognize it. They say, ‘Huh. It works”. It makes sense’” – Barack Obama.

The Eurogroup is due to meet tomorrow evening after the EUCO failed to find a common ground for a fiscal coordinated response two weeks ago. EU leaders asked finance ministers to come up with new solutions that could be implemented to face the ongoing crisis.

Main topics for discussion

  • Coronabonds (common debt), supported by 14 of the 19 eurozone countries, notably Italy, Spain and France.
  • Corona fund (transfers to countries in need) proposed by France and partially endorsed by the Netherlands on the condition it is a one-off transfer of €10-20bn.
  • ESM precautionary credit line (which can go up to 2% of GDP, with a limit at €410bn), supported by France and Germany.
  • Revised EU multiannual financial framework (mostly transfers for about €37bn in 2020).
  • Higher EIB guarantees (loans, up to €200bn).
  • European unemployment scheme – SURE (loans, and not reinsurance system as it was previously specified, to member states for about €100bn to cover for short-term unemployment).

Comment

Ahead of every crucial Eurogroup meeting, member states usually circulate non papers. The most interesting one was from the Netherlands which has been, until very recently, the most vocal opponent to more fiscal solidarity to tackle the coronavirus crisis. Under increasing pressure, the Dutch government has opened the door to the creation of a corona fund of about €10-20bn with no condition attached and consisting mostly in a one-off transfer to countries in need. Though it is much less ambitious than the initial project proposed by France that also included debt mutualization instruments, it is an important step showing that the forthcoming Eurogroup could successfully agree on a potential fiscal package that will be finalized by EU leaders afterwards.

We doubt that there will be a agreement on the corona fund as there are still important technical deadlocks to offset, but it could certainly be part of further talks.

Given that coronabonds have been one of the most major stumbling blocks during recent meetings, it is likely they will be out of the discussion. Last week, EC President Von der Leyen confirmed it is not part of the mandate from the EUCO. The momentum behind coronabonds, which was presented by supporters as the single silver bullet, has diminished strongly over the past weeks, even from prominent advocates like France. As the ECB is literally about to clean up all the secondary market with the start of the PEPP, the risk of sovereign debt crisis is close to zero. As such, there is less need for debt mutualization to cope with the emergency phase but, we still consider it would be an appropriate instrument for the reconstruction phase along with an ambitious EU multiyear investment project.

To sum up, we think the Eurogroup will end up proposing multiple instruments to face the ongoing crisis, including (1) the ESM precautionary credit line with soft conditionality (e.g. the credit line should only be used to deal with the effects of the coronavirus), (2) a more ambitious EU budget, (3) higher EIB guarantees and leveraging and (4) the EU assurance scheme. The Eurogroup should also confirm that more measures may come if needed, giving the political assurance Europe will do “whatever it takes”.  All these potential measures are subject to agreement between the heads of state or government of the EU member states at an upcoming EUCO meeting which has not been scheduled yet.

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