The US Fiscal Package, and the EU’s Options

March 24, 2020

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The Senate failed to vote on its package yesterday Monday, for which the numbers have rapidly risen from just under a trillion US dollars to around USD 2 trillion currently - close to 10% of US nominal GDP. Both sides are holding out hope for a vote today Tuesday, and space has been made in the Senate’s agenda for Wednesday, should it not pass today. Fears are that the bill could stall until the week-end. Meanwhile, House Democrats released their own bill Monday night, putting an even heftier USD 2.5 trillion on the table.

This bill is most unlikely to pass a Senate vote or receive the President’s approval. It does, however, put pressure on the Senate, and serves as a template for what Democrats would do were it not for the Republican-majority Senate.

One key issue is oversight of any federal money allocated to corporations. Politico reports that Treasury Secretary Mnuchin has now agreed to strict oversight of the USD 500 billion destined to support corporations. The Democrats also wish to create a "COVID-19 Stimulus Accountability and Transparency Board”.

These are the main points of the new House bill (Vox, 23 March 2020):

  • The House bill would require any corporation taking federal relief money to prioritise their workers’ wages and benefits over CEO pay, layoffs, or stock buybacks.
  • The bill would give USD 500 billion in loans to small businesses. It would further expand unemployment insurance, creating a temporary Federal Pandemic Unemployment Compensation of USD 600 per week for workers impacted by the coronavirus and eligible for unemployment benefits.
  • For direct payments, the bill would provide each individual USD 1,500 of government assistance, and up to USD 7,500 for a family of five. Retired and unemployed Americans would also receive the benefit.
  • It would provide more than USD 150 billion to hospitals and community health centres for coronavirus treatment and equipment such as ventilators, masks, and other protective equipment for health care workers, and calls on President Donald Trump to immediately invoke the Defense Production Act. It also would require the Trump administration to endorse strong Occupational Safety and Health Administration (OSHA) regulations for health care workers.
  • The bill would eliminate cost-sharing for coronavirus treatment and vaccines for all patients, including those who are uninsured.
  • The bill would put nearly USD 60 billion into America’s schools and universities; USD 30 billion would be provided to states to help their school funding, and USD 10 billion would be directed toward public universities. It would also help student borrowers with debt payments.
  • Finally, the bill would provide USD 4 billion in Election Administration Grants to states to come up with contingency planning and preparation for their elections, which could expand vote-by-mail and no-excuse absentee voting.

In Europe, the numbers for support packages are also rising. Germany has so far announced EUR 150 billion worth of borrowing, a EUR 156 billion worth of supplementary budget, a EUR 500 billion bail-out fund, and the country’s debt-brake rule has been frozen. Together, these measures amount to 9.1% of Germany’s nominal GDP. Yesterday, the Union’s economic and finance ministers reiterated that the escape clause from the fiscal rules of the Growth and Stability Pact has been activated in the face of the EU-wide severe economic downturn.

There is much discussion about EU-wide support for Italy in particular. COVID-19 bonds have been suggested, as have emergency lending under the auspices of the European Stability Mechanism, the ESM. News could potentially come on these matters on 26 March when the European Council holds its Summit of EU Heads of State and Government. There are a number of options:

  1. With the Stability and Growth Pact’s rules suspended, all countries are free to engage in the spending they need as long as it is COVID-19 related. Countries are then supported by the ECB’s asset purchases.
  2. The ESM is in effect the fiscal lender of last resort in the Euro Zone. It could activate the Outright Monetary Transactions, or OMT. In a different, more domestic, crisis, such funds would come with strings attached regarding for instance the future delivery of reforms of pension systems, say. However, funds could be specific to COVID-19 and be limited to only such spending as it relates to the crisis, including health spending, unemployment benefits, and support for firms. The ESM currently has EUR 410 billion at its disposal, equal to 3.4% of Euro Zone GDP. If ever there was a time to activate the OMT, it must surely be now.
  3. There is also a provision which was approved by the European Parliament in March 2019 but which still needs the blessing of the European Council in order to become operational, and this provides for the issuance of Sovereign Bond- Backed Securities, SBBS. These were intended to be issued by private entities created for that purpose. The SBBS would pool various countries’ sovereign bonds and repackage them, thereby providing buyers with a more diversified exposure to the EU sovereign bond market than what notably domestic banks tend to possess. Its aim was to reduce the doom-loop whereby governments and banks enfeeble each other as was the case in the Global Financial Crisis. If the issuer is a private entity, there would only be private-sector risk, and no mutualisation of risk between European governments. However, President Macron has suggested that the European Investment Bank could be an issuer.

The advantages of some EU- or Euro Zone-wide COVID-19 bond or fund would be threefold. It would show regional solidarity in a time of crisis and thereby send an important political signal. It would arguably increase transparency and accountability. It might also allow those with sufficient means directly to support the actions taken to alleviate the impact of this crisis. During World War II, 84 million Americans bought USD 185 billion worth of War Bonds.

Any novel type of fiscal coordination within the EU or the Euro Zone would require modifications to treaties and that is not going to happen. Germany is reportedly keen on participating in the discussion of something along the lines set out above, but has ruled out anything that would change how the EU’s budget works. The good news is thus that there are viable options virtually ready to go.

March 24, 2020

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