Euro Area: Eurogroup adopts rescue package against coronavirus crisis; remains divided on post-crisis stimulus
On 9 April, Euro area finance ministers rolled out an emergency package aimed at cushioning the economic impact of the coronavirus crisis. Amounting to about EUR 540 billion, the measures include precautionary credit lines for member states to help pay health costs directly related to the crisis; a program to finance loans to businesses; and a jobs support program. The rescue package comes on the top of measures announced by national governments, which, although differing in size, consist of direct fiscal stimulus, liquidity and employment support and public guarantee schemes for bank loans. Moreover, it follows the suspension of the Stability and Growth Pact by the European Commission (EC) and goes in tandem with the ECB’s massive asset purchasing program.
The most important piece of the plan is that member countries will be allowed the unconditional use of the European Stability Mechanism (ESM)—a bailout fund created during the debt crisis. With up to EUR 240 billion of the ESM’s total EUR 410 billion assigned to fund health spending related to Covid-19, countries will be able to receive loans of up to 2.0% of their GDP for emergency healthcare-related spending, with no conditionalities for as long as the Covid-19 crisis lasts. Second, the European Investment Bank (EIB) will create a guarantee fund worth EUR 25 billion, leveraging up to EUR 200 billion in financing to small- and medium-sized enterprises hit by the crisis. Lastly, finance ministers agreed to provide some temporary support to the labor market, endorsing an initiative by the Commission aimed at underpinning short-time work schemes (SURE) by helping governments finance jobless-insurance payouts for up to EUR 100 billion for loans at favorable rates.
The Eurogroup also sketched out the proposal of a recovery fund, a temporary tool to aid a post-lockdown economic rebound. However, its size and funding sources remain a matter of dispute among national governments. As it stands, countries in the Eurozone are deeply divided over burden-sharing tools; while southern European countries such as Italy and Spain are pushing for mutualized Eurobonds and grants, Eurobonds still seem unlikely given opposition in Germany, the Netherlands and Austria. Instead, it seems more likely that the European Commission will leverage an expanded budget to raise money to support spending and investment in member states during the recovery phase, as highlighted by Chancellor Angela Merkel’s recent commitment to expanding the EU’s seven-year budget.
Commenting on the variety of measures adopted by the Eurogroup, Bert Colijn and Carsten Brzeski, economists at ING, noted:
“Eurogroup decisions add to the enormous amount of stimulus in place to fight the coronavirus and its economic consequences. To give credit, where credit is due, the fiscal answers in the Eurozone have been much swifter and stronger than in the past. Still, debt sustainability concerns are not yet off the table. […] The long-term debt position of the countries will be negatively affected by the additional spending. In the end, the debt sustainability issue will only be solved by either debt mutualization, debt forgiveness or debt monetarization.”
Fiscal and monetary measures can only alleviate the worst consequences amid the ongoing coronavirus outbreak, which is set to hammer economic activity this year by disrupting supply chains, hitting tourist flows and dampening both domestic and external demand. In addition, the pandemic could exacerbate the fragilities of banking systems which are already burdened by a high stock of bad loans, and could also strain debt sustainability in countries with burdensome public-debt-to GDP ratios.