The EU´s economy has been and continues to be deeply affected by the long lockdown, causing great difficulties to millions of families.

Initial uncertainties of European institution and self-centeredness of Member States in the first phase gave rise to euro sceptical forces which fed anti-European feelings, acting on the fears of citizens and amplifying their ideological exploitation and the spread of fake news.

But the emergency we are facing requires responsibility, courage and organization.

This note aims at giving clear and real data on the commitment of Europe in the management of the pandemic crisis.

What is going on

After the first moment of confusion, today we must recognise that the EU is playing its part.

In the beginning, the ECB, but also other European institutions, underestimated the extent of the pandemic, as so did most of the national governments, not only in Europe.

Now, the EU is planning a joint response to the pandemic in order to strengthen the health sector and to mitigate the socio-economic impact of the crisis.

The way the EU is facing this crisis is certainly not the EU we have always dreamed of: there are still too many national egoisms which have prevented the strengthening of common policy and economic instruments.

Egoisms and divisions have been visible also within Member states. This lies in the nature of ‘local’ approaches and responsibilities of governance, where each community, even the smallest, tends to protect its own interests ad people – often however with negative repercussions on the wider social and health systems.

A global crisis needs common solutions

The consequence of this “sovereignty”: “If I shut in within my borders I cannot prevent the Dutch or the Germans from doing the same. “

But in the face of a crisis that is upsetting the already precarious global balances, no state can shield itself from the crisis and its socio-economic impacts on its own.

The virus knows no borders. Countries like Australia or New Zealand, isolated for their location and structure, have nevertheless been hardly affected by the pandemic.

In the face of a global crisis, we need global solutions that the mobilization of political, medical, economic, fiscal and monetary responses that are not possible for a single country. Europe must respond adequately to what China and the US do in order not to lag in the post-pandemic reconstruction.

What has already been done by the ECB and Ecofin.

In April, the European Central Bank approved the Pandemic Emergency Purchase Programme (PEPP) worth 750 billion euros for the purchase of government bonds on the market, in order to ensure liquidity and contain the risk of an unmanageable rise of interest rates.

This last programme is added to the 300 billion euros purchase of government bonds, reaching the figure of 1,050 billion euros in purchases. In March, the Council of Economic Ministers of the EU (ECOFIN) activated the suspension clause the Stability Pact for a “severe economic downturn”, allowing increased public spending.

European aid for reconstruction

On 9th of April, the Eurogroup (the coordination of the Ministers of the Economy of the 19 Eurozone countries) adopted a proposal for three instruments to support states:

The use of the European Stability Mechanism (ESM) on the sole condition that resources shall be used for direct and indirect health expenditure related to the Coronavirus emergency, without the need for an analysis of the public debt of the state requiring the activation of the Fund.

Common bonds issued by the European Investment Bank (EIB) to provide liquidity and guarantees directly to enterprises.

A new fund called SURE (an acronym for Support to mitigate Unemployment Risk in an emergency) intended to finance part of the national short-time work programmes.

ESM

The European Stability Mechanism, (ESM) is a European fund financed by the states, established in 2012 to support particularly hit Member State in the aftermath of the 2008-2009 financial and economic crisis.

It may intervene – at the request of an EU Member State in economic difficulty – to provide financial assistance by granting soft loans or by recapitalising banks. The ESM was deployed to save Ireland, Greece, Portugal, Cyprus and Spain.

The real advantage of the ESM, in addition to providing liquidity at virtually zero cost to support businesses and families, is to facilitate access to the OMT (Outright Monetary Transactions) program, the famous ‘Bazooka’ announced by Mario Draghi: The unlimited purchase by the ECB on the secondary market for government bonds.

The new ESM without conditions

Before Covid19

Access to the ESM aid is based on strict conditions and a fiscal adjustment plan.

Access is granted after a debt sustainability analysis.

The resources are disbursed in several steps in order to verify the achievement of the required objectives.

After Covid19

Access to ESM aid is unconditional (for direct and indirect health expenditure related to the Coronavirus emergency).

The resources (up to 2% GDP) are set only for expenses related to the emergency.

There is no debt sustainability analysis.

Resources disbursed in a single solution.

Why say ‘yes’ to the ESM

The ESM could immediately lend 240 billion euros. It is the cheapest and quickest way to find resources to support the health sector affected by the acute phase of the virus.

The activation of the ESM opens the door for unlimited purchases of government bonds on the secondary market by the ECB (the Otms, the ‘Bazooka’ of Draghi): this would ensure that spread is kept under control.

If each country did it alone, interest rates would continue to rise until it would become unsustainable.

What is ‘SURE’

It is a new tool specifically aimed at saving jobs; however, it needs to be activated.

It is meant to support Member States (which would have to take loans. i.e. to further increase public debt) for temporary measures to avoid layoffs.

The operating system is very similar to that of the ESM, yet the resources can be used exclusively to save employment. In this crisis, an instrument of such a scale has never been set up for workers. It is the first common instrument in Europe for social schemes and will be worth 100 billion euros.

While the ESM is an already active instrument, SURE must be created (and therefore financed) and requires the immediate payment of guarantees, meaning an increase of public expenditure.

How the EIB works

The European Investment Bank is a European institution capable of issuing common bonds.

It exists since 1957 to finance projects which contribute to the achievement of the European Union’s objectives.

To fight the socio-economic impacts of the Corona-crisis, the EIB will intervene to lend up to 240 billion euros of liquidity or guarantees directly to companies.

Eurobond or Coronabond

Today, the EU is not able to issue own bonds in the same way as a national state because it has no fiscal capacity of its own to guarantee the repayment of loans: new European governance will be needed, with supranational powers on taxation and finance.

All state aid mechanisms (ESM, SURE) issue common debt securities to raise resources backed by guarantees and shares of EU Member States.

Today, the only way to activate a so-called Eurobonds system would be to create a new instrument, somewhat identical to the ESM: a fund (with immediate payment of guarantees by the Member States, thus having a direct impact on public debt) able to issue bonds and give loans to the EU Member States in need – yet this is still far from finding agreement among the EU Member States.

What could we do then?

We could interpret the definition of “expenses related to the health emergency” of the ESM in the widest possible way,   including economic and financial costs induced by the health crisis.

We have to make sure that access to the ESM also gives access to OMT of the ECB – that is to say to open the possibility for the ECB to proceed to the unlimited purchase of government bonds on the secondary market.

We have to have our voices heard in the process of the establishment of the so-called “Recovery Fund”, both in terms of design and amount.

Recovery fund

The proposal should not include debts of the past (i.e. it should not lead to German taxpayers paying for the Italian debt; nor should it impose national restructuring measures, as has the classic ESM, by the ‘infamous’ troika), but, as has been decided, it should establish common investment targets and the thereto related issue of government bonds.

The Recovery Fund should ensure that – through the 2021-2027 budget of the EU- the economies of the EU 27 are relaunched and the solidarity between the Member States is ensured.

The Recovery Fund would be temporary, targeted and proportionate, to face the extraordinary costs of the current crisis.

It should aim at least 1 trillion euros.

In conclusion

The EU certainly reacted too late, and national emergency policies prevented it from deploying its strength. But considering the now agreed upon interventions, impressive financial means have been made available to the economy.

1750 billion by the ECB, the suspension of the balance-sheet obligation, 100 billion by SURE, 240 billion by the new ESM (without conditions for health expenditure related to the Coronavirus), 200 billion by the EIB and not least the expected at least 1 trillion by the Recovery Fund. This represents a mass of investments and loans higher than those of the USA and China.

They must certainly be made available soon and without too many obstacles nor bureaucratic constraints. If this is the case, we can say that the EU will be up to the challenge!