Until Mario Draghi's pledge in July 2012 to do "whatever it takes" to prevent a collapse of the euro zone, the response of the European Central Bank (ECB) to the financial crisis that erupted in 2008 was ineffective. This time around its president, Christine Lagarde, made it clear at an early stage that the ECB would support the euro zone economy by buying huge quantities of government debt. All euro members will benefit from this without discrimination, so Italy and Greece will get similar support to Germany and the Netherlands.
This ECB policy means that governments across the euro zone can borrow this year at the current very low or negative interest rates to deal with the consequences of the Covid-19 crisis, and without having to worry that large borrowing will cause their interest rate to rise. This is especially important for countries like Italy and Greece with pre-existing economic problems and high public debt.
The strong position of Ireland's economy and public finances entering the Covid crisis means Ireland is unlikely to have problems borrowing at competitive rates even though our debt is high. Nonetheless, the ECB's action is very welcome as it shows suitable EU solidarity.
However, while the ECB is doing what is necessary there would be further advantages if a pooled approach to additional borrowing across the euro zone was undertaken through issuing eurobonds or "corona bonds". Nine countries, including Ireland, advocated an approach along these lines, but the German, Dutch and Finnish governments opposed it.
Lack of empathy
The Dutch opposition was particularly strident, showing a remarkable lack of empathy for fellow EU members who have suffered especially badly from the effects of the pandemic.
The German government showed more flexibility and, along with the French, they brokered a compromise last week that will allow existing EU funds to lend to countries who wish to use that facility.
However, this alternative borrowing facility does not seem to add greatly to what the ECB is already doing. It is possible that it could allow Italy and Greece to borrow at marginally lower interest rates than are available on the market. However, the lending from the EU funds will still add to Italian or Greek debt in the same way as if they borrow on the market with the indirect support of the ECB.
Funding the recovery of European businesses will be a challenge
Given that the ECB, on behalf of all EU citizens, is buying Italian debt in the same way as it is buying Dutch debt, with the implicit guarantee of all euro zone countries, it is unreasonable that the Dutch government opposes a shared approach to directly funding the crisis across the EU.
When we come to funding the recovery in the EU economy, this lack of EU solidarity could prove particularly damaging.
For Italy and Greece, who both heavily dependent on tourism, the recovery is likely to be more difficult than for Germany or Ireland. This factor, added to a weaker starting position, means they may take longer to restore their public finances to balance. The higher debt levels will make it more difficult for them to undertake a smooth adjustment.
National governments
While various wage subsidy schemes are supporting household incomes through the economic standstill, funding the recovery of European businesses will be a challenge.
One option, which would be broadly consistent with the approach agreed by governments last week, would be that the European Investment Bank (EIB), rather than national governments, would be responsible for lending to EU businesses to tide them through the crisis. This would mean that the borrowing to fund ailing businesses would not add to German, Italian or Irish debt.
Such a mechanism would mean lower levels of debt than otherwise on the balance sheets of individual governments, and ease recovery in heavily-indebted nations.
Such an approach would require some standardisation of the support for business across the EU. This is unlikely to be popular in countries that have adequate resources, such as Germany. However difficult to achieve, an EU-wide approach would have the major advantage that businesses would be treated in a similar fashion across the EU, whereas national schemes leave open the possibility of national favouritism.
For example, such a mechanism would mean that, instead of Germany injecting equity into Lufthansa, and the Netherlands and France injecting equity into Air France/KLM, the EIB would do so.
This would ensure business was treated fairly across the EU. It would also mean that national debts would be lower as the EU itself took on the risks inherent in such investment.
