The #Eurogroup continues to be terrifyingly behind the curve. ECCL+OMT would have been a viable strategy 10 days ago, but the @ecb announcement has changed the situation completely. Now we need a long-term solution.
Thread:
consilium.europa.eu/en/press/press…
1/ 10 days ago, the main worry was soaring financing costs for 🇮🇹🇵🇹🇪🇸 and others. At that stage, an ECCL-based approach would have put OMT on the table: The Eurogroup would have given the ECB the necessary political cover. But ministers failed to put such a safety net in place.
2/ Then last Wed, the ECB decided to act on its own, without political cover. This is a stunning difference to 2012 when far-reaching decisions by the leaders e.g. on banking union paved the way for "whatever it takes". The PEPP is now the Eurozone's safety net for market access.
3/ This means that the Eurogroup should not attempt to put in place a second safety net that would again rely on the ECB - and ECCL is only a credible backstop if linked to OMT. The ECB has taken care of this. Ministers should turn their attention to building long-term solutions.
4/ This could mean to build a less ECB-dependent insurance for market access to avoid overburdening the ECB and avoid possible hiccups from the Karlsruhe judgment on QE in May. But more importantly, we have to make sure that we get the appropriate fiscal response everywhere.
5/ And here, the main binding constraint is likely not financing costs now, but different debt levels. If we want an equally powerful fiscal policy answer in this crisis in all member states, the necessary debt cannot fully end up on the most vulnerable member states' books.
6/ This is a complicated task and I do not have a full solution for this yet. Many forms of Eurobonds mainly ensure market access at reasonable costs but would still increase everyone's debt levels in my reading. One way out could be a commonly-funded European stimulus package.
7/ This would be funded by jointly-guaranteed bonds, would avoid mutualising current debt stocks and would ensure that the funds could flow where they are needed. This would imply a certain amount of de-facto transfers, but these would be in everyone's interest.
8/ The situation is messy and rapidly evolving but it seems clear that the focus of ministers should no longer be on the immediate calming of markets but on building long-term solutions. The #EUCO tomorrow should give them a clear mandate to work towards this goal.
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