Yanis Varoufakis, the former finance minister of Greece, had a front row seat for the EU’s last existential crisis. Now that Europe, as well as the rest of the world, is struck with coronavirus, he claims that European leaders are making the same mistakes all over again. “They are dealing, just like in 2010. They dealt with that crisis as if it was a crisis of liquidity, when it was a crisis of bankruptcy”, he said. I trust Yanis would agree with me that European leaders are practicing the “Greek Tragedy of Errors” or a kind of corona economics. Voodoo economics has become a popular, widely-used phrase to dismiss economic pledges and corona economics will probably go in history as a failure of leadership, as well as an institutional failure. At Europe’s dramatic times, political leaders and the European Central Bank (ECB) are stuck in rigid frame of mind that only spawns complicated and shortsighted solutions, and possibly adverse effects.
Yanis Varoufakis said “banks should not continue to sell non-performing loans to funds and put homeowners at risk of foreclosures – especially after people have been asked to stay indoors for weeks on end to contain the spread of COVID-19”. He also criticized the fact that “Every billion or trillion they are referring to is loans” while loans are the last thing businesses and governments need now. He proposed the EIB should issue eurobonds and support the European Investment Bank in major investment programme and do not push more debt onto the shoulders of the European Union member states.
Tackling the crisis as a liquidity crunch, the ECB is going out of its way to provide reassurance that banks will continue to benefit from access to ample central bank liquidity at favourable terms. In this regard, a central element of so-called “collateral easing measures” is for the ECB to expand the acceptance of credit claims as collateral. This means accepting collateral such as loans with a lower credit quality that are guaranteed by governments. The ECB has also decided to temporarily “freeze” ratings at the level that applied on 7 April 2020 to ensure that banks’ can still borrow more against a devalued collateral. Banks are also incentivised by the ECB to buy other banks’ short-term debt. The liquidity easing measures also included a temporarily waive of the minimum rating requirement for Greek government bonds. In short, the ECB a “trash bin” for junk claims held by the banks.
In March this year, the ECB initiated the temporary Pandemic emergency purchase programme (PEPP) with a total enveloppe of €750 billion. The PEPP is an asset purchase programme of private and public sector securities. It will be terminated by the end of the year. The programme is acting as a backstopping of additional public borrowing of countries hit by the pandemic and is an poor alternative to the reluctance of European countries to share the burden of the pandemic. EU leaders remain divided on the issue of jointly backed bonds.
In their meeting of April 23rd, EU leaders endorsed a €540 billion package and agreed to work towards establishing a recovery fund targeted towards the sectors and geographical parts of Europe most affected. The package includes a joint employment insurance fund worth €100 billion. The package will operate through the European Stability Mechanism (ESM) for funds to covering health-related expenses, EIB the European Commission’s new instrument “SURE”. The EIB is to create a guarantee fund of EUR 20 billion. The SURE instrument would provide loans granted to Member States, of up to EUR 100 billion in total from the EU budget, against guarantees provided by Member States. The eurogroup also agreed to work on to kickstart the recovery and support the hardest-hit countries.
All in all, the package containing little fresh money is not ambitious and provides mostly loans and guarantees. I always think of my surprise when I discovered that the money pledged by European leaders at the Valetta meeting to tackle the thorny migration issue was in fact just repackaging of development funding. Yanis Varoufakis described the European response to the pandemic as “kicking the can down the road”. Unfortunately, there will be no fairness in shouldering the cost of the pandemic at the end of the road. So far, the economic response will very likely affect people in different and unfair ways. Some will feel the pain much more than others.