The European Union is divided on ESM (state-saving fund) and Eurobonds (or coronabonds): can they really be useful to get out of the crisis caused by the coronavirus pandemic?
The coronavirus emergency has produced a further crack between the member countries of the European Union: the northern countries, often called “virtuous”, are the most opposed to coronabonds, or Eurobonds, bonds issued by the EU to support the expenses of individuals States, because the southern States (France, Italy, Spain, Greece in particular) have too high public debts, debts that would be “spread” among all the other countries. Instead, the countries of Southern Europe are against using the ESM, with the current rules (valid since 2012), because it would be a system of too expensive loans.
Two different concepts, which seem to challenge each other in a duel. But coexistence is possible. Let’s find out how.
What is ESM and how it works
The ESM (European Stability Mechanism) is a european intergovernmental organization. Active since July 2012, it has the main task of providing financial assistance to Eurozone countries that have or could have problems raising resources on the markets: a support that is granted only in the event that it is necessary to safeguard its financial stability euro area.
ESM instruments include loans to individual countries to allow for a macroeconomic adjustment, loans to encourage indirect bank recapitalization, as well as purchases of government bonds on the markets, precautionary credit lines and direct recapitalization which, however, have not been used so far.
ESM loans are not non-repayable loans. They are in fact granted only after the requesting country has signed a letter of intent, or a memorandum of understanding negotiated with the European Commission. Within this, specific interventions are generally required, in the context of fiscal consolidation (essentially cuts in public spending or tax reforms), structural reforms, or the financial sector.
There are two types of credit lines available: the “precautionary” (Pccl, Precautionary Conditioned Credit Line) intended for countries with debt / GDP ratio below 60%, and the “enhanced” (Eccl, Enhanced Conditions Credit Line), accessible even to those who currently cannot meet the eligibility criteria for the previous one.
Eccl loans oblige the country to take corrective measures to meet the non-respected parameters and avoid any future difficulties in accessing the markets: this explains the clash between EU countries.
Changes to the ESM loans for the coronavirus emergency
Eurozone member States now have the possibility to access Eccl loans with a lighter conditionality and up to an amount equal to 2% of national GDP. The ESM loan must in fact be used for the direct and indirect costs of health care, treatment and prevention related to the coronavirus crisis and the credit line will therefore be available until the end of the emergency.
Subsequently, the member States will remain committed to strengthening the economic and financial foundations, in line with the EU’s economic and fiscal coordination and surveillance frameworks.
ESM or Eurobonds?
ESM and Eurobonds are increasingly being shared in recent times in a comparison on which is the right solution to adopt to counter Covid-19. However, this is an incorrect approach, because it compares a financial institution (ESM), therefore with legal personality, and a simple financial instrument (Eurobonds, or coronabonds) for which there is no universally accepted definition and that , in the most common sense, it is intended as a debt instrument issued at European Union level.
Among the functions of the ESM, as we have seen, also issuing debt instruments that could be understood as “european government bonds”, ie Eurobonds. Last February the ESM issued two bonds and raised 4.5 billion euros on the financial markets: since it exists. it has done so a hundred other times.
But when politicians, economists, ordinary people, talk about Eurobonds they probably mean something else, that is, the issue of debt securities by an institution that still does not have the legal power to do so, that is, the “European Treasury“, which should play functions exactly similar to those of the individual national treasures.
However, we are still far from a similar objective, because in the EU fiscal policies still remain the responsibility of individual member states and there is no common fiscal policy, much less there is the mutualisation of the debt of the member States, that is, the pooling liabilities of individual financial statements, two conditions necessary to issue European bonds, which would be common debt securities.
However, this possibility has been completely excluded, even recently, by countries of Northern Europe, those “virtuous” in terms of debt, such as Germany and the Netherlands. Something about mutualization is perhaps moving, with the “Recovery Fund” relaunched by the Eurogroup, but we are still in the embryonic stage, nothing more.
And without a common debt and a European treasury that can manage it, the only shared resources for the coronavirus emergency therefore remain those used to capitalize on the Community financial institutions (ESM and EIB – European Investment Bank).