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Agreement reached in Europe: A mix of ESM, sure and Eurobond

After two days of negotiation, the Eurogroup finance ministers found a compromise: a package of common measures for the coronavirus emergency of over € 500 billion, to which could be added an amount that overall is expected to exceed 1,000 billion.

Obviously, it is a compromise. In fact, everyone had to give in to their initial requests. Who more, who less. The Mediterranean countries asked for Eurobonds, perhaps in the context of the French proposal for the Recovery Plan. The Northern countries –  headed by Germany and the Netherlands considered – and actually still consider this hypothesis impractical, and declared themselves open only to the use of the European System Mechanism (ESM), but under the strict conditions provided by the Fund itself. Finally, the European Commission of Ursula von der Leyen put its project (Sure) on the table to reduce the effects on unemployment.

Actually, it was clear to everyone that the European response would never come by activating only this or that instrument, but it could only be from the use of a mix of tools. And so it was. The three instruments approved by the finance ministers are: the ESM; the European Investment Bank (EIB); the SURE (Support to mitigate unemployment risks in emergency). In order to assess the scope of the agreement – and understand if it is a good agreement – we must first examine what is expected for each instrument, starting with the most relevant one: the European Stability Mechanism (ESM).

First of all, it should be remembered that the so-called state-saving fund was created during the last financial crisis to provide loans to those states that were unable to finance themselves on the markets, but in the face of strict conditionality. In practice, those who receive the loans undertake to approve a memorandum of understanding that defines with rigorous precision what measures they undertake to take (especially in terms of cuts in the deficit / debt and structural reforms).

The compromise provides that European countries can apply for loans to the ESM, at much lower rates than the market and with rather long maturities, for a total amount that cannot exceed 240 billion euros. At the insistence of the northern countries, the entire firepower of the Fund that exceeds 400 billion will not be used. However, each country cannot access credits for an amount greater than 2% of GDP. Southern countries are popping up in dropping the stringent conditions for accessing the Fund, but on condition that they use precautionary credit lines only to cover health and prevention costs related to coronavirus. A time limit is also set: the ESM can be accessed in these ways only up to the duration of the coronavirus emergency. If they do it later, the most severe conditions are restored.

The second instrument on which the ministers agreed was the SURE, strongly desired and already announced in the last few days by President von der Leyen mindful of his previous position as Minister of Labor of Germany. This mechanism will be able to unlock up to € 100 billion to integrate both the Italian layoffs and the Kurzarbeit in Germany. In order to do this, member states will have to provide national guarantees of up to 25 billion which will be used by the Commission to issue triple A bonds (very safe and therefore with low interest rates) which are then transferred to the member countries through long-term loans.

Generally, the amount that can be allocated to member countries will be rather small, but higher than the commitment required of them through guarantees. Therefore, even if for a limited amount, it is already a first form of Eurobond with a mutualisation of the relative debt. It creates a significant precedent, useful for the future in order to resume Eurobonds.

By: Domenico Greco

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