Market Overview

After several failed attempts, finance ministers of the European Union agreed last Thursday on a €540 billion package to support Member States and, in particular, companies and workers who will probably be penalised the most by the expected consequences of the crisis.

The agreed stimulus package will use the European Stability Mechanism (ESM) to finance the States and the European Investment Bank (EIB) to help companies and workers. The support is also accomplished by the new instrument of the European Commission SURE.

The agreement was eventually reached after another intense round of bilateral contacts, the day after the different ministers had been on a 16-hour conference call and failed to do so. The main point of the contention was not the insistence of the Netherlands on request macroeconomic reforms to countries applying for the support of the ESM. The mechanism had suggested some "light conditions" which would include the accession of loans only to costs related to the coronavirus and a general commitment to adhere to EU tax rules. But this was not enough for the Netherlands and it led to a lasting confrontation with Italy who considered the proposal of these initial conditions unacceptable. In the end, it turned out to be a consensus where both parties gave way - countries can mask a cheap ESM loan to cover other costs not linked to health, including the impact of containment measures, but in this case new reforms will have to be accepted.

Another point of disagreement regarded the European Commission's SURE mechanism. The Netherlands wanted assurances that the new mechanism would only be temporary and to ensure that the mechanism does not become a Union unemployment benefit scheme. The country also sought to extend the scope of the mechanism to areas other than support for the labour market. The Spanish government revolted, seeing the measure as an attempt to prevent future plans for an EU-wide unemployment benefit scheme. The Dutch ended up winning this battle, as the mechanism may also cover some health-related measures.

This agreement is, however, only the first in the economic response to the virus. European leaders will face a tougher negotiation to seal an agreement on the recovery plan for the coming months and to come to an agreement on how they will pay for it. Here, the possible issuance of "coronabonds" will most likely return to the discussion, with different points of view to mutualise the costs of the recovery effort. For now, we are left with this unprecedented stimulus package.

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