CORONAVIRUS & ECONOMIC CONSEQUENCES: LET'S MAKE A BIT OF CLARITY

29/03/2020

In these days there is giant news about the Coronavirus, European aid and the future of Europe itself. Everyone is talking about it, but no one seems to want to tell the whole story. Some see and highlight only the negative sides, while others only highlight the positive ones. Therefore, taking this lack of information as a starting point and further noting that, until proven otherwise, we live in Europe and this issue concerns us personally, we will do so on this page.

On Thursday, the heads of the respective European governments met to try to reach a preliminary agreement on the aid to be allocated to the emergency we are experiencing, an emergency that can sink the European economy by as much as 10%. Unfortunately, the last meeting did not produce the desired results. As always, internal divisions have prevented us from quickly finding joint solutions capable of dealing with emergencies, in this case, that of the Coronavirus.

It must be said, however, that the institutions as such, namely the Commission and the ECB, acted, it would seem, well and promptly. Certainly, the still limited budget competences that the Union has, prevent it from resolutely tackling any problem on a European scale. To be precise, the European budget amounts to approximately 1% of the GDP of the Member States, while the national budget is around 50%; we can see that there is little room for manoeuvre. Another matter is that of the ECB (European Central Bank), which, after the initial gaffe on the part of its governor, the French Christine Lagarde, has made a very decisive commitment, yesterday launching the largest 750 billion euro government bond purchase programme, the largest seen to date, financing the issue of new debt within all Eurozone countries. Well, that is no small thing, really.

However, in addition to the good moves mentioned above, one must note (mercilessly) the lack of unity on the part of the states when taken individually. Practically, the solutions that have been used, i.e. the decisions taken by the ECB and the use of funds from the Community budget, have been taken quite quickly because they are already available and ready to use. Another issue concerns the hypothetical Corona-bonds, nothing more than debt securities issued on a European scale to combat the coronavirus pandemic; hence the name Corona-bonds. This instrument does not yet exist and therefore requires the approval of the member states (27 states). That is why, on Thursday, we saw the negotiations by representatives of European governments, which ended with nothing.

This option would allow the European Central Bank (ECB), or other institutions - among which the European Investment Bank was also mentioned - to issue EU debt securities that would then finance the various European economies (in proportion to the damage suffered) during and after this pandemic. Besides, "our" Mario Draghi, for those who did not know, former governor of the ECB, as well as one of the few who succeeded in the difficult task of saying "nein" to Germany, has expressed himself decisively in spurring the member states to face the problem more strongly and cohesively, but above all with the help of new expansive fiscal measures (new public debt to be precise). We will see whether the issue he raised will be heard, we believe so.

The Crown-bonds, as well as representing a finally united Europe, serve to counter any kind of speculation due to the vulnerabilities that a single state may encounter while trying to issue new debt on its own, just think of the already very high levels of Italian and Greek debt, but also the worrying levels of French, Portuguese and Belgian public debt and the difficulties they may face if the situation degenerates. These measures would give breathing space to the health system, to citizens, but above all to businesses, which are facing a tragic period, probably much worse than the one already experienced in 2009.

For the record, the United States is about to approve an extraordinary plan of 2,000 (!!!) billion dollars (a figure of 12 zeros), while in Europe, several states are, for the time being, alone issuing new debt. In this case, Germany will reach 160 billion, while Italy, news of these days, will probably reach the threshold of 50 billion. Well, there it is - nothing to say. At times like this, there is no other alternative, but the Corona-bonds and the "all for one" hypothesis would probably be much more efficient and appropriate at the moment. It would as said, greatly reduce the issue costs expressed in interest. However, the crux of the matter lies in the fact that these potential bonds would show the world that the Union is strong but, above all, supportive, which is what we need right now.

The problem, however, lies in the nature of the European treaties. To date, they do not provide for the European institutions to incur public debt (which states individually do), because full mutual trust is still lacking and therefore the issue has never been dealt with. From this point of view, we are currently experiencing disputes between the South and the North, with the South united wanting the Crown-bonds, while the North, also united, remains sceptical about it. We specify that the nomenclature "South" here is indicative, since next to Italy, among the signatories of the proposal we see France, Spain, Ireland, Belgium, Greece, Portugal, Luxembourg and even Slovenia. Incredibly, in this case, the South also includes France of Macron, a state which, it is said, has a strong voice within the main European institutions. We are also pleased to see that with Italy there is also neighbouring Slovenia, a country with which there have been some tensions in recent weeks, tensions which we hope can be resolved soon.

Well, you will say, and why do we not act now? The question is simple, the countries of the North (not only Germany, for example), do not yet intend to finance the countries of the South. Finally, it is estimated that the total cost to German taxpayers is around EUR 30 billion more than under normal conditions. A solution, however, may come in the coming weeks. Our hopes stem from the fact that, for the first time, countries as large as France, but also Luxembourg (which usually have a lot of power in Europe), have sided with the Italian side. Needless to say, this support for the issue gives us much comfort. Besides, the solution could come from the words of the governor, the Frenchwoman Christine Lagarde, who, after an initial gaffe, came up with the excellent idea that the Crown-bonds could be used in a "one-off" way (just once), which could appease the souls and fears of the hard and pure Nordicists.

We hope, therefore, that this idea, representing a possible middle way, can finally satisfy everyone and finally show that Europe as an institution is not only based on technical-economic issues, but also a lot of solidarity among its peoples.

Martin Novak - Gorizia3.0