Thread by @JAndritzky

#COVID19 Economic Crisis: Sharing the Burden in Europe

Plenty of liquidity is on its way. It’s time to think about the distribution of losses. In the spirit of solidarity and in the view of spillovers, burden sharing should not remain an entirely national matter.

A thread 1/12

National measures have been announced to change the allocation of losses across sectors:

Households ➡️ public, eg via social safety nets
Corporates ➡️ public, eg via loan guarantees and grants
Corporates & HH ➡️ banks, eg via mortgage moratoria

2/12

The crisis hits the corporate sector hard. We must avoid corporate-sovereign doom loops. ☠️💥☠️

Therefore, we ideally deploy European burden sharing BEFORE national losses are passed on public balance sheets.

Too little discussion is taking place on this!

3/12

While incomplete, the architecture of the EU and the euro area has improved since the GFC. We should build on this, rather than reinvent the wheel. Where needed, we should complete the architecture, as we proposed.👇🏼 #FutureEuropeForum

ceps.eu/ceps-publicati…

4/12

The #COVID19 firewall against another debt crisis in Europe could include the following layers of backstops. Some are already deployed.

1) @EIB could co-finance loans of commercial and national promotional banks and leverage the EIB-EIF Co-Investment Facility for equity.

5/12

2) Bankruptcy can protect a firm’s operations and jobs, while bailing in shareholders and creditors where this can’t be avoided otherwise.

We could consider an EU corporate insolvency statute, supported by a fund to facilitate resolution akin to the SRM.

6/12

3) The firewalls for banks #BankingUnion, including @ECB liquidity, @EU_SRB and ESM Direct Recapitalization are already in place but may need to be topped up, as proposed by @MSchularick and @sascha_steffen.👇🏼

sascha-steffen.de/uploads/5/9/9/…

7/12

All this offers member states ways to avoid loading up their national public balance sheets by using European institutions.

Will it be enough to shield sovereign balance sheets? Maybe not, but Europe can increase it by a lot.

Too little debate on these instruments!

8/12

We may still need a fiscal backstop.

The ESM’s stigma could be reduced by (i) several MS coming under its precautionary umbrella, (ii) light conditionality (no “Troika”), and (iii) a commitment to safeguard solvency.

The EU’s BoP Program for non-euro MS can be topped up.

9/12

Enhancements of these instruments increase debt issuance, creating more euro safe assets and, together with ECB swap lines, bolster the euro as reserve currency.👇🏼

project-syndicate.org/commentary/eur…

10/12

Nevertheless, we should also set up a #CoronaFund, filled by stronger member states, for financial grants as sign of solidarity in the combat of #COVID19 & its fallout.

History will not judge us kindly if the virus manages to kill not only people but also European unity!

11/12

Cc #EconTwitter
@MFratzscher @MarkusEconomist @pisaniferry @agnesbq1 @GuntramWolff @MESandbu @martinph01 @VMRConstancio @Lars_Feld @PeterBofinger @michael_huether @lucasguttenberg @SDullien @FuestClemens @GFelbermayr @jsuedekum 12/12