Europe is financially well-equipped to deal with the coronavirus shock, but it has to decide what it wants to become

April 6, 2020

 

Europe is fighting a war, it is clear. No doubt that the priority must be people’s health. However, we cannot ignore that our economies are suffering and that something extraordinary is needed in order to avoid an – otherwise inevitable – depression. Mario Draghi declared in the Financial Times: “The challenge we face is how to act with sufficient strength and speed to prevent the recession from morphing into a prolonged depression […] It is already clear that the answer must involve a significant increase in public debt. […] Much higher public debt levels will become a permanent feature of our economies and will be accompanied by private debt cancellation.”

 

It is sure that the European budgetary rules will be temporarily eased; in fact, the European Commission has already declared that the Stability Pact has been suspended. So, the challenge is not about allowing member states to run larger deficits but, instead, finding someone who wants to buy this debt at a reasonable interest. Many European countries already have a high debt ratio and piling up more debt would definitely mean increasing their credit risk. Any investor would require high interest to buy these bonds. Therefore, any financial instrument that protects the members from speculation is welcome. 

 

In this sense many ideas are being discussed, such as a European Stability Mechanism (ESM) intervention, the use of Outright Monetary Transactions (OMTs) – Draghi, just by mentioning them in 2012, reassured the investors and cooled the markets down – and, finally, the creation of eurobonds (or coronabonds). Let us explain what they are.

 

The European Stability Mechanism