Eurozone agonises over bonds

Via the BBC:

The coronavirus pandemic has exposed deep divides in Europe, with EU member states arguing over how to tackle the economic fallout.

Italy and Spain have accused northern nations – led by Germany and the Netherlands – of not doing enough.

Spanish Prime Minister Pedro Sánchez has even warned that if the EU fails to come up with an ambitious plan to help member states saddled with debt by the fight against coronavirus, the bloc could “fall apart”.

EU Council and Commission chiefs released a statement on Monday that said a “strong package is in the making”.

A teleconference between Eurozone finance ministers on Tuesday went on for seven hours and was set to continue through to Wednesday morning after Italy refused to back down on its demands.

A similar meeting two weeks ago bore little fruit. As a result, leaders sent their finance ministers back to the drawing board.

Italy, Spain, France and some other EU states want to share out coronavirus-incurred debt in the form of “coronabonds” (or eurobonds) – mutualised debt that all EU nations help pay off.

Some from these hard-hit nations have been angered by a perceived indifference from other EU states.

Wealthier countries like Germany are not yet digging deeper into their pockets to help out poorer nations like Italy and Spain.

Italy’s agony

Italy remains the epicentre of the crisis in Europe, with the highest death toll – more than 17,000; next comes Spain, with nearly 14,000 deaths, Johns Hopkins University data shows.

Even before the economic damage of this crisis, Italy’s public debt was 133% of its GDP (total output), or about $2.3tn (£2tn) – the highest in the eurozone after Greece.

Germany wants to set up an EU rescue fund and lend using mechanisms set up during the financial crisis of a decade ago.

This week, a group of Italian mayors and other politicians bought a page in Germany’s Frankfurter Allgemeine Zeitung newspaper to remind Germany that it was never made to pay back its debts after World War Two.

Public opinion has also been shifting in Germany.

Economists, politicians and commentators who once railed against mutualising eurozone debt to bail out Greece amid the last financial crisis are calling for exactly that to help Southern Europe deal with the coronavirus.

Even the German tabloid Bild, that led the anti-Greece charge 10 years ago, is now calling for coronabonds. The situation today is more like a natural disaster then a crisis sparked by risky lending, the paper argues.

For years some economists have urged the eurozone to issue common bonds, to address the structural fragility that the euro crisis exposed. But others, mainly in northern Europe, argue that taxpayers in wealthier countries should not have to bail out countries whose politicians were fiscally irresponsible.

Agreement emerging

Finance ministers are likely to converge on three ways to prop up the economy – use of the €410bn ($443bn; £360bn) European Stability Mechanism (ESM) bailout fund; the European Investment Fund; and a European Commission scheme called SURE, a new €100bn fund to help workers and businesses hit by the crisis.

“There is an agreement emerging on the first three options, but that is not enough,” French Finance Minister Bruno Le Maire told journalists ahead of Tuesday’s meeting.

Mr Le Maire wants a fund worth “several hundred billion euros” in joint borrowing to finance economic recovery.

But Austria, Denmark, Finland and the Netherlands have refused to back joint borrowing, anxious that they could be liable for repaying the debts of member states in the south.

The EU will probably agree on economic support through the usual channels, not through new coronabonds.

“There is a lot of room for solidarity within the existing instruments and institutions,” read a statement from EU Council and Commission chiefs on Monday.

Germany’s Chancellor Angela Merkel recommended using the ESM in this crisis, and also praised the European Central Bank (ECB) for launching €750bn in bond purchases to calm the sovereign debt markets.

A dramatic loss of confidence in southern European sovereign debt – especially that of Greece – threw the eurozone into crisis in 2010, and led to multiple bailouts, at huge cost to taxpayers.

It’s weird because northern taxpayers would basically be bailing out their own banks, which are hugely exposed to southern pain.

The collective action to date has been reasonable:

Yet MUCH more will definitely be required.

We still fear that without it, the anger will be so large in the south that break-up becomes a real possibility, via the FT:

The president of the European Research Council — the EU’s top scientist — has resigned after failing to persuade Brussels to set up a large-scale scientific programme to fight Covid-19.

Professor Mauro Ferrari, who started a four-year term as leader of Europe’s flagship scientific institution on January 1, submitted his resignation to EU commission president Ursula von der Leyen on Tuesday afternoon.

“I have been extremely disappointed by the European response to Covid-19,” he said in a statement to the Financial Times. “I arrived at the ERC a fervent supporter of the EU [but] the Covid-19 crisis completely changed my views, though the ideals of international collaboration I continue to support with enthusiasm.”

The ERC, set up in 2007 to fund Europe’s best scientists, has become one of the world’s most prestigious funding agencies with a budget of around €2bn a year.

Prof Ferrari, an Italian-American pioneer of nanomedicine, said his rift with the European Commission started in early March “as it became evident that the pandemic would be a tragedy of possibly unprecedented proportions”.

He said he proposed then to set up a special ERC programme to combat Covid-19. “I thought that at a time like this, the very best scientists in the world should be provided with resources and opportunities to fight the pandemic, with new drugs, new vaccines, new diagnostic tools, new behavioural dynamic approaches based on science, to replace the oft-improvised intuitions of political leaders,” he said.

We are talking about lives lost this time, not dollars and cents, as in the GFC. When southern blood is up, and is confronted with cold technocrats from Brussels, the outcome is neither in control nor certain.

I can see Italy flying out, as it probably should, or at least taking the gambit to a brink so precipitous that markets break.

After the virus, comes the revolution.

David Llewellyn-Smith

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