Manuela Moschella e Aitor Erce – MES o non MES? L'Europa alla prova della crisi – 8 aprile 2020

good morning everybody my name is Manuela muscala from the Scala normally superiore and I’m very delighted here today to a daughter I tour a trained doctor I director is a research analyst for the European development development investment the European Investment Bank and is an expert on issues related to the design of official assistance lending programs over the past six years he has been the principal economies at the European Stability Mechanism so dr Apter thank you very much for being with us today we are so 2fj to be with us today to make us create some clarity as you all know we are going through very lively discussions about what the ESM the European Stability Mechanism can do for Italy and other crisis it countries the the crisis I’m talking about is the coronavirus crisis and so there is this ongoing discussion about what the ESN can do for eurozone countries last night we had a very long eurozone leader meeting we know that the meeting was inconclusive and one of the main contentious issue was exactly about the role of the ESM in countries like Italy and Spain so before getting to any conclusions what we would like to do today without the urge is to start creating a compass to navigate these uncertain times and so we would like first of all to know a little bit more about these important but pretty new European institution so what I would like to ask either in the first place is to give us some basics so what is exactly is the ESM and why was it created okay Sam Thank you Thank You Manuela for this invitation to speak today I’m very glad that I’m capable of discussing a bit about this issues with you and maybe like trying to help your students like those that may a maiden listen this conversation had clear a little bit like clarify concepts s asking us what we are and what can be done with a with infrastructure that we have already set up at the eurabia level and then like me to start from from scratch you proposed the European Stability Mechanism it is now like in so many of the proposals and all of the discussions about how to manage the crisis was created in 2012 in the middle of the of the depth crisis in the euro area the follow the global crisis it was built because we may all recall following the global crisis many many many countries in Europe they found themselves suffering very strong capital flights and their private sectors and the government’s they didn’t really have an ability to sustain the economy why lourdes capital was flying in the countries and they required support the support initially was provided in the form of bilateral loans of like a dedicated fund called the European financial stability facility which sounds very much like some of the ideas of the way today but none of these bilateral loans or other ideas like actually provided a resolution to the crisis in Europe so in addition with Mario Draghi’s whatever it takes like a big move by the ECB the European governments decided to set up a permanent bailout fund that would be in charge of providing the financing to countries if they could ever go into crisis again the critical thing of this initial design is that because there was a sense in which part of the problems that had been faced by euro area countries have to do with a lack of an adequate economic structure I mean assume sorry the lack of fiscal discipline the provision of these loans was really in our ambitions too we done against conditionality I saw the country’s I mean it was basically an esteem of caste for reform I said they like to call it a day yes em right so I

don’t know if you want me to know I have a question either you said that when the ESM was created of course a crucial issue at the time was capital flight you know it was there this big problem of market access currently I think that we are not witnessing this kind of capital flight that we had back in 2010 and then 2012 when the ESM was created so I think that many people watching this conversation will ask ok so why do we need the ESM right now III I’m sorry but I’m gonna have to give you bad news there was just yesterday the data from the target system was out like a state of from the target system Italy has suffered the largest capital flight in record in the last month okay so we need any assistance 100 billion in increased liabilities with target part of this is the result of all the bond buying by the ECB don’t take me wrong but another tourist is another part is not so what’s the part of capital flight is already going on the issues this time monetary policy has been fasted for yet the question the question remains whether we want this to be a situation in which the only game in town is the ECD which has limited capacity to engineer multi transformation and it’s not very clear for how long is going to be able to deviate from the capital key as it is to it now in order to purchase a lot of Italian there because this is another data that has been already out and like the bootlaces under the pandemic program are completely biased towards Spain France and Italy but this cannot last for long so I mean like I agree there until now it’s contained okay he’s contained but this is not really the solution we want I mean I mean ideally we want to be able to finance the expenses from this pandemic at costs that are a steep as possible $150 over Germany is the borrowing course for Italy now in the ten and I mean I think that that could be put down she’d be put down it would make everybody’s life this year so let me get your analysis which are important at this stage so I think you rightly stressed out that currently Italy in other eurozone countries are enjoying the support of the ECB but I completely agree with you that we cannot take this support to be toothless forever right I think we are all aware of this problem at the same time Italy Spain France all other eurozone countries we are spending and we need to spend more to support people to support our households firms to cope with these terrible crises so you recently published a series of analyses on what the ESM could do exactly can you spell out some extra details and you were talking about the interest rates that Italy has to pay potentially on father board issuance can you give us some further details about what exactly the ESM could do yeah of course of course sure so I mean like then I think that the may be useful way to think about like like managing public debt is to recognize arraign like having a large dev stock can be problematic because of two reasons one is that it may generate very large interest payments the second one is that because their stock is very large you may need to issue new debt to replace the older so what they call rollover in a technical way a lot and very often and these every time that you need to go on as your your creditors whether they want to be your creditors for they can always tell you know right and this generates what is called rollover risk right so uh I mean like go into the interest rate right as I mention now currently the the Italian government is following uh thing is a little bit like over one percent in the ten year domain right okay I mean like this is cheap I mean there is no doubt about that but it if it could be cheaper the cumulative savings over years for a country like Italy with the amount of David class would be of tens of billions if not hundreds of billions that is a lot of money I mean like the currently like really on the table for Italy there are fifty billion in expenses then the requirement is Shoreham what we stress

is that I mean like if one could used a not only the December day is the European architecture as the ESM allows to because he has a man loves the capacity of the European Central Bank to open the IMT the right monetary transaction program which is a targeted program on the countries which require empty these could amount to spread targeting he’s good Wow this would allow from the one hundreds will allow the ECB to probably push further the borrowing costs for Italy I mean this would probably allow the Italian DMO maybe shorten a little with the issuance but unity and this may reduce significantly the interest rate bill then there is the aspect of rolling over right the aspect that if you have a lot of depth and you need to refinance it you need to go and ask for the confidence of your creditors all the time right but it turns out that they is same and in these the ESM is very special they SM can perform at with the transformation through its balance sheet on the one hand they ascend can borrow very short and in borrowing very short because the ESM the passes and interest rate is more margin over financing cost so if the ESM would be borrowing these days on an average material one year and a half the interest payments from any loan by the esa would be Sedo leave that’s one beneficial aspect again because it may reduce the interest rate bill but in our viewer one as we saw in in the analysis you mentioned as important is the fact that the ESM as it has done in other countries can provide financing in very long maturities right I mean so far the the debate is discussing Matilda’s of five years that gives some accommodation but I mean like without the necessity to go to that extreme the SM has already provided the grease with loans with a 35 so this could reduce and normally the amount of bonds that need to be issued in the market because if the ESM provides hundred billion along with a fifteen year maturity that position to be financed with five year bonds requires the issuance of 300 billion bonds it’s so sensible you know it makes sense we can see the the technical details behind it but of course one prominent question in Italy like in many other countries regards the conditionality that you were talking about since the beginning so what kind of condition allottee support from the ESM would entail right for the country also because in the newspaper this morning in the Italian newspaper this morning there was also this concerned that once the OMT the outright monetary transaction from the ECB will be available for the for italy for instance this would also inhale for the conditionality so what kind of condition led do you envisage to be attached to the ESM support so I mean this is critical this is completely critical in order to to have any potential of backing by governments currently the idea of having conditionality like it was done in Greece right where the memorandum of understanding had 300 pages most of which were literally useless like that in snow Shenzhen and I would I mean like we don’t support that kind of solution and I completely support their perspective of governments like the Taliban that they don’t want to go for that solution but I mean like if I mean keeping the given the willingness of some countries in Northern Europe to to play by the book that we have I mean there are ways to look into the book that allow for a concept of conditionality that has nothing to do with what our governments feel right yes there is I mean like there might be the political stigma of not having a enough firepower at home that you need to resort to someone else right but I don’t know the extent to which that kind of a stigma is also gonna bide with corona bonds but in any case the ESM has a set of headlines that haven’t been used yet which are called precautionary right fortunately for Europe Italy blocked the reform of the ESM treaty so the way that those facilities work is as for right there is one of them is called a Eccl this facility allows access to funds without any exposed conditionality different

from the conditional it already exists at the European level what the Eccl means in terms of expose conditionality is that the country that takes money through this facility should follow the recommendations heat the countries in an excessive deficit procedure should follow the recommendations in the countries in an excessive imbalances pachie I mean let’s be clear I mean like this is something that we should be doing anyway right and if you wanna put it bluntly you can accept that there is no where they come for G because the we know how sanctions work in Europe so how much of a buy that has I mean I think that the fear from politicians comes from maybe not really so much that the many bloggers gonna come and tell you what to do but that they have to sell internal that they cannot do it alone on his mother of privation it’s also mean we are democracies right so I mean politicians response to their electorates but let me stress on another point here either which I think it’s important for our audience and for this objective that we have to make clarity you mentioned Corona bonds and there is a lot of discussion about alternative instruments recovery bones there is the proposal from the European Commission to provide support for unemployment finding coming from the European Investment Bank and I’m gonna try to show you the analysis that you did with your colleagues that have been recently published let’s see if I can because I would like to ask you the difference of adding support from the ESM right now as compared to the alternatives the policy alternatives that are under discussion so if you can tell us briefly about the main differences of the policy options on the table from out from out from our perspective the main reason why we consider that the ESM is is an option to consider is because it’s already part of the playbook right I mean like this is something that you can access like using the rules with we consider which is a set of conditions that are known conditions in an export center despite we understand all the political implications of the issue so in our perspective this is a solution Aires is literally there you have managed this Annie and importantly this is a solution in which there is capital for 700 billion to finance 500 billion in borrowing the reason / / / provision of capital by like a strongest countries in Europe to make sure that this instrument is still a right this is like having a joint and several warranty right and you see these days a lot of the discussion about like there this ero bonds not bosses should it be joined should it be several but I joint and several is the best protection you can have some countries this day saying they won’t agree to provide the joint warranty right I mean if they would be ready to provide the joint and several warrant that would be very little difference between providing the funding one way or the other I mean maybe in the sense of more liquidity for bonds that are already known by the market would imply maybe smaller borrowing cost but other than that but with political will to provide a joint and several warranty there would be no I mean like that the differences would be you’re probably you need to set a new market you need to mark the instrument this would take a little bit more of time initially the instruments would be less liquid because they are less known there would be a novelty premium so maybe initially they could be a bit more expensive right what I mean like if there would be political will to have a euro bond dry running with a joint and several warranty I mean in a matter of months probably that would be your bridge I mean they could be your observational equivalent I mean the point is whether with a well whether we wanna agree on something that can really help us now right and then continue talking or we are not gonna get these that can really help us now because we think that we have to continue talking right and as some of our calculations show right if Spain and I’m not gonna have to just we’ve done the world also for Spain I mean it would be to access a nice amount of funding through the a combination of Yemen or empty right well the comparison of the savings on interest that would come from the pilot air native and financed in all that man on the money on the market you wouldn’t conditions that are sustainable don’t take me wrong if this is not we cannot do it of course we can do it we are rich countries the issue is how much is gonna cost us and whether we can save all that money for the reconstruction and I think I mean when our point is that there I mean there is a margin of gain I mean I

am I know that the Italian threshold Italian demo is one of the best the emotion create the metallic glitter this is leader and everybody can acknowledge this right but you see I mean like way I mean like I mean there is a sense in which if you get a good agreement to just like make the right and in the meantime having like part of this financing with a nice long maturity that implies a very very small adjustment on the primary balance to pay it off that comes with zero interest rates I mean I know we want more I mean I understand that we need more junior I mean we can’t not be just like sovereigns without central bank’s right I mean we have seen these in practice but I mean this is the parts I mean like we are considering that this is a path that is going to help us today and in happiness today is gonna help us help in our selves tomorrow I think it’s it’s perfectly clear I mean we have to make sure that we understand what we have at hand today and as you said try to also to start planning for the future and this is my last question either and I know that making predictions is not just difficult but quite a bizarre deuce this day especially when we talk about eurozone politics but what do you think what what is gonna be the solution in the short term I’m hoping I’m hoping that the modern or today or on Thursday or when they will announce a package that has sufficient amount to show that they CV is not the only game in town there is no fiscal muscle and all the muscle releasing from foot this is gonna be hard be good because tensions are gonna be emerge so let’s hope that you know eurozone leaders listen and they understand really the challenge of our time and as you said that a meaningful package of support come around quite quickly and in the meantime really let me thank you once again on my behalf on behalf of this : or male and till soon thank you so much thanks to you what’s great talking to you thank you