Commentary. The ECB and monetary policy alone cannot solve the structural problems accentuated by the corona-crisis regarding the supply and demand conditions in the real economy.

The EU needs a new economic agenda

The clash in the European Union, and in Italy, about the European Stability Mechanism and Eurobonds is obscuring the most significant economic and social problems that the coronavirus is bringing to the fore all over the world. The latest forecasts of the IMF are confirming that the most serious world recession since 1929 is starting, which is, moreover, coming in the wake of that of 2008. There are also prospects of profound changes in lifestyles and in the common sense of the public regarding important aspects of our social coexistence.

In Europe, the corona-crisis could also end up providing the reason for continuing the unifying process; however, the agenda on which the governments are clashing remains conditioned by contingent electoral logic.

The process of the construction of the European Union has already suffered particularly badly from ungoverned globalization and the state-market imbalances that have most affected its small and medium-sized countries. Now, the economic and institutional fragmentation of the EU and its policies of strict accounting inconsistently applied to macroeconomics are weakening it in its fight against the corona-crisis. In this context of great changes, the disagreement over the ESM and the Eurobonds is of a smaller importance than it is being given.

Even with the proposed updates, the two instruments remain very different. The ESM suffers from the vision of counterproductive rigorism that has held back the unification process. In the Eurogroup meeting on April 9, the proposed reduction in its conditionality mitigated its vexatious nature; however, it was still emphasized in the report produced after the meeting that “afterwards, euro area Member States would remain committed to strengthen economic and financial fundamentals, consistent with the EU economic and fiscal coordination and surveillance frameworks, including any flexibility applied by the competent EU institutions.” Accordingly, this reduced conditionality is time-limited!

Eurobonds, on the other hand, even if limited to the needs induced by the pandemic (Coronabonds), would constitute a qualitative leap forward to counter the corona-crisis and to re-launch the construction of the European project on a new basis. However, even among the instruments already in use in the EU, there are others that are proving to be more decisive in importance.

The ECB is already intervening in support of the member states on account of their specific needs generated by the crisis. The purchase of national government bonds worth 1.15 trillion euros on secondary markets in 2020 (not excluding further increases) is no longer linked to each country’s participation in the ECB’s capital. The types of collateral accepted by the ECB for loans to ordinary banks have expanded to include low-rated banks such as the Greek ones, which also offers further support to all Eurozone government bonds.

While it is impossible to discuss Eurobonds in the Eurogroup, €2.2 trillion in bonds from European countries are already on the ECB’s balance sheet. Of course, the primary securities market (on which the ECB is currently unable to intervene) and the secondary market are different, but they are intercommunicating more and more.

On the other hand, it is no coincidence that our spread is much lower than it was in 2011, when the situation was less serious. Therefore, the ECB is already making interventions similar to those that the government representatives in the Eurogroup are heatedly discussing, and which are also dividing the government majority in our country.

However, the ECB and monetary policy alone cannot solve the structural problems accentuated by the corona-crisis regarding the supply and demand conditions in the real economy. Liquidity, however it is provided (via Coronabonds, the ESM, other state or European loans), will help in various ways to solve the pressing financial needs. However, the structural difficulties on the supply side (the increased fragility of the productive systems generated by the combination of delocalization and protectionism) and on the demand side (the reduction in domestic incomes and international trade) cannot be solved with injections of liquidity, which, by lowering the productive levels, are instead fueling financial bubbles.

The imbalances between the reduction of the supply and the growing liquidity could give rise to differentiated variations in the prices in different sectors, even in an increasing direction, which could coexist with recessive and depressive pressures, fuelling novel phenomena of “recessflation” and “depressflation.” To counter these new imbalances, the markets will need even more interaction with the institutions, and it would be a priority for the Eurogroup to deal with this issue.

Among the “side effects” of the coronavirus, there is also the fact that it brought confirmation of just how inconsistent the logic of the “divorce” between the Central Bank and the Treasury is. The United States and the UK are recovering the use of the instrument of the monetary financing of spending, which can sustain supply and demand without fuelling financial bubbles. Including this point on the EU’s agenda would be more forward-looking than merely debating the merits of the ESM and Eurobonds.

Subscribe to our newsletter

Your weekly briefing of progressive news.

You have Successfully Subscribed!