The president of the European Commission, Ursula von der Leyen, said “The European Union has the most comprehensive package of measures combating the coronavirus and it is deploying different instruments in order to have the biggest impact for solving the crisis”. This statement has triggered my curiosity and led me to look into the package of €540 billion (4 percent of EU27 GDP) that EU leaders endorsed on the 23 April 2020. I was not surprised to find out that the amount announced is an outright inflation of reality. So, let met comment on the three safety nets the package covers.
First, the package provides €25 billion in government guarantees to the European Investment Bank (EIB) for mainly funding a guarantee scheme. The EIB has estimated that €1 billion guarantee tranche will mobilise up to €8 billion of SME financing by financial intermediaries. So, the European Union is nowhere close to providing €200 billion of funding, but the package wrongly adds up the expected amount of investment that the guarantee supports. This is by no means a mistake. It is an exaggeration of the total financial response.
Second, the package includes an amount of €240 billion for a credit line that the European Stability Mechanism (ESM) was allowed to provide to countries of the euro area hit by the pandemic, to finance health-related spending. The combined volume of loans was calculated on the assumption that all 19 area countries draw from the credit line, but less than the theoretically available funds are expected to be requested and funds do not to have to be drawn, according the ESM.
Thirdly, the package foresees the creation of temporary loan-based instrument (SURE) of up to €100 billion for short-term work schemes – to help workers keep their incomes and help businesses stay afloat. The SURE instrument is the emergency operationalisation of another programme “the European Unemployment Reinsurance Scheme”. All Member States will be able to make use of this but it will be of particular importance to the hardest-hit. To finance the loans to Member States, the Commission will borrow on financial markets. The loans will be underpinned by voluntary guarantees from Member States and will start to function once all Member States have committed to a minimum of €20 billion. Access to the instrument will be discontinued once the COVID-19 emergency has passed. It not certain that the instrument will be operational before the end of the pandemic, as countries are already reopening their economies.
Putting aside the inflated volume of the package, the finally agreed amount is about one-third of what the European Central Bank (ECB) had urged. The European Union acknowledged that it has agreed to work on a temporary Recovery Fund to tackle the economic consequences of the pandemic. However, we will most probably have to wait till the adoption of the 2021-20127 EU Multiannual Financial Framework (MFF) for essential investments and other recovery related expenditures. Already at the start of the year, the President of the European Central Bank, Christine Lagarde, pushed for greater coordination between the European policy makers, arguing that a joint fiscal push would help jump-start the sluggish economy. Again, in its meeting of March 18, the ECB highlighted that “joint and concerted action at the euro area level was still lacking”, including through unified fiscal measures. At the end, the response falls short of expectations and has dissipated the prospects of a speeding recovery.