In an article published yesterday, I said:
Europe must answer the questions: “Are we together on this issue?” and “Is the union worth fighting for?”
(See “European disunity, a continent courting a viral crisis” Forbes April 9, 2020)
We have an answer; it’s disappointing.
An agreement was reached by EU finance ministers, but it was truly European because it can only be described as a “compromise”.
An agreement that demands more debt
The deal is worth € 500 billion ($ 545 billion) and will allow euro area member states to borrow from the European Stability Mechanism (ESM) bailout fund to finance spending needed to overcome the crisis.
Portuguese Finance Minister Mario Centeno said:
“We have decided to draw half a trillion euros to respond to this crisis … It is completely unprecedented. We have never reacted as quickly to a crisis as this. Will it be enough? Well, now we have to fight the virus, start reacting in terms of opening up our economies as soon as possible … and then we can start to rebuild. “
Will it be enough?
That was the question asked by Mario Centeno and the answer is “NO!” Resounding.
Look at the case. The text of the agreement paves the way for the creation by the European Investment Bank (EIB) of a fund that can guarantee loans to companies with reduced cash flows in the euro area.
However, liquidity is only available to be used to cover the costs of health care and is only available to manage the difficulties caused by the crisis. Funding will be available within two weeks and any recipient must agree to keep their finances in good shape after the pandemic. I must ask what grace period will be granted to companies after the crisis to establish a new sense of normalcy in their cash flow and balance sheet?
What’s more, which company wants to take on more debt, even at low rates at a time when it has virtually no cash flow and no real clue as to what the post-coronavirus economy will look like?
Compromise Yes, Community No
It is an unsatisfactory agreement to which the two extreme points of view of Italy and the Netherlands are persuaded to concede ground. The two parties were pressed by France and Germany so that a lodging vine sheet could be signed before the Easter holidays.
Italy was the hardest hit country in the eurozone by coronavirus. Why even before the impact is felt, Italy should only experience GDP growth of 0.4% in 2020. It would be a dream figure now, because Fitch sees growth collapse by 2, 1% in 2020.
Spain was also hit hard and before the spread of the coronavirus is expected to increase by 1.9%. Fitch has revised this number and now sees a 1.0% drop
Where is the meaning of the EU or a narrower euro area in all of this? In 2009, I opposed Eurobonds, because the debt crisis in Greece was only due to a very overwhelming Greek spending structure. The current economic crisis has not taken place in Europe.
We can assign the blame later, and I am sure that a day of global calculation will come. However, here and now, European projects, i.e. the union and the euro are melting before our eyes and the scenario is so serious that collective action has been … indeed, is still required .
This bad deal is shy and was shot with wet powder. Italy, Ireland, Spain and six other member states called for Eurobonds so that everyone can benefit from lower borrowing costs. These obligations could have been absorbed by the ECB and would have been a clear indicator of the intention to save the union.
By not grasping the nettle and the initiative, she tells the struggling eurozone members that they must use the new monetary freedom offered by the “general escape clause” and raise as much capital as possible on the Free market.
Please note, when the coronavirus crisis has passed, and it will pass, we will look at the levels of debt watering the GDP held by the whole euro using nations which have been punished by the health crisis and the economic dislocation which has monitoring.
So when these nations; my gaze is on Italy, I cannot honor their debt agreements, there will be a wave of recrimination in the euro zone which will make the Greek crisis of 2009 a walk in the park in comparison.