Thread by @mnicoletos

1/11 A thread on the #euro and why I think its existence is about to be tested.

2/11 #Europe is about to face a simultaneous endogenous & exogenous economic shock. The #COVID19 is creating multi-level disruptions, and the #EU will need to act swiftly to address them. However, history has shown that #EU's decision-making process is very rigid. #euro

3/11 Yesterday, the European Commission pledged 25bn to tackle the economic crisis caused by the #coronavirus outbreak. This amount is equal to ~0.15% of #EU's GDP. Hence, bolder moves will be needed to address the upcoming economic disruption. #euro

news.trust.org/item/202003101…

4/11 Two of the obligations of the #Maastricht treaty were that its members keep their debt limits <60% of GDP & their annual deficits <3% of GDP). The debt obligation has not been met. Moreover, Debt/GDP has been increasing steadily in most member countries. #euro

5/11 If I am not mistaken, the average Debt/GDP ratio for the #Eurozone is standing at ~85%, while being much higher for some countries. (In #France, the Debt/GDP ratio has reached 98%, and in #Greece is over 180%.) #euro

6/11 So the debt limits went out the window. What about the deficits? Except for #France, which has found (some) ways around it, everyone else has mostly abided by this rule. Given the economic shock, it is clear that the #EU will be forced to raise the deficit limits. #euro

7/11 IMO a) it will be tough for all 19 countries to agree on how much they need to raise the deficit b) even if they agree on how much, it will not be an overnight process. The big problem here is that time is not #EU’s side #euro

8/11 One could argue that the #EU could allow members to raise the debt limit. However, will investors & the #ECB continue to support the #EU economy (with negative rates) during a decline in economic output? #euro

9/11 But again, that would need all #EU members to agree on it and markets to be interested in buying their debt at negative rates. To her defense, Christine Lagarde has urged numerous times #Eurozone members to reform budget rules. #euro

ft.com/content/feee36…

10/11 Christine @Lagarde has realized that the #ECB is running out of (effective) ammunition and that negative rates have not boosted investment in the #Eurozone. The (ongoing) economic shock is affecting both supply and demand; The #EU will need a more holistic approach. #euro

11/11 In the coming weeks we will see (IMO) CBs trying time devalue the #USD in order to buy time (to alleviate pressure on global balance sheets). Even if it works (IMO it will be temporary), the #EU’s structural flaws won’t the fixed.

The #euro’s existence will be tested.