EsadeGeo Daily Digest, 07/04/2020

Financial Times – Guy Chazan / Coronavirus crisis prompts German rethink on Eurobonds

  • Nine years ago, Michael Hüther, one of Germany’s leading economists, poured scorn on the idea that the eurozone could issue common bonds to deal with the burgeoning sovereign debt crisis. Such “eurobonds” would act as a “negative incentive”, rewarding southern European countries for their lack of budgetary discipline.
  • Yet with the onset of the coronavirus pandemic, Mr Hüther has had a dramatic change of heart. Late last month he was one of seven prominent German economists who called on eurozone governments to issue €1tn in joint “European crisis bonds” to help the countries worst affected by coronavirus.
  • The first casualty of the crisis was the “schwarze Null” or “black zero”, the doctrine of no new borrowing relentlessly pursued by Angela Merkel’s government for much of the last decade that delivered six years of budget surpluses. This was abandoned in spectacular fashion last month when Olaf Scholz, finance minister, unveiled a €150bn emergency spending plan largely financed by new debt.
  • So far, the red line on common debt issuance is holding. Germany has always argued the idea would violate the “no bailout” clause in the EU treaty. Mr Hüther, meanwhile, has defended his change of heart. “Unless we can come up with a common crisis bond, I see a grim future for the EU,” he told the German daily Tagesspiegel. “It’s not about financing dams in central Italy. It’s a question of life and death.” 
  • Euractiv / Merkel warns on EU’s future as US braces for worst of virus

Foreign Affairs – Erik Jones / Old divisions threaten Europe’s economic response to the coronavirus

  • The European countries worst affected by the coronavirus pandemic—Italy and Spain, which have the highest death tolls in the European Union and face the strongest economic headwinds—are also among the principal beneficiaries of the new ECB policies. 
  • By purchasing Italian and Spanish bonds, the ECB has given Rome and Madrid leeway to focus on keeping their people healthy, without worrying about a domestic economic collapse. These bond purchases have also made a sovereign debt crisis of the kind the European Union last witnessed in the summer of 2012 less likely.
  • But the ECB’s recent moves have raised hackles in Germany and the Netherlands, where leaders fear that the bank’s actions will encourage governments to live beyond their means or avoid making painful adjustments once the crisis has passed. 
  • And the disagreements remain rooted in very real differences at the national level: by the end of 2019, Germany and the Netherlands had debt-to-GDP ratios of 59 percent and 49 percent, respectively; the ratios in Italy and Spain were far higher, standing at 136 percent and 97 percent, respectively.
  • Politico – Lili Bayer / EU budget won’t be corona-era Marshall Plan

The New York Times – Bethan Jones and Fabio Montale / Italy is sending another warning

  • Everyone knows Italy’s story by now. The first European nation to be hit hard by the coronavirus, it has become a harbinger for the rest of Europe and America. First, there was the lockdown. Then the sight of a health care system stretched to the point of collapse and the terror of a rising death count.
  • Now, nearly a month after the country went into lockdown, Italy is sending another warning. The economy is in trouble, bound for a major contraction. And the precariously situated workers — self-employed, seasonal, informal — are suffering the most. It’s not clear how much longer they can survive.
  • In Campania, the region of which Naples is the capital, 41 percent of people are at risk of poverty. Work is a problem: Last year, unemployment was around 20 percent and about that proportion of the region’s work force was underemployed. And for those who do have work, it is often informal, insecure — and particularly vulnerable to the crisis. An estimated two million people across the south have no formal contract.
  • The vulnerable workers of Naples, and the south more generally, need more help. The 400 million euros, close to $432 million, the government has set aside for food stamps is not enough. Now there is talk that the government’s next budget might include an “emergency income,” covering those so far overlooked. But the budget isn’t due until later in the month. For workers locked out of state support, that isn’t soon enough.
  • Politico – Hannah Roberts and Jacopo Barigazzi / Mafia plots post-coronavirus pounce

Project Syndicate – Joseph E. Stiglitz / Internationalizing the crisis

  • As has been obvious since the outset, the COVID-19 pandemic is a global problem that demands a global solution. In the world’s advanced economies, compassion should be sufficient motivation to support a multilateral response. But global action is also a matter of self-interest. 
  • The impact of COVID-19 on developing and emerging economies has only begun to reveal itself. There are good reasons to believe that these countries will ravaged far more by the pandemic than the advanced economies have been. These countries’ health systems are even less prepared to manage an epidemic than those of the advanced economies.
  • These developments are already being reflected in the yield spreads on developing countries’ sovereign debt. Many governments will find it exceedingly difficult to roll over the debts coming due this year on reasonable terms, if at all. Moreover, developing countries have fewer and harder choices about how to confront the pandemic.
  • When people are living hand to mouth in the absence of adequate social protections, a loss of income could mean starvation. Yet these countries cannot replicate the US response, which features (so far) a $2 trillion economic package that will blow up the fiscal deficit by some 10% of GDP (on top of a pre-pandemic deficit of 5%).
  • The New York Times – Paul Krugman / Will we flunk pandemic economics?

Today’s food for thought:

The selected pieces do not necessarily reflect the views of Javier Solana and EsadeGeo. The summaries above may include word-for-word excerpts from their respective pieces.

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