QTOD -- COVID19 and the European Stability Mechanism
Updated: Mar 27, 2020
As the day ends in the United States, market optimism (and a welcome bounce) is being driven by the prospect of a multi-trillion dollar stimulus package in Congress. The decisions made in that bill should provide a runway to support the U.S. economy over the next few weeks even as they alter dramatically the policy landscape. For more details, see our Daily COVID19 Report.
Potentially more dramatic shifts are underway in Europe. The details are so technical that they do not generate significant media attention. But we will be updating tonight our COVID19 and other proprietary lexicons on our platform to capture the latest additions to the pandemic response vocabulary.
EuroArea finance ministers met again today, their third meeting in as many weeks. No joint statement was issued. Instead, Finance Minister Centeno (who leads the group because Portugal holds the rotating EU Council Presidency) issued a solo statement which includes this detail towards the end:
In other words, the pandemic's economic repercussions are providing the EuroArea with the opportunity to take another step towards creating a fully functioning regional IMF...despite initial German objections. It seems the compromise with France was to create a facility with conditionality. Cynics will cite the experiences with the Stability and Growth Pact to question the likely strength or enforcement of conditionality in general, and in the context of the pandemic in particular.
The move is not merely one of meeting a dire and deep need for economic support among economies hard-hit by the pandemic crisis. The European Stability Mechanisms (ESM) is not within the European Union institutional umbrella even though its main purpose is to support the common currency created by the Maastricht Treaty. Deeper mechanisms for generating mutual support structures accelerate the momentum away from prohibited fiscal transfers under that treaty. They also provide another stepping stone towards common bond issuance by EuroArea sovereigns.
Assuming both Congress and the ESM continue along their trajectories, we may well soon view March 24 as the day when fiscal policy finally joined the fight to finance the pandemic economy and central banks finally gained a real partner.
These insights were powered by the patented BCMstraetgy, Inc. data platform, which quantifies public policy risks.