If there is to be any hope that fiscal discipline might one day develop across the EU, eurozone countries and the European Central Bank (ECB) will have to demonstrate their ability to respond to an unprecedented crisis with unprecedented measures, says Anton Brender.
What can we do, together, to cope with the financial consequences of the covid-19 pandemic? This is the very question the eurogroup has been discussing heatedly. Over the last few years, the divide between the northern and southern member States on the management of fiscal balance has not diminished.
The "ants" of the north can pride themselves that over the short summer enjoyed by the European economies, they have amassed surpluses to buffer the deterioration of their public finances. The same cannot, unfortunately, be said for the "grasshoppers" of southern Europe. Yet it is in these countries where the pandemic has had the most dramatic effect, and where the confinement measures to reduce the human cost will produce the most serious economic impact.
The looming deterioration of Italy’s public finances are particularly worrying: even before the crisis, the growth outlook for the country was poor and, in the absence of steady growth, it will be very difficult to bear the additional debt burden brought by the pandemic."
The looming deterioration of Italy's public finances are particularly worrying: even before the crisis, the growth outlook for the country was poor and, in the absence of steady growth, it will be very difficult to bear the additional debt burden brought by the pandemic.
It is no surprise that Italy's prime minister was the first to call for Europe to design new financial solidarity instruments.
The European Commission responded by offering to create a fund of €100bn to cover part of the fiscal cost of the short-term unemployment measures put in place almost everywhere. For the rest, the most fragile countries were invited to use existing instruments: the European Investment Bank - whose lending capacity will be bolstered; and the European Stability Mechanism - whose conditionality was sharply reduced. However, there was no unanimity on the issuance of jointly issued debt securities to collectively finance the consequences of the crisis.
To go down this road would be to open what the Germans call the euro bond Pandora's Box. There is no guarantee that this type of financing, currently referred to as "exceptional", would not become the norm in the future, sinking any hopes that the member State profligate spenders would eventually comply with the fiscal discipline underlying the treaties.
Righting one of the wrongs of the "founding fathers" of the single currency might secure this. The architects of today's system not only forbade the central bank to directly buy up the debt of member States, they also denied States the resources derived from the issuance of banknotes in circulation.
Naturally, the profit the ECB is making are transferred to the governments; but the source of financing constituted by the issuance of notes is not. One way of sharing the increased debt brought about by the present contraction in activity would be to agree to the ECB maintaining government debt on its balance sheet for an amount equal to the amount of currency in circulation, like the US Federal Reserve does.
The latter still accounts for around 10% of eurozone GDP, i.e., to almost what this health crisis could cost each national budgets. The powerful symbolic nature of such a decision would not be lost on participants. It would also definitively put to one side - and off-market - the fiscal consequences of the drama being experienced in our countries, while setting at the same time a mechanical limit for the monetary financing of their budgets.
That it may imply adapting the wording of the treaties is inessential : what's important is to announce that, to retain the spirit of the treaties, we are ready to do so.
Anton Brender is chief economist at Candriam Investors Group, in Paris.