FRANKFURT — Europes currency union is passing up what could be its last chance to address its fatal flaw.
Eurozone finance ministers on Tuesday batted away suggestions that the coronavirus pandemic could be the catalyst for joint debt instruments, which would be the definitive statement that its members will stand by each other financially whatever happens.
Instead, the Eurogroup ministers made clear that whatever national governments have to spend to beat the virus, it will ultimately be for them to pay back.
Mário Centeno, chairman of the group, said after the meeting that the European Stability Mechanism would be the unions first line of defense for a cash-strapped country.
That matters because the €400 billion ESMs emergency loans remain the liability of the country taking them — assuring the Germans, Dutch, Finns and others that their savings wont go to support supposedly profligate southern Europeans.
“Given the severe economic and fiscal repercussions of the coronavirus outbreak, investors have again started to question the sustainability of public debt in southern Europe” — Goldman Sachs analyst Alain Durré
With joint liability barred by EU law, investors must allow for the risk that, for example, Italy will not be able to keep up payments on its €2.5 trillion debt — at least while it uses the euro and cant simply pay back in lira.
“Given the severe economic and fiscal repercussions of the coronavirus outbreak, investors have again started to question the sustainability of public debt in southern Europe,” Goldman Sachs analyst Alain Durré said in a note to clients on Monday.
The European Central Bank has for now covered some of these concerns with its latest monetary comfort blanket — the €750 billion Pandemic Emergency Purchase Program unveiled last week. Bigger than any program launched during the last euro crisis, it is more than enough to keep sovereign borrowing costs at acceptable levels in the near term — especially since the ECB gave itself the freedom to waive its usual limits on purchases from any one country, allowing it to buy disproportionately more Italian debt.
The ECBs move bolstered confidence in Italian government debt. At one stage last week, Romes 10-year bonds were trading with an interest rate of more than 3 percentage points above its German counterpart — a spread in excess of 300 basis points, in market jargon. The level has since fallen below 200 basis points.
While that leaves Italy paying an interest rate of 2 percentage points higher than Germany, its considered sustainable by most economists.
Still, the difference in borrowing costs will persist as long as a shared debt instrument — along with other elements of a fiscal union to accompany the euro — are off the table.
Nine EU prime ministers, including those of Italy, France and Spain, on Wednesday called for such a bond to raise money for battling the economic fallout. They pushed the idea in a letter ahead of a videoconference summit meeting Thursday.
Northern skeptics are still lined up against the notion. After initially noncommittal noises from Chancellor Angela Merkel, German Economy Minister Peter Altmaier told Handelsblatt this week that talk of “corona bonds” was “a phantom debate.”
A corona bond would come with a guarantee from all member countries. That would put the financial firepower of Germany and the Netherlands behind a credit that might be used mostly to support other, weaker economies.
It is Italy — the global epicenter of the pandemic for the last three weeks — where fiscal constraints pinch hardest.
“This is an extraordinary situation requiring extraordinary measures” — Panicos Demetriades, former governor of the Central Bank of Cyprus
While Germany outlined support measures totaling over €1 trillion for its own economy earlier this week, including a whopping €156 billion budget deficit, cash-strapped Italy has had to limit itself to a