Along with the loosening of restrictions, additional fiscal programmes are sparking hopes of economic recovery. Despite the surge in public-debt, the USA, Japan and Germany are in a position (not least thanks to central banks’ purchase programmes) to fund these programmes on favourable terms. Yet that is proving very difficult for euro-area periphery countries affected particularly heavily by the pandemic as their public finances were already strained before the crisis and as they have no central bank of their own.
To support these countries, the EU has already agreed on the short-time work scheme SURE and on favourable credit lines via the ESM and the EIB. German Chancellor Merkel and French President Macron have proposed a Recovery Fund with an additional EUR 500bn of firepower. The funds are to be raised by the EU and then transferred to states in need.
Despite the resistance being put up by the “Frugal Four,” we expect a pandemic transfer system to be set up during the German EU Presidency. Even if this fund is conceived as a “one-off“, it could serve as a blueprint for more mutualisation of public expenditure. A large proportion of the fund’s resources will probably flow to hard-hit (periphery) countries. Only a small portion of the funds will be transferred in 2020; from 2021 onwards, however, the programme is likely to stimulate economic activity without burdening national budgets.
The massive expansion in issuing activity by the (still) AAA-rated EU will put a noticeable strain on this segment, pushing Bund yields somewhat higher. At the same time, pressure on periphery bonds will decline, allowing the ECB to align its purchase programme more closely to its capital key, entirely in keeping with the German Constitutional Court’s (FCC) ruling.