Thoughts on the Eurogroup meeting

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  Yesterday's Eurogroup videoconference focused on instruments to deploy in order to tackle the coronavirus outbreak. Discussions were mostly about the use of the ESM, but the issuance of joint debt (or "coronabonds") has not been excluded yet, despite the vocal opposition of two member states, the Netherlands and Germany. Some clarifications are still needed, but a transitory solution which has "broad support" could consist in using the Enhanced Conditions Credit Line (ECCL) of the ESM to help countries in need.


Eurogroup president Mario Centeno: “there is broad support to consider a Pandemic crisis support safeguard based on an existing ESM precautionary instrument, such as the Enhanced Conditions Credit Line (ECCL). This would provide an additional line of defence for the euro and work as insurance to protect us”.

Comment

We had low expectations regarding the outcome of the Eurogroup meeting, given it was mostly a technical discussion on the instruments that could be deployed in order to offset the economic crisis. Considering the inherited divisions from the last crisis about common EU issuance, it was not surprising that “coronabonds” were not widely debated. It will be up to EU leaders to find a political consensus on that point and convince the most vocal opponents, the Netherlands and Germany, at their forthcoming meeting due on 26 March. EU leaders are deciders of last resort when it comes to such as sensitive political issue. During the call, ECB’s Lagarde strongly backed “coronabonds”, which can be seen as a very positive sign, and it remains the favorite option of France, Spain and Italy. We don’t expect a breakthrough on Thursday either but, as was the case with the banking union following the 2012 crisis, we believe that the EU will have no other choice than implementing some form of temporary joint issuance to share risk that could be administrated by the ESM.

In the interim, the Eurogroup lengthily discussed the creation of an ESM COVID-19 credit line, which is seen as a transitory solution by Spain preceding the launch of “coronabonds”. The ESM has two types of precautionary facilities: a Precautionary Conditioned Credit Line (PCCL) and an Enhanced Conditions Credit Line (ECCL). The ECCL has been judged more suitable to face the current crisis, as it is more flexible, faster to implement and does not imply to fulfill pre-qualification conditions (such as to have a sustainable general government debt, as it is the case with the PCCL). So far, it has been decided that countries will need to apply individually and will be able to request a credit up to 2% of its GDP (or higher in some situations). At this stage, it is still unclear whether to attach or not conditionality to ESM credit line. In normal times, a country asking for help from the ESM would have to sign a Memorandum of Understanding (MoU) detailing policy conditionality, aimed at addressing the remaining weaknesses. Here again, we see the same inherited divisions with The Netherlands asking for conditionality and Spain and Italy accepting the launch of the ESM credit line only if there is no conditionality. It will certainly be of prime importance to lift conditionality to gain support from Spain, Italy and France. The Netherlands are isolated, they can slowdown the negotiation process but their last-ditch opposition cannot last long and we think they will have no other choice than giving up on conditionality. This point should be clarified in the coming days.

What’s next: The EUCO will probably take a final decision on the implementation of the ESM precautionary credit line on Thursday. A draft statement ahead of the EUCO meeting that has been released yesterday also indicates that EU leaders could endorse at this occasion the creation of a permanent European Crisis Management Centre to coordinate more efficiently the EU response in case of crisis. We could also have more insights about the EC proposal for an European employment reinsurance that would top up national schemes, as unemployment is likely to increase sharply in the coming months. It will take much more time to have a draft proposal about “Coronabonds”, but we are carefully optimistic it will happen soon. As Jean Monnet once said: “Men only act in a state of necessity and usually only recognize necessity in a period of crisis”. It perfectly summarizes how the EU is working.  

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