Overview
Entrenched positions
Improving on the fractious European Council meeting of 26 March was never going to be difficult. In the end, the Eurozone’s finance ministers agreed on a common set of fiscal measures that were as bold as could be hoped for at this stage. While “innovative financing instruments” that will be considered have a far less catchy title than coronabonds, there was relief that the EU were finally able to break the deadlock on the emergency package.
But the issue of debt mutualisation was once again kicked into the long grass. Eurozone members have agreed to keep talking about it, even though each side of the debate fell back into their entrenched positions at the end of the meeting.
The measures announced last week add up to €500 billion and will be made available within two weeks. These include access to €200bn of European Stability Mechanism (ESM) credit lines of up to 2 per cent of each member state’s GDP. There is little conditionality attached to these credit lines - anathema to Southern Europe - provided these funds are directed at the healthcare response. Up to €100bn is allocated to the SURE unemployment reinsurance mechanism proposed by the Commission to backstop national schemes. Meanwhile, €25bn of funding will be provided to a European Investment Bank (EIB) guarantee fund that can be leveraged up to €200bn to guarantee lending to SMEs across the euro area. The Eurogroup also agreed to work on a post-crisis Recovery Fund.
ECB will still have to do the heavy lifting
The Eurogroup has now handed over the baton to EU heads of government, who are due to meet at the next Council meeting on 23 April. Perhaps wisely, finance ministers have agreed to disagree on the financing mechanism for the Recovery Fund - a decision that would not have come directly within the remit of last week’s meeting in any case.
It remains to be seen how any potential breakthrough on the Recovery Fund would roll into EU Budget negotiations for 2021-27. The European Parliament is asking the Commission and member states to be bold on this - but budget discussions have already raised tensions among EU member states as the bloc attempts to accommodate the budget shortfall created by Brexit.
The bigger question also remains of whether the EU has done enough to effectively support its weakest citizens or if the current crisis will provide more fodder for populists once the emergency subsides.
European bond markets appear unconvinced of the Eurogroup’s efforts so far. Despite the deal, it is the European Central Bank (ECB) that will continue to have to do the heavy lifting in terms of providing liquidity support and monetary stimulus. With the central bank on the other side of the table anchoring credit and sovereign spreads, bets against the single currency may prove too expensive at present. But the widening in Italian spreads this week suggests markets want more solidarity to materialise - and sooner rather than later.
