Thread by @lugaricano

Can we break the North-South deadlock paralizing the Union´s fiscal response?
I believe a possible solution involves using the EFSM, backed by the EU budget to purchase the junior tranche of a "coronabond". I explain the impasse and solution in this THREAD /1

Tuesday the EG failed to agree on the ESM/fiscal response to COVID-19. They deferred to today's Council, but I fear they will not make progress. Northern countries offer Italy a traditional rescue, but this is not acceptable. /2

Two main disagreements exist on ESM use: conditionality and availability.
1. Should ESM support be tied to immediate economic reforms or should lending conditions be laxer?
2. Should the ESM be available on an individual application, or should it be easily available to all? /3

Even though the virus is an external and symmetric shock, “Hawk” countries are only willing to provide conditional (even with IMF participation!) and individual, case by case, support.
This would be politically explosive for Italy and unacceptable /4

Italians are nearing the limit of their patience: Two examples: the failed ESM reform last year (only front page news in Italy) euractiv.com/section/bankin…
and Lagarde’s testimony two weeks ago (huge repercussion there). /5
reuters.com/article/us-ecb…

Europe must show solidarity: it is in our best interests. It is bad luck that COVID-19 started in the south. Contrary to what some argue, there is NO plausible moral hazard. What is the supposed mechanism? Are Italians supposed to have let virus grow to receive European money? /6

On the other hand, we must have some understanding for countries looking aghast at the prospect of being stuck with a mountain of debt. The commitment must be clear, but also of a given, known in advance, maximum size /7

Faced with the ESM deadlock, are there any other options to finance a fiscal response? Are there any prospects for Coronabonds? A possible issuer of Coronabonds would be the EIB. /8

There is a proposal for a Pan-European guarantee fund: with 25bn in fresh money it would issue 195bn in EIB Coronabonds, and would allow 220bn in loans to the private sector through support to national guarantee schemes and standard lending channels /9

Alas, these numbers would not be enough (only 0.16% of EU-GDP in fresh money). I have called for 275bn in guarantees to provide 2.2tr in loans. Also the EIB could only provide liquidity. We also need to invest in healthcare and protect incomes. voxeu.org/article/covid-… /10

An alternative are Commission Coronabonds backed by EU budget. The COM has issued bonds before, through the EFSM, and now they are looking to do so to provide liquidity to employment protection schemes around Europe (as I prosed a few weeks ago
politico.eu/article/how-to… ) /11

The key question is whether they can avoid the existing limit on the size of the facility. A limit set by the difference between the current budget and 1.23% of GNI is likely, but that would severely limit the firepower especially if there no leverage is possible. /12

We can break that limit if we return to the language (vetoed then by UK) of the Comm. 2010 proposal for the EFSM, which said "loans and credit lines above the ceiling referred to in Article 2(2) shall benefit from the joint and pro-rata guarantee of the euro-area Member State"/13

One way to get further capacity from an EU budget backed facility would be to approve Sovereign Bond Backed Securities, and have the facility be used to buy junior tranches. SBBS have been sitting in the Council’s drawers for a year, and could be easily approved. /14

By just buying junior tranches, EU budget could support the issuance of 500bn+ in Coronabonds (calcs below). Only concern is legal: to avoid the no-bail out clause all countries would have to accept (soft) conditionality for the junior tranches to be purchasable. /15

The coronavirus crisis is of a different nature than the financial crisis , and does not just impact the Eurozone. The instruments of the past crisis will be difficult to use for the current one. We need new instruments to act, ones that be deployed quickly. ÈND /16