EU fiscal deal finally arrives
Despite being hit earlier than the U.S. by the coronavirus, the European Union as a whole had not yet created a fiscal response, but that changed late last week. The question is, will it be enough?
After several days of negotiations, EU finance ministers finally agreed upon a €540 billion deal. The details still are being worked out, but its three pillars are:
- Credit lines up to 2% of each member country’s GDP, amounting to roughly €240 billion, administered through the European Stability Mechanism.
- Loan guarantees worth up to €200 billion for small and medium-sized enterprises, provided by the European Investment Bank.
- Subsidies of around €100 billion to pay employees for hours they lost through reduction in hours or furloughing to incentivize companies from resorting to layoffs, a facility called the Support mitigating Unemployment Risks in Emergency (SURE).
While these measures provide much support, they fall short of the major joint fiscal action that likely will be needed. The leading proposal is that EU countries would issue a massive amount of bonds, not so affectionately referred to as coronabonds. But discussions have stalled due to the same divisions between the northern and southern member nations that wreaked havoc during the sovereign debt crisis. Until they can overcome the dispute, the steps taken so far can buy time in the near term, but more likely needs to be done.
The opposite is happening across the English Channel as the U.K. government and the Bank of England (BoE) are working together. The Treasury reinstated the BoE's ability to directly finance certain government spending—essentially serving as overdraft protection. The program has some rightly concerned about the independence of the central bank, but officials said the government would repay the BoE by year-end. Notwithstanding this risk, the flexibility offered by the facility is welcome news to the market, although further steps likely will be needed as the economic malaise continues.