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Europe has done pretty well so far in this pandemic, but as the 2nd wave rises, possibly serious policy mistakes mount. Like the apparent refusal of southern governments to take the cheap RRF loans offered them. A quick thread https://www.piie.com/blogs/realtime-economic-issues-watch/southern-europe-will-regret-not-taking-eu-loans-now
Political stigma is attached to taking EU money, but RRF funds are managed by the @EU_Commission which (unlike the @ESM_Press) has its own incentives to disburse as much cash as possible as quickly as possible, and would likely prefer the grants and loans never to be repaid 2/n
After all if you care about the international role of the euro, you want as much common EU debt issued as possible, and no repayment until you have your new revenues (TOR) to do it. A cursory look at May 2020 CSRs (to which MS must adhere to be eligible for RRF cash) shows 3/n
No binding conditions, while the @EU_Commission has made it explicit that it will apply a very broad - incl. in human capital - definition of investment for RRF eligibility. For any MS gov wishing to pump RRF grants or loans into their economies now, there is not going to be 4/n
Meaningful resistance from @EU_Commission not surmountable for any MS. Claims that “conditionality” or even “national absorption capacity” amount to large obstacles for expansionary RRF finances fiscal stimulus as soon as the RRF is finally agreed/bonds issued look
Exaggerated. It’s a purely national political choice not to take RRF loans now and for several reasons a bad one. First, markets clearly now wants common EU debts, so any EU member (trading below France) saves money on interest. Secondly, who knows when the RRF will in the 6/n
Be repaid? EU leaders might in the future decide to authorize debt rollovers or make other changes to RRF issued bonds. These options aren’t available to nationally issued debt and could be valuable. 3) it is surely a bigger risk right now to do to little than too much for MS 7/n
As 2nd wave crests. 4) By refusing to take the over-the-line fiscal aid in form of loans available now, MS make it politically harder for the ECB to continue its forceful below-the-line monetary support from asset purchases. 5) the argument that fx. Spain and others might 8/n
Take RRF loans in 2022 or 2023 does not help the @ECB now, as it decides what needs to be done. Hopefully @Lagarde has a solid GC majority to do what is necessary, but it is not a coincident that she just called for the RRF to be made permanent (ie. expandable in the future) 9/n
In the end, the more RRF funds are issued, the easier it will be for the @ECB to keep doing what it has to do, which will again entice markets to keep buying Southern debt at current yields. That seems more important than “political stigma” for Madrid, Lisbon, Rome or Athens END
