While EU leaders disputed Thursday evening the good collective economic response to the coronavirus crisis, the important decision had already been taken the day before by the central bank of the region.
By lifting the last irons on Wednesday that limited its plan to buy bonds of 750 billion euros, the European Central Bank has positioned itself to absorb an avalanche of expected debts, necessary to finance the region’s response to the pandemic of coronavirus.
However, one of the major debates that remains to be resolved is how much of this additional debt burden should be borne by national governments, the central bank or the EU acting collectively.
Former ECB President Mario Draghi described in a Financial Times article on Friday how “the huge and inevitable economic cost” of the pandemic “must ultimately be absorbed, in whole or in part, in government balance sheets” .
While most economists and policy makers agree with this assessment, the question of how to share the financial burden of coronaviruses has opened deep divisions within the ECB and between European leaders.
Draghi’s call for radical action and EU solidarity came after nine member states wrote a letter calling for the issuance of a common European debt to finance the fight against the coronavirus before a European Council videoconference which will divide on Thursday.
The letter argued that this decision was necessary to ensure “stable long-term funding for the policies necessary to counter the damage caused by this pandemic”. But the arguments met with an icy response to the video call from a number of northern European states hostile to demands for greater fiscal unity.
Alexander De Croo, Deputy Prime Minister of Belgium, one of the nine signatories, argued at the leaders’ meeting that solidarity with other member states was not at risk of “moral hazard” given the extraordinary nature of crisis.
“Our European interest is linked to our own national interest. It is in our best interest to give a boost to the economies that are being affected in a gigantic way, ”he added in an interview.
Fabian Zuleeg, director general of the European Policy Center, added that countries could not afford to fall back on pre-crisis orthodoxies given the magnitude of the challenge ahead. “The most important thing is that we overcome the resistance of certain national leaders to do something at European level which is commensurate with the scale of the problem we are seeing.”
For its part, the ECB has made it clear that it is ready to act “without limits”. The size and flexibility of the central bank’s new asset purchase plan has eased tensions in the sovereign bond markets.
Significantly enlarged and strengthened support from the ECB will be needed in the months and years to come, with most economists agreeing with Draghi’s statement that “much higher levels of public debt will become a permanent feature of our savings. ”
European governments have already announced multi-billion euro bailouts to support businesses, workers and healthcare systems affected by the viruses. with measures which they claim represent around 2% of gross domestic product.
“If you add up what the EU member states do with their national budgets, it’s really impressive,” said an EU diplomat. “It is the time of the Member State, and not so much of the EU.”
Draghi acknowledged this, but said “a more comprehensive approach is needed”. Pernille Bomholdt Henneberg, an economist at Citigroup, estimated that a fiscal easing of 5% of GDP was necessary “given the accumulating shocks on consumer activity, business investment and financial volatility”.
For the moment, the debate among EU leaders on joint budgetary action has focused on the use of the European Stability Mechanism as a safety net for countries facing severe economic downturns and needs. ‘spiral borrowing.
However, a highly politicized debate still hangs over the details of the proposals, including the severity of the conditions attached to the loans.
ECB President Christine Lagarde also urged EU leaders to go further by issuing joint debt instruments – often called Eurobonds – to finance the relief effort in the hardest hit areas by the coronavirus.
Economists say that without joint EU funding, the ECB will be doomed to do the heavy lifting to avoid a sovereign debt crisis like the one that brought the eurozone to the brink of collapse in 2010-12.
“Whether we go through the MES or the ECB’s balance sheet, much of the additional debt will end up with the central bank and this should not lead to a sovereign debt crisis,” said Guntram Wolff, director of the Bruegel. -tank in Brussels.
There are already signs that conservative voices in Germany are uncomfortable with how far the ECB is going, fearing that it will go astray in governments’ monetary funding, which is contrary to EU law .
Otmar Issing, the former chief economist of the ECB who now heads the Center for Financial Studies in Frankfurt, wrote in the Frankfurter Allgemeine newspaper this week in response to the central bank’s new 750 billion euro bond buying program: “What is public monetary financing that the ECB [EU] treaty?”
The most serious concern for economists is Italy, which has been the hardest hit by the coronavirus and has entered the crisis in an already weak position. Italy has the highest debt level of any major European country, an economy that has experienced no growth for a decade and a banking system that still eliminates bad debts from the last crisis.
Goldman Sachs economists predicted that the Italian economy would shrink 11.6% this year and that the additional spending needed to protect businesses and workers from the virus would drop its national debt from 135% of GDP to more than 160% .
“I want to defeat the coronavirus, but I don’t want to have a gigantic hangover afterwards. This is the big risk if I look at some of the diets in Europe, “said De Croo of Belgium.