Approve the ESM Treaty for a European credit line, di Lorenzo Codogno e Giampaolo Galli, il Sole 24Ore, 12 marzo 2020.

The outlines of the economic shock produced by the coronavirus are still very uncertain, but undoubtedly its size will be similar, if not greater than that of the 2008-2009 crisis. Much has been said about the nature of the shock and that it largely derives from the supply side. This is undoubtedly true. However, there is no supply shock that does not drag on an important impact on demand, and in this case, it will be enormous. Therefore, it will require unprecedented policy support actions. It is thus very much welcome the increase in the financial package decided by the government.

Policy action must have three objectives. First, to give massive help to the economy and try to avoid the collapse of the economic fabric, also due to the lack of liquidity; the ECB will soon contribute to addressing this issue. Second, interventions must be timely and as automatic as possible. Resources cannot be expected to arrive in a few months, when it may be too late for their survival of companies. For example, a check equivalent to the taxes paid last year could be sent as a zero-rate loan to be repaid in the next few years. Third, it must be made explicit that the economic stimulus must be relevant, but also temporary. Aside from an increase in healthcare spending, most interventions should not foreshadow structural increases in public expenditure.

The shock will be temporary, but it risks leaving permanent scars on the economy, with a lower GDP growth path compared to the current one, which is already very weak. This will inevitably bring to the fore a risk for public debt sustainability. The problems will emerge in many European and non-European countries, but given its well-known vulnerabilities, they will be felt above all in Italy. Therefore, prompt action must also be taken on the international aid front.


On the agenda of next Monday’s Eurogroup is the Treaty of the ESM (Eurozone’s bailout fund), for which a ‘political endorsement of the package’ is being requested. In Italy, the opposition has already raised its voice asking the government to reject the agreement, a position that in the past, we believed was not entirely without justification. In light of what is happening, perhaps it is better to rush the approval instead. The reason is that Italy could immediately take advantage of one of the two precautionary credit lines provided for countries that are affected by adverse shocks that are beyond their control. Initially, the precautionary credit lines seemed to serve primarily to protect other countries from a financial crisis in Italy: therefore, for the other countries, the exogenous shock was the crisis in Italy. Today, however, with all evidence, Covid-19 is the exogenous shock beyond the control of national governments, and Italy is the most affected country.

The ‘conditional credit line’ is reserved for countries that strictly comply with the rules on public accounts. Italy, however, could have access to the ‘enhanced credit line’, which requires the signing of an MoU (Memorandum of Understanding) with the ESM and the Commission. This perhaps requires some borderline interpretation relative to the original intentions of the Treaty, which seems possible given that there is ample flexibility in defining the conditions for access to this credit line. In Annex III, in a few lines, it is said that countries that are not eligible for the other line, but whose economic and financial situation is stable and whose debt is sustainable, have access. It goes without saying that these conditions must be assessed before the shock; otherwise, the country would not ask for financial assistance in the first place.

Besides, the Board of Governors of the ESM, which represents the governments of the Eurozone, may decide to change the criteria for access to precautionary assistance and amend Annex III accordingly (art. 14.1). Typically, the signing of the MoU requires that the country undergoes a public finance adjustment programme. Still, for Italy, such a programme would make no sense since today there is a need to support people and companies affected by the crisis induced by the epidemic and, more generally, to avoid the collapse of the economy.

If anything, the MoU could postpone a new assessment of the situation in Italy, after the end of the epidemic, to decide whether to renew the credit and the possible structural reform measures necessary to bring the country back on a growth path higher than the previous one. All forms of ESM assistance are deemed to be used to avoid crises in the entire Euro Area. And there can be no doubt here: the crisis Italy is entering is severe, and it will inevitably have consequences for the economic and financial stability of the whole Euro Area. This is also a political opportunity not to be missed to find solidarity and coordinated solutions to strengthen Europe and prevent that yet another crisis undermines its foundations, perhaps even in a fatal way.