The capital markets are one of Europe’s slow-burn political issues. The coronavirus crisis, which is raising its ugly head over Europe, and the slow coming together in Brussels to formulate a joint rescue package have rekindled the need to balance public and private risk-sharing and diversify funding for European companies.
Great lessons are learned only when much is at stake, or so it is deliberated. There has been remarkable progress in strengthening global financial regulation and resilience since the 2008-2009 Great Recession. The rapid and synchronized response of monetary and macroprudential regulation to COVID-19 depends on and is a case in point on important improvements. European central banks, in collaboration with financial regulators, have achieved a swift, overarching response, including ultra-monetary policy easing and liquidity injections, combined with relaxed credit requirements and reduced capital buffers.
The speed and roundness of the response would be without the readily mobilized financial supervision (e.g. within the framework of the Single Supervisory Mechanism (SSM) of the European Central Bank (ECB), the European Systemic Risk Board (ESRB) and supervisory authorities (ESAs), analytical capacities for immediate Comparison of the soundness of systemically important financial institutions in Europe and macroprudential rules harmonized with advice on how to adjust them in adverse circumstances.
But the Great Recession has no practical foundation which would help calm a real economic crisis of the present magnitude and magnitude: particularly one with massive simultaneous supply and demand disruptions within and between countries, with immediate consequences for workers and businesses. We are facing a strange enemy and the ammunition that was bought in response to the Great Recession is missing.
Relived the void
In view of the urgency, the European heads of state and government gathered around the virtual round table to discuss the scope and form of the joint response. The north-south divide occupied a prominent place at the table and was particularly evident in the case of the “Coronabond”, the theorized type of communal debt in the Eurozone. As the impasse persisted, many member states had put their own discretionary tax systems in place to save jobs and save businesses. The ECB’s pandemic emergency purchase program (PEPP) was the only supranational stepping stone that was firmly anchored in the accounts of the continent’s heads of state and government.
The European heads of state and government got away with a compromise of 500 billion euros deal put the “Coronabond” emission aside on April 9th. The package consists of safety nets totaling 240 billion euros for the overburdened health systems in the euro area under the umbrella of the European Stability Mechanism (ESM), the rescue fund that was created in response to the euro area’s debt crisis. The € 100 billion fund, called SURE, is made available to keep EU jobs and businesses alive, while small and medium-sized enterprises (SMEs) are supported through an EU-wide loan program and loan guarantees from the European Investment Bank (EIB) .
The Eurogroup followed the call with a “minimum denominator” and focused on mitigating the immediate impact, but lagged behind a strategic rebuilding plan. However, the need to set up an all-member supported fiscal facility (i.e. Corona bond) to fund post-COVID post-COVID rebuilding remains the elephant in the room. It will continue to split and some members will question EU values Raison d’etre. Perhaps the deadlocks of the past justify a recalibrated approach that addresses the most serious weaknesses in the economy and at the same time refrains from wasting political capital on blocked paths.
As a Publicity The joint debt facility remains – at least for the time being – outside the political reach Private Risk sharing mechanism could help. The latter was in large part by the Capital Markets Union (CMU) agenda, but was the EU’s slow-burn problem in part due to the availability of cheap bank finance amid the ECB’s ultra-laid back stance. But the latest political and economic upheavals have rekindled the capital market thread, as companies are increasingly over-indebted and banks cannot be exposed to endless risks. The coronavirus crisis presents a unique opportunity to advance the parts of the CMU agenda where political appetites can converge and the greatest macroeconomic benefits can be realized amid the current challenges. For example, with European companies hardest hit, progress can focus on diversifying their funding mix.
Financial markets as a cushion
Europe is notoriously dependent on bank financing. Companies in the euro area Banks source about 55 percent of their debt financing, compared with just 30 percent in the United States. In times of heightened turmoil, one-sided dependence on everything is a gamble, just as Europe should have learned the hard way in previous crises when banks’ credit channels were compromised. In addition, the profitability of European banks came under pressure due to the negative interest rate policy of the ECB and sluggish growth, which lagged well behind the US.
In addition, research has shown that financial fragmentation is detrimental to monetary unions such as the Eurozone, as deep and liquid financial markets are considered Shock absorbers, in the absence of other adjustment mechanisms (e.g. flexible exchange rates). This is especially important in times of need as they create more maneuverability place for both monetary and fiscal policy and do not waste political capital.
If there were seamless European capital markets, some of the corporate finance could be hedged through markets, reducing the undue burden on banks and / or public institutions and diversifying risk. In the public sector, Europe could be a EU recapitalization fundmanaged by the EIB to directly support the capital base of affected companies. In the private sector, companies could raise funds by issuing bonds backed by EIB guarantees to attract investors to secondary markets. In the United States, a vibrant commercial paper market allows companies to issue debt securities to meet their short-term needs, rather than looking to banks for them. But the latest ECB data convey that in Europe only 11 percent of euro area SMEs consider equity and only 4 percent debt as a potential source of funding.
As intermediaries between sources and users of capital, capital markets drive innovation and support long-term growth and prosperity. They channel savings into productive investments and help companies, investors and individuals manage risk. All of this leads to the idea that capital markets create value for economies and societies – one that is largely untapped in Europe and is exacerbated by Britain leaving at a time when Europe’s existence depends on exhausting all conceivable political leeway.
Fund the answer
In addition to the governments that provide corona-related public services, effective crisis management relies on a number of private sector industries (healthcare, food, pharmaceuticals, industrial production, transport, telecommunications). SMEs in particular can form crucial links in such supply chains for emergency measures. However, they are usually the first to fall victim to credit tightening in times of need. Large corporations may have faster access to public lifelines, such as under the ECB’s CSPP, and often have priority over bank lending. However, in the absence of measures like the recent EU deal or discretionary fiscal measures to support SMEs, they have historically been tied to options.
The coronavirus crisis has shown that more needs to be done to further diversify external funding for European companies and the risks involved should be spread across public and private sectors. A seamless EU financial and capital ecosystem is a critical shock absorber in troubled times and a critical factor for businesses to restore prosperity once the worst has subsided. European policy makers should decide their battles on where progress can be made on the CMU agenda that is politically inexpensive but practically effective in responding to the challenges exacerbated by the coronavirus crisis. Seemingly small steps can end up growing big, especially when moving around is difficult.
Sona Muzikarova is Chief Economist at the GLOBSEC Policy Institute.
Wed, May 6, 2020
“This is time for solidarity and boldness in the European response to this unprecedented crisis. Unfortunately that is [German] The court’s decision jeopardizes the Bundesbank’s participation in the ECB’s program in the long term. It also undermines the authority of the European Court of Justice (ECJ) and could set a worrying precedent for states that enforce their sovereignty with illiberal measures against the rule of law in Europe, ”says Benjamin Haddad.
Mon, May 4, 2020
Overall, the differences in the size and makeup of fiscal programs across countries around the world imply uneven and staggered recoveries, which makes them longer-term. When designing the next wave of fiscal packages, it is important to learn from recent experience to better balance the various elements in order to be more effective.