Image source: andreykuzmin © 123RF.com
European Finance Ministers struggle to strike a chord over the proposed relief package for the reeling European economy as a result of the coronavirus fallout. A teleconference, which started on Tuesday evening, dragged until Wednesday morning, as the profound differences of opinions underlined a clear division between two camps.
Earlier in the week, the President of the European Council Charles Michel, the President of the European Commission Ursula von der Leyen, and the President of the ECB Christine Lagarde promised massive financial support coming in the near future.
"There is a lot of room for solidarity within the existing instruments and institutions. We have to exploit these tools fully and remain open to doing more. A strong package is in the making. Our goal is clear: we will protect European citizens and businesses from the economic impact of the pandemic."
Despite the shared optimism, however, an underlying rift between the Finance Ministers of poorer countries that have been hit harder by the epidemic and those of more affluent countries with more resilient financial systems became more apparent after the conference.
Spain and Italy insist the financial support that has been extended so far is insufficient. They require the issuing of joint European debt to mitigate the continually increasing impact of the economic fallout.
Sharing the debt between all member states is going to alleviate some of the financial strain that poorer countries were already feeling even before the crisis. Italy’s debt was running at 134 per cent of its GDP before the outbreak of COVID-19.
Italy Debt to GDP. Image source: TradingEconomics.com
These numbers are certainly going to rise in the wake of the financial recovery that is going to take place after the epidemic is dealt with.
That is why the coronabonds are perceived in southern Europe as a balancing mechanism that is going to redistribute the financial burden of the recovery equally amongst all members of the bloc.
Meanwhile, the governments of countries like Germany and the Netherlands, which run a very tight fiscal budget, are opposed to the idea of issuing coronabonds. The ‘richer north’ perceives the proposition as an attempt of financially irresponsible countries to share the brunt of their outstanding debt with others.
The corona-crisis has exposed a geographic rift of opinions between the more prosperous north and the poorer south, which could have lasting effects for the EU's political landscape and its future cohesion.
If a mutually satisfactory agreement is reached soon, the European bonds market is likely to react to the news right away. The yields of short-term Spanish and Italian bonds are expected to jump on the much-needed financial alleviation.
The market already reacted in a likewise fashion when the ECB announced its stimulus bazooka in Mid-March.
European Bonds. Image source: Trendsharks ©, created with TradingView.com
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