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21 March 2020

Vox EU: A proposal for a Covid Credit Line

This column proposes a Covid credit line in the European Stability Mechanism, with allocation across member states proportionate to the severity of the public health and economic challenges encountered.

A dedicated ESM credit line: The Covid Credit Line

A possible scheme would be that a series of member states – ideally all of them in order to avoid any sort of stigma – apply to the Enhanced Conditions Credit Line of the ESM. This would give them access to ESM loans and open the way to an activation of the ECB’s Outright Monetary Transactions scheme, thereby further strengthening the ECB’s ability to control bond yield spreads and avoid self-fulfilling debt crises. 

The ECCL is however a specific instrument intended to address country-specific market access risks. It can lend only for one year, with possible extensions up to another year.2 A better alternative would be for the ESM to create a new, dedicated Covid Credit Line with a long duration, access conditions and ex post conditionality.3 It should grant to all member states long-term credit lines dedicated to the financing of the Covid relief effort. Allocation across member states should be proportionate to the severity of the public health and economic challenges encountered. Conditionality should be minimal and consist in member states committing to be transparent in the use of the Covid Credit Line and not to introduce new discretionary spending or tax reduction measures that are not Covid-related as well as to wind down the Covid relief effort once the crisis is over. The duration of these credit lines should be very long because member states will emerge from the Covid crisis severely weakened and will not be in a position to repay soon. And the alternative of replacing ESM credit lines with newly issued domestic debt would frustrate the exercise. Consistently, the new bonds issued by the ESM should be of very long maturity, though at maturities that have a market.

This option would represent a concrete improvement in comparison to the current situation. The ESM has currently a €410 billion lending capacity (3.4% of euro area GDP), which can be increased by the Board of Governors. It would still involve little coordination and solidarity among member states, as each of them would remain sole responsible for its debt vis-à-vis the ESM. But a Covid Credit Line would help sustain the members’ effort, it would help make the corresponding borrowing cost independent of individual fiscal situations. Rising the volume of European (ESM) bonds would also be stabilising for the financial sector and would broaden the scope for ECB action.

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