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Covid Upsurge Faster Than Expected
Brussels Officials Expect Pressure For More Stimulus To Focus On ECB
European Union officials increasingly fear the bloc's economy will hit another air pocket as a Covid-19 resurgence hits earlier than expected, telling MNI that this could fuel calls for more European Central Bank QE despite a EUR750 billion pandemic recovery fund set to be legally finalised by the end of the year and disbursing funds by the second half of 2021.
EU countries still have to prepare detailed economic recovery plans over the next few months, which must be approved by EU institutions, a process which could take another five months, before they are eligible for EUR390 billion in grants and EUR360 billion in loans, officials told MNI.
While another EUR240 billion have been made available by the European Stability Mechanism, officials said fears of political stigma means the money will probably be left untapped, throwing the onus of any additional stimulus response back onto the ECB. Calls would rise for the central bank to expand its EUR1.35 trillion Pandemic Emergency Purchasing Programme, they said.
The economy could sag even if Covid-19 upsurges are contained without further generalised lockdowns.
"With the second wave now seeming to come earlier than expected, I am not sure about the foundations for that optimism. Look at Spain," one source said.
While tapping ESM money could save countries which run into trouble 100 basis points of borrowing costs, such a move would be politically toxic, officials said.
"Italy, Spain just can't tap it for political reasons. The opposition would say, 'we're being rescued by the ESM. It's just like the way Asian states don't call the IMF after (the Asian crisis of) 1997. The ESM has a branding problem. They are always the guys who provide austerity," one source said.
While the possibility of accessing ESM loans in itself might provide some reassurance to markets, officials noted that some in the EU are beginning to wonder whether the ESM itself has a future in its current form.
Should a fresh rise in Covid cases start to have a serious impact on economic growth, there will be pressure for national fiscal plans to be further enlarged and maybe even for countries to resort to the ESM. But officials reject as outlandish any idea that the Recovery and Resilience Facility, only agreed after a bitter tussle at an extended summit, could be enhanced.
"No, that's just completely out of the question, given how difficult getting an agreement at the summit was," said another EU source.
Meanwhile, other measures taken by the EU in the spring, including the EUR100 billion SURE instrument to fund support for employment and up to EUR100 billion in cheap loans from the European Investment Bank, should together with national policies help to shore up economic activity in the interim. The formal and final decisions on the SURE and EIB elements of the package are scheduled to be completed in September, with money starting to flow to states later in the autumn.
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