A first reaction to the @EU_Commission announcement of the #recoveryfund #mff and other aspects of the Euro 750 billion #fiscalstimulus package to be launched by @vonderleyen today ...

A twitter #thread

"it is too little, it is too late and it may end up being watered down"

My initial reaction and response to the Franco-German #recoveryfund proposal was captured here on @POLITICOEurope and remains largely true ...

https://www.politico.eu/article/this-isnt-europes-hamilton-moment/

This is not a macro economic significant sum
Nor is it a step towards a #fiscalunion or even just #eurobonds

According to @reuters #Italy will get Euro 82 billion in grants and euro 91 billion in loans. #Spain will get euro 77 billion in grants and 63 billion in loans. Italian and Spanish GDP in 2019 was Euro 2,000 billion and Euro 1,400 billion and may fall by euro 300/200 billion 2020

Disbursed over 3-4 years this, particularly the grant element, is simply not enough to be a macro-significant factor in crisis management or aiding recovery. In particular the net element of the grant may only be 5-15 billion once #Italy & Spain's share of repayments are deducted

As I wrote in my earlier twitter thread here https://twitter.com/SonyKapoor/status/1263048812597305344 and in my politico piece, the #corona rescue package from the #EU should be judged on criteria: 1) size 2) degree of asymmetry 3) precedence setting 4) permanence 5) long-term impact 6) timeliness and 7) scope

It appears to fail on all fronts ... The net-transfer implied, for #Italy, the hardest hit economy for example, is just 1%-2% of #GDP. That is because of the tiny (roughly 1% of GDP size of the #recoveryfund. The asymmetry between net beneficiaries and net payers is limited to 3%

Does it set an important new precedent? Others say yes, and I say, "not really". Net transfers through #EU budgets happen through Cohesion and Structural Funds, for example, & are built into the EU budgets #MFF. Nor is the EU borrowing by EC new, with Euro 80 billion outstanding

There is no new precedent of "joint and several" guarantees, an important part of any true #eurobond as was proposed by the #Coronabonds proposal that was rejected. So no new eurobonds, or no new pan-EU or pan #Eurozone safe asset that everyone agrees needs to happen in #EMU

Without important precedents, there is no "Hamilton moment". Without such a moment, there is no step towards a fiscal union. Without a step towards a fiscal union, the vast burden of countercyclical and crisis response policy will continue to fall on the @ecb for the #eurozone

This is not the "fiscal response" that @Lagarde asked for whatever the @ecb may say in public. Apart from the signalling impact that the @EUCouncil is doing "something, anything" which is better than doing "nothing at all", this does not provide the "fiscal counterpart" to @ecb

With the @ecb starting to hit the limits of what it can do within the constraints of the "capital key" that limits purchases of sovereign bonds to rough % of GDP, it has little choice but to violate them, and violate them rather dramatically over the next few months 2 help #italy

The limited size & asymmetry of the #RecoveryFund means that the asymmetric response has to come from ECB. But that is in direct opposition to not just the #GCC but also in some sense to the ruling from the #ECJ. Those rulings were explicit about the importance of the capital key

This will undoubtedly be politically charged and toxic and brace for many more battles to come on what the #ECB can and cannot do. It forces the #ECB into territory that it should never have had to tread in, and will undoubtedly create a backlash bigger than we saw in the past

And on to my next point. Does this see a permanence of the increase of @EU_Commission own funds? #EC wants that and that would be a positive sign. But the franco-german proposal was very clear about the "temporary" nature of the increase. And it is "tiny". Permanent = Good

Without a permanent increase in "own funds", the most difficult decisions on repayment are put off for the future. The default option, unless the #EC is granted a permanent increase of its spending cap AND own funds, is that already scarce future EC budgets will be depleted

The long-term impact of that would be terrible leading to a depletion, rather than an increase in federal level funds. An anti-fiscalunion if you may. If political will can't even be mobilised in the midst of a horrible #pandemic that was no one's fault, it is hard to see when

And last but not the least, this commentary is just about the initial proposal from the EC, before it has been watered down by the #FrugalFour or other member of the @EUCouncil which will almost certainly weaken this "damp squib" of a package even further.

All in all, my mind is struggling to see how others far more optimistic analysts and commentators can call this proposal "stunning" "a game changer" "surprisingly ambitious" or as in this Bloomberg Headline "Fiscal Shock and Awe"??? Are we even looking at the same proposal???