Eurogroup Review: “Habemus Papam”
Head of Macro Analysis
Summary: Following a lot of bilateral calls between Germany, France, Italy and the Netherlands, and one of the shortest plenary sessions in the history of the Eurogroup, yesterday evening, the finance ministers reached a compromise on the use of the ESM and agreed on the Commission's unemployment reinsurance scheme (SURE) and on EIB loans.
After a 48-hour saga and a very short plenary session that lasted only 32 minutes, the Eurogroup agreed to three safety nets (for workers, businesses and public finances) adding up to €540bn and opened the door to a recovery fund for the reconstruction phase that could be financed by “innovative” financial instruments (see here). However, inherited division from the sovereign debt crisis has not disappeared and the hardest part of the negotiations covering the recovery fund is yet to come.
Wopke Hoekstra, Dutch finance minister: “We are and will remain opposed to Eurobonds. We think this concept will not help Europe nor the Netherlands on the long term”.
Roberto Gualtieri, Italian finance minister: “We have put on the table of the European Council a Recovery Fund enabling common debt issuance. Off the table is any conditionality on the use of the ESM financing. Now it’s up to the leaders to take the right decisions”.
Bruno Le Maire, French finance minister : “the debate on debt mutualisation is on the table”.
- The Eurogroup reached a consensus on the activation of the ESM with soft conditionality attached. It is capped at €240bn or 2% of member states’ GDP. The only requirement is that the credit line will focus on “direct and indirect” healthcare costs related to the COVID-19 and will end when the crisis is over. The terms still need to be agreed by the ESM governing bodies in the forthcoming days.
- Support to businesses has been increased with extra financing through EIB loans, up to €200bn.
- The Commission’s unemployment reinsurance scheme (SURE) has been adopted after assurance was given it would be temporary. The EU is allowed to borrow money in the market, up to €100bn, and will hand the funds to member states, without conditionality, in order to mitigate unemployment risks.
- The finance ministers expressed willingness to explore “innovative” financial instruments to finance a recovery fund, without explicitly mentioning joint debt issuance.
Being objective, this is a very reasonable outcome. It required a lot of bilateral calls between the main players and Germany’s Olaf Scholz acting as a go-between to iron out differences regarding the ESM and SURE. Politically, the compromise is very encouraging. Together with the ECB bazooka (PEPP) and national measures, the Eurogroup fiscal package should do the trick to mitigate the health crisis. It sets all the principles for future negotiations and a roadmap to follow in order to implement further measures. The following quote of Brian Tracy, a popular motivational public speaker, perfectly summarizes how the EU works: “The hardest part of any important task is getting started on it in the first place. Once you actually begin work on a valuable task, you seem to be naturally motivated to continue”. Remember Greece. It took three economic adjustment programs to deal with the situation. The EU has probably less time left, but there is no sense of urgency neither as the ECB is cleaning up all the secondary market in order to avoid tensions on sovereign bond yields.
Now, it is up to the EU27 leaders to give the final go and discuss some form of burden sharing and an exit management strategy. The hardest part is just to start. It is reassuring to see there is a consensus that the package so far on the table (EIB/ESM/SURE) and the existing instruments and institutions will not be enough to cope with the reconstruction phase that will begin, at the earliest, this summer. However, there is a clear disagreement between the Netherlands and Italy on what the “recovery fund” means. Clear guidance from the EU27 leaders to the Eurogroup will be needed in order to move forward fast on that issue.
In our view, it is unquestionable that coronabonds will come back. Some form of debt mutualization will be indispensable. Neither Italy nor Spain are in a position to raise the necessary funds for the reconstruction of their countries with new national debt alone. Germany needs to join forces with France for the common good and convince the Netherlands this is no time for egoism. If the European Union fails to show the necessary solidarity, countries from Southern Europe will not forget we have abandoned them, which will result in a definitive loss of confidence in the sense and credibility of the European project.