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March 20, 2020

Eurozone faces second major crisis

The eurozone faces its second crisis in a decade, but this time the starting fiscal and monetary positions are far worse than in 2010. There is once again a real risk that the eurozone might blow up, warns Les Échos. That old discussion is now back on the agenda. We already see disagreements within the eurogroup and the ECB council. Debt and deficit ratios have diverged since 2010 and are expected to diverge even further over the coming months. It is not far fetched to see a scenario where public debt could rise by 50% of GDP. Some member states have the capacity to tap the markets at low rates, while others will see their risk premiums rise. Will the ECB do whatever it takes this time? 

The capacity of member states for joint action will be tested. Not only is their fiscal space different, there is also a time inconsistency among member states when it comes to decision-making over how to battle the spread of the virus. Italy has no time to wait while Germany is slowly preparing. Member states also seem to have different mortality rates. Their responses thus reveal different political choices at any given point in time. 

How can a common eurozone response be formulated if everyone is at a different point on the curve? This can only happen if those member countries where the cases and deaths are still lower step in, and refrain from thinking that they could be better off than the others. Otherwise, we see the same prejudices emerging as ten years ago: north versus south, creditors versus debtors. It will be a feast for populists. 

The eurogroup has already experienced its first round of divisions.  The idea of a common corona-bond to help member states fight the crisis was immediately rejected by Mark Rutte. Angela Merkel gave her usual ambiguous response, welcoming it as an interesting idea while leaving it to other member states to block it in the end. The eurozone crisis is back. This time it could be fatal. 

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March 20, 2020

Despite Brexit, Germany and UK are quite similar in the crisis response

Two of the most comparable European countries in their crisis-response right now are Germany and the UK. They are both on the more relaxed end of direct crisis-response measures. We expect that to change in both countries, first in Germany. And they are also on the more activist end in granting direct aid to the corporate sector. The one big difference is that the UK is much more willing to use additional discretionary measures to stabilise the economy, while Germany is more focused on credit flows.

The UK chancellor is due to announce a big package of help to companies today. The Germans already did this, through credit lines funded by the stated-owned KfW development bank. Yesterday, the Germans filled an important gap. The finance ministry has made available a package of credits of up to €40bn for small companies and single entrepreneurs like independent artists. This will come in a mixture of direct support and credits. The conditionality will be assessed later. If people demand it, they will get it, but if they deemed free-riders, they will have to repay the money with interest. So this is not a helicopter drop. 

Credit life-lines are a great instrument to deal with short-term disruptions when solvency is not in question. As we argued in our lead story, solvency is becoming the bigger issue if the shutdown is longer and the economic outlook more uncertain. This is particularly true for struggling solo-entrepreneurs, many of whom may be reluctant to take up debt in case they fail to meet the criteria.

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