The Eurogroup met yesterday, Monday 16th March, to hammer out its coordinated fiscal response to the massive recession already in progress following the lockdown of much of Europe’s society. The task they faced is enormous: If sales, tourism, services etc. fall by 50% for just one month (which is certain), and then by 25% for only two more months (i.e. the best-case scenario), then annual growth will be -10%. Across Europe!
So, what was the Eurogroup’s duty to announce? An immediate massive fiscal boost, its purpose being to reassure people that they will not be poorer. E.g. the government of Hong Kong that ploughed $10 billion immediately into the economy by ordering the tax office to credit every household’s bank account with $1250 immediately.
Not expecting such swift action from the Eurogroup, the fact remains that nothing short of a 5% fiscal injection was needed to reduce the calamity from -10% of GDP to, say, -3% (assuming a very large multiplier effect).
So, what did the Eurogroup decide?
Here is their official communique, announcing some impressive numbers. Commentators spoke of a bazooka aimed at the recession. In reality, the bazooka was a pathetic water pistol. Once again, the Eurogroup proved itself to be, not just dysfunctional, but a clear and present danger for Europeans.
WANT TO KNOW HOW THE EUROGROUP DECIDES? CLICK HERE TO LISTEN TO EUROLEAKS
The first thing to note is what they did not do. As everyone knows, eurozone governments live in the straitjacket of the so-called fiscal compact that allows next to zero room for fiscal expansion. This fiscal compact does, however, contain a clause that can be activated in times of emergency that released, temporarily, governments and allows them to throw money at an unexpected crisis. Before yesterday’s meeting, almost everyone expected the Eurogroup to announce the triggering of this clause. THEY DID NOT!
What they did do was to announce two things: First, a bevy of loans for the private sector. Secondly, they referred to the utilisation of the so-called automatic stabilisers and also on unspecified measures of 1% of GDP. Let’s take these two separately:
The European Investment Bank will offer €8 billion of working capital lending for 100,000 European firms, promising to try to this sum to €20bn
The Eurogroup toyed with the idea of calling upon the bailout fund (the European Stability Mechanism) to use its unused lending capacity of €410 billion