Eurogroup agrees on lowest common denominator - Capital Economics
European Economics

Eurogroup agrees on lowest common denominator

European Economics Update
Written by Andrew Kenningham

The Eurogroup’s agreement on €540bn, or 4.5% of GDP, of support for responses to the coronavirus crisis falls a long way short of the large-scale joint fiscal boost which many euro-zone governments had argued for, and which would have done more to contain the surge in national public debt.

  • The Eurogroup’s agreement on €540bn, or 4.5% of GDP, of support for responses to the coronavirus crisis falls a long way short of the large-scale joint fiscal boost which many euro-zone governments had argued for, and which would have done more to contain the surge in national public debt.
  • There are three elements to the package which was – finally – agreed yesterday evening. The first is that the European Commission is providing up to €100bn from its existing budget to boost national programmes for workers and the self-employed.
  • Second, the European Investment Bank will provide guarantees worth up to €200bn which will be focused on lending to small and medium-sized enterprises. And third, but most important, the Eurogroup agreed on “Pandemic Crisis Support” worth €240bn or 2% of GDP. In practice, this is the only element of the package which had not already been agreed before last night.
  • The Pandemic Crisis Support programme will be available to all members of the European Stability Mechanism (ESM), each of which will be eligible to borrow up to 2% of national GDP. And the only condition attached is that countries “commit to using these funds to support domestic financing of direct and indirect healthcare, cure and prevention-related costs due to Covid-19.” Efforts by the Dutch government to insert stricter budgetary conditionality therefore appear to have failed. There are so far no details about the cost and maturity of the loans, though these will probably result in only a small reduction in borrowing costs for countries such as Italy. (See here.)
  • Die-hard optimists will point to the Eurogroup’s pledge to work on a Recovery Fund for the post-crisis period as a vehicle which could be used to deliver a more substantial joint policy response. Indeed, this could in principle be the basis for common debt issuance, which would be much more helpful in mutualising some of the growing national debt.
  • However, while possible, it currently seems unlikely that the Recovery Fund will be the basis for euro-bond issuance. It appears designed to appeal to all constituencies, as it will “turbo-charge the European investments…to build a better, greener, more resilient and more digital economy”. Moreover, the head of the Eurogroup, Mário Centeno, commented that “while some member states expressed the view that this should be achieved via common debt issuance, others said that alternative ways should be found.”
  • While the agreement announced yesterday evening was largely as expected in the end, it reflects a political failure for the many governments, including France, Italy and Spain, all of which argued for a much larger, joint fiscal response. Moreover, fact that it took 16½ hours of discussions and that these re-opened bitter divisions between north and south over the nature of the currency union itself, takes away much of the shine from the announcement. And the lack of detail about how the ESM-backed Pandemic Crisis Support will work suggests that there are still some areas of disagreement to resolve.
  • To be clear, we do not think the euro-zone crisis will flare up again in the near future, despite the huge increase in sovereign bond issuance which is about to take place. But that is entirely thanks to the ECB having stepped up its asset purchases and torn up its previous rule book which restricted which bonds it could buy and when. The contribution of euro-zone governments has been slow and underwhelming.

Andrew Kenningham, Chief Europe Economist, andrew.kenningham@capitaleconomics.com