The European Council has just finished the longest meeting that it has had since the Nice, France gathering in 2000 and agreed upon a €750 billion recovery package. The package consists of grants and loans to counter the economic impact that the coronavirus has inflicted on the bloc since March.

European Council (EC) President Charles Michel described it as a “pivotal” moment for Europe and this sum represents the largest joint borrowing the EU has ever undertaken so far. The deal focuses on a €390 billion program to member states hardest hit by the virus such as Italy and Spain. An extra €360 billion in low-interest loans will alsombe available to EU states.

The ‘Frugal Four’ Opposed Grants for Spain and Italy

The agreement followed 90 hours of talks that started on Friday, during which tempers were frayed. The “frugal four” (Sweden, Denmark, Austria and the Netherlands) alongside Finland had opposed extending €500 billion in grants.

At one stage, French President Emmanuel Macron accused the frugal four of placing the European project in danger.

The €390 billion sum was recommended as a compromise, and the frugal countries were won over by the guarantee of rebates on their EU budget contributions.

Dutch Prime Minister Mark Rutte, despite being the biggest opponent of the original package, welcomed the deal.

This agreement will no doubt provide both German Chancellor Angela Merkel and Italian Prime Minister Giuseppe Conte with relief as they were the biggest proponents of the package from the beginning. Merkel argued throughout the last five days that “exceptional situations also require exceptional efforts.” Italian borrowing costs are also set to fall to March levels as the stimulus cheers markets.

The Deal Will Only Provide Short-Term Relief

Nonetheless, this stimulus will only provide the eurozone with short-term relief. Now that the EU has been provided with a recovery fund, the bloc’s greatest challenges lie ahead. The economic impact of the coronavirus has tested the single currency’s survival in a way not witnessed since the 2008 recession. If European leaders are serious about preventing a pandemic or any other external threat from threatening European unity again, they must deal with the bloc’s existential problems that the coronavirus exposed.

This was the first European Council meeting without Britain at the table. In December, a UK-EU trade deal should be completed, but if that process fails, the UK will quit the EU without a deal. This outcome would be far worse for the EU as Germany exports 800,000 cars to Britain every year, which equals 14 percent of all vehicles it makes domestically. German car imports would be levied by a 10 percent tax under World Trade Organization (WTO) rules.

Brexit Remains a Problem

The IMF suggests Ireland would suffer an output loss of four percent in the event of a no-deal Brexit. Therefore, EU diplomats should focus all their energy on preventing a no-deal scenario if they want to stimulate economic growth.

The coronavirus has also increased the prospect of other countries leaving the EU, too. The Daily Express reports on one survey which suggests that 50 percent of Italians support an “Italexit,” or Italy’s exit from the EU, whilst 27 percent of Italians prefer to remain within the bloc. Earlier this year, the President of the European Commission Ursula von der Leyen had to apologize for the way the bloc treated Italy at the start of the pandemic. It is unlikely that Italians will forget this when it comes to the polls, and COVID-19 has increased the prospect of an anti-EU coalition government being formed in Italy in the future.

Will There Be More EU Integration in the Future?

Milton Friedman and Martin Feldstein warned in 1999 that the eurozone cannot succeed without a political union. The coronavirus may make EU leaders realize that there is a greater need for political integration to prevent this situation from happening again, but it is looking doubtful all nations will agree, particularly Poland which is about to enter its own battle with Brussels over the imposition of gay marriage.

The markets may be celebrating the outcome of this European Council meeting, but technically the party is already over. How the EU evolves now will be the ultimate test of its survival.

L'articolo Why Eurozone Recovery Depends on More Than a €750 billion Stimulus proviene da InsideOver.

In a desperate attempt to mitigate the economic effects that the coronavirus has had on the EU’s economy, the European Central Bank’s (ECB) President Christine Lagarde announced on Thursday that the central bank will increase its Pandemic Emergency Purchase Program (PEPP) by €600 billion.

The amount comes on top of €750 billion of government bond purchases that the ECB announced in March. Altogether, the program will cost €1.35 trillion.

Furthermore, the EU institution said that the duration of its COVID-19 bond-buying program would be extended from the end of 2020 until June 2021, or until the bank believes that the crisis is over.

Lagarde’s Announcement Calms Markets

The central bank’s announcement has already had a positive impact on the market as it contributed to a further reduction in lending costs, with the yield on Italy’s 10-year government paper dropping from 1.56 percent to 1.40 percent shortly after the decision was announced.

The euro was 0.25 percent higher than the US dollar following the ECB’s announcement.

The coronavirus has had a severe impact on the EU’s economy. According to data obtained by CNBC, the unemployment rate rose from 7.1 percent in March to 7.3 percent in April due to the lockdown impacting upon jobs.

Nonetheless, manufacturing and services activity reached a three-month high in May.

Lagarde Will Not Let the Eurozone Collapse

By expanding the ECB’s bond-purchasing program, Lagarde has proven yet again that she will do whatever it takes to prevent the eurozone from collapsing and that she will amend the central bank’s own rules to thwart such an outcome. However, the ECB President still has many obstacles to overcome before she can claim that her bond-buying program is a total success.

The German Constitutional Court remains firmly opposed to the Bundesbank’s participation in any EU bond-purchasing scheme. Last month, Germany’s highest court declared that the PEPP must be ‘proportionate.’ This is despite the fact that the European Court of Justice (ECJ), the highest court in the EU, ruled in December 2018 that the ECB’s bond-buying program is legal. Germany’s highest court maintains that the ECJ had acted outside of its powers and its judgment is considered arbitrary, which shocked the President of the European Commission, Ursula von der Leyen, at the time, and many others.

The Guardian reports that Lagarde is confident that a good solution will be found that does not compromise the ECB’s independence. Despite this, there is no guarantee that the German Constitutional Court will share Lagarde’s optimism regarding the central bank’s PEPP.

The ECB President told a press conference that there is a “broad consensus” over the new stimulus package, but that remains yet to be seen. If a compromise solution cannot be reached with Germany’s highest court, then it is difficult to see how Berlin can legally participate in the PEPP. That is why some could argue that the German Constitutional Court may have killed the eurozone.

The Eurozone’s Fate Rests in Germany’s Hands

Ultimately, the eurozone’s fate will be determined by the German Constitutional Court. If Germany can legally participate in the PEPP, then Lagarde would have got her way, but the stimulus is only the beginning in terms of reforming the eurozone further. For the eurozone to survive in the long-term, it needs further integration and monetary reform, otherwise it will be very difficult to maintain its existence in the future.

Lagarde may be confident that she can compromise with the German Constitutional Court, but considering they opposed the original stimulus, a much larger one might be hard for Germany’s highest court to stomach. But at least for now, the ECB President can celebrate the announcement of her latest stimulus package, even if it means that her struggles have only just begun.

L'articolo Will Lagarde’s Expanded COVID-19 Stimulus Rescue the Eurozone? proviene da InsideOver.

The EU has already pledged itself to a €540 billion bailout to rescue the eurozone from the economic effects of the coronavirus, but the President of the European Commission (EC) Ursula von der Leyen, announced on Wednesday that she will pledge an extra €500 billion on top of the sum the bloc is already willing to spend. Altogether, that means Brussels is spending €1 trillion to aid the eurozone’s recovery.

On top of killing 172,000 people across Europe so far, the coronavirus has brought the continent’s economy to a grinding halt, with businesses gradually reopening and tight controls being imposed on borders that were once wide open for trade and travel.

France and Germany Support von der Leyen

The EC President intends to help the countries most affected by the pandemic such as Italy and Spain, and she already has the support of France and Germany. The latter countries announced their own joint initiative last week to raise €500 billion on financial markets to begin fixing the eurozone’s problems.

But von der Leyen’s proposal on Wednesday is likely to encounter some obstacles. COVID-19 has also revealed the EU’s inability to agree upon appropriate fiscal measures to lift the bloc’s economy out of a recession. There is an argument over whether the EU’s funds should be loans or grants. The “frugal four,” which consists of Austria, Denmark, Sweden and the Netherlands, are against joint debt in the form of coronabonds and favor loans. Italy and Spain have suggested that loans would not be sufficient to help them recover from the economic effects of the virus.

Coronavirus Has Exposed the EU’s Deep Divisions

The reason why the frugal four oppose grants is because they would require net contributors who pay into the EU’s budget to fill the financial black hole caused by the UK’s exit from the bloc. Before Brexit, Britain was Brussels’ biggest contributor. On the other hand, funding the continent’s recovery through loans would result in nations like Italy being saddled with more debt.

Mujtaba Rahman, Managing Director for Europe at the consultancy Eurasia Group, told CNN that without German opposition, the frugal four will struggle to convince enough member states to block the EU’s recovery fund. This will make it slightly easier for von der Leyen’s plan to be approved.

Nevertheless, that does not mean Germany will be footing the entire bill. The German Government has not agreed to provide the capital guarantees to procure relief funds before 2021.

An Agreement Won’t Come Easy

But time is tight and because the EU consists of many layers. This makes it harder for the bloc to come to a decision sooner. The European Council, which brings the EU’s leaders together twice a year to make important decisions, is meeting in June or July and they will need to negotiate a final deal then. The European Parliament would then need to provide an affirming vote in early September.

The political consequences of failing to reach an agreement would be substantial. The markets would panic and the EU’s credibility would be in tatters.

Timing is Everything

Even if all the EU’s member states manage to agree what a final stimulus package would look like, the eurozone’s survival depends upon the scale of recovery in the southern European states, particularly Italy. The Daily Express reports on one survey which suggests that 50 percent of Italians support an “Italexit,” or Italy’s exit from the EU, whilst 27 percent of Italians prefer to remain within the bloc. If the Italian economy continues to stagnate, these numbers are only likely to increase.

With Germany’s support, von der Leyen will more than likely win the European Council’s approval for her stimulus in June or July, but she should anticipate that her plans will more than likely be watered down. Like with all the crucial decisions the EU makes, timing is everything, and if the member states fail to agree on anything, Europe’s recession will be deeper than expected.

L'articolo Can von der Leyen Unite the EU Behind Her Coronavirus Stimulus? proviene da InsideOver.

EU leaders could be getting close to agreeing upon a fiscal package that may rescue the troubled eurozone from the economic effects of the coronavirus. French President Emmanuel Macron and German Chancellor Angela Merkel are proposing a €500 billion European recovery fund to be distributed to EU nations worst affected by COVID-19.

Considering Germany was hesitant at first to contribute toward a eurozone bailout, the agreement Merkel has come to with her French counterpart represents a fundamental shift in her position.

A Huge Victory for France, Spain and Italy

Macron believes that this is the right step toward ensuring that the eurozone remains united. Merkel proposed that the money for the fund be raised by the European Commission (EC) borrowing on the markets, which would be repaid gradually from the EU’s budget.

The proposed recovery fund would also provide grants to help finance the bloc’s investment in a greener future, which shows that the two EU leaders intend to ensure that Europe’s recovery is a green one.

This is a huge victory for France, Spain and Italy, three EU states which have consistently argued that the bloc needs to display more solidarity by sharing its debt. Arguably, though, the EU’s two most powerful nations attempted to demonstrate to their voters that their leaders can take decisive action when necessary — and for different reasons.

Are Macron and Merkel Focused on Approval Ratings?

Macron’s re-election bid is less than two years away. For him, this represents a huge foreign policy victory as he forced the Germans into accepting the need for grants as opposed to loans. Nonetheless, the French President still had to concede that German taxpayers would never accept a fund worth trillions of Euros.

Equally, Merkel’s term in office is ending, and she wanted to ensure that her final days were not spent presiding over the EU’s demise.

Though both leaders’ actions might have scored them points at home, it remains yet to be seen whether this fund will rescue the eurozone in the longer term.

Much of Europe’s economy remains in lockdown and until many employees return to work, that will be the crucial factor that will determine Europe’s economic prospects. The fund is designed to prevent jobs and businesses from disappearing once the lockdown ends.

Divisions Over the Recovery Fund Remain

Furthermore, some EU leaders remain opposed to the fund, which needs to be approved by the bloc’s 27 member states at the European Council’s meeting next month. Austrian Chancellor Sebastian Kurz is pushing for loans as opposed to grants. The Dutch Government in particular is anxious about any move that could institutionalize debt-sharing and unconditional grants, arguing that there is a ‘moral hazard’ in bailing out member states that have failed to prepare for economic difficulties.

Even the French President admitted that a Franco-German agreement does not mean all 27 member states have agreed to it as well.

The EC is also expected to announce its own plan next week, and it will be interesting to see how they propose to deal with the economic consequences of COVID-19.

Can EU leaders Agree to Further Integration?

As Milton Friedman and Martin Feldstein warned in 1999, the eurozone cannot succeed without a monetary union. Any money that the EU pumps into the single currency will only provide short-term relief and its survival will depend upon what happens in the next two years.

The future prospects of nations like France, Italy and Spain are grim as their economies have not fully recovered from the 2008 recession. They also have no monetary or exchange rate to jump-start their own economies. Italy’s poor public finances have restricted it to a €25 billion fiscal stimulus that equals 1 percent of its GDP.

The Franco-German package must be accompanied by serious institutional reform if EU leaders are serious about ensuring that the eurozone survives, otherwise southern European nations will remain in permanent stagnation and may even one day quit the single currency. But the EU’s biggest challenge will be to persuade its 27 member states to support further integration, and given the bloc’s recent history, even that looks unlikely.

L'articolo Will Merkel and Macron Save the Eurozone? proviene da InsideOver.

As EU leaders struggle to agree upon a recovery package designed to alleviate the economic effects of Covid-19, Germany has thrown its weight behind funding the bloc’s measures, whatever they may be. German Chancellor Angela Merkel told a meeting of politicians from her Christian Democratic Union (CDU) and the Christian Social Union in Bavaria (CSU) bloc on Tuesday that Germany must help its European neighbors recover from the crisis.

She was seeking consultations on an EU reconstruction program and she is open to ideas as to how it will be funded. The Bundestag would then be involved in determining how much aid will be transferred to Brussels.

A Significant Step for Germany

This is a significant step for Germany as it proves that its finances will be distributed across the EU to ensure that the impoverished states like Italy, Spain, Portugal and Greece will be bailed out no matter what happens. This is exactly what happened in 2012 when the German government had to rescue those four countries and Ireland, and again in 2015 when the Greek financial crisis was at its worst.

Merkel has understandably been reluctant to use her country’s money to finance the economies of southern European nations. Both Germany and the Netherlands have consistently opposed the use of coronabonds to aid southern Europe’s economic recovery. These bonds are a means of issuing collective debt across the 19 eurozone states.

Furthermore, it was only last month that the Chancellor told the Bundestag that they should be prepared to inject more cash into the eurozone before a meeting of EU leaders that paved the way for £470 billion of financial support.

The German Constitutional Court May be a Problem

Nonetheless, Merkel still faces opposition at home from one of Germany’s political institutions. The country’s Constitutional Court ruled on Thursday May 7 that the European Central Bank (ECB) must clarify how the EU’s bond-buying scheme to support the eurozone is “proportionate.”

Also, the Bundesbank will be excluded from joining the quantitative easing asset purchase program in three months’ time unless the ECB’s Governing Council adopts a new decision that proves that the monetary policy objectives pursued by the central bank are not disproportionate, the Constitutional Court said.

In response to the Constitutional Court’s ruling, Merkel declared on Wednesday, May 13 that the court’s decision should spur efforts toward greater eurozone integration. She added that it was clear since the euro’s inception that greater political coordination among its participant countries was essential, and threw her weight behind support for a political union.

Merkel’s Risky Decision

This is a risky move for the Chancellor. Support for her coronavirus measures has grown in recent months, with German publication Bild throwing its weight behind her plan to rescue southern Europe even though it opposed the 2010 Greek bailout.

DW reported that 72 percent of Germans surveyed by public broadcaster ARD said they are satisfied with Merkel’s government.

Meanwhile, support for the Alternative for Deutschland (AfD) party dropped by two percentage points to 10 percent. This shows that Merkel can pursue her latest measures knowing that the public largely support her.

However, as Bloomberg’s Andreas Kluth suggests, in the long-term northern European voters may resent having to pay for the south and this could lead to the rise of northern nationalist governments taking their countries out of the eurozone.

Merkel’s popularity may be high for now, but the AfD won 94 seats in the Bundestag in 2017. Their support may have decreased recently, but if the costs of the EU’s economic recovery increase over time, they could easily capitalize on this resentment.

Even if EU leaders are able to finally agree upon a final rescue package, it is clear Merkel will ensure that Germany finances it. She may have the support of the German public and the Bundestag for now, but if the EU’s measures have no effect, she may soon find it evaporates in the long-term. This will jeopardize her plans for greater monetary and political integration across the EU.

L'articolo The Significance Behind Merkel’s Support for EU Economic Recovery proviene da InsideOver.

The EU’s economic woes are set to continue, with Euronews confirming that both Italy and France entered a recession in the first three months of this year while Spain’s GDP fell sharply.

The Worst GDP Numbers in a Decade

France experienced the largest fall in GDP since 1949 as its GDP fell by 5.8 percent in the first quarter. This is much sharper than the 1.6 percent contraction observed in the first quarter of 2009. Italy’s GDP fell by 4.7 percent in the first quarter. If this figure is confirmed, it would be the worst reading since 1995.

The Spanish economy shrunk by 5.2 percent, which is the worst reading since the 1970s. Furthermore, the EU’s GDP decreased by 3.5 percent in the first quarter of this year, according to Eurostat, the bloc’s official statistics agency. The drop was even more acute for the eurozone’s 19 member states, with GDP to have contracted by 3.8 percent quarter-on-quarter.

The news comes as the European Central Bank (ECB) announced that it had kept interest rates unchanged, but was ready to increase its coronavirus stimulus program if necessary. The central bank also announced that it had eased lending conditions for banks. ECB President Christine Lagarde said at a press conference on Thursday that the eurozone is facing an “unprecedented” economic contraction.

Was Creating the Eurozone a Mistake?

The coronavirus has tested the EU’s resolve to maintain the eurozone on a scale not witnessed since the 2008 recession. Both Milton Friedman and Martin Feldstein warned when the eurozone was established in 1999 that the EU had made a significant mistake by establishing a monetary union before it had created an effective political union.

Out of the three eurozone economies that have entered a recession, Italy’s is the most vulnerable and what happens here will determine the rest of the single currency’s fate. Desmond Lachman, a resident fellow at the American Enterprise Institute, wrote in the Hill that Italy’s prospects of a quick post-coronavirus economic recovery are slim. Whilst the country is stuck in the single currency, it does not have its own monetary or exchange rate policy to jump-start its economy. The same applies to France and Spain.

Although the ECB is initiating every financial measure possible to prevent the collapse of the eurozone by offering TLTROs (targeted longer-term refinancing operations), which are loans that the central bank offers at cheap rates to banks in the eurozone, market participants worry about debt sustainability in the longer-term.

Considering the public finances of France, Spain and Italy are highly compromised, they are unable to use their own fiscal policies to stimulate their economies. Italy’s poor public finances have restricted it to a €25 billion fiscal stimulus that equals 1 percent of its GDP.

The Next Two Years Should Worry EU Leaders

Should these three nations fail to experience a quick recovery from a deep recession, they will experience large budget deficits that would put their public debt on an unsustainable path. Italy’s banking system may experience a solvency problem as its non-performing loans would continue to increase to staggering levels.

The next two years should worry EU leaders. The Italian Government in particular could need more than $1 trillion in financial support to finance its deficit. Its banking system may also need the same amount of money just to stay afloat.

In the wake of the Italian, French and Spanish recessions, the ECB’s latest measures prove that they will reluctantly purchase these nations’ government bonds just to prevent Italy in particular from quitting the eurozone. However, without the financial sovereignty to speed up their own recoveries, it is questionable how long the ECB can finance its current plans. Italy’s long-term debts are only likely to worsen. Italian politicians must ask themselves if it is worth retaining its country’s eurozone membership for the sake of maintaining fiscal unity across the continent, or whether they should embark on their own path.

L'articolo How the French and Italian Recessions Will Impact the EU proviene da InsideOver.

The Financial Times said that under Christine Lagarde’s leadership, the European Central Bank (ECB) is the only EU institution that can ‘save the eurozone’ in the midst of the economic impact that the coronavirus is having on Europe’s economy. This is because ECB governors agreed during a meeting on Wednesday that banks could put up ‘junk’ bonds as collateral when borrowing from the central bank, in case firms and eurozone governments witness their credit ratings downgraded.

Italian debt could slide toward ‘junk status’

The ECB is now offering banks access to substantial amounts of cash via low interest loans on top of its $1.2 trillion ‘quantitative easing’ bond program with the aim of ensuring credit travels to the real economy to sustain the damage of a financial blow caused by lockdowns.

In order to access liquidity, banks must still put up collateral, which is often government or other debt on their books. If government or other debt is labeled as ‘junk’, that means it could not be classed as collateral. This will hinder banks’ ability to continue lending and disrupt their economic activity by forcing them to sell the debt.

The country that would be most affected by the ECB’s latest moves would be Italy. According to France 24, ING analysts wrote ahead of a telephone conference late Wednesday that junk bonds ‘have Italy written all over them.’ Experts believe that Italian debt could slide toward junk status.

Covid-19 is testing the limits of the bloc’s solidarity

The ECB’s decision has helped maintain short-term financial stability by keeping consumer prices on an even keel. The central bank’s bond holdings are on track to total around $4 trillion by December, approximately a third of the eurozone’s GDP. This will help cover the €1.5 trillion of additional government spending that will be necessary to fight the upcoming recession.

As Bloomberg’s Piotr Skolimowski argues, what makes the eurozone unique is that the 19 member states are not part of a fiscal union and Covid-19 is testing the limits of the bloc’s solidarity.

Gilles Moec, chief economist at AXA in London and former Bank of France official, believes the ECB could resort to ‘slow debt monetization’, and says that the central bank could even buy the loans made by banks to businesses and repackage them into 30-year loans with a zero percent interest rate. The idea is that if loan repayments are extended over a period of thirty years as opposed to three years, then the debt is more than likely to be paid back.

Italy will lose out in the longer term

The ECB has a couple of options to curb the economic effects Covid-19 is having on Europe’s economy, but the choices it makes to rescue the eurozone will damage Italy’s economic prospects in the future. The central bank’s suspension of its own fiscal rules means that the indebted Mediterranean nations will have to repay their debt at some point. Italy’s debt-to-GDP ratio could exceed 160 percent, estimates Goldman Sachs. Italy is likely to experience classic debt trap dynamics in the future once the ECB’s assistance stops. This means that the Italians would be unlikely to refinance their expanding debt.

Italian journalist Thomas Fazi said three options are left for his country if that happens: it quits the euro, accepts the European Stability Mechanism’s austerity program that could lead to decades of austerity, or Italy’s debt is monetized. For the Italians, any path that the ECB follows may provide short-term relief but long-term pain for a nation that has already experienced over a decade of austerity following the 2008 financial crisis.

Lagarde may be doing everything she can to rescue the eurozone for now, but her policies will be financially damaging for the southern European states. Once she ends her suspension of the ECB’s rules, Italy will come out of this crisis worse than other EU member states.

L'articolo Can the European Central Bank’s rating cuts save the eurozone? proviene da InsideOver.

As the coronavirus continues to impact upon the global economy, the President of the European Central Bank (ECB) Christine Lagarde has launched an emergency €750 billion package to ease the impact of the pandemic. It will buy government and company debt across the eurozone, including the troubled member states of Italy and Greece.

Details of the ECB Package

However, it will only be a short-term asset-purchasing scheme and it will end once the ECB determines that the Covid-19 crisis phase is over. Furthermore, the US Federal Reserve stated it would cooperate with other central banks to boost the availability of dollars for commercial banks. This is an important tool that was used to preserve stability during the 2008-09 financial crisis.

What Motivated the ECB’s Decision?

The ECB President’s actions have been motivated purely by politics. Lagarde said herself that “there are no limits to her commitment to the Euro.” The ECB is restricted to purchasing up to 33 percent of a member state’s debts, which shows that the central bank is willing to smash its own fiscal rules in order to preserve the single currency.

Before Covid-19 spread throughout the globe, many journalists were anticipating that Italy would crash out of the Eurozone at some point. The ECB President’s latest move shows that she will not let a global pandemic destroy the Euro by buying not only Italy’s debts, but Greece’s, too.

Even the Daily Telegraph’s Jeremy Warner writes that many EU member states have spent so much political capital on the European Monetary Union (EMU) that policymakers are determined to prevent the coronavirus from destroying the eurozone, even if that means the single currency has to stagger on.

The reality is that the EU is doing everything it can to minimize the impact a recession is going to have on the European economy. The Organization for Economic Cooperation and Development (OECD) slashed the Eurozone’s growth rate to 0.8 per cent from 1.2 per cent earlier this month.

European Commission President Ursula von der Leyen has promised “maximum flexibility” in the implementation of state rules and the Stability and Growth Pact. In addition, member states are holding on to €8 billion of unspent funds that would be redirected to urgent needs related to the pandemic, which could potentially unleash €37 billion.

No Guarantees That the Eurzone Will Survive Post-Coronavirus

But this stimulus will not solve the eurozone’s problems in the future. As Doug Holtz-Eakin, the President of the American Action Forum and a former top economic adviser to George W. Bush and John McCain, told NY Mag when discussing the same situation in America, there is no evidence that supply shocks can be fixed through fiscal stimulus. Demand is likely to rise sharply once the number of Covid-19 cases drops over time, and that will boost economic activity. Fiscal measures only increase debt in the longer term, which will not help any European states when this is over.

Many EU members know that the financial consequences of tearing apart the Eurozone will be catastrophic. Martin Wolf of the Irish Times stated that the single currency can survive through the creation of cross-border finance and it must be easier for Eurozone states to restructure debt. Banking and capital unions are vital to ensure the single currency survives. Of course, all single currency members would need to agree with each other that this needs to happen, and the current climate might persuade many nations to adopt measures that can preserve the Euro’s existence.

Nonetheless, the Eurozone’s survival beyond the coronavirus is not guaranteed. It will require a tremendous amount of political will to persuade all Eurozone states to strengthen the mechanisms necessary to secure the single currency’s future. It remains yet to be seen whether that will happen or not.

L'articolo Will Lagarde’s ECB Stimulus Ease the Coronavirus’s Economic Impact? proviene da InsideOver.

Concerns about an economic crisis affecting the eurozone have reignited after it hit a seven-year low on Friday, which will have an impact on the EU. Germany’s economy stagnated while both France and Italy contracted in the last quarter. The chances of a recession increased after the coronavirus dealt an economic blow to the eurozone.

The EU has experienced its weakest economic growth since 2013, with a rate of 0.1 percent. The last time it was this low was when the debt crisis risked a European recession.

Germany’s growth rate failed to meet expectations and was down from an upwardly revised 0.2 percent in the third quarter.

As German Chancellor Angela Merkel nears the end of her chancellorship, this news could not come at a worse time. As Politico’s Matthew Karnitschnig argues, the economy has been key to her longevity. Until now, German output has grown in all but one of her 14 years in office, stuttering only during 2009 when the 2007-09 Recession was at its worst. Growth has been steady, but modest, reaching a 1.6 percent average during her tenure.

Germany’s latest economic results will be felt across the continent. Finance Minister Olaf Scholz has repeatedly resisted calls for a financial stimulus from industry leaders. However, what Merkel needs to demonstrate during her last months as Chancellor is leadership. There are many challenges facing her country and if she wants to secure a legacy, she must use what time she has left to address them.

When Gerhard Schröder was Chancellor until 2005, he implemented a series of welfare and labour reforms as part of his ‘Agenda 2010’ vision. By the time the 2008 Recession started, the German economy quickly recovered thanks to German cars and machinery being exported to China. It now has the world’s largest trade surplus. But the reason why there is a lack of an economic vision from the Christian Democratic Union of Germany (CDU), Merkel’s party, is because they have been in power for too long. This is why new leadership is needed.

Annegret Kramp-Karrenbauer, the politician seen as the Chancellor’s successor, announced on Monday that she would step down from the CDU chair. In response, the Social Democratic Party (SPD) has said it could quit the governing alliance if Merkel is forced out of office. If the CDU hope to retain power, they should solve their internal battles so that they have a chance of getting re-elected with a new vision for a new decade, especially with the AfD rising in popularity.

One problem Merkel faces is Brexit. With Boris Johnson insisting that a trade deal must be sorted by December, Merkel must urge her European counterparts to demonstrate some flexibility in providing Britain with a deal that benefits both sides. A no-deal Brexit would damage German automotive companies like BMW, which produces 60 percent of its Mini vehicles at the company’s Cowley plant in Oxford.

The Chancellor has been trying to resolve trade tensions between the EU and the US since last year, and this is damaging Germany’s economy in the long-term. Last month, US President Donald Trump and the EU promised to continue with negotiations to secure a trade deal between both sides. Germany’s industrial output has dropped by 1.5 percent since June and is now down 5.2 percent year-on-year, with Trump’s tariffs being identified as a central reason for that. Ending this crisis will be a positive outcome for Merkel and for Europe.

Dealing with these problems is the only way Merkel can secure a positive economic legacy during her final days in office. It remains to be seen in the coming months whether she still has the political will to solve them.

L'articolo How Can Merkel Transform Germany’s Economic Woes? proviene da InsideOver.

In 2011, the eurozone survived a crisis that threatened its existence. Portugal, Ireland and Greece were provided with rescue packages and the President of the European Central Bank (ECB), Mario Draghi, was praised as a hero. In 2012, he said he would do ‘whatever it takes’ to save the euro. As he prepares to retire from his role this month, his long-term legacy on managing Europe’s single currency is questionable. He could not be leaving at a worse time as Germany tinkers on the verge of a recession.

One of his final acts is to introduce a stimulus package that will slash interest rates from -0.4 per cent to -0.5 per cent and resume quantitative easing (QE). His target is to ensure inflation remains below 2 per cent. Klaas Knot, the head of the Dutch central bank, referred to this measure as ‘disproportionate.’ The governors of the French and German central banks are also opposed to this stimulus package. By buying up bonds from toxic EU member states like Ireland, many governors are wondering if the ECB is now bypassing its own bylaws at the expense of ensuring the euro survives.

Furthermore, purchases have been unsuccessful. When the ECB bought a large number of Spanish government bonds last August, yields declined by more than a percentage point at first. But then yields drastically increased in value. Draghi’s plan has the risk of creating further division between the north and the south in the fragile equilibrium of the ECB’s Governing Council. Norbert Barthle, the CDU’s chief budgetary expert, told Spiegel Online that it is “not the central bank’s job to buy up government debt.” Representatives of the Mediterranean countries also suspect that the Bundesbank is becoming increasingly reluctant to bail out southern European countries and may contemplate returning to the Deutsche-mark.

The advantage for Mediterranean countries in 2011-12 was that larger economies like Germany were not experiencing a painful recession. Although the Dax index increased by 15 per cent this year, the German economy declined by 6.7 per cent. The Financial Times reports that the MSCI believes a no-deal Brexit would deliver a 5 per cent blow to German equities. Also, falling Chinese demand and Donald Trump’s threat of tariffs on European cars means the country’s stocks may crash. If the EU’s largest economy enters a recession, the eurozone is unlikely to survive.

The Spectator argues Germany must take bold fiscal action. The European Commission called for ‘pre-emptive, rather than reactive’, fiscal policy- which only Germany can deliver. If Merkel can help Boris secure a Brexit deal, that would partially relieve the EU’s economic anxiety. Andrew Sheng of the South China Morning Post suggests the eurozone needs a modern-day equivalent of the Marshall Plan and that Germany can provide it thanks to its huge budget surplus. He adds that the German Chancellor must accept that Greece’s debts are also Germany’s problem as long as the eurozone ‘family’ continues to exist.

Last year, Merkel proposed a strict eligibility criteria for a European Monetary Fund that excludes those nations failing to tackle their debts from receiving money. This attitude is consistent with Berlin’s hawkish outlook on the eurozone crisis. A sluggish German economy will only make the Chancellor more reluctant to bailout Mediterranean countries. But the EMF alone is unable to rescue the euro.

Today, Italian debt to GDP has risen to 130 per cent. The country is already facing a two trillion-euro financial crisis and the ECB can only buy 33 per cent of a nation’s debt. This means the central bank does not have enough cash to rescue the entire Italian economy. If Italy crashes out of the euro, it will struggle to repay its Target2 loans to Germany and damage the latter’s economy further. Some, like Nikolai Hubble, predict this could lead to a recession worse than 2008.

Therefore, no amount of German money could ever rescue the eurozone crisis. It is now a question of when, not if, the entire system collapses.

L'articolo Can the Eurozone Survive Another Likely Recession? proviene da InsideOver.