Angela Merkel, in an interview with South German newspaper stated that the decision to use the European Stability Mechanism – Mes – and remains Italian: But we didn’t activate it because it remains unused. Registrar’s statements – greeted with coldness by the Italian premier, Giuseppe Conte – betray a form of surprise: why does an instrument set up at a politically very high cost seem to be so opposed in one of the countries most affected in Europe by the coronavirus pandemic?
To understand this, it is necessary to explain what the Mes is: and under what conditions the money made available by this institution can be collected.
So what is Mes? In itself, the European Stability Mechanism is an intergovernmental body whose legal basis is a treaty between the countries of the euro area, which are shareholders in shares more or less equal to their economic weight: and has existed legally since September 27, 2012. Last April, during an Euro Group, an agreement was reached on Pandemic Crisis Support, managed by Mes: a credit line with a value, for each country, at sums not exceeding 2% of its 2019 gross product. For Italy , about 40 billion euros.
The interest rate would be negative (Italy should repay less than it borrowed) in the event of a seven-year maturity; and practically zero (0.08%) in the case of a ten-year maturity. A ten-year loan from Mes, at current government bond yields, it would therefore save Italy 4.8 billion compared to a loan that Italy should seek on the market by placing government bonds. Those 4.8 billion would therefore be a margin that this government or more likely future governments they could invest in school, in social spending, in major works or in the reduction of the huge public debt.
What should these Mes funds be used for? The only condition required to access this tool is that it is used only for direct and indirect healthcare costs. In other words, that loan could be spent to strengthen hospital facilities, hire medical and paramedical staff, but also for health prevention in other fields: the safety of companies that resume production, school construction now that there will be need more classrooms for smaller classes. In other words, this new instrument of the Mes requires that social spending increase rather than decrease.
Are there preliminary constraints? No. The Eurogroup, which brings together the Mes shareholder states, has clarified that the Pandemic Crisis Support available for all Member States and does not provide for enhanced surveillance of the type of that seen in recent years for the rescue of Greece, with representatives of EU Commission, ECB, IMF. There are no preliminary economic or budgetary reforms that are required.
Moreover, the entire disbursement would take place entirely within the first year of life of the credit line however, the Mes would not be able to tie new money transfers to macroeconomic adjustments that have not already been discussed in advance.
The only constraint is that of the destination of the expenditure: those funds are to be used for direct and indirect healthcare costs linked to the Covid emergency. Healthcare, care, prevention: a definition that could also include, for example, the burden of keeping workers from closed businesses at home, while prevention could concern investments to be made to put and maintain a factory in the new safety conditions necessary for resumption of production.
Are there conditions linked to debt sustainability? The answer is: but the analysis has already been carried out, and has promoted Italy. Much of the debt issued at fixed rates, the Commission noted, the average maturity has increased in recent years to almost 8 years and the important share of public debt held by residents is positive.
Because some political forces continue to harbor doubts – so that, as shown here, is the no front stronger than the s front in Parliament? (In favor there are the Pd, Italia Viva, the leader of Forza Italia Silvio Berlusconi; against, the 5 Stars, Lega, Fratelli d’Italia)? Perhaps because between 2010 and 2012 the EFSF and the MES have granted about 98 billion loans to Portugal, over two hundred billion to Greece, 76 billion to Ireland, 41 billion to Spain: and in that case there was an external verification of the rehabilitation programs for countries by European authorities. A condition that the new tool does not have.
Why don’t other countries apply for this Mes loan? Indebted and coveted economies like Covid like Spain and Portugal have a good reason not to do it that Italy doesn’t have: they already pay very low interest rates to finance themselves on the market. The yield of the ten-year bond of Madrid and Lisbon of 0.45% makes us the relative savings of access to the Mes much smaller than for Italy. Note that even the yield on Greek bonds has been lower for weeks than Italy has to offer to find creditors on the markets.
However, it is not precise to say that nobody accesses the Mes. Cyprus is doing it and since the news began to leak, shortly after the middle of May, the general cost of debt in the collapsed country: already from 1.33% to 0.90%. One of the reasons that access to that credit line satisfies a necessary condition for the European Central Bank to activate Outright Monetary Transactions in the event of a crisis. The latter are potentially unlimited purchases of securities with maturities of up to three years on the securities of a country targeted on the market. So access to the Mes is already saving money in Cyprus on the rest of the debt.
This would make a big difference for Italy, because this year it must finance itself on the market for at least 600 billion euros; a difference of even 0.3% in the returns offered to the market would allow the taxpayer to save about two billion.
Someone objects: But the Treaties have not changed. Usually this is the argument of the most uninformed, who no longer know what to invent to defend a pre-established position. There is nothing in the European Union Treaties which obliges the Mes to make or not make any choice. The Mes treaty provides for conditionality on loans. But, in fact, in this case it only requires that money be invested in social spending. Nothing else.
For this who refuses the Mesknowing that he still needs tens of billions of loans, he should explain to the Italians why he decided to put the burden of additional debt on them and their children (at least 4.8 billion, but probably more) than they would have been avoidable.
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