A new conditionality for the corona area?

by Antonis D. Papagiannidis

Italy and Spain may well be the EU countries most heavily struck by the corona-virus pandemic, with death tolls there taking a nasty turn, with their healthcare systems buckling under the strain; France may be suffering the national ignominy of having to ask for neighbouring countries (most unpleasantly: for Germany) to accept French nationals at their own ICUs – but Greece risks being singled out in the ongoing EU/European zone row over the need to build a common European response of sorts to this most dangerous, external but symmetric shock. Why symmetric? Because whatever discrepancies in the Covid-19 toll between countries, the resulting shock to their economies will probably take the same path: a collapse in demand; extensive disruption to supply chains; surge in unemployment; erosion of business stability; fiscal position deterioration due to government efforts to mitigate the shock. The end result: “public debts will increase […] higher public debt levels will become a permanent feature of our economies accompanied by private debt cancellation […] speed is absolutely of the essence for efficiency”  (this is Mario Draghi in the F.T., not a Club Med country politician addressing a local audience).

So why do we feel that Greece might well end rather lonely in this business – lonely notwithstanding the fact that Greek PM Kyriakos Mitsotakis signed along with 8 more heads of State and Government (3 each from the main political families in Europe: Christian Democrat, Socialist, Liberal) out of a total of 27 what amounted to a modern “cahier de doléances” to the European Council, asking for “exceptional measures” to mitigate the negative effect on the European economies? And thus joined the fray over “corona-bonds”, decried as a step towards debt mutualisation by Northern European counties.

The truth is that the shock may well be symmetric, but the underlying fiscal situations in Member States (and, more importantly, the fragility of their economies) present quite asymmetrical  a picture. So, while Rome and Madrid will be leading the fight to convince Germany, Austria, the Netherlands, Finland and the usual “frugal” suspects to agree to any fiscal support scheme/common debt instrument, while Emmanuel Macron will be adding some more fiery institutional language about the non-future of Europe if it proves unable to rise to this challenge, Greece may well end being once more made to stand in the corner. How so?

If at the end of the day the Ministers of Finance and/or the Eurogroup put on the table a solution based on using an extended version of the existing ESM with credit lines adapted to the corona situation, that is with looser conditionality, the “whatever it takes” mode that is being adopted throughout Europe to face the Covid-19 situation will be questioned. Certainly a “helicopter money” approach will not be easily accepted.

Here is where Greece’s own support scheme of 800 euros/person for people working in businesses who claim they have seen their turnover bleed, on top of the deferral of tax/social security/loan interest payments coming due, is already under close scrutiny. The fact that a further scheme has been announced of (purported) training for lawyers, engineers and other professionals based on a 600 euros voucher (so as to make use of available EU Social Fund programmes) then changed over to an extension of the 800 euros general scheme, did no good to dispel the feeling that “helicopter money” would be tried out.  Neither did the interest payment deferral for 6 months (while tax was differed for a shorter period) help, since it has to do with a banking system already laboring under a mountain of NPLs and with a prevailing low payment culture.

So access to ESM funding to face the Covid-19 crisis, even more so to any corona-bond programme that might be agreed upon if Germany and the “frugals” relent, may end up with conditionality expressly modeled so as to avoid temptations such as those of the Greek approach.