After two meetings and some intense backroom negotiations, the Eurogroup finance ministers agreed on 9 April to allow member state governments to access the European Stability Mechanism (ESM) for temporary financing.
Such support could amount to as much as two percent of a country’s gross domestic product.
It would be offered under standardized terms agreed by the ESM’s governing body. And it would rely the ESM’s existing framework for conditional lending within the provisions outlined in the ESM Treaty.
The only condition for access is that the money be used to support health and medical costs associated with the crisis surrounding Covid-19.
This credit line will remain available until the immediate public health crisis is over. After that, the expectation is that ‘member states would remain committed to strengthen economic and financial fundamentals, consistent with the EU economic and fiscal coordination and surveillance frameworks.’
The Eurogroup did not, however, agree upon how, or how much, funding ‘to prepare and support the recovery’ will follow.
Instead, the Eurogroup finance ministers bought time for the heads of state or government of the European Union to consider just how much solidarity they are willing and able to express for one another in the face of an unprecedented economic downturn.
Kicking the can down the road like this is easy to understand.
The Dutch Finance Minister, Wopke Hoekstra, has made it clear that he would not agree to any major finance program for European recovery that placed Dutch taxpayers at risk for monies borrowed in other countries without conditionality.
The Italian Prime Minister, Giuseppe Conte, made it equally clear that his government would never agree to it.
The compromise reached in the Eurogroup satisfies both parties insofar as there is no major funding effort and the only conditions on the funds available relate to use and timing related to the ongoing health emergency.
If you add together all the different measures the Eurogroup finance ministers describe in their report, however, it is hard not to conclude that the fiscal response is underpowered.
True, it remains significant. The SURE program provided by the European Commission will backstop national unemployment systems with €100 billion in temporary loans.
The Commission can add another €2.7 billion on top of that, as an Emergency Support Instrument, together with €37 billion from money set aside for cohesion funds.
And member state governments have committed what the Eurogroup describes as additional discretionary spending worth approximately three percent of European Union gross domestic product.
These European totals come in well below the more than $2 trillion pledged by the United States Congress in its ‘Coronavirus Aid, Relief, and Economic Security Act’ (CARES).
However, it is worth pointing out that the two packages are not directly comparable and, when you add loan guarantees from the European member states and the European Investment Bank into the mix, you get to a number that is much closer to the U.S. total.
It is encouraging that the Eurogroup managed to come to an agreement. It is even better that Europe’s heads of state or government remain open to discussing how they are going to finance the rebuilding that will take place once this crisis has passed.
Yet when they do so, it will be important to point out just how much of the stabilization they have relied on has taken place through the guarantee of credit to the private sector and how many of those guarantees and how much of that credit creates risks that are shared across member states both through the ECB and through the European Investment Bank.
But while European solidarity exists for the private sector, if you know where to look for it, that same solidarity is harder to find for the public sector. The distinction is puzzling.
After all, private sector firms are so much more likely to go bankrupt than member state governments – and they are very likely to go bankrupt if member state governments can no longer pay their obligations.
If credit guarantees really are the only way that member state governments can cobble together a fiscal response that is macroeconomically significant, would it not make sense for them to provide credit guarantees for one another as they think about financing a long and painful recovery?
Surely what’s sauce for the goose is also sauce for the gander?
By Erik Jones, Professor of European Studies and International Political Economy at the Johns Hopkins School of Advanced International Studies.
