What role for the ECB? Bringing symmetry to asymmetrical risk in the EU

What are the features of ESM Pandemic Crisis Support?

On 23rd April 2020, EU leaders endorsed the Eurogroup agreement of 9 April 2020, which established three safety nets for workers, businesses and Member States, amounting to a package worth 540 billion Euros. Besides the three safety nets, this Eurogroup Report also agreed to establish the “Pandemic Crisis Support”. The Pandemic Crisis Support is based on the current Enhanced Conditions Credit Line (ECCL) of the European Stability Mechanism (ESM), which in turn, was adjusted in light of the specific challenges caused by the COVID-19 pandemic.

As specified by the Eurogroup Report of 9 April, the Support “will be available to all euro area Member States” and the only requirement to benefit from the credit line is that Member States applying for this support would commit to use the credit line “to support domestic financing of direct and indirect healthcare due to the COVID-19 crisis”.

On 8th May 2020, the Eurogroup agreed on the features and standardized terms of the Pandemic Crisis Support, confirming that all Euro area countries meet the criteria of eligibility to access this credit line. The access granted will be 2% of the respective Member State’s GDP as of the end of 2019. After preliminary technical assessments of Member States’ economic and financial situation, the Support’s debt sustainability and its financial sustainability risks, the ESM governing bodies will approve the Pandemic Response Plans, decisions to grant financial assistance to each Member State according to its individual situation, in line with Article 13 of the ESM Treaty. The credit line is expected to be operational by 15 May 2020.

Whilst the conflict over the ESM, the Pandemic Crisis Support and the SURE were solved during the European Council meeting on the 23rd April, the Recovery Fund and its exact use are still in doubt.

European Commission President von der Leyen is convinced that the Recovery Fund will not only provide a first initial repair of the crisis’ damage, but that this instrument will also generate recovery. In the same speech, given after the last EU Council conference in April, she mentions how crucial it is to preserve the “integrity and cohesion of the Single Market”.

The single market and EU cohesiveness at risk?

The preservation of the Single Market is indeed one of the goals that today’s EU, as a political and economic actor, should pursue. Diverging positions and approaches to the tackling of the current crisis would undermine the Single Marker’s integrity and cohesion, generating even more uncertainty – and subsequently further depressing economic activity.

On the one hand, even if solidarity is key, and the answer to many of the political conflicts within the EU’s response to the crisis, the reason why there’s no consensus on the shape of the Recovery Fund is clear: the risk EU countries face is different because at the national level each member state has a different financial room of manoeuvre given their public debt % on GDP. As such, the effects of any EU policies and financial assistance will differ considerably.

What role for the ECB?

In this potentially very asymmetric scenario, it is worth considering the role of the European Central Bank. Its action – detached from the dictates of political conflict – can in theory be much prompter than that of other institutions and could thus provide a truly European response. This depends on the ECB decision making procedure, based not on unanimity but on a rotation of voting of its Governing Council.

The ECB’s primary action is to provide liquidity and it is committed to the principle of symmetry. According to the Press Release on 30 April, a new series of long-term refinancing operations – under the name of PELTROs – will be carried out. These operations are in action since the beginning of May and such injection of liquidity will support the euro area’s financial system. The interest rate linked to such refinancing operations will be 25 point below average.

Moreover, certain purchases have been made under the new PEPP program (pandemic emergency purchase program), aimed at alleviating the risks posed to the Euro area by the pandemic. What is interesting to underline is the readiness of the Governing Council to “increase the size of PEPP (now at €750 billion) and adjust its composition, by as much as necessary and for as long as needed”.

What to expect from the future?

This crisis shows us how the European order is still fragile and needs to be ever more ready to face crises in the future, even anticipating their break out. However, arguably the readiness and flexibility of the ECB shows that the 2008 lesson has been learnt.

The ECB predicts that we could observe a drop in the GDP by 5-12% this year. This will all depend on the effectiveness and duration of the containment measures, together with the potential positive efforts of the successive recovery policies already in place. In particular, Christine Lagarde highlights the fact that the new liquidity is currently supporting those sectors more exposed to the crisis. Thanks to the ECB, EU institutions and national policy measures concerning credit support, banks should feel “encouraged to extend loans to all private sector entities”.

By Chiara Russo and Costanza Marcellino, RMES students at FASoS, Maastricht University

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