SummerEU ePub 2020 WORLD COMMERCE REVIEW

Next Generation EU. says Maarten Verwey, Sven It is time to accelerate the COVID crisis can Langedijk and Robert a , Dirk create a path to European Kuenzel provide an Schoenmaker argues integration overview

THE GLOBAL TRADE AND FINANCE PLATFORM www.worldcommercereview.com Tagliapietra, and Guntram Wolff present aframework for apost economic COVID-19 recovery European governments have adopted stringent measures to slow thespread ofCOVID-19. JuliaAnderson, Simone Rebooting the COVID-19 crisis Claeys argues thatGrégory theEU'sSUREplanto safeguard employment istoo modestto have asignificant impact forward step small A repair andprepare for generation thenext The coronavirus hasshakenEurope andtheworld to itscore. Ursulavon derLeyen presents arecovery planto moment Europe’s proposal, hasbeenmissedto reform andfeels the EUbudget that anopportunity budget GenerationThe considersEU EUresponse theNext to ZsoltDarvas theCOVID-19 hassofarbeenweak. crisis uncompromising An oftherecovery planproposed andanassessment impact oftheexpected bycollective the Commission action Maarten Verwey,Europe Kuenzel Sven provide oftheeconomic rationale overview LangedijkandRobert abrief for for plan recovery A CONTENTS www.worldcommercereview.com unique opportunity to develop atrulyEuropeanunique opportunity programme that helpsrestructure theEUeconomy change for The Peitz has beenaskedfor arecovery fundproposal. seea and Martin Motta Massimo opportunity An Fund annuities to finance economic a€1trillion package reconstruction Reconstruction How should Europe respond to theeconomic Luis argues crisis? that Garicano theCommission issueconsolidated European a Towards . And we are by beingaskedto strengthening act Europe This isourgeneration’s crisis moment, Schuman says Lagarde. Christine We have beenpassedthebaton of integration to path The era inthe(post)COVID-19 era willremain policy sustainability anenduring COVID-19 the in The current hasgiven crisis areminder abouttheneedto strengthen oursocieties. Cosmina argues Amariei that finance Sustainable time isoftheessence to create highlyintegrated, andfairfinancialcapitalmarkets functional readjustment and Rebecca Christie Thomas Wieser consider theEUpost- reckoning withfinancialmarkets, andargue that financial EU’s The CONTENTS www.worldcommercereview.com risks impose? risks technology help, what are risks there inusingbigdata, andwhat policiescanmitigate any limitations that these All available resources needto bebrought to bearonCOVID-19. JScott Marcus asksto what extentcandigital COVID-19 versus data Big argue that Marimon usingtheESMto provideRamon way thefundsneededisaworkable forward now fight COVID the EU memberstates are debating how to finance thefight against Aitor COVID-19. Erce, GarciaAntonio Pascualand finance can ESM The accelerate thegreen economy argues Schoenmaker thatDirk governments canattach green conditions to aidto mitigate theCOVID-19 and crisis recovery green A oftheCOVID-19 pandemic impact COVID-19 of time the Peitz conditions onthestate aidthat suggestimposingstrict isneededto andMartin reduce Motta Massimo the in policies aid state EU propose avaccines strategy for Europe to meetthechallengeoffuture pandemics A long-term solutionto COVID-19 includesvaccine development.COVID-19 Reinhilde Veugelers andGeorg Zachmann against Racing CONTENTS www.worldcommercereview.com impact oftherecovery planproposedimpact by theCommission provide oftheeconomic rationale overview abrief for Maarten Maarten Verwey, Kuenzel Sven Langedijkand Robert collective action andan assessment oftheexpected collective action A recovery plan for Europe www.worldcommercereview.com A additional liquidity assistance topsadditional liquidity 22%ofGDP. measures ofaroundalready 3.2% ofEUGDP fiscalsupport to theireconomies extended for the year 2020, andthe immediatelyacted andforcefully through thePandemic Purchase Emergency Programme. states Member have contrastIn to previous andsizeable. response crises, intheEUhasbeenswift theeconomic policy The ECBhas forecast scenario are strongly tilted to thedownside. will stillhave lower real erupted. GDPlevels to at theabove theendof2021thanwhenCOVID-crisis Risks recovery in2021(European of6.1%expected Commissiononly apartial ofmemberstates 2020a).Alarge majority The Commission’s 2020economic Spring forecast suggeststhat real GDPin2020will fallby 7.4%intheEU, with aboutthefuture and course (Bénassy-Quéré ofthecrisis uncertainty Weder diMauro 2020). physical confinement, concerns aboutincome andjobprospects, worsening financial conditions, andpervasive havetrading restrictions beencompounded by acollapse ineconomy-wide spendingandinvestment dueto on healthsystems andeconomies inEurope andaround theworld. Supply-side problems from and production been confirmed globallyandthere have beenalmost400,000 deaths.confirmed Inaddition,ithas wreaked havoc The ferocity oftheCOVID-19 pandemichastakentheworld by surprise. To date more thansixmillioncaseshave of therecovery planproposed by theCommission. a brief overview oftheeconomic rationale overview a brief for andanassessmentimpact oftheexpected collective action economies. late In May, theCommission presented itsproposals for a recovery plan. This column provides EU leadersandinstitutionshave theirattention turned towards themedium-term recovery oftheir linkedto to theCOVID-19 easerestrictions pandemiconcitizenss memberstates andbusinesses, start www.worldcommercereview.com are, theywillnotbeenoughto ensure arapid recovery andto avoid permanentdamageto theEUeconomy. term, thesemeasures have theshort preventedIn masslayoffs in Europe. However, asimpressive asthesemeasures condition-free Pandemic instrument, andtheEIB’s Support Crisis pan-European guarantee fund. SURE instrument proposed work by schemes, theEuropean theESM’s short-time Commission to support almost the EUlevel, rapid agreements schemes, includingthe have support beenreached onanumberof important arrangements that have income streams for supported employees andeasedlabourcosts for employers. At spendingonhealthcare, much-neededemergency Besides EUgovernments have working activated short-time marks an important step on the path to recovery to path the on step important an marks required. The package proposed by the Commission Commission the by proposed package The required. For a genuine recovery, a concerted effort will be be will effort concerted a recovery, genuine a For www.worldcommercereview.com . 2020). A substantial part of this policy support shouldbeorganised support ofthispolicy (eg. etal.2020).Asubstantial part Bénassy-Quéré isnecessary support To limitthedamage to theeconomy, to minimisedownside andto risks advance therecovery, continued policy The for case EU-level intervention This asadrag ongrowth could act andinvestment for years to come. challengefor countries that already— aparticular hadelevated debtanddeficitlevels before thepandemicstruck. term, countries willunavoidably withsignificantlyBeyond theshort higherdebt beleft to befinanced inthefuture to from rise near-balance in2019to around 8.5%ofGDPin2020. member states’ publicfinances. The Commission’s spring forecast the average expects government deficitintheEU healthcare measures costs, and theeffectsof short-term recessionHigher fiscalsupport willtaketheir tollon large negative second-round effects oninvestment, employment, growth andprosperity. physical, humanandfinancialcapital. Businessfailures theycause alsodisruptinternational value chains;inshort, A fragile corporate meansaslow sector andprotracted recovery andfewer jobs. Insolvenciescauseawaste of andcontinued negativeespecially inacontext ofdeepuncertainty cashflow for many companies. from loansisdifficult tosustain over time. Pilingdebt onto already stretched balance sheetsisnodurable solution, For companies, problems liquidity willincrease isstalled, thelongerproduction financing andtheuseofbridge the EUin2020baselinescenario. workers Low-skilled are andtemporary likelyto behitthe hardest. job losses—thelatter are to expected drive uptheunemployment rate to around 9.5%intheeuro area and9%in employment types. Householdincomes are likelyto suffer, and permanent cutsinearnings bothdue to temporary Even donotcover intheEU, andoften work schemesare thefullwages, time-limited short-time norall www.worldcommercereview.com state aid to theireconomies intheform ofadditionalspending, support taxrelief discretionary been lessableextend and low choices. macroeconomic As andpolicy resilience aresult, factors thesecountries dueto have amixoflegacy Many oftheEUcountries hithardest by thepandemicwere already onarelatively footing andhad weak budgetary 6% and7.5%inmostothermemberstates. The regional ismore variedstill(Figure impact 1). large inGreece, andCroatia,to beparticularly , at around 9.5%each,compared to recessions ofbetween Economies with large tourism sectors, for example, affected. have GDPlossesin2020are beenparticularly expected countries differs considerably composition. too, ontheirsectorial dependingpartly at theEUlevel. JustastheCOVID-19 diseaseeffects somepeoplefarmore thanothers, on itseconomic impact same timeastrong boostto therecovery inallmemberstates. A coordinated EU-level investment stimuluswould counterbalance thesecentrifugal powers, whilegiving at the thesocial, andundermine political, ofourUnion. economicapart, andfinancialstability also jeopardise competition, trade andinvestment would drive across livingstandards It theSingleMarket. further Not onlywould thisprevent somecountries theircitizens from and businesses;itwould adequately supporting investment andgrowth, higherandmore persistent , andlessfavourable debtdynamics. economic divergence intheEU. thelongerterm, economically weaker In countries may alsoface lower rates of This combination –amore offactors severe recession response andaweaker –entails areal policy ofincreasing risk 1 . www.worldcommercereview.com Source: JRC in RHOMOLO are consistent withthe2020SpringForecast. based onregional account bilateral dataandasetoffullyobserved finalandintermediate shipments consistent withthenationalaccounts. The economic disturbances implemented Note: Shadingshows estimated GDPgrowth in2020%.The analysisiscarried outusingtheRHOMOLO macroeconomic framework, anumerical-spatial general equilibriummodel Figure at regional 1.GDPimpact NUTS 2level excluding measures ofpolicy theimpact www.worldcommercereview.com around 25-35 million people could experience a financing shortfall shouldtheadversearound scenario materialise. 25-35millionpeoplecould experience afinancingshortfall could to rise 35%and50%,respectively. This meansthat around 180,000-260,000European companies employing buffers, capital andliquidity the year exhausting working after respectively.In theadverse scenario, theseshares thebaselinescenario,In between 25% and35%ofcompaniesby theendof would experience afinancingshortfall pandemic lastlonger. undertheadverseand asmuch€1.2trillion scenario, to control oneconomic activity inwhichrestrictions the financial corporates in Europe underthe spring could wipeout€720billionofequity forecast’s baselinescenario Using firm-level data from theORBISdatabase, the Commission estimates that theaccumulated lossesofnon- repairEquity needs forproviding therecovery andpreparing muchneededsupport theEUfor the future. Investments thedoublebenefitof inthegreen valuable astheycarry anddigital transition are particularly existing urgent investment needsrelated to thegreen anddigital transition. These investment needsare combination ofinvestment resulting lossesdirectly from theCOVID-19 and crisis The Commission estimates that theEUeconomy’s investment needsfor 2021and2022are at least€1.5trillion. Investment needs repair andsovereign financingneeds analysed in detailthefinancialneedsof European economy. These include considerable investment, equity To facilitate onthesize theCommission Instrument, andallocation informed oftheRecovery has decisionmaking Financing therecovery 2 . www.worldcommercereview.com clearly macro-relevant. ensuresclearly fullcoordination design, By thepackage oftheinvestment impulse, addingto its From amacroeconomic point ofview, hasanumberofdesirable features. thispackage is The size ofthepackage firepower oftheEUbudget equivalentreaches €1.85 trillion, to around 13%ofEUGDP at 2019 levels. Generation EUtoWhen adding Next theproposed size thetotal ofthe2021-2027MFF€1.1trillion, financial additional fundingwillberepaid over oftimethrough alongperiod future EUbudgets–between 2028and2058. This willallow theCommission to useitsstrong credit rating to borrow €750billiononthefinancialmarkets. This obligations to 2.0%ofEUGross National Income. by themaximumamount temporarily that theEUcanrequest lifting from memberstates to cover itsfinancial 2021-2027, aswell Instrument, asthenewRecovery Generation EU’.‘Next Generation EUwillraise money Next On 27May theCommission unveiled containing arecovery areinforced package long-term EUbudgetfor Next Generation EU corporate sectors. investments specifiedabove guarantees lossesontheliquidity orthe providedexpected by memberstates to their increased social spendingin2020and2021. These estimates donotyet cover thefinancingofadditional EU sovereigns, meanwhile, willneedto finance anestimated to extra €1.7trillion cover losttax receipts and Sovereign financingneeds to invest andthosecompanies willseetheircapacity that manageto survive bankrupt severely impaired. unaddressed, work schemes. through left many short-term If schemes for companies support willgo solvency and between €650billionand€900intheadverse scenario. into accountThis taking isafter the existing could range between €350billionand€500inthebaselinescenario,The corresponding shortfall liquidity www.worldcommercereview.com Source: Commission services Figure 2.QUESTsimulation ofRecovery results ofimpact Instrument pps. of GDP EU27 income Higher Higher Impact of Recovery Instrument onGDPandgovernment Instrument ofRecovery Impact GDP Higher Higher debt debt ratios compared to baseline(pps.) Lower debt 2030 2024 EU27 income Higher Higher Debt-to-GDP Higher Higher debt Lower debt www.worldcommercereview.com Deputy Director General, Director Deputy allattheDGEconomic andFinancial Affairs, European Commission Verwey General, isDirector Maarten Sven Langedijk anEconomic Policy Adviser, Kuenzel to the isanAssistant andRobert AUTHORS ABOUT THE step onthepath to recovery.important ■ For agenuinerecovery, willbe required. effort aconcerted proposed by the The package an Commission marks by increasing demandfor increasing theirexports, GDPby more than1%compared to baselineby 2024(Figure 2). downside for risks theentire Union.Interestingly, itwould alsoraise GDPgrowth inhigher-income memberstates would contributeThe package significantly to reducing thedivergences intheUnionandthereby to limitingthe medium to longterm. thanks to astrong denominator effectit would leave levels EUgovernment slightly lower, debt-to-GDP even inthe are estimated to beat least1%higher. Upto 2millionadditionaljobsare estimated to becreated by 2022,and raise real GDPlevels by around 2%by 2024compared to abaselinescenario. Even ten years later, real GDPlevels Generation EUusingtheCommission’smost inneed. simulation ofNext Astylised QUESTmodelshows that itcould Finally, ensures theproposed that allocation thefundswillflow ofthepackage to thosememberstates that are effective way a particularly to stimulate aggregate demand. effectiveness. isheavily biased towardsThe package publicinvestment. With interest rates at the zero bound, thisis www.worldcommercereview.com https://ec.europa.eu/info/sites/info/files/economy-finance/assessment_of_economic_and_investment_needs.pdf European Commission (2020b),“IdentifyingEurope’s recovery needs”, SWD(2020)98final. https://ec.europa.eu/info/sites/info/files/economy-finance/ip125_en.pdf European Commission (2020a),“European Economic Forecast, Spring2020”, InstitutionalPaper 125, May. https://voxeu.org/article/covid-19-economic-crisis-europe-needs-more-one-instrument Aetal.Bénassy-Quéré, (2020),“COVID-19 economic crisis:Europe needsmore thanoneinstrument”, VoxEU.org, 5April. https://voxeu.org/content/europe-time-covid-19 AandBWederBénassy-Quéré, diMauro (eds) (2020),Europe intheTime ofCovid-19, aVoxEU.org CEPRPress. eBook, References financialneeds, spending, includingforsocial are2. Other alsoassessedin European Commission (2020b). notified by Spain represents 4.2%ofthe total amount. measures notified Italy and by representing around 17%eachoftheentire amountofstate aidapproved.Aid total state aidapproved sofar estimate. isabest 45%ofstate Around aidapproved notified hasbeen ,by with On thisbasis, theamountofmorenational measures than€2.19trillionof notified statesby 26member and theUK. 1. UnderitsCOVID-related state temporary aidframework, theCommission hastaken 155decisionsapproving 193 Endnotes www.worldcommercereview.com The EUresponse to theCOVID-19 hassofarbeen crisis EU proposal, has been andfeels that anopportunity weak. Zsolt Darvas considers the Next Generation considers theNext ZsoltDarvas weak. An uncompromising missed to reform theEUbudget budget www.worldcommercereview.com A The overall andsomelimitations. proposal advantages: hasanumberofusefulaspects Main Summary is missedto reform theEUbudget. suggesting that anopportunity however generally small, are andfundingreductions compensated by newfundsfrom therecovery instrument, The changesto theproposed standard seven-year focuses budgetthat issuesare primarily onlong-term structural • • • • Funding isincreased for research actions, external andhealth,whichiswelcome. Generation EU’‘Next aimsat macroeconomic stabilisation whileboostinggreen anddigital transitions. by pleasing memberstates unhappy aboutpreviously proposed cuts. programmes, possiblyto deploy themfaster orto increase thechance ofacceptance ofthewholepackage Resilience Facility, whichincreases transparency. The rest willbescattered all over inexisting EUbudget Two-thirds ofthenew€440billiongrants would bechannelled viatheproposed and newRecovery guarantees and€250billion loans, inadditionto thestandard seven-year budget. Generation EU’‘Next financed by long-term EUborrowing would include€440billion grants, €60billion expenditures. recovery facility, Generation EU’,‘Next that would borrow moneyinthenameofEUto finance EU-wide rather weak until theCommission putonthetableadrastically newproposal: thecreation ofanew from decisive Europeanpart Central Bankmeasures, theEU-wide response to theCOVID hadbeen crisis www.worldcommercereview.com • • • • The proposal boldness oftherecovery facility canboostconfidence ontheeconomy. withpositive impacts should beconcentrated onthenewrecovery facility. Leaving proposals outearlier for the' area budget'isnot abiglossdueto theirinferior design; focus behaviouraltrigger changes, suchaslower pollution. usefulnewownSome resources are proposed, whichhelpalign EUrevenues withEUgoalsandmight also The current 2020EUbudgetisincreased by €11.5billion. might fall behind fall might jobs and well-being are at risk, and hard-hit regions regions hard-hit and risk, at are well-being and jobs EU is expected to suffer from a very deep recession, recession, deep very a from suffer to expected is EU changed the economic and social outlook as the the as outlook social and economic the changed ... the coronavirus pandemic has completely completely has pandemic coronavirus the ... www.worldcommercereview.com Limitations: • • • • • • • and helpsomecountries accept thewholeplan. Rebates would stay. This may bedesigned to alleviate oppositionto amore fundamental reform oftheMFF is heavily front-loaded to 2021-2024,even thoughthegreen transition willhave alongertime frame. The Just Transition Fund ofthetransition towards impacts to alleviate climate thesocio-economic neutrality governments would ofoverall onlychangethedistribution national contributions. budget andloanrepayment for ‘New Generation EU’. resources Own coming from EU-basedentities and Only thenewown resources that are paidby non-EUentities willhelpthefinancingofgeneral EU Common Agricultural Policy. for amoreThe proposal fundamental reform missestheopportunity oftheEU’s budget, includingthe The proposed €250billion loansare alessusefulmechanism thanthegrants. frontloaded butspread over anumberofyears. toDue theadministrative processes, programme design andapproval, willnotbe pay-outs actual economic situation would necessitate. Though macroeconomically significant, the overall measures announced remain below what thedire www.worldcommercereview.com Source: Author's compilation basedonCommission Communications COM(2018) 321 final(page30)and COM(2020) 442 final(page20). eration EUfund alsoincludesguarantees, buttheir amountisnotspecified. Note:does notallow Insufficientinformation splitting the202102027MFF between proposal grants, guarantees Gen- andloans.actionexternal of Next * component The€15.5billion constant prices Table 1.Comparison oftheMay 2018andMay 2020MFFproposals for commitment appropriations (in2018 Research andinnovation European strategic investments Environment andclimate action andresilienceRecovery Agriculture policy andmaritime and values Investing inpeople, socialcohesion Union Economic andMonetary Regional development andcohesion Space Defence Security Border management Migration Resilience and crisis responseResilience andcrisis External action External Margins European publicadministration Pre-accession assistance Total 2018 MFFproposal for 2021-2027 1,134.6 330.7 123.5 242.2 91.0 44.4 22.3 14.4 17.2 18.8 10.0 93.2 22.2 75.6 12.9 5.1 5.7 4.3 1.2 2020 MFFproposal for 2021-2027 1,100.00 340.2 116.4 237.7 87.7 30.8 15.3 18.2 13.4 17.7 12.1 89.2 74.6 12.9 5.8 4.6 9.5 4.3 9.6 Grants 443.7* 310.0 15.5* 13.5 15.0 50.0 30.0 9.7 2020 Next Generation EU 2020 Next proposal for 2021-2027 Guarantees 56.3* 56.3 Loans 250.0 250.0 www.worldcommercereview.com increase of etc. innationalcohesion projects co-financing theelimination for ofrebates;respect ruleoflaw; establishingnewrevenue sources; theeuro area budget;the EUfunds spending; increases likethefightto the againstclimate inspendingonnewpriorities change;linking agriculture; concerns abouttheproper useofsomefunds;proposed cutsto agricultural andcohesion policy The mostcontentious issuesledto adeadend:theassessment ofEUadded value ofsomespendinglikein planning error inanational budget. should be1.00%,1.08%or1.12%ofgross national income (GNI), whichgapsare several smallerthanany factors statesMember were aboutmacroeconomically bickering irrelevant points suchaswhetherthesize ofthebudget than two years theCommission after made itsfirstproposal without reaching an agreement. Debates around theEU’s seven-year Financial Multiannual Framework (MFF)for 2021-2027dragged onfor more The MFFsaga • • • detailed, becauseoftimepressure. perhaps The proposal isalsostillincomplete calculations asunderlying andproposed regulations are stillto be to improveThe proposal alsomissesanopportunity ontheEU’s outdated budgetingmethodology. revenuescustoms duty could bekeptby memberstates as ‘collection costs’. based onthecommon consolidated corporate taxbaseisdropped; of nothingissaidaboutwhat proportion Little information isprovided aboutEUbudgetrevenues; proposal theearlier to derive anEUrevenue stream www.worldcommercereview.com states’ publicfinances: mobilise allunusedfunds, allow reallocations between andwithinprogrammes, simplify The Commission took several initiatives that were well made, even iftheycannotmakeabigdifference for member the 2020annualEUbudgetbecause allceilings hadbeenfixed in2013,whenthe2014-2020 MFF was agreed. contrast,In therest oftheEuropean response hasbeenrather weak sofar. Not muchcould have beendonewith collateral from banks. bank capitalrules, offering credit to bankswithasubsidyandaccepting aneven broader setandlesscredit worthy The European Central Bankaddressed theeconomic falloutby significantly expanding assetpurchases, relaxing across competition undermining asalsoargued in thesinglemarket, theUnionrisk by Guntramsupports Wolff Moreover, helpsotherEUcountries through stimulusinonecountry spillover effects. However, uneven state starts. Such rescues are welcome ready astheykeeptheproductive andhumancapacity to takeoffwhenthe recovery The EUreacted andfiscalrulesto by allow relaxing governments state-aid to subsidisebusinesseslosingrevenues. EU-wide response sofar economic andpoliticalconsequences, notonlyfor thecountries concerned butfor theEUasawhole. publicdebtlevelsSoaring insomecountries might sovereign trigger withpotentially debtcrises devastating social, regions might fallbehind. tooutlook astheEUisexpected suffer deep fromrecession, a jobsand andhard-hitvery well-being are risk, at While thesedisputes remain today, thecoronavirus pandemichascompletely changedtheeconomic andsocial . www.worldcommercereview.com The Franco-German temporary recoveryThe fundproposal temporary Franco-German of18May 2020putanentirely newalternative onthetable: The recovery fundproposal andthe counter-proposal Overall, theEurogroup’s isfeeble. €540billionpackage financing ofEU cohesion spending. access provide criteria, by delaying liquidity therepayment andabolishnational co- ofunspent pre-financing • • • countries. enterprises intheEU, thoughwelcome, would notsignificantly alleviate thefiscalburden ofhigh-publicdebt The ’s to hard-hit smallandmedium-sized support liquidity €200billionextra countries isjustasmallstep forward to mitigate (SURE)for Unemployment inan Emergency allEU Support Risks The €100billion temporary GDP, sothepotential interest saving from asmallcredit lineisminiscule. reduce demandfor thecredit line. Also, pandemic-related healthcare costs sofarhave been well below 1%of Applying for anESMloancould hasweak signal public finances that thecountry (‘stigma which could effect’), applied for itinthetwo weeks since itbecameoperational. pandemic-related healthcare costs. usefulnesscan bequestioned, hasyet considering that Its no country members, whichoffers cheaploans for 10 years amountingto coverto maximum2%ofGDPeach country €240 billionisanewpandemiccredit line from theEuropean (ESM)for Mechanism Stability , asitcanat bestleadto marginal interest savings. www.worldcommercereview.com elements: and, oftheUnion, macroeconomic for stabilisation thefirsttimeinhistory two at theEUlevel.It includes main features: spending, medium- andlong-term structural whichisthemainscope ofthe ‘standard’ seven-year MFF; The European Commission revealed itsnewMFFproposal on27May 2020. The proposal neededto combine two The 27May 2020new MFFproposal benefit must remain. fund) shouldnotbemore than1.00%ofGNI;andinsisted that theEUbudgetrebates from whichthesecountries avoids any mutualisation ofdebt;theystated that theoverall level ofstandard MFF(notconsidering therecovery current EUspending. The four countries recovery alsocalledfor fundwhichonlyprovides atemporary loansand that reprioritized“modernised existing was EUbudget” spending. inessence acall for It asubstantial reshuffle of A counter-proposal by theso-called common consolidated taxbase. digital transitions, strengthen research reforms, structural andinnovation, andensure support fairtaxation anda The proposal Franco-German alsoaimedto integrate thefundinto theEU’s multiannualbudget, foster green and amount, was oftheCOVID notashightheseverity induced would crisis have warranted inmy view. money guarantee. This said, €500billion(orabout3.6%ofEUGDP),though amacroeconomically significant instead that large of loansortheusualEUfinancialtrick trigger amounts ofprivate investments from littleEU This was rightly hailedasadefiningmoment intheUnion’s asitproposed EUspending to implement history actual involving redistribution between EUcountries. €500 billionjoint borrowing expenditures would finance EUbudgetary andfor themost affected sectors regions, ‘’ – , , the andSweden theNetherlands –Austria, –calledfor Denmark, a www.worldcommercereview.com to beefficient. However, ofthe current considering theseverity crisis, onitsown itremains below thelevels neededfor astimulus is,This newfacility proposal, liketheFranco-German abold, macroeconomically relevant, positive step forward. ‘Next Generation EU’ –thenew recovery instrument ofthesituation.available theurgency in2020,reflecting amend thecurrent multiannualfinancialframework 2014-2020andmakeanadditional€11.5billioninfunding additionto theaboveIn proposals, in2021,theCommission alsoproposes whichapplyfor to starting theperiod measures. Therefore, used. muchlessthan€540billionare likelybeactually few countries to canbeexpected draw ontheESMcredit ofthese€540billionearlier lineandSURE, whichare part discussed above, that mostlyconstitute ofloansandthereby differ from EUbudget expenditures. As argued, very misleadingly,Somewhat theCommission’s communication addsathird item, the€540billionEurogroup measures • • pay-out wouldpay-out spread over more years. this instrument. While mostofthecommitments for thisinstrument would bemadein2021-2024, actual €60 billionwould beguarantees and€250billionwould beloans constant 2018prices, or€809billionat current prices. of€750billion,about€440billionwould Out begrants, The newandtemporary Generation EU’‘Next instrument for 2021-2024,amounting to €750billionat EU budgetrevenues andmemberstate contributions. billion at current prices, whichcould bearound 1.12%ofEUGNI The standard seven-year MFFfor 2021-2027,amounting to €1,100 billionat constant 2018prices, or€1,240 1 andto be financed, asusual, by somedirect 2 . The EUwould borrow long-term to finance www.worldcommercereview.com Arm 1: Supporting memberstates to recover 1:Supporting Arm (€415billiongrants and€250billionloans) The three armsofthe ‘Next Generation EU’ instrument benchmarks. depending onprogress madeandonthebasisofpre-defined Parliament willhave control over theallocation ofthefunds. would bereleasedThe ininstalments EUsupport would beassessedintheEuropean Semester process. Thereby, theCommission, theCouncil andtheEuropean Countries would have to recovery oftheirNational Reform andresilience Programmes, plansaspart which concentratedwill be andwhere oftheUnionmostaffected resilience needs are greatest.” intheparts from availablecommunication stating willbe that “It isnotclearonthispoint apart to states allmember butsupport issofarimpossibleto evaluateIt theextent ofpossibleredistribution via Generation EU’‘Next becausethe for borrowing from theIMFremains anopenquestion. from theEUbudgetunder Generation EU’‘Next a would carry ‘stigma’ effect similar to what theliterature suggests have to raise lessfrom inthemeantime. themarket This canhelppublicdebtmanagement. Whether borrowing However, themostfiscally-stretched countries could stillbenefit from long-term EUborrowing, since they would generally low, thebenefit would besmall. could benefit from cheaperborrowing from theEUthanfrom butsince themarket, interest rate differentials are €250 billionloanswould also beavailable inthescheme, thoughthiscomponent islessuseful. countries Some billion ofthe€500amount would beguarantees instead ofEUspending. almost fullyincorporates that proposal theFranco-German from €60 of€500billionEUspending, thefact apart This instrument isaimedat macroeconomic stabilisation andfinanced by EUborrowingIt oncapitalmarkets. www.worldcommercereview.com Arm 2: Arm Triggering private investments (€56billionguarantees) • • • • • up to €300billioninvestment. Therefore, financial engineering aims EUmoney to increaseby 10-fold; actual guarantee of€75billionto theEuropean Investment BankGroup, willleverage whichinturn thisguarantee by guarantees providing againstlosses. partial Altogether, €31billionfrom theEUbudgetwillprovide a €26 billionfrom the Generation EU’) aimsto‘Next mobiliseprivate investment instrugglingcompanies (€5billionin2020by Instrument modifyingthecurrent MFFandthen The Support proposed newSolvency Green Deal. to implement theEuropean changesnecessary thestructural andrural farmers areas inmaking support The European Agricultural Fund for Rural Development would benefitfrom anadditional€15billion to of €40billionin2021-2027; The already plannedJust Transition Fund would besignificantly boosted by €30billion, to reach a total value 2021-2022; by €5billionassoon2020viaarevision ofthecurrent support 2014-2020MFFandby €50billionin policy REACT-EU aimsto achieve aquickresponse whiletheotherinstruments are putinplace. increases cohesion It digital transitions. improvelasting recovery; theeconomic andsocialresilience thegreen ofmemberstates; and andsupport €310 billiongrants investments goalsare and€250billionloans. to Its support andreforms essential to a The andResilience Facility’‘Recovery isthelargest component ofthe ‘New Generation EUinstrument’, with www.worldcommercereview.com Disbursement from andResilience Facility theRecovery to is notexpected befrontloaded (Table 2).Only6%is Composition andtimingofEUspending (€39billionmostlyforactions grants, butsomeofthisamount isfor guarantees) 3: Arm ‘Learning the lessonsfrom thecrisis’: mixofmeasures related to health,protection, research andexternal • • • • • • new External Action Guarantee) Action new External and€5billionto aid. humanitarian To strengthen €5billionwould actions, external beallocated to instrument theneighbourhood (includinga forEuropean healthandclimate-related research support andinnovation activities; isproposed to beboosted by €5billionto reach atotal envelope of€94.4billion,to increase team, isto bereinforced support andemergency capacity by €2billion; rescEU, theEU’s civilprotection mechanismto finance investments inemergency response infrastructure, the NewGeneration EUinstrument, to enhance prevention, EUhealth crisis preparedness andresponse; A newEU4Healthprogramme withatotal fundingof €4 billion,ofwhich€7.7billionwould befinanced from single market. This could generate €150billionprivate investments. buildingstrong andresilientsupport value chainsacross theEUandenhance theautonomy oftheUnion’s The newStrategic Investment Facility willgetanother€15billionasanadditionalwindow underInvestEU to investment of€240billion; InvestEU programme, already agreed by theco-legislators, would beboosted by €3billionto private trigger www.worldcommercereview.com Source: isproposed This to facility include€310billiongrants and€250billionloans(at2018constant prices). Note: The tableonpage40ofregulation proposal COM(2020) 408final. can bedeployed fast. expenditures (see Table 1),thismethodoffers someadvantages. ExistingEUprogrammes are upandrunning it difficult measures todisentangle recovery the temporary from themore long-lasting ‘standard’ EUbudget Resilience Facility. Onethird ofthegrants isusedto top upvariousexisting facilities. Though thiswillmake Two-thirds ofthegrant component ofthe ‘New Generation EU’ instrument are and includedintheRecovery GNI, willbedistributed over anumberofyears, in2023-24. withthelargest expected pay-outs Resilience Facility. Thereby, thetotal €440billiongrant component of Generation EU’,‘Next whichis3.2%ofannual fully committed in2021-2022,could helpfrontloading, and Recovery ofthe butitsfirepower islessthanone-sixth paidoutin2021,andabouthalfbetween 2023-24.REACT-EU, toexpected beactually whichissupposedto be Table annual breakdown 2.Expected oftheRecovery andResilience Facility disbursements Grants -Commitments Grants -Payments Loans -Payments Loans -Commitments 39% 6% 15% 50% 2021 40% 16% 28% 50% 2022 10% 23% 25% 2023 10% 26% 23% 2024 0% 18% 10% 2025 0% 8% 2026 0% 3% 2027 1% years Later www.worldcommercereview.com member states, asCameron etal argued. The Commission’s communication doesnotforesee suchchanges. changesare allocations neededfor to avoidimportant thecountry undueconcentration ofthisfundinginsome The green transition itismeant to accompany, willnotbethat frontloaded; Moreover, neitheritssocialimpacts. transition towards climate neutrality. frontloading ofthe JTFisinconsistent impacts be important, to withitsobjective alleviate thesocio-economic Resilience Facility, whichisavailable for four thenext years. While frontloading macroeconomic stabilisation would However, theJTFseemsto beheavily frontloaded astheincrease would befinanced and Recovery by the 2020proposal. small amount intheinitialJanuary welcome, considering that thisispositive EU-wide initiative ( The newproposal to increase theallocation from theJust Transition Fund from €10 billionto €40billionis (JTF) toextended EU-financed programmes. technologies, EUgoals, whichare asargued by important Schoenmaker Dirk companies’ economic andenvironmental thereby viability accelerating andcircular theadoptionoflow-carbon digital transitions, whichiswelcome too. attaching By green conditions to state aid, governments canpromote More generally, aimsat therecovery combining facility macroeconomic stabilisation withthegoalsofgreen and the green anddigital transitions iswelcome. isaccepted.the wholepackage Allocating more fundsto EUpublicgoodsuchasresearch inhealth,resilience, and that increases thenewrecovery facility thesespendingcategories, which might increase inturn thechances that Moreover, countries that complained aboutEUexpenditure cutsinthe2018proposal might finditadvantageous Cameron etal),whichhadbeenallocated arather . The shouldbe same principle www.worldcommercereview.com disappointing Leaving outthe2018proposal for the ‘euro area budget’ isnotabigloss, given that itsproposed design was for amoresuggests that thecurrent fundamental reform opportunity oftheEU’s budgetwas missed. a somewhat larger cutisproposed, thisiscompensated from by top-ups the ‘New Generation EU’ instrument. This thedifferencesMayMay betweenOtherwise, the 2018andthe 2020proposals are generally smallandwherever proposal asashare ofGNI(1.11%) downward andthecurrent proposal asashare ofGNI(estimated thesameas2018 at 1.12%)ispractically billion proposal madetwo years ago(bothare at 2018constant themeantime, prices). In GNIforecasts were revised The proposed overall amount ofthe ‘standard’ seven-year MFF, €1,100billion,isslightly lower thanthe€1,1134.6 role inaddressingan important publichealthcrises. Reinforcing EU’s healthcapacities isobviously welcome, asthecoronavirus pandemicrevealed that theEU canplay oftheworld. neighbours andotherparts 2018 proposal. The EUCommission thusproposes to takeagreater responsibility for helpingourlessfortunate The to andcorrects isapositive proposed someextentthetimid aspect increased actions fundingofexternal agriculture. Importantly, CAP isineffective andpossibly counterproductive in achievingthegoalof greening European Wolff). Policy even for thoughtheEuropean isquestionable(seeour paperwithGuntram farmers value addedofsupport changesto hasnot ledtoThe theEU’s more pandemic-induced emergency wide-ranging Common Agricultural replicate redistribution existing EU budgetfacilitieswithoutameaningful across countries. . The so-called Budgetary Instrument for Instrument Convergence. Budgetary The andCompetitiveness so-called (BICC 1 . ) seemedto www.worldcommercereview.com EU borrowing for theNewGeneration EUinstrument ‘in afairandshared way’. This claimcallsfor clarification. somewhat misleadingclaimthat EUbudget revenues newdirect (called ‘own resources’) will ‘help’ therepayment of dropped, even though we hadapositive viewofthisproposal earlier. The commission communication contains the The 2018proposal to derive anEUrevenue stream basedonthecommon consolidated corporate taxbaseis behavioural changes, suchaslower pollution. border ofcarbon on thedesirability adjustment. Aligning EUrevenues withEUgoalsissensibleandmight trigger While the 2018revenue source proposals were positive Claeys), there (seeourblogpost withGrégory debate isa border onlargecarbon adjustment companies mechanism,alevy andadigital tax). andarevenuelevy basedontheEU’s Emissions Trading System) andnamingsomenewpossiblerevenue sources (a already madein2018(asimplified value addedtax-based own resource, waste anon-recycled plasticspackaging Little information isprovided aboutthefinancingofEUbudget, beyond someusefulreaffirming proposals The role ofnew own resources currently proposals. adjusting itsearlier Little issaidabouttheothermajorEUbudgetspendingitem, cohesion policy, beyond that theCommission is subsidiesisanothermissed ofearnings Nationalreform co-financing opportunity. andanimaldiseaseepidemics. earthquakes public goods, suchasenvironment andbiodiversity, and, againstlarge likeintheUS,insuring suchas risks would haveIt beendesirable to reallocate farmers’ subsidiesto failures earnings market correcting andpromoting www.worldcommercereview.com their attempt to reduce netcontributions isunderstandable. for spendingthat donotconstitute European public goods, orthat there are for risks theirproper use. thiscase In myIn view, thelargest netcontributors might judgethat abigshare oftheEUbudgetisredistributed to countries EU andhave low publicdebtlevels. a correction attheappropriate time” : countries that benefitfrom the rebates are amongthemostprosperous inthe “any burden whichisexcessive state member sustainingabudgetary inrelation to itsrelative from maybenefit prosperity rationale for rebates doesnotcorrespond to theoriginal ideaofthe1984Fontainebleau Summit EU budgetrevenue corrections, orrebates, are granted inacomplex andnon-transparent system (seehere). The The rebate compromise onnon-recycled plasticwaste.and thelevy and therefore reduce national contributions. donot, liketheonebasedonEU’s Others Emission Trading Scheme adjustment mechanismproposal andanewdigital tax,would bepaid, at leastpartially, by non-EUbasedentities national contributions to theEUbudget. Onlysome ofthoseproposed by theCommission, border likethe carbon Therefore, unless thenewresource comes from entities outsidetheEU, oftotal theyjustchange thedistribution paid by finance ministries. accrue to national budgets, implyinglower national budgetrevenues. newown Some resources would even be Guntram highlights Wolff that anEUtaxoncompanies would meanthat therevenues from suchataxwould not to theown resources, contribute. necessarily reduce thetotal contribution ofthecountry, ifwe takeinto account what companies, whichare subject resourcesOwn might reduce thecontributions by national finance ministries to theEUbudget, butdonot , whichstated that www.worldcommercereview.com Perhaps keepingtherebates willbetheprice for theapproval oftheNewGeneration EUinstrument. ■ 2. The Commission’s Communication €500billiongrants, talksabout ofthat butthedetaileddescriptionreveals thatpart proposed larger amount. deterioratedGNI outlook andthereby a lower amountnow accounts forthesameshare GNIaspreviously ofexpected that thethen-proposed €1,134.6billionoverall value would May 2018andMay2020, amountto 1.11%ofGNI.Between Under suchascenario, the€1,100billionseven-year MMFamountsto 1.12%ofGNI.The May2018proposal foreseen I usedtheMayCommission forecast for2021andassumedthatreal GNIgrowth year 1.5%per willbe in2022-2027. 1. The Commission hasnotexpressed theoverall amountoftheproposed MFFasashare ofGNI.For my calculations, Endnotes Fellow isaSenior Zsolt Darvas at Bruegel net contribution ofothercountries by 0.05%,ineachyear (see Table 4chere) by 0.12%,ofGermany by 0.07%,whileit would andwould notchangethenetcontribution ofDenmark reduce the Full elimination oftherebates would increase thenetcontribution by oftheNetherlands 0.15%ofGNI, Commission initsproposal in 2018.” otherwords, In rebates remain. 2027. To avoid this, thecurrent rebates could phasedoutover be oftimethanforeseen amuch longerperiod by the states member in2021- increasesphasing outofrebates ofcontributions would forcertain entaildisproportionate The May 2020proposal saidthat: “in thepresent situation, given theeconomic oftheCOVID-19 impact pandemic, 3 . www.worldcommercereview.com This article was originallypublishedonBruegel This article rebate isconsidered forAustria period. inthepost-2020 2016, butnotlater, plusbenefitted from ainits reduction contribution to theUK rebate, whichendswithBrexit. Hence, no countries inthe2021-2027MFF. Austria benefitted from initsGNI-based reductions temporary contributions in2014- these three countries. Denmark’s rebate contribution isprojected to to thesameasDanish the rebates be ofthethree isentitledto lowerthat Denmark rebates thantheNetherlands, Sweden andGermany, butcontributes to therebates of 3. The reason would why notface Denmark any changeinnetcontributions by acomplete eliminationofrebates is would guarantees. be www.worldcommercereview.com The coronavirus hasshaken Europe andtheworld to its core. Ursulavon der Leyen presents arecovery planto repair andprepare for generation thenext Europe’s moment www.worldcommercereview.com E again. And there are four freedoms that needto befullyrestored. questioned. There that needsto istheSingleMarket recover. There istheplaying fieldthat needs to bemadeeven The common European goodswe have builttogether are beingdamaged. Things we takefor granted are being challenged likenever before inourlifetime orinourUnion’s history. become aneconomic sobigthat crisis you simplycannotmissit. uniquemodelbuiltover Our 70years isbeing Today, we own definingmoment. face ourvery withavirus sosmall your eyesWhat started cannotsee it, has or precedent anywhere intheworld. always bethesafest for Europe. This iswhat hasenabledusto buildaUnionofpeace withoutpeer andprosperity At thesedecisive moments, we have always opted to takealeapforward together. Since theboldestmeasures will moving forward together –with visionandambition–towards thesamedestination. after. For eachgeneration, thechoice hasalways thepath ofleastresistance beenachoice between taking aloneor All those generations, andallthosehistoric achievements, were built ontheonesbefore andinspired theones ofourUnion. and welcoming themhome-to theheart was aboutreuniting ourEuropean story next familybyOur bringing ourbrothers andsisters backinfrom thecold unity of our single market andoursinglecurrency. ofoursinglemarket unity Fordestruction. thegeneration that followed, itwas andfreedom aboutpursuingprosperity by choosing the founding was aboutbuildingalastingpeace generation, where thestory there was onlysuffering, painand aboutgenerations.urope isastory And eachgeneration ofEuropeans hasitsown story. For ourUnion’s www.worldcommercereview.com same binary choice. same binary Complex questionsof sovereignty andburden-sharing have to bebalanced. And soinfront ofusonce againisthat We across seetheeconomic, ourmemberstates. fiscalandsocialfall-out Divergences widen. anddisparities bigger thanany ofus. This isEurope’s moment. ofEurope,economy inonepart weakens astrong economy inanotherpart. This isaboutallofus. And itisway companyalone. Abankrupt inonememberstate, isareliable suppliergonefor abusinessinanother. Astruggling andspilloversThe hashugeexternalities crisis across countries. Noneofthat canbefixed by any single country moment responsibility for us to do the right in this defining defining this in right the do to us for responsibility also huge opportunity for Europe. And it is a huge huge a is it And Europe. for opportunity huge also The crisis we have to tackle is enormous. But it is is it But enormous. is tackle to have we crisis The www.worldcommercereview.com Generation EUwill: markets. This isanurgent andexceptional for necessity anurgent and exceptional crisis. This iswhy Next resources ceiling, to allow theCommission strong to credit useitsvery rating to borrow moneyonthefinancial Allow meto explain Generation how EUwillwork. Next The moneywillberaised by theown temporarily lifting this would ourrecoveryto a bring effort total of€2.4trillion. goesalongsidethethree safety netsof€540billioninloans,It already agreed by Parliament andCouncil. sum, In core MFF-sumsupto intoday’s €1.85trillion proposals. willsitontop ofarevamped Generation EU-togetherbillion. It Next with the long-term EUbudgetof€1.1trillion. This iswhy theCommission isproposing €750 anewrecovery Generation instrument, EU–worth calledNext investment are goodfor all. And inourUnion,we that theboldestmeasures know trulyare thesafest for ourfuture. people, businessandeconomies depend andrely oneachother. ourUnion,cohesion, convergence In and Europe isinauniquepositionto beableto invest inacollective recovery andacommon future. ourUnion, In generation. Fornext me, thechoice issimple. Iwant usto takeanewboldstep together. nots, orwe walk that road together. We takethat leapforward. We pave astrong path for ourpeopleandfor the We eitherallgoitalone;leaving countries, regions andpeoplebehind, andaccepting aUnionofhaves andhave- • • Protect ourSingleMarket. Invest inrepairing oursocialfabric, www.worldcommercereview.com our Unionis: Investments theoutstandingachievements that willnotonlypreserve ofthelast70years, butthat willensure that in away that Europe’s generation willreap next thebenefits tomorrow. meanthatthe effects ofthiscrisis we need to makeinvestments onanunprecedented scale today. But we willdoit So, beyond to showing overcome solidarity oftoday, thecrisis Ipropose anewGenerational Pact for tomorrow. Yes, our Unionmuststrive for better. more accountable for fighting climate changeandsaving ournature. Driven by idealism for Europe andabeliefthat our planet. With aclearvisionto promote andtheruleoflaw. humandignity to Determined holdgovernments future ofEurope’s generation. next This generation that andfeels isgloballyconnected responsible for ourworld, And whilewe are doingthis, we needto press fast-forward towards agreen, digital andresilient future. This isthe • • • • • and astrong globalplayer alsointhefuture. social digital climate neutral Help rebalance balance sheetsacross Europe. www.worldcommercereview.com Europe remains cutting-edge in key areas like Artificial Intelligence, Europe inkeyareas precision remains likeArtificial or farming cutting-edge green engineering. And willinvestIt inkeyEuropean andtechnologies industries to makecrucialsupplychainsmore resilient. willensure It member states have better access to publicorprivate moneyto get fresh capital. decisions andinvestments over decades–butthat findthemselves risknowat because competitors inother healthy companieschanging that world. have Generation EUwillhelpthoseperfectly Next madetheright andthetraining makessure andtheeducation theyneed to that adapt to peoplegettheskills It this rapidly Therefore, Generation EUincreases Next Erasmus andyouth employment support. people. Nomemberstate shouldhave to choosebetween responding to orinvesting thecrisis inourpeople. thesamevein,In nomemberstate shouldhave to choosebetween responding to orinvesting thecrisis inour leaves nobodybehind. Generation EUwilltherefore Next multiplythefundingfor theJust Transition Fund. from 5Gto housingrenovation. At thesametime, we mustensure that economy thetransition to aclimate-neutral Generation EUstrengthensNext theEuropean Green andHorizon Europe Deal –andwillinvest inkeyinfrastructure and cleanindustries. opportunity. All memberstates needto invest intechnologies thattherecovery willspark through newinnovation Generation EUwillrestoreNext andrebuild -that great ourSingleMarket generator ofinnovation, and prosperity budget achieves that. exactly throughpriorities European programmes. proposal My to invest thesefundsviaprogrammes inourEuropean To Generation itsmassive EUwilldirect makethishappen,Next financialfirepower to invest inour common www.worldcommercereview.com planned extension oftheemissions tradingplanned extension scheme. These could bebasedonaC0 This iswhy theCommission willadditionallypropose anumberofnewown resources. These could bebasedonthe backaccordingwill pay everything andwell-tested to aknown formula through future EUbudgets. Generation EUwilldofor whatAnd Next that is exactly allofus. We are investing together in Europe’s future –and memberstate.in every And investments madethrough theEUbudgethave paidoff for all-many times over! And our European Unionislivingproof that itworks. This Unionthat hasincreased andlivingstandards prosperity investment andreforms, for more cohesion andfor convergence oflivingstandards inEurope. Green andresilience. Deal And theEUbudgethasalways comprised grants. This isnothing new. Grants for targeted The grants willbeclearinvestments inourEuropean Strengthening priorities: ourdigital European singlemarket, contribution according to afixed formula. of thememberstates. They willbechannelledthrough theEuropean budget. And thiswilllimiteachcountry’s Let mebeclear: These grants are ajoint investment inourfuture. They have nothingto dowiththepastdebts €250 billioninloanspassedonto memberstates. Commission willraise €750billionfor Generation EU. Next that total, Of €500billionwillbedistributed ingrants and oftheUnion.And itwillbeowned willshow by thetrueandtangible usall.total, valueIt ofbeingpart In the European common good. Generation EUwillhelpmakeourhealthsystemsNext more resilient for future crises. This investment willbeanew 2 border taxto counterbalance www.worldcommercereview.com Recovery Plan Communication: “Europe’s moment:RepairandPrepare Generation” fortheNext References Ursula von derLeyen isPresident oftheEuropean Commission We owe itto future generations. Long live Europe! ■ towards astronger Union. and prosperity. Today isthetimeto write ourgeneration’s andtakeanothercourageous chapter step to thestory yearsSeventy agoour founding fathers andmotherstook thefirst courageous step to create aUnionofpeace and more resilient thanever before. to dotheright inthisdefiningmoment. We cannow lay the cornerstone for aUnionwhichisclimate neutral, digital for wecrisis Europe. have isenormous. Butitisalsohugeopportunity to And tackle itisahugeresponsibility for us IsaySo let’s putourold prejudices to oneside. And let’s rediscover thepower oftheideaaunited Europe. The make sure that ourresponse lives upto defined, crisis. thisclearly accidental andtruly extraordinary will bemuchmore expensive down theroad. Together we mustlay thefoundations for our future. And we must Now isthetimeto taketheright decision. To thosewhofear thecost ofinvestment, Isay that thecost oninaction tax. Here we needto beambitiousandIamcounting onyour support. from ofcheapproducts abroad whichdamagetheclimate.imports And thesecould alsobebasedonanewdigital www.worldcommercereview.com May 2020 delivered isbasedonaspeech attheEuropean ParliamentThis article ontheEURecovery package, Plenary , 27 Factsheet 4Adjusted Commission Work Programme 2020 Factsheet 3Financing theRecovery Plan forEurope Factsheet theRecovery Plan forEurope 2Key instrumentssupporting Factsheet 1The EUbudgetpowering theRecovery Plan forEurope GenerationQ&A ontheMFFandNext EU Website ontheCommission’s coronavirus response Website fortheadjusted Commission Work Programme 2020 Website fortheMFFproposals document Staff working EUbudgetpoweringEU BudgetCommunication: therecovery planforEurope” “The www.worldcommercereview.com A smallstep forward Grégory Claeys argues thatGrégory theEU'sSUREplanto safeguard employment istoo modestto have a significant impact the significant crisis impact COVID-19 www.worldcommercereview.com T The three mainadvantages ofSURE canit haveimpact inthecontext oftheCOVID-19 crisis? The Commission expression ofUnionsolidarity.” SURE asa“tangible portrayed Buthow generous isit, andwhat irrevocablebillion indirect callable guarantees from EUcountries. from andinterest, itsdebt, principal membercountries to service ifadebtor defaults),butalsoby anadditional€25 guaranteed by theso-called ‘headroom’ oftheEUbudget (ie. theadditionalresources theCommission cancallon Second, to protect theEU’s AAArating, themoneyraised by issuingbondsoninternational willbe financialmarkets schemes heavily usedsince thebeginning oftheCOVID-19 lockdowns. features. First, itsstated isto objective ensure that countries work caneasilyandcheaplyfinance theshort-term back-to-back loansto itsmemberstatesThe EUhas beenmaking since the1970s, butSUREhastwo original What isSURE? ofamoremodest, andshouldbeevaluated complete recovery asonlyapart plan. terms ofhaving ontheEU’sIn asignificant impact fiscal response tothecrisis, COVID-19 however, SUREis too andissueacommon safecapacity asset. • SURE willprovide source anextra offinancing for EU countries on financingandpotentialtop of market generated alotofinterest, itsmainbenefitis to show that, ifneeded, theEUcancreate aborrowing that request financial assistance initiatives. to fundjob-saving While thecreation oftheinstrument has ofupto €100billioninloansto EUcountries (SURE),willprovide support in anEmergency temporary he ’s to mitigate Unemployment Support Risks temporary newinstrument, theso-called www.worldcommercereview.com • short-term work schemes.short-term Approval justrequires inthe Council, aqualifiedmajority andthere willbenoneed facility. To access theSUREfunds, EUcountries would onlyneedto show that the moneyisdeployed for theESMcredit lines, evenparticularly underthesimplifiedprocedures ofitsnew ‘Pandemic Support’ Crisis SURE offers alighter andmore agile governance framework thanotherEUfinancialassistance programmes, to member states. becausetheEUshouldcurrentlythe market, beableto borrow at onthemarket around 0%andpassthisrate term thanwhat somecountries, includingGreece, , Italy, andSpain,cancurrently obtainfrom credit loanscould linesfrom becheaperandpossiblylonger- theEuropean (ESM).Its Mechanism Stability complete recovery plan recovery complete and should be evaluated as only a part of a more more a of part a only as evaluated be should and on the EU’s fiscal response to the COVID-19 crisis, crisis, COVID-19 the to response fiscal EU’s the on SURE is too modest to have a significant impact impact significant a have to modest too is SURE www.worldcommercereview.com Four limitsofSURE • • equivalent to 0.02%ofItaly’s GDP. debt by 10%.Given therelatively low level ofthespread between thetwo, thiswould onlyrepresent savings SURE would cover 10%of thenewdebtincurred thisyear, andthusreduce borrowing costs onthisnew around €360millionperyear. Considering its forecast deficitof11.1%GDPin2020, ie. around €200billion, 0% for 10years, instead ofthe1.8%itwould pay the markets, would at thetimeofwriting. thensave Italy significant savings ininterest costs.Imagine Italy for wereexample that to borrow from SURE€20billion at SURE’s marginal effect onpublicfinances asthe willbeprogramme very is toosmall(€100billion) tolead to example usingworkers’ idletimefor onlinetraining to improve theirskills. be prolonged, SUREcould alsobeusedto work share schemes, national for onshort-term bestpractices to have suchschemesinplace andencourages memberstates to usethemisgoodinitself. itwere If to entered withoutsuchschemesandhadto thecrisis improvise. that SUREemphasisesthe need The fact France andBelgium have schemes;othersincludingCyprus, well-established , andLatvia However, different theseschemesare very indifferent EU countries: Germany, countriesincluding Italy, in unemployment. two months andhave proved ofEuropean crucialto ensure and firms to prevent thesurvival rise quick a very relationships, costly for whichisvery workers andcompanies. They have beenusedextensively inthepast futureuse themduring possiblelockdowns. work schemeshelpavoid Short-term thebreak-up oflabour Finally, SUREprovides anadditionalincentive for countries work to schemesand putinplace short-term toxic thantheESMinsomecountries, suchasItaly. to consult eachnational request. parliament for Given every itsnovelty, SUREmight alsobelesspolitically www.worldcommercereview.com • • Mechanism (ESM)wereMechanism created to problem. address thisvery which was limited to €60billion. The European Financial Facility Stability (EFSF) andtheEuropean Stability This was already anissuefor oneofitspredecessors, theEuropean Financial Stabilisation (EFSM), Mechanism small. accessmid-March. If to finance were to become a real problem for some countries, SURE would thenbe too tocountries themassive at thisstage, by intervention theEuropean thanksinparticular Central Banksince The mainlimitation ofSURE isthat it solves thewrong problem. Access to finance isnotanissue for euro area by eachcountry. available would have to bedividedbetween them,reducing thealready smallsavings oninterest costs made France, theNetherlands, Austria). Second, ifmany countries useit, therelatively smallamount ofmoney that already enjoy interest rates at asimilar orlower level to what theycould secure usingSURE(eg. Germany, However, there would betwo limitsto that solution:first, SUREisnotfinanciallyadvantageous for countries large numberofcountries, ideallyallofthem, to useSUREat thesametime. Monetary Outright OnesolutiontoTransactions avoid any scheme(OMT). ‘first-mover’ stigma would be for a addition,unlikeanESMcreditIn line, aloanfrom eligible SURE would for notmakeacountry theECB’s erasing savings generated by thelower cost ofSUREloans. a request andtherefore asasign ofweakness askfor higherrates whencountries issuenewbonds, thus evidenceempirical that theannouncement ofIMFprogrammes canincrease yields. could interpret Markets effects from EUfinancial assistance programmes, but(even ifthey are notfully comparable) there issome There that isarisk astigma willbeattached to theuseofprogramme. There are notyet studiesonstigma www.worldcommercereview.com politically, itwould beeasierfor theECBto buyEuropean debt thanto buy national debts. useful to theeuro area particular, inacrisis. In suchanEUdebtinstrument would helptheECB fulfilitsmandate – Undeniably, acommon debt-management office issuinga commonsafe asset atlarge enoughscale wouldbe very ESM andtheEFSF. safe method, assetusingthe community instead ofusingintergovernmental agreements, aswas donewith the The mainadvantage ofSURE is to show that, ifneeded, theEUcancreate aborrowing andissueacommon capacity month. ofthecomplete recoverymeasured initiative aspart that willbepresented by theCommission by theendof However, willhave ontheEU’s thefacility asmallimpact fiscal response shouldbe Its merits to the crisis. COVID-19 members anincentive to usetheminthecurrent crisis, andmaybe alsoto improve them in thefuture. work schemesandgivesshould becommended. ofshort-term EU SUREalsorightly highlights theimportance The Commission’s quickproposal andnegotiations withmemberstates, establishing SUREwithinafew weeks, Conclusions • borrowing costs. transfers following As alendingfacility, thematerialisation ofarisk. SUREonlyinvolves mutualisation of dismantled inacouple ofyears. SUREisalsonotaninsurance mechanism,asitdoesnotinvolve any ex-post put itwhenwas announced. At therequest ofsomeEUcountries, andwillbe SUREwillbetemporary is itan“emergency operationalisation ofaEuropean Unemployment Reinsurance Scheme”, astheCommission Finally, SUREisnotasignificant andpermanent EUborrowing to beusedasastabilisation capacity tool. Nor www.worldcommercereview.com This article was originallypublishedonBruegel This article Claeys FellowGrégory isaSenior at Bruegel EU budget. fromWhat theother25EUcountries. isneedednow issupport ■ Issuingsuchalargedirection. amount ofEUdebtshouldbepossibleby increasing drastically theheadroom ofthe proposal to issue€500billion ofEUdebtto increase thesize ofEUprogrammes few inthenext years goesinthis However, would suchafacility needto bemuchbiggerthanSURE. The 18May Franco-German Fund’‘Recovery www.worldcommercereview.com Tagliapietra, andGuntram Wolff present aframework for a European governments have adopted stringent measures to slow thespread ofCOVID-19. JuliaAnderson, Simone Rebooting EuropeRebooting post COVID-19 economic recovery www.worldcommercereview.com investment andinternational trade. European Unioncountries have seenan estimated average declineinannual COVID-19 lockdown measures have ledto contractions ineconomic sharp output, householdspending, corporate Three phasesofeconomic response to COVID-19 around andrecoverystructured fundswithborrowing equity at EUlevel. The hard phases shouldfollow choices inthenext asetoffour principles, shouldbe andtherecovery effort markets. lie ahead:aspeedierrecovery could runcounter to green neighbouring ambitions;national rescues could hurt approaches have for government thesinglemarket, budgetsandtheEU’s climate strategy? Difficult trade-offs provided to fiscalsupport companies bestructured?How should further What implications willdifferent government debt. to achieve. At thesametime, decisionstakentoday will have long-term implications for and thesinglemarket measuresThe asCOVID-19 success lockdowns ofsupport are relaxed of recovery the EUwants dependsonthetype Policy challenge be designed. lockdown measures continue andtherecession getsdeeper, amore comprehensive strategy for thefuture needsto to helpcash-strapped meettheirimmediate needs. firms liquidity Butas support and indiscriminate emergency to helpcompanies cope withthe immediate consequences. The basicapproach hasbeento provide generous have ledto asevere inEuropean recession Unioncountries andpolicymakers are providing generous support To slow thespread ofCOVID-19, European governments have adopted stringent containment measures. These The issue www.worldcommercereview.com A framework for COVID-19 apost economic recovery Emergency liquidity Emergency Practical measures Four principles Phase 1 Solvency support Solvency EU Equity FundEU Equity Phase 2 Share infuture pro ts Level playing eld Financial viability EU societalgoals Rebooting theeconomyRebooting EU Recovery FundEU Recovery Phase 3 www.worldcommercereview.com has beenmore heavily affected insome countries thaninothers. For example, tourism slowdowns hitMediterranean countries andairlines. have particularly The sector construction countries have variedsignificantly. estimated. The ofthepandemicandcontainment healthandeconomic impacts measures and onsectors ofCOVID-19The ontheEuropean impact economy might ultimately outto turn beeven greater thancurrently record 7.4percent in2020(European Commission, 2020). GDP growth ofupto 3percentage points permonth oflockdowns inevitable trade-offs inevitable choices between the possible measures and the the and measures possible the between choices principles should consistently inform policymakers’ policymakers’ inform consistently should principles principles guiding their recovery strategies. Such Such strategies. recovery their guiding principles The job now for policymakers is to make clear the the clear make to is policymakers for now job The 1 . The EUeconomy ispredicted to contract by a www.worldcommercereview.com once full immunity oravaccineonce fullimmunity isavailable, sopossiblywell into 2021. This to phaseisexpected lastroughly until theendofany measures. lock-down Lockdowns may well endonlyfully recapitalization isneeded. standards are tightening capitalandinvestment todebt anddraw reserves meettheirworking onequity needs. At thesametime, credit As thelockdowns continue, support. Phase 2 willbeaboutsolvency musttakeonincreasing firms amounts of and 1.1percent inSpainto 10percent ofGDPinGermany (Anderson etal,2020). countries hasdiffered widely. For instance, immediate fiscalstimuluses have ranged from 0.9percent Italy ofGDPin Framework to allow suchmeasures. governments to However, undertake thesize offiscal responses indifferent EU As as19March early 2020,theEuropean ruleswithaso-called CommissionTemporary amendedtheEUstate-aid enterprises). to prevent lay-offsshortfalls, and to deter hostiletakeovers unnecessary (especiallyfrom non-EUstate-financed to and firms workers.support These measures are meant afloatto keep firms inthe face ofnear-universal cash The national economic measures takeninphase1are by characterised indiscriminate, national-based liquidity hasbeencrudeandindiscriminate, andrightfully so.support The motto isspeedover perfection. andto protect Europeanfrom from firms bankruptcy hostiletakeovers by enterprises.foreign state-backed Phase1 measures are meant to temporarily freeze economies astheywere before thecrisis, to shieldhealthy businesses response thefiscaleconomicto thepandemic, policy In three phasescanbebroadly distinguished. Phase 1 2 . For through direct support increasingly-leveraged looms;solvency firms, bankruptcy www.worldcommercereview.com 1 injections have measures,1 injections beenemergency phase2requires alsorequires along-term plan.It recognition of Moving from phase1onto phasesisnotsimplyamatter thenext ofproviding instead ofdebt. equity While phase Four guiding principlesfor managing phases2and3theEUenergy transition national recovery programmes. Acomprehensive strategy for phases2and3isneeded. by budget decisions related to theEU’s multiannualfinancialframework (MFF)and theEU fund,recovery alongside takennow oftomorrow.Decisions willthusshapethesinglemarket phase3,economic outcomes In willbeshaped uncoordinated decisions, whetherbecauseoffiscalspace orpreferences. phase2could during well leavedisbursements andothersupport ascountries lastingmarks takedifferent and Phases 1and2haveimportant. sofarlargely involved national fiscalpolicy. However, differences instate-aid As countries move account phases, to thenext ofEUcross-border taking effects willbecome increasingly company canbedeemedsolvent today. could determine whether ornota measures inphase3(suchasdemandsupport) enacted and aboutpolicy standingintherecovery phase.will determine whoisleft Conversely, abouttheshapeofrecovery predictions One keyconsideration isthat decisionstakeninphase2–whogetsbailedout, how andunderwhat conditions – presented. We measures inphases2and3. that discussthekeyprinciples shouldguidesupport ofEurope andgeographical mostaffectedthe sectors parts by thecrisis. Butsofar, noclearstrategy hasbeen The 2020taskedtheCommission of23April withdesigning asizablerecovery fund, targeting lockdown measures willleave initswake. Phase 3willthenbeaboutrecovering from thesevere switching of contraction phasethat thelikelyon-and-off www.worldcommercereview.com the pastandfuture. First, assessedinterms ofboth withfinancialviability should onlyfinancially viablefirms receive support, solvency We consider inthisevaluation. four to principles beofutmostimportance andthesocial,objectives economic ofrescue andpoliticalrisks programmes. be fiscallyirresponsible and could Acarefulcost thesinglemarket. balance must be struckbetween public However, governments company cannot andshouldnotrescue every withunlimited amounts ofcash. This would years, whichhumancapital willbepermanently destroyed. during tangible andintangible capitalwillbedestroyed. that Rebuilding capitalandfounding willtakemany newfirms many jobs willbelost. support, Second, withoutfurther Third, withnumerous companies failing, invaluable achieving that publicgood. healthy istherefore population. It appropriate that thepubliccontributes to paying for theeconomic falloutfrom iswarranted inthefirstplace.support First, governments imposelockdown measures to achieve apublicgood: But before highlighting why itis that such ontheprinciples shouldguidefuture reflecting worth economic support, they ensure that rescue plansdesigned today donotcauseunintended damagetomorrow? should consistently inform policymakers’ choicesCan between thepossiblemeasures andtheinevitabletrade-offs. The jobnow isto guidingtheirrecovery for makecleartheprinciples strategies. policymakers Suchprinciples versuspublic indebtedness; solvency socialcohesion. ahead:speedy economic recovery versusdifficult trade-offs environmental privatesector goals;healthofthe versus www.worldcommercereview.com Second, state support should not undermine competition shouldnot undermine intheEU’sSecond, state support singlemarket. instruments, especiallyfor themore arduous ofsmallercompanies. assessments oftheviability guarantees andsubsidisedloansto willbe andindividuals. firms required partnerships based for equity- Further andanalyticalcapabilitiesofcommercialThe localknowledge banksisalready extensively usedto distribute state role.important interest.direct Even so, credit tightening might leadto under-investment therefore andthepublic sector hasan Involving private investors would helpensure that investments are viable inthelongrun,especiallyiftheyhave a administrations to are decideunilaterally left whichcompanies to help. of rescue funds. Suchasystem would bemore transparent andaccountable thanifpoliticians andtheir We ofprivate favour investors amechanisminwhichtheexpertise decisionsontheallocation isusedto support assessments? key questionhere theseforward-looking iswhoshouldconduct economy.Meanwhile, approach upsofthepost-crisis suggestsfinancingthepromising aforward-looking start- A economy, whichcould fail. meanlettingsomefirms structures. industrial ahealthy post-COVID-19 pre-crisis The recoverypreserving shouldbeaboutjump-starting economy.business modelsthat are to expected beviableinthepost-crisis plansshouldnotbeabout Rescue The may crisis well alter consumer preferences systems. andproduction Public resources mustfocus with onfirms need to gobeyondfinancial viability published2019financial accounts. Taxpayers that firms were inbadshapebefore shouldnotsupport thevirus-induced lockdowns butassessments of www.worldcommercereview.com competitive firms also work to limit further distortions ofthesinglemarket.competitive distortions also firms work to limitfurther To that end, the Commission’s state-aid deal withinsolvent suppliersandclients intheirdailybusiness. Rulesto restrain thebehaviour ofartificially- Firms that operate ineconomically less-affected countries willbe at a great advantage compared thatto firms scope ofdeployment. of state aid that aidprovided advantage ofthefact underthe taking Temporary Framework canbecumulated withothertypes somecountriesNevertheless, willdeliver amounts, lessthanthemaximumauthorised whileotherswillgobeyond, €800,000 capongrants) imposesome discipline(Neven, 2020). the foundation ofEurope’s long-term growth willbeaffected.Quantitative limitsontheamounts ofaid(eg. the 2020). public money(Motta, The more long-lastingdifferences are, themore andtherefore thesinglemarket of competitive disadvantage could subsidywars trigger between EUcountries, leadingto hugewastes of These differences competition, especiallyifthey continue phase2. during risk distorting At the extreme, fears approximately halfoftheapproved COVID-19 state aidasof1May 2020). COVID-19 Inevitably, crisis). somecountries willprovide thanothers(Germany more generous accounts support for Temporary Framework introduced by theEuropean Commission the inMarch rulesduring 2020to relax state-aid rulesallow registersRelaxed EUgovernments into liquidity state-aid cash-deprived to (seeBox inject 1onthe support. borders ensures that themostinnovative andproductive thrive, firms rather thanthosethat receive themoststate One oftheEU’s mainstrengths competition iswell Fair withinitssinglemarket. functioning competition across 3 . Furthermore, quantitative limitsonaidto donotprevent individualfirms majordifferences in the www.worldcommercereview.com agreed and supported byagreed theentire andsupported EU. environmental obligations, willhave to beresolved. Indeed, acleardefinition ofbroader societal goalsneeds to be Political disagreements, for example over or conditions ondividendsandbonusesattached injections to equity enforcement, for example. Putting conditions onstate aidwillrequire difficult technicalquestions tobeaddressed – around monitoring and thechangesrequiredmaking to achieve the EU’s societalobjectives. given to to implement. shouldbe firms Support conditional on changes that require normally years ofrule-making As governments engageinbilateral negotiations withfirms, theyare inauniquelystrong position to push for the would beabsurd ifpublicfundsnow subsidisedthebusiness modelsthat needfundamental change. The EUand itsmembershave setthemselves societalgoalsincludingclimate andsocialcohesion. neutrality It achievement andnotundermine ofbroaderThird, societalgoals. shouldsupport state support distortionary intheirown right distortionary notions that are noteasyto enforce strategy –whenisapricing ‘aggressive’ –and andwhenisitpro-competitive? These rulesare welcome additionsto theCommission’s arsenal. However, thesenewrulesrely onvague behavioural rivals whiletheyare repaying thestate. amendments prohibit from aid-infused firms engaging in aggressive commercial expansions andfrom acquiring 4 . www.worldcommercereview.com aid, whichcanbe granted by EUgovernments until theendof2020: As 2020and8May amended on3April 2020,the Temporary Framework provides for thefollowing of types • • • • Measures to recapitalise whennootherappropriate firms solutionis available. for relevant ofproducts protective theproduction thecoronavirus clothing);support to tackle outbreak. and upscalingoftesting facilitiesto develop andtest (including vaccines, products ventilators and coronavirus-relatedMeasure to support research for anddevelopment; theconstruction support Subordinated debt and wage subsidies -Targeted intheform ofdeferral oftaxpayments, support contributions suspensionsofsocialsecurity -Subsidised publicloanswithfavourable interest rates for upto sixyears -State guarantees for loansupto 90percent onloansandfor ofrisk upto sixyears guarantees onloansfor anominalvalue upto €800,000 grants,- Direct taxadvantages, selective injections, equity advance payments, zero-interest loansor Measures that helpbusinessescover capital and investment immediate working needs: Box 1: What hasbeendone:the Temporary Framework www.worldcommercereview.com State aidgranted underthe Temporary Framework thefollowing mustrespect conditions, amongothers: • • • • should not go beyond the pre-crisis capitalstructure. should notgobeyond thepre-crisis Recapitalisations mustnotexceed theminimumneededto ensure ofthebeneficiary, theviability and large enterprises). -With appropriate needs justification, theliquidity for the coming 18months for SMEs(12months for -25 percent ofthebeneficiary’s total turnover of2019,or thebeneficiary’s-Double 2019 wage bill, The iscapped at: amount oftheloansandguarantees perbeneficiary areFirms sector excluded inthefinancialservices Firms mustbefinanciallyviable as ofend-2019 www.worldcommercereview.com beyond rescues, emergency mustbeframed interventions publicinvestments, asworthy notexpensive bailouts schemesfundedby thetaxpayerGenerous support shouldgive thetaxpayer someclaimsonfuture profits.Moving Fourth, taxpayers shouldreceive theirshare oftherewards oftherecovery. after thecrisis after light ofthesedifficulties,In andunder pressureact fast, itwillbe tempting to topostponethesediscussions until held firms to muchhigherstandards (for example onenvironmental protection) thanothers. thegoalsindifferentIf withsome countries diverge distortions, market too much,thererisk offurther willbea condition ofreceiving ashare offuture profits. designed, thiswould notleadto systematic cross-border would begiven transfers support on becauseequity ensure asingleapproach to recapitalisation measures andto well protect theintegrity If ofthe singlemarket. 3suggestalarge thiscontext, European discussed insection fundshouldbecreated theprinciples In equity to this phase, EUcompetition law istheonlyeffective tool for response coordination. havenational policymakers nochoice butto draw from national budgetsto rescue theirendangered economies. In byPhase 2 hasbeencharacterised alackofEUcoordination. While EUnegotiations drag oninthebackground, characterised by the need for solvency support: direct capital injections into hard-hit capitalinjections direct balance sheets bycharacterised theneedfor support: solvency worries that willgetworsesolvency lengthens. asthecrisis At the microeconomic level, phase2willthusbe ofthepublicaidprovidedMost sofarhasbeenintheform ofdebt(loansandguarantees) anddoesnotaddress Applying thefour principlesinphase2 5 . But this would be a rare opportunity missed.. Butthiswould bearare opportunity 7 . 6 . www.worldcommercereview.com because theyallow for ashare infuture profits. with remuneration contingent onfuture profits out firms, but rather investing instruments (eg.In ofinstruments,terms orequity-type in them. transfers equity societal goals, thusproviding oftheupsides. aclearsocialsharing European taxpayers would thusnotbebailing societal goals. Better still, thefundcould bemanagedfor thepublic’s benefit, andtheprofits dedicated tofinancing Conditions could beattached to thedisbursedfunds, accelerated ensuring changestowards agreed common fundstowardshelp direct mostlikely thefirms to beviableinthelong-run. institutions, would leverage localknowledge. oftheseinstitutionswouldWithin theexpertise anEUframework, suchasnational promotionalReliance onlocalpartners, banks(suchasKfWinGermany) andprivate financial countries, thuslimitingdistortion. of fundswould allow for allocation proportionate andaconsistent approach to indifferent helpingfirms EU The fundwould allocate capitalaccording particular, to 3.In thefour setoutinsection principles thecentralisation guarantee fund, are insufficient borrowing from theEUbudget. The EIB currently discussedsteps suchasthenewly-established inthisdirection, However, thenewfundwould have to differ fromInvestEU inthat it would bebasedonsignificantly larger equity). investors andnational banksinvests inEuropean (including SMEs)through ofinstruments firms (including a variety build ontheexisting InvestEU withprivate plan(previously astheJunckerPlan), viawhichtheEIBworking known A large European fundcould operate equity underthecontrol oftheEuropean Investment could Bank(EIB).It 8 . 9 ) are preferable to pure transfers orsubordinated debtinstruments www.worldcommercereview.com higher post lock-down, puttingadraghigher postlock-down, ondemand. rebuild theirsavings assoonincomes recover. istherefore It entirely possible that the private savings rate willbe Second, householdshave suffered amajorshock to theirincomes andhave reduced savings. They will want to and humancapitalwillhave newproductive beenlost. Rebuilding willtaketimeandinvestment. structures First, provided, despite allthegovernment support many willhave firms disappeared. Valuable physical, financial 2019 willbereached, for three reasons. Even ifaCOVID-19 vaccine becomes available, itwill likelytakeseveral years of until thelevel ofeconomic activity Principles in phase 3:towards astrong andsustainablerecovery societal goals. andenforcementmust beshort-lived mustbebiting. This would without common too risk littlestate support, effectsofstate subsidiesiscrudeandmechanical:state-aid exemptions most effective way to limitthedistortionary 2021,whenvarious lockdown measures areJanuary likelyto ofapan-European stillbeinplace. fund, Short the fundcannotbecome operational suchanequity 2020,itshouldat during leastbecomeIf fully operational in theEuropeanexperts, Commission and member states. Table thedisadvantages 1summarises andadvantages ofthevarious instruments currently beingconsidered by problemsto pure becauseoftheknown associated stakesinclosely-held equity SMEs. withvaluing equity only thethird isrequired undertheEU Temporary Framework). For instruments SMEs, may bepreferred equity-type without voting rights, (ii)withquantitative limits, (iii)withatimelinefor government exit (ofthesethree conditions, However, effects ofpure instruments. equity shouldbe:(i) Equity care shouldbetakento limitthedistortionary www.worldcommercereview.com Table 1:Comparisons ofdifferent instruments for recapitalisation Source: Bruegel Equity proposal) instrument (SAFE Equity-like debt Subordinated Potential partner & private equity venture capital banks, private promotional promotional Commercial National National banks banks funds share inupside Government Yes Yes No Seniority Lowest None Low backs, especially implementation Lowest: difficult in closely-held to implement Reasonable Reasonable and to buy with SMEs Ease of SMEs difficult toassess, uncertain times uncertain of the aid very of theaidvery Highest: value Highest: single market Distortionary Distortionary effect onthe especially in Lower Lower www.worldcommercereview.com First: the recovery fundneeds to focus onbroader EUsocietalgoals. The EUrecovery initiative/fund would thusbecrucialintherecovery shouldbebased onfour phase. guidelines. It insufficiently andpolitical anddoinglong-term damage cohesion. tobothEU economic performance stronger insurance. Second, fearing reactions, market countries could borrow theireconomies too little, supporting astheinterestsustainability rate advantage ofEUdebtcanbesubstantial. Grants obviously would provide for andiseffectively markets alsoasupport EU borrowing primary that isloanedto memberstates supports render debtunsustainableinaself-fulfillingcrisis. markets. riseinspreads A and countrieseven secondary could wouldthen become difficultprimary tofundon Notably, suchafundshouldprevent two scenarios. First, by relying onlyonnational borrowing, thedebtofsome EU countries to boosttheireconomies, variablefiscal arising room for manoeuvre. The recovery initiative/fund responds to theneedto counterbalance thehugedifferences between theabilitiesof light ofthat,In we ofarecovery discussthekeyprinciples initiative/fund. recovery programmes. As phases2and3are intrinsically linked, measures shouldbebasedonthesameobjectives. phase3,theEUmustplay amajorroleIn –through theMFFandrecovery initiative/fund –alongsidenational and vaccination, andbecause ofprivate andpublicresponses to theexperience. This could reduce productivity. Third, globalvalue chainscould besignificantly disturbed for sometimebecauseofthedifferent stagesofthevirus www.worldcommercereview.com the trade-offs However, itispossibleto design recovery policiesthat candeliver onbotheconomic andsocietalgoalsreduce byminimising thesocioeconomic thecrisis, damageleft andthosealsoaimedat promoting broader societalgoals. point for thedesign oftherecovery.the starting exist between policies Trade-offsexclusively certainly aimed at The planningwork donesofarontheEuropean Green Deal, policy, andonanewEUindustrial shouldrepresent consistent withthesebroader societalgoals. measures promoted that bothdemandandsupply-support undertherecovery initiative/planit isimportant willbe The EUhascommitted to leadthetransition to ahealthierplanetandnewdigital world (von derLeyen, 2019),and Third, the recovery fundneeds to theright balance strike between grants, loansandaccountability. unionmore fragile.monetary national responses.primarily Purely national borrowing would weaken andalsorender thesinglemarket the euro area macroeconomy, whilehelpingovercome fragmentation that theproblems result ofsingle-market from unioninparticular, themonetary suchEUborrowingIn would significant bring advantages andstrengthen the that EUborrowing istheway forward to fundthecosts currently beingincurred. isoptimalto smooththeconsequencesIt ofalarge shockthrough time, ie. through borrowing. Wolff (2020)argued Second, therecovery fundneedsto through befinanced primarily borrowed money. 10 . www.worldcommercereview.com a structural rethink. a structural to deliver aneffective ontheobjective economic alignedrecovery withbroader societalgoals, theEUbudgetneeds (European Commission 2020). The MFFisindeedtheEU’s maintool for engineering transfers via grants. Butinorder President von derLeyen the EU’s claimedshecan turn budgetinto the“mothership” oftheEuropean recovery Fourth, the EUbudget’s andallocation structure methodsshouldberethought. andaccountability.incompatible withlegitimacy with central control andenforcement. Providing grants centrally whileexercising spendingdecisionsnationally is Ultimately, asystem withlarge amounts ofEuropean grants requires inessence aEuropean spendingprogramme politically more more charged difficult andtheirlegitimacy toestablish. areBoth helpfulbutgrants obviously provide more insurance, thoughtheyalso implybiggertransfers and are be large enoughto beeffective andnot rely onleverage alone. even isclearer thoughtheir additionality now than itwas Overall, because ofthehighdegree EUdebtmust ofrisk. Given theunprecedented faced by companies intheCOVID-19 uncertainty crisis, thesetools willbeinsufficient, 2020). in thepast, given abouttheirreal (Claeys additionality theuncertainties andLeandro, 2016;Claeys and Tagliapietra, privateorder andpublicinvestment to large-scale trigger initiatives. Suchinitiatives have beenreceived sceptically European Green Investment Deal Plan, tend to focus onfinancialarchitectures basedonguarantees andloans, in Traditional European Commission schemes, from theJunckerPlan to InvestEU, upto therecently-proposed www.worldcommercereview.com 2. As reported inthe2020Q1European Central reported 2. As Bankbank-lendingsurvey. For example, €200,000ofdeminisaidand and of3percentage inFrance points andItaly. 1. Each monthoflockdown to cause isexpected adecline inannual GDPgrowth of2.4percentage inGermany, points Endnotes ofBruegel the Director Julia Anderson is a Research Assistant, Simone Tagliapietra a Research Fellow, and Guntram B Wolff is ofMFFspendingshouldbetargetedsignificant at the part European regions mostaffected by COVID-19 and digital –andmademore efficient and effective. Finally, the wayMFF resources areallocated really matters. A thewake ofCOVID-19,In theEUbudgetshouldbetargeted more ofthefuture at thesectors –suchasgreen andthe real size (Darvas andeffectiveness of cohesion policy Wolff, 2018). effective for greening andbiodiversity andisunevenly distributed. The literature alsoshows overgreat uncertainty The economic literature shows that provides especiallyfor theCAP farmers, richer goodincome butisless support, up71percentmaking ofspending;Moes, 2018). predominantly focused ontheCommon Agriculture Policy (CAP) andCohesion andStructural Funds (together particular,In itcannotonlyrely onincreased contributions from memberstates. The 2014-2020 EUbudgetwas that have mostby beenimpacted COVID-19, inbothhealthand economic terms. ■ To doso, itwillbe essential to introduce into theMFFallocation methodsasetofparameters regions that prioritise 11 . www.worldcommercereview.com 11. Wolff thiscreates (2020) discussedwhetherand to what extent moral hazard concerns. (2020)andtheEnergyAgency Transitions Commission (2020)have reached similarconclusions. investment ineducation andtraining, natural capital investment andcleanR&D. others, Among theInternational Energy multipliers andpositive These climate includecleanphysical impact. infrastructure, retrofits, buildingefficiency 10. For instance, Hepburn etal(2020)showed thatthere thatoffershigh types isasetoffiscaleconomic recoverypolicy theSAFEproposal: https://voxeu.org/article/implementing-european-pandemic-equity-fund 9. See database offiscal measures: https://www.bruegel.org/publications/datasets/covid-national-dataset/#germany compensation forthemore than€500billionGermany hasallocated to asimilarguarantee programme. Bruegel’s See EIB aimsatabalanced countries. allocation But€25billionspread across across participating states member isscant related to COVID-19. This isfar too littlehowever, andisunlikely to toany easemarket noticeable degree. distortions The 8. The EIBisintheprocess ofsettingup a€25billionfundto guarantee ofloansforpurposes upto €200billionworth commission/presscorner/detail/en/STATEMENT_20_610 include direct recapitalisation measures, eg. stakes intheformofequity https://ec.europa.eu/ andsubordinated debt.See thescope extend oftheTemporary 2020,theEuropean 9April Commission7. On proposed to further Framework to 6. Lonergan andBlyth(2020)argue isamisnomerinthecase that‘bailout’ ofCOVID-19. com/planet4-eu-unit-stateless/2020/04/20200430-European-airline-bailout-tracker-2.pdf 5. Noneoftherescue packages given sofar to airlineshave includedgreen conditions. https://storage.googleapis. See thatarival4. Knowledge isbarred from aggressive pricingcould invitation anopen be fortacitcollusion. for incurred direct damage. 3. For governments 107(2)(b),whichpermits example, to compensate firms €200,000 ofdeminisaidandunderArticle governments 107(2)(b), whichpermits to compensate firmsforincurred directdamage.under Article www.worldcommercereview.com Domínguez-Jiménez isbasedonaBruegelPolicy McWilliams. BriefIssue1|May2020 andBen This article Leigh and Nicolas Véron for theircomments. Excellent research assistance was provided by AliénorCameron, Marta The authorsare grateful Alexander Lehmann, Claeys, to Agnès MariaDemertzis, Grégory Bénassy-Quéré, Michael Bruegel Blog, 22April Wolff, G(2020)‘EUdebtasinsurance againstcatastrophic events intheeuro area: thekey questionsandsomeanswers’ Von derLeyen, U(2019)AUnionthatstrives agendaforEurope formore -My implementationofstate aidscontrol rulesinthecurrentNeven crisis’, D(2020)‘The mimeo February N(2018)‘EUbudget,CommonMoes Agricultural Policy andRegionalPolicy –enroute to reform?’ BruegelBlog, 22 Motta MandPeitz (2020)‘EUstate inthetimeofCOVID-19’ aidpolicies Lonergan EandMBlyth(2020)‘Beyond bailouts’ International Energy (2020)‘Now Agency isthe time to plantheeconomic recovery theworld needs’ retard progress onclimate change?’ COVID-19Hepburn, C,BO’Callaghan, fiscal NStern, JStiglitz andDZenghelis (2020)‘Will recovery packages accelerate or European Commission (2020)‘European Economic Forecast Spring2020’ Energy Transitions Commission (2020)7prioritiesto helptheglobaleconomy recover ZandGWolffDarvas theEuropean (2018)‘Rethinking Union’s post-Brexit budgetpriorities’ January Claeys, GandSTagliapietra (2020)‘A trillionreasons Investment to scrutinisetheGreen Deal Plan’ Claeys, GandALeandro Juncker planneedsto turnedonitshead’ be (2016)‘The response to theeconomic fallout from thecoronavirus’ fiscal J,EBergamini, SBrekelmans,Anderson (2020)‘The JíménezandCMidões ACameron, MDomínguez ZDarvas, References , Smith School Working, SmithSchool Paper 20-02 , Discussion Paper,, Discussion IPPR , Bruegel , InstitutionalPaper 125 , VOX, 18April , BruegelBlog, 8June , Policy Brief1/2018,Bruegel , BruegelBlog, 15 , 27April , www.worldcommercereview.com post-Brexit reckoning withfinancialmarkets, andargue that timeisoftheessence to create highlyintegrated, Rebecca Christie and Rebecca Christie Thomas Wieser consider theEU functional andfairfinancialcapital markets functional The EU’s financial readjustment www.worldcommercereview.com what we assume will be a structurally very differentwhat we very oftheEU. assumewillbeastructurally linkthan existed whentheUK was part result; it offinancialmarket wants. andanEUreckoning withwhat kind This would ensure astabletransition to defined, thoughlimited, aplan timeperiod; for how to managedivergences that may barriers andthe regulatory theaimsshould be theEU-UKnegotiationsto seekanagreement onfinancialservices, In to provide stability for a come. strive to adjustto afuture participants forand theEUasmarket that structure willremain years highlyuncertain to licences across theEU. anddistribute activities This willresult induplication andthushighercosts inboththeUK London willremain aglobalfinancialhub, even asEU companies move setupadditional operations outoftheUK, whereas inthepastitcould dobusinessunderacomprehensive passport. regulatory equivalenceThe transactions, dependent rulings, UKwill become for on athirdtemporary financial service country the mainBrexit rationales, we divergence expect to increase acouple after ofyears. seamless transactions, to continue inmany for sectors anumberofyears. As autonomy regulatory hasbeenoneof The future outwithcloselyaligned regulations relationship whichwillallow willstart equivalence, andtherefore and otherservices. efficiency. TheEUwillthusface a great dealof readjustment and realignment regulatory ofitsmarket forfinancial a highprobability ofaweak contractual outcome, given thedominance ofpoliticsover considerations ofmarket thenegotiations between theEuropeanIn over UnionandtheUnited Kingdom theirfuture relationship, we see Executive summary www.worldcommercereview.com budgets are undergreat stress. These integrated donotexist intheEU. markets now Action isoftheessence. pensionssystems allrequirepreserving highlyintegrated, andfairfinancialcapitalmarkets, aspublic functional The andrecovery challengesofrestructuring inthewake ofCOVID-19, confidence ofensuring intheeuro andof Brexit asacatalyst for canact theEUto address what shouldlooklikeandhow itscapitalmarkets to getthemthere. should belocated. will needto decide how prominentresponsibilities arole finance shouldplay andwhere andsupervisory regulatory The UKhashistorically beenbothabusinesscentre leaderinthefinancialsector. andpolicy In itsabsence, theEU contingency measures were required were measures contingency services preparations concluded that no additional additional no that concluded preparations services a European Commission assessment of financial financial of assessment Commission European a Brexit has caused much less volatility than forecast; forecast; than volatility less much caused has Brexit www.worldcommercereview.com management (European Parliament, 2017). to investment fromcountries andfund andspanarange deposittaking inthesinglemarket ofactivities services whole EUforcompanies based inonememberstate. financialservices rights are permanent for all Passporting Up to now theUKhas benefitted from ‘passporting’, whichallows free andpermanentoperations throughout the Commission, 2019) preparationsfinancial services and measuresconcluded that noadditional contingency were required (European But Brexit hascaused muchlessvolatility thanwas widelyforecast. The European Commission in2019assessed would be. from assessingwhat theeconomic policymakers EU distracted consequences ofincreased financialfragmentation deal withanunanticipated disruption.Competition to lure companies andEUinstitutionsfrom theUKto withinthe This raised inturn questionsaboutfinancialstability, given fears that andeconomiccontracts actors would have to the needfor alignment regulatory andongoingEuropean judicialoversight. seemed increasingly oftheinternal whileleaving unlikely that market the UKcould theEU, remain part becauseof phasesoftheUK’s theearly In withdrawal from theEU, was anarea thefinancialsector ofsignificant It concern. that thesenegotiations willtakelongerthansomemight have hoped. deadlines were lengthenedinresponse to politicalandlogistical considerations. The COVID-19 pandemicsuggests place 2020. during open andwillbedecidedinnegotiations taking These talkscanbeextended, justasprevious Brexit isnow areality. The future relationship andtheEuropean between theUnited Kingdom Unionremains Introduction 1 , whilepledging to monitor conditions andadjustasneeded. www.worldcommercereview.com to easeinto rather newequilibrium thancreating anewsystem overnight. While itwould benice for the process to work faster andmore efficiently, andpoliticians realisticallymarkets tend ‘technical details’ to beresolved left themainagreement after isconcluded transition andsector-specific timelines. in financial-sector relations between theUKandEU, into account taking possiblenegotiating extensions, We itwilltakethree expect to five years for political, technical andtransitional work to lead to anewequilibrium level. supervisory in detailhow oftheEUandUK the financialsectors would interact and witheachother at the regulatory agreement stillforeseen between theEUandUK, to beconcluded by theendof2020,willbeableto regulate the EU. This meansthat equivalence willbereadily available at thebeginning. seemshighlyunlikelythat thenew It The UKhas arobust financialrulebook that, at thepoint theBrexit transition ends, period willbefullyaligned with definition ofequivalence, governments have astheyseefit. widelatitude to act importantly,Most itcanbe withdrawn unilaterally at relatively notice. there Because short isnoclearglobal case indesignated areas. basisfor specificsectors. ofarrangement isestablishedonacase-by-case This sort regard eachother’sparties regulations asbeingequivalent, trade canflow more bethe freely than would otherwise The EUalready provides for regulatory ‘equivalence’ withnon-members. This essentially meansthat aslongboth which willnecessarily bemore limited. no longerbeeligible for suchsmoothcross-border acceptance. itwillneedto Instead establishotherrelationships, As theUK transitions to thestatus ofthird country, oronethat isnotunderthelegalregime oftheEUtreaties, itwill www.worldcommercereview.com how suchasNew muchitiswillingto jurisdictions, outsource to theUKorotherthird-country York. have to decidehow much ofwhat historically hasbeendoneinLondon shouldbeduplicated insideitsborders, and London, whichhasbeenthehubofEUcapitalmarkets, willnotbethesame, butneitherwillitwither. The EUwill opened up. equivalence willtherefore inallprobability expire orbewithdrawn orareas in thesectors where divergence has will deviate from EUstandards andrules. At that point, whetherfor technical, substantive orpoliticalreasons, as indicated already by UKpoliticians, there willbechangesto UKlegislation decisionsthat and/orregulatory It willneed asawhole.to beestablishedsector by sector,the financialsector regulation by Overregulation. time, Granting equivalence solutionfor for isnotanacross-the-board anewrelationship between thetwo partners EU. willneedto address It theissuesof: The eventual agreement will, however, have to setthescene for adivergence ofregulation between theUKand preventingfinancial services, acliffedge. situation. Despite we allthepoliticalrhetoric have littledoubtthat ultimately there willbeanagreement, alsoon areextensions needed andby whentheymustberequested, coupled withfears orwarningsofanew ‘no-deal’ theEU-UKnegotiations onthefutureIn relationship, may muchoftherhetoric focus onthedrama ofwhat • • • Establishment ofmechanismsfor granting andreviewing suchdeterminations. frameworks; and recognitionMutual andsupervisory offinancial regulatory ofthenewrelationship equivalenceDetermination between ofregulatory theUKand the EU; at thestart www.worldcommercereview.com time to issuesistherefore takepoliticaldecisionsonthese financial market now. the private astheywillnotbeableto shoulderthesemultipleburdens sector and challengesby themselves. The Public finances, under severe strain inmany EU countries for the foreseeable future, willneed to closelywith work theEUwillnotbeable tocapital market, meetthesechallenges andmitigate thenegative fallout ofthecrisis. dealing withthefinancialturbulence induced by COVID-19. Without afully integrated andsinglefinancial The EU’s climate ofpensions, change, inthecoming decadesincludetackling theviability priorities and ensuring along withoutlivingupto theirpotential. euro area theEUeconomy. andwillbetter serve –andthe broader themarkets economy –may Otherwise, sputter challenge, theEUmay emerge that financialmarket enhances withamore confidence unifiedandfunctional inthe to Brexitreshape EUfinancialinfrastructure offers forthebetter. anopportunity takeupthe Ifpolicymakers efficient andstable, and how toensure that cross-border flows offinance work tothebenefitof member countries. convenience, willneedto confront policymakers longstandingquestionsabouthow to more makeEUmarkets dominance providing theEUwithanefficient centremarkets. forfinancialandcapital AstheEU nowlosesthis Historically, mostEuropean politicianshave seemedto want to keepfinance at arm’s length,with London’s EU alsobenefittingfrom the changes. Financial companies want to keeptheiroperational optionsopen. the moves. Paris, Frankfurt, Amsterdam andLuxembourg have alsoseeninflows, withanumberofothercitiesinthe from London (Hamre and Wright, beingthemostpopulardestination 2019),withDublin andtarget of28percent of The thinktankNewFinancial identified that 332firms have oftheirfinancialbusiness relocated away atleastpart fromconducted London. This willreinforce therelocations that have takenplace over thelasttwo years orso. that for now activity isstill offinancial services We part to aslow theEUofacertain butinevitableshift expect www.worldcommercereview.com measures, andfallbacksolutionsare inplace. contingencies andpossibilitieshave for beenknown quite sometime. Firms have takentheirprecautionary thistime,During there islittlelikelihoodofsignificant market associatedvolatility withBrexit, asmostofthe the future arrangement. issues suchasinterim deadlinesby needto whenvarious extensions berequested, rather thanonthesubstance of end. untilthere the Additionally, willbenosolutiontovery financialservices initialdebate may focus onprocedural associatedAssuming that withCOVID-19 theuncertainties abate over theyear thennegotiations willgoon.But priority. where insomeareas operational offinancialservices isa ofthestatuscontinuity with extensions quopre-arranged the two countries willlooklikeonce thetransition ends. period At timeofwriting, thisissetfor theendof2020, With officials debating theUKoutofUnion,EUandBritish whathave thefuture started relationship between The negotiation period itneeds.sector and itthusbecomes harder to prepare for thefuture. The EUwillneedto overcome to buildthefinance thisinertia financial oftheCOVID-19 pandemic makesstructural regulation 2020,theimmediacy feel evenIn more abstract, butnoturgent. important comes theEUfaces to theadditionalchallengeofhow financialservices, to push onsomethingthat is forward by national politicians, to regulators retain segmentation asmuchmarket andsupervisors aspossible. When it To makethesedecisions, theEUwillhave to transcend what we have seenover thepast20years, namelyattempts www.worldcommercereview.com turnover ininterest rate derivatives and14percent assets. ofotherfinancialintermediary and Herzberg, 2019).Beyond Brexit banking, could alsoultimately leadto areallocation ofasmuch40percent of assets could beontrack to relocate, whiletherest, related to UKandnon-EUclients, might stay inLondon (Calò EU clients account for roughly 20percent revenue, oftotal UKbanking suggestingthat upto 20percent ofthese isenormous.scale ofthebroader financial industry assets. in banking The UKishome €11trillion to nearly globalposition,butitisseeingchangesinitspositionrelationLondon to willnotloseits important Europe. The status.the future arrangement isnotfullyworked outwhentheUKtakesontruethird-country brace for ahard Brexit (ECB, 2020;European Commission, 2019). Those preparations canbecalledonto theextent theyearsIn between thereferendum andtheUK’s preparations madethenecessary financialfirms departure, to Europe but it is seeing changes in its position in relation to to relation in position its in changes seeing is it but London will not lose its important global position, position, global important its lose not will London www.worldcommercereview.com “The envisaged partnership shouldreaffirm the financialstability, commitment to envisaged Parties’ preserving partnership market “The integrity, to cooperate and communicate, whileessentially leaving alldoorsopeninterms ofwhat thefinal outcome willbe: that key eachsidewilluseto regulate“the instrument” financialinteractions. The Commission calls for supervisors The European Commission’s negotiating mandate, publishedon3February 2020,makesclearthat equivalence is What willtheEU-UKagreement like? look andwillcontinue inparallelunderway to theofficial track oftheEU-UKnegotiations. now andhumancapitalinsplittinguptheiroperations. seeadvantages interms offunction areThese well shifts andback-up facilitiesinseparate toJust asbankslearned keeptheirheadquarters physical locations, theymay has itsadvantages. place, anditmay become more dependent oncommunications andtravel infrastructure. Butdiversification also advantages ofhaving itsfinancialmarket workforce willlosesomeoftheone-stop-shop allinone The industry business oroffer otherbenefits. replace London. Instead, companies are spreading outacross Europe to citiesthat specialiseinspecificlinesof The future for istherefore EUfinancialmarkets more decentralised. There isnosinglefinancial centre risingup to concentration for European distribute themselves asfirms markets into andacross thesinglemarket. appearslikelythat at London thegloballevel,It willkeepitsimportance whileweakening asasinglepoint of of alsoraisesLondon itself.The thequestionofwhetherthiswillaffectglobalimportance scaleofsuchashift increasing fragmentation whilealsopossiblyeasingconcentration risks across risks theindustry. Calò willhave concluded ontherecipient andHerzberg theseshifts abiggerimpact citiesthantheywillonLondon, www.worldcommercereview.com out (Asimakopoulos and Wright, 2020). the mostlikelyoutcome, willmeanthat that nosucharrangements withatailrisk politicalconflict canbe worked within theEU.are dealtwithby passporting equivalence decisionsas views andtime-limited selective The industry Equivalence isnotasinglestate, butrather apatchwork ofarrangements that replace onlysomeofthethingsthat 2020). political negotiators willallow (for itto sectors become example, delinkedfrom otherimportant seeThe Guardian , There could beputonaseparate but hasbeensomehope that financialservices track, we thinkitisunlikelythat for at leastfive years, which could onlybewithdrawn divergences inthecaseofserious by oneofthepartners. forOne possibility amore favourable agreement could beto give fullandunequivocal equivalence financial-sector oftime, period contractual relationshipcomparedfor a onfinancialservices certain to mere equivalence. For example, theEUmight seekafavourable agreement onaccess to fishing waters by offering amore stable unrelatedoffs dossiers. between otherwise The outcome ofbothsides. willdepend on thepoliticalpriorities piecemeal equivalence for segments. individualrulesandmarket Politics matter, sothere willbeaneedfor trade- It mayThe inmind. finaldealwillkeepbothofthoseobjectives well result insomethingthat goesbeyond isgood, unilaterally plainerEnglish,stability isbetter. andbeingableto act inthenameofstability In to adoptormaintainany measureability forprudentialreasons” (European Commission, 2020). autonomy, to take andtheirability equivalence decisionsintheirown interest. This iswithoutprejudice to theParties’ investor andconsumer protection andfair anddecision-making competition, theParties’ regulatory whilerespecting www.worldcommercereview.com Brexit, theEUchosenotto focus on technical solutionswhilethepoliticalbackdrop was stillsomuchinflux. withdrawing it, whentechnical cancome anddiplomatic into factors play. For example, leadingupto intheperiod The EUhasabetter track whengranting record at economics equivalence andexpertise thanwhen oflooking advantage ofindependent expertise. this process would require demonstration ofeconomic causefor such awithdrawal ofequivalence, andwilltake To beeffective, thenew EU-UKagreement willneedanarbitration process that produces rapid results. Ideally 2019). Pressurelacking. toto dothisismagnified seenas rely inindustries exclusivelytoo important ondeference (Löber, fashionifthey feel cansometimesjustifyapplyingtheirrulesinanextraterritorial out, authorities cooperation is Löber,As Klaus headoftheEuropean Central Bank’s oversight divisionfor payments andinfrastructure haspointed standards exist, however. towhich benchmarks use. Regulators willnotwant theircross-border reach to belimited onlyto areas where such (2017) analysis ofequivalence noted, there isnointernational standard for how to determine equivalence or The EUwill have Rose alotoflatitude whendecidinghow to Norton proceed. As theindustry-commissioned equivalence 2020). findings” (UK, and Canada. At thesametime, it“could includeappropriate consultation andstructured processes forthewithdrawal of The future relationship shouldbelegallybindingandfollow precedents setintheEU’s trade agreements withJapan pragmatic line. Times, 2020a). When theUKpublisheditsinitialnegotiating positionat theendofFebruary 2020,ittook amore ‘Permanent equivalence’ was floated inBritain’s openinggambitinthefuture relationship negotiations (Financial www.worldcommercereview.com and associated fees (Financial Times, 2019),andtrading onSwiss exchanges was broadly unchanged. thus removing therequirements related to trading onEUexchanges. Relationships were establishedfor middlemen exchange. notmuchhappened. fact, Swiss regulators In ordered theircompanies to trade onlyonSwiss exchanges, scenario, aworst-case In Swiss stocks that traded intheEUcould have beenbanned from trading ontheirhome those intheEU(Baltensperger, 2019). of third countries that are notrecognised ashaving requirements prudential andbusinessconduct equivalent to most affected were thosethat prevented stocks traded inthe European Unionbeingtraded onstock exchanges the natural questions aboutwhat would happen andwhat thiswould implyfor theUK. provisions The particular The decision to letSwiss equivalence expire created headlinesbecauseofSwitzerland’s finance ties to theEUand andachieve thesame effectiveresults astheEUrules. supervision under consideration are equivalent to thoseappliedintheEU, andto verify that theyare legallybinding, ensure agenciesto assesswhethertherulesappliedincountry Commission works inconsultation withsupervisory The UKwill have to jointherest oftheworld inundergoing equivalence evaluations. These taketime:the Canada andSingapore inthespecificfieldof credit rating agencies. of trade agreements. Later inJuly, theCommission moved to withdraw equivalence for Argentina, Australia, Brazil, some provisions inrelation ofabroader to stalemate to inrenewing lapseon1July2019aspart aseries 2019,theEuropeanIn Commission putthe world onnotice that equivalence isnotguaranteed. First, itallowed bulk ofthefuture arrangement isstillundefined. constraints have therefore limited technocratic problem-solving, andwethat thiswillcontinue expect whilethe negotiatorsNeither theEUnorBritish wanted to give away theendgameany thanwas earlier necessary. Political www.worldcommercereview.com planning to Brexit, winddown businessafter theirBritish existing contracts willautomatically becovered by the regime endsat theendofmainBrexit transition (foreseen period at theendof2020). For European companies The firms oftransition for UKhasputinplace forwhenthecurrent period two types financialservices passporting ratings companies onthe date have workarounds ofBrexit, already sothenecessary beenputinplace. recognized intheEU. The was Authority European required andMarkets Securities to withdraw recognition ofUK somecases,In suchascredit ratings agencies, willneed EU-registered firms entities for their ratings to be agreement isinplace andthefuture relationship isunderway. Different willbe financialsectors affected differently. Given that, profiting sectors today from equivalence may losetheirprivileges, possiblyincrementally, once Bank ofEnglandandtheJohnsongovernment (Financial 2020). Times, 2020;UK, makes senseifyou want to exercise it, whichwe assumewillbethecase, especiallygiven themessaging from the point intime.at acertain The point ofBrexit, argued, asoften islegalandconstitutional independence. This only Ongoing equivalence matters over interms ofstabilisingexpectations time, notonlyinterms of trading conditions Longer-term outlook thegrowth ofthebroader prospects hurt economy. administrative burdens, however. Thus may cross-border become more permanently activity expensive, whichmay andclients. offirms andthesinglemarket Equivalence,wereon thepart designed passporting to reduce costs and This suggeststhat many could prospective beovercome barriers regulatory andmoney withadditionalpaperwork might face even higherhurdles, dependingonthesector. be difficult, ifnotimpossible, inthecaseofawithdrawal ofequivalence between the two. segments Othermarket That was aboutit. Given thenumbersandvolumes ofEUandUKequitiesrespectively, thisbenign outcome might www.worldcommercereview.com of maintaining client relationships ofIreland, (Law 2019). Society UK law applied actively firms Ireland,for licences suchas inEUjurisdictions, inorder to have more options in terms are closelylinkedto financialproducts,services suchasaccounting andthelegalprofession.In therun-up to Brexit, Adjustment might prove to bemore providers ofachallengefor that thoseservice are notfinancial, butwhose the EUtowards union. agenuinecapitalmarkets evenbanking, thoughitwould makefor fairer competition, increase legalandeconomic convergence andmove system forwould similarto capitalmarkets resist that now strongly inplace for theestablishment ofasupervisory Many nationalcompanies andinterest politicians, financialservices groups thrive segmentation, onmarket and currently etal,2017). (Sapir limititsindependence andcapacity segments. Abroadening ofthescope ofESMA’s requires authority reform ofitsgovernance and funding, which (ESMA), dutiesinsomemarket Authority Markets whichwas created in2011andalready supervisory hasdirect One way for theEUto improve itsfinancial market oversight would be to reinforce the European and Securities and saiditwould consider whetherandhow to reopen thenotifications window later. window permissions before askedfirms Authority to notifyitoftheirplans to usethis temporary Brexit took place, regime permissions 2020). to thetransitiontemporary ends(FCA, applyafter period The UKFinancial Conduct For theUKhasalsoestablisheda that firms wish to losingtheEUpassport, continue doingUKbusinessafter for allothercontracts. Financial Contracts Regime, whichapplies for Services amaximumof15years for insurance contracts andfive years www.worldcommercereview.com qualifications. new financialhubs,knowledge to the thatcentresextent EUcitiescanestablish andstandardise professional that was previously unnecessary,support increasing costs andgiving companies incentives to consolidate in This means workers whoare to posted theotherwillneedvisasandadministrative from onejurisdiction full freedom ofmovement. firms could face additionalhurdles managing theirhumancapitalbecausethefinalEU-UKdealisunlikely toinclude matters may bedisputed, once theUKisnolongerautomatically ofJustice. boundby theEUCourt International could alsoseeanincreaseCourts inlegalbattles over hasprecedence, whichjurisdiction and whatever substantive travel to London, butnow Londoners might needto inreverse. makethejourney thepast, to Europe works inBrusselsorDublin makesure smoothly? In everything hasbeenwillingtoto partners Will theycontinue to beableto useaLondon-based lawyer to managetheirEUaffairs, orwilltheyneed to switch transition could greatly complicate relationships, working especiallyfor London-based clients. contracts andtechnical changesthat willresult from theUK’s changeinEuropean status. Undersomescenarios, this faces considerable to makesure to shifts The handleallofthenewcross-border ithasthecapacity legalindustry complexity fromextra usingmultiplesystems. companies follows that suit, firms operate intheUKandEUwillneed to makesure theycanmanageallof the European for Mechanism, Stability example, itscontracts from hasshifted UKlaw to law. awave If of EU institutionsandEuropean international providers. financialinstitutionswillneed to withEUservice work The www.worldcommercereview.com To move inthefollowing ahead, theEUshouldtakeaction areas: will be. there istowards amore efficient and integrated inthe capitalmarket EU, the greater the negative on theEU effects The EU’s economic success thusdependscruciallyonhow theEUorganises itself withouttheUK. The lessprogress but ithaslongcounted oncross-border finance to beoneofthesinglemarket’s strongest enablers. andtherealsector economy to agreat are intertwined extent. Europe might have ageneral distrustof ‘speculation’, istoo simpleto sayIt that the UK ishometo ‘more finance’ andtheEUhasapreference for‘less finance’. Thefinancial willtakeonnewresonance.activity options(Paganomarket etal,2014).After Brexit, thequestionofhow capitalmarkets to encourage andsupport with dependence onbankfinancingandageneral situation inwhichthere are too many banksand too few capital Brexit thusforces Europe to consider needs whatto have. elseitsfinancialsector The EUhasalready been grappling which cross-border relations willrequire themostattention. border efficiently and well. tonon-bank financingchannels. Londonhasbeenahomeinparticular Thisisthe areain One reason this transition isdifficult to navigate theUKhas isthat manyprovided oftheservices were done cross • with thedebate ontheEU-UKrelationship, butitwilltakeon newresonance. where theEUwould beweaker ifitfences itselfofffrom globalfinancialchannels. Ringfencing is notnew analysisClear-eyed ofwhere Europe’s to functions remain in-house, financialstability requires and certain www.worldcommercereview.com • • • • be a particular point ofcontention,be aparticular astheycut across andindustries. multiplesectors To theextentthat Data-sharing policiesthat are practical, effective andadequately protective. Data-transfer questionswill currency’s globalrole. insurance would buildworldwide confidence intheeuro, while continued fragmentation willholdbackthe champion banksinbiggerEUcountries oftheEUfinancialsector. takeupalarger proportion Deposit sovereign linkthat theeuro area sohard hastried to break could strengthen inadvertently ifnational Current vulnerabilities willtakeonanewprominence thebank- astheEUfinancialsystem reshapes itself: the current system. might notaffect thisdebate directly, butitshouldoffer anewmomentum toaddress in existing weaknesses Completion ofthe euro union,includingfulldepositinsurance area union.Brexit across banking thecurrency tradingfinancial sectors, andissuance. includingequity to move itwillbenecessary andcapitalmarket, towardsmarket more centralised oversight inanumberof leeway that itbecomes effectively unaccountable.If theaimis to have internal asmoothly functioning system willrequireA functional afairdegree offlexibility to be butitmustnothaveworkable, somuch require abalance between consistent pan-European rulesandafairframework for amultipolarunion. border issuesincluding resolution planning, capitalset-asides andoperational management. risk This will Recognition ofthecurrent inthecontext tension ofcross- between homeandhostcountries, particularly inthefinancialplumbing. blockages Vigilance settlement snagsthat could becauseofunexpected onoperational arise risks, particularly www.worldcommercereview.com that unravels muchofthecareful work that went before. of thefinancialinfrastructureunpleasant surprises. Atcould break worst, down part and setoffashock aneglected extra face legaland administrativefinancial firms costs tomake preparations and continually review them to avoid As discussionsonthefuture EU-UKrelationship remains continue, issue. acentral At uncertainty policy aminimum, • • • • regulatory competitionregulatory to allow withintheEU. divergence might have are becausemarkets abroader evolving impact quickly, andweigh how much Consider emerging suchasfinancial technology (fintech) sectors andsustainablefinance, where regulatory businessfromabsorbing London. tofrom strengthen Brexit theEUfinancialsystem could across beanopportunity theboard, notjust by Renewed focus onanti-money initiatives. laundering Once again,thechangeto thefinancialsystem arising structures. COVID-19 underscorescross-border andamplifiesthese concerns. supervisory than before ifitcontinues onitscurrent course ofsettingupself-protective alongsidenew national barriers toAction increase ishard trustamong EUnations. to It imagine how Europe canemerge from Brexit stronger European Central sothehesitation andSweden ofcountries suchasDenmark Bank, isunderstandable. considerable operational constraints for countries outsidetheEurosystemto the financialsupervision to shift Renewed union. consideration countries willjointhebanking ofwhethernon-euro There would be area, given itsusefulnessasabargaining chip. Furthermore, incentive theEUhasastrong recognition tactical to withholddata adequacy for theUKinthis inhibitinformationnew barriers exchange, regulators willbemore likelyto retrenchment. require industry www.worldcommercereview.com 1. See European Commission1. See communications 2019onBrexit preparations. ofJune2019andSeptember Endnotes Rebecca Christie isa Visiting Fellow, and Thomas Wieser isaNon-Resident Fellow, at Bruegel which enhances confidence intheeuro area the EUeconomy. andwillbetter serve ■ takeupthe challenge, theEUmay policymakers emerge financialmarket, If withamore unifiedandfunctional to reshapeThe EUnow itsfinancialinfrastructure losesthisshield.for thebetter. ButtheEUalsohasanopportunity centre.a market Historically, European politicianshave beenable to keepfinance at arm’s length,becauseof London’s dominance as The adjustments willforce theEUto confront longstanding questionsabouthow memberstates work together. cooperation. regulation concerned, andinternational ofallsectors structure changesinsupervision, andwillrequire further Financial inthewake risks ofCOVID-19 sector willbecome greater. This aboutchangeto will initselfbring the technicians to leavepolicy many looseends, inorder to allow negotiations to taketheircourse. managers. Butthenature comes isthat ofcrisis itoften from directions. unexpected Political considerations require As ofthis writing, operational andsettlement seem to risk risk have beenthoroughly vetted by lawyers andfinancial www.worldcommercereview.com (2017) ‘Understanding equivalence and the single passport in financial services Third-country European Parliament Third-country (2017)‘Understanding infinancialservices equivalence andthesinglepassport https://ec.europa.eu/info/sites/info/files/communication-annex-negotiating-directives.pdf Ireland’, ofGreat withtheUnited BritainandNorthern Kingdom partnership COM(2020) 35final, available at European Commission (2020)‘Recommendation ofnegotiationsforanew authorisingtheopening foraCouncil Decision september-2019-finalising-preparations-withdrawal-united-kingdom-european-union-1-november-2019 Union on1November 2019’, COM(2019) 394final, available athttps://ec.europa.eu/info/publications/communication-4- European Commission (2019b)‘Finalising preparations forthewithdrawal from oftheUnited theEuropean Kingdom EU equivalence decisions’, 29July, available athttps://ec.europa.eu/info/publications/190729-equivalence-decisions_en European Commission (2019a)‘Commission setsoutitsequivalence withnon-EUcountries andpresents policy itsrecent html?uri=cellar:40eadc58-8dc8-11e9-9369-01aa75ed71a1.0016.02/DOC_1&format=PDF fromUnited theEuropean Kingdom Union’, COM(2019) 276final, available athttps://eur-lex.europa.eu/resource. European Commission (2019)‘State ofplaypreparations measures ofcontingency forthewithdrawal ofthe ecb.is200123~0bc778277b.en.html ECB (2020)‘Press conference transcript, 23January’, available athttps://www.ecb.europa.eu/press/pressconf/2020/html/ and-herzberg).pdf?sfvrsn=4 publications/financial-stability-notes/no-9-the-future-of-global-financial-centres-after-brexit---an-eu-perspective-(calo- of Ireland Financial Notes Vol. Stability 2019,No.9, available athttps://www.centralbank.ie/docs/default-source/ FutureCalò, (2019)‘The S,andVHerzberg ofGlobalFinancial Centres Brexit: after anEUPerspective’, Central Bank https://bruegel.org/2019/07/the-consequences-of-switzerlands-lost-equivalence-status/ Baltensperger, consequences ofSwitzerland’s M(2019)‘The lostequivalence status’, BruegelBlog, 25July, available at org/report-a-reality-check-on-equivalence/ Asimakopoulos, P, CheckonEquivalence, andWWright (2020)AReality NewFinancial, available athttps://newfinancial. References www.worldcommercereview.com Pagano, M,SLangfield, VV MKBrunnermeier,Boot, A Acharya, CBuch,MFHellwig,Sapir andI A van denBurg (2014)Is https://www.nortonrosefulbright.com/-/media/files/nrf/nrfweb/imported/regulatory-equivalence-paper.pdf RoseFulbrightNorton Equivalence, (2017)Examining Regulatory commissioned by FSNForum, report available at challenges/ Institute,University available athttp://fbf.eui.eu/ebook-download-european-financial-infrastructure-in-the-face-of-new- for Cross-Border Cooperative Oversight’, inEuropean Financial Infrastructure intheFace ofNewChallenges, European Löber, (2019)‘Extraterritorial Klaus Application ofFinancial orRegulationintheArea Market Infrastructure: The Case lawsociety.ie/gazette/in-depth/brexit-backstop/ ofIreland (2019)‘GrowingLaw Society a“Brexit numbers backstop”’, seeking 29November, available athttps://www. https://newfinancial.org/an-update-on-brexit-the-city-the-impact-so-far/ Hamre, sofar’, –theimpact EFandWWright update on‘Brexit (2019)An &theCity NewFinancial, October, available at 43d18ec715f5 George Parker Fleming, andSam 10February, available athttps://www.ft.com/content/9623b8a2-4c3a-11ea-95a0- Financial Times Javidto (2020a)‘Sajid pushfor“permanent equivalence” inBrexit talks’, forCity Crow, by David 0bcf87a328f2 Carney, by andChris Giles, LionelBarber 7January, available athttps://www.ft.com/content/713a70b4-315d-11ea-a329- Financial Times (2020)‘Central banksrunninglow onways to fight recession, warns Mark Carney’, withMark interview available athttps://www.ft.com/content/1aa1561a-dea5-11e9-9743-db5a370481bc Financial Times (2019)‘Trading costs Switzerland’s riseafter lossofEUaccess rights’, by Philip Stafford,September, 24 uk/news/statements/financial-services-contracts-regime Conduct Authority, available athttps://www.fca.org.uk/brexit/temporary-permissions-regime andhttps://www.fca.org. pagesonBrexitFCA transition (2020)‘Web measures’, updated 24March 2020and18Feb 2020,respectively, Financial BRIE/2017/599267/EPRS_BRI(2017)599267_EN.pdf access to thesinglemarket’, Briefing, February, available athttps://www.europarl.europa.eu/RegData/etudes/ www.worldcommercereview.com This article isbasedonBruegelPolicy Contribution Issuen°8|May2020 This article Future_Relationship_with_the_EU.pdf https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/868874/The_ (2020)The FutureUnited Kingdom RelationshipwiththeEUThe UK’s to Approach Negotiations, February, available at brexit available athttps://www.theguardian.com/politics/2020/jan/13/city-access-eu-markets-eu-fleets-uk-fishing-rights- The Guardian (2020)‘EUtrade forfishing” chiefforesees “financial services Brexit bargain’, Boffey, Daniel by 13 January, Bruegel, available athttps://bruegel.org/wp-content/uploads/2017/02/Bruegel_Policy_Brief-2017_01-090217.pdf Sapir, A,DSchoenmaker andNVéron ofBrexit thebest fortheEUFinancial (2017)‘Making System’, Policy Brief2017/1, https://www.esrb.europa.eu/pub/pdf/asc/Reports_ASC_4_1406.pdf Committee Scientific 4, European oftheAdvisory Board,Risk Systemic Europe available Overbanked? Reports at www.worldcommercereview.com that sustainability will remain an enduring policy inthe willremainthat policy sustainability anenduring The current hasgiven crisis areminder abouttheneed Sustainable finance in to strengthen oursocieties. Cosmina argues Amariei the COVID-19 era (post) COVID-19 era www.worldcommercereview.com course anddidnotmakedrastic changes. The was mainobjective protecting investment capitalfrom any permanentloss. Many investors alsostayed the credit/government bondsandcash/liquidbuffers. momentum), withtargeted environmental, socialandgovernance (ESG) factors, inadditionto investment-grade theinitialphase,In repositioning took place through defensive strategies inequities (highquality, low volatility, harder to generate especiallyinthefixed income space. Asset owners andasset managerswillcontinue to face alower-for-longer yieldenvironment, withpositive returns Market developments widespread, ontheirsaving, withanimpact consumption andinvestment decisions. from thereal economy. There are amongindividualswillbecome alsoconcerns more that financialinsecurity Even have warnagainstthepotential thoughmarkets rebound, decoupling witnessedaremarkable supervisors Prudential buffers have beenlowered inorder to allow tochannelfunds thefinancialsector to corporates. are beingrolledto Fiscal stimuluspackages attenuate outinaneffort thenegative andmonetary consequences. exit strategiesMost are gradual andinformed by theevolving publichealthsituation inthememberstates. governments, businessesandhouseholds. This unprecedented hard sectors andexacerbating thevulnerabilities ofmany shockhasbeenhittingcertain The spread oftheCOVID-19 virusbrought theEuropean economy to astandstillandheightened volatility. market Context www.worldcommercereview.com (SMEs), capital markets are still not an actual optionandtheywillrely are(SMEs), capitalmarkets onotherfinancingmechanisms. stillnotanactual companies deemedstrategic could benefitfrom publicassistance. For many smallandmedium-sized enterprises The corporate landscapeislikelyto change. While many sectors/ mode, companies willremain certain insurvival segmentation ofthe investment universe by assetclasses, regions orsectors. approach organised around andreturn risk streams could become incomparison with theclassical thenorm, real assets, aswell asto rethink index- themixofalpha-seeking, strategies. andfactor-based Atotal portfolio thenearfuture toIn itisexpected gobeyond traditional assetclasses, withanincreasing demandfor alternatives/ market theme in the (post) COVID-19 era COVID-19 (post) the in theme market Sustainability will remain an enduring policy and and policy enduring an remain will Sustainability www.worldcommercereview.com Hence, acommon thread amonginvestors willbethefocus onstrong fundamentals (P/Brather thanP/Eratios moreThis willtrigger crisis downgrades, consolidation. andawave apossiblesurge inbankruptcies ofindustry management measures andpursuingthesustainablefinanceMany agenda? stakeholders argued for the European questionemerged: between crisis Isthere themidstof pandemic, anyIn animportant apparent trade-off Environmental, andGovernance Social sustainable strategies could offer betterrisk-adjusted andimprovereturns resilience. portfolio remained strong (seeFigure 1),compared to outflows from conventional funds. This thatconfirms certain practice,In highlyrated ESGcompanies tend addition,theinflows to belesscyclical. In into sustainablefunds even for correcting after performance othervariables. of2020. inthefirstquarter mainstream counterparts The ESG component was thestrongest contributor to the their highlighted ofsustainablefundsandindices outperformed that reports themajority industry Multiple but walk thewalk’. andmaintainedchanges inthemarkets (oreven accelerated) theirESGcommitments, namely ‘not onlytalkthe Despite arapidly evolving situation, someinvestors were from stillableto separate structural shifts temporary support. combined withpolicy/financial activity could stressed emerge corporates, forBut opportunities otherwise withupsidepotential from aresumption in intensity. namely companies withsoundbalance sheets, resilient withhighintangible businessmodelsandsectors assets 1 ), www.worldcommercereview.com Source: Morningstar Direct, Manager Research.Source: MorningstarDirect, Figure European sustainablefundflows 1.Quarterly (€billion) 10 20 30 40 50 60 0 Q2 Q3 2015 Q4 Q1 Q2 Q3 2016 Q4 Q1 Q2 Q3 2017 Q4 Q1 Q2 Q3 Total AuM: €621billion(March 2020). 2018 Q4 Q1 Q2 Q3 2019 Q4 2020 Q1 www.worldcommercereview.com Source: European Commission, SWD(2020)98final, Brussels. Figure ofinvestment 2.Overview year) gaps(€billion,per into accounttaking future andneeds. trajectories to buildcompetitiveEU. advantage innewindustries, beseenasan opportunity Nonetheless, thisshouldactually across pipelineofsustainableprojects/assets At the present, many lieintheunsatisfactory bottlenecksactually inpublicandprivatetrillion fundsfor achievingclimate by neutrality 2050. needed (seeFigure 2).As initiallyannounced, theEuropean Green Investment Deal Plan aimsto mobiliseat least€1 orderIn to meet the2030climate andenvironmental targets, around €470billionadditionalannualinvestments are Commission’s Communication onEurope’s moment:RepairandPrepare Generation fortheNext . Green to Deal remain central for arobust recovery andgrowth intheEU, andthiswas recently reinforced inthe Social infrastructure Social Strategic investment (for EUautonomy value oncritical chains) Digital transformation Green transition Wider environmental objectives, beyond climate Climate mitigation andenergy 2030targets 192 125 130 340 470 20 www.worldcommercereview.com investors competitive. Climate stewardship by assetmanagers Inflows into climate-related investment funds could play a greater role intargeting solutionsthat are not yet imperative butnotsufficient. companies cannoteconomically justify ‘radical’ green investments. The financingofthe ‘pure’ green players is Beyond that, that ithasto thelarger beacknowledged challengeistheinvestment caseinrelevant sectors. Some also scrutiny over dividends, share buybacks, executive remuneration andinvestors’ engagement. brought to theforefront, onemployees, impact customers, inparticular supplychainsandlocal communities but management, andrisk isessential. selection security construction, The andGovernance Social dimensionswillbe More broadly, oncorporate ofESGfactors andconsequently performance, understandingtheimpact portfolio upgrades that leadtoskills theadoptionofgreener technologies, payback periods. withshorter ‘perfect’ thetransition candidate to neutrality, for carbon by supporting stimulating innovation inparticular and standard regime andanaccreditation/supervision for verifiers. external Moreover, markets could bethe equity A recovery inthegreen context could lay thegroundwork for more issuance ofgreen by bonds,anEU supported sustainable investments may notreach thedesired levels. areof theireconomic notadequately activities priced in,orintheabsence ofadequate economic incentives, operational expenditures, revenue solutionsfor generation theexternalities andlow-carbon If end-consumers. thelongerrun,mostcorporatesIn willhave to demonstrate aclearpathway interms ofcapitalinvestments, record mandates. whendelegating external 3 with a long-term outlook, for withalong-term example outlook, insurance companies andpensionfunds, could usetheirtrack 2 shouldbeoriented towards clearoutcomes, andinstitutional www.worldcommercereview.com compared withSMEs, for whichsuch aregime shouldbeadequately calibrated. Failure by SMEs to provide non- At present, large companies moretend to comprehensively report and dominate on ESG factors investors’ portfolios financial information, linked to auniqueidentifier entity. forthe reporting the Commission should consider creating apubliccentralised database at theEUlevel, withbothfinancialandnon- The scope ofcompanies to becovered level hasbeenachieved, isanothercentral ofmaturity Once acertain aspect. comparability andreliability. information istheway orvoluntary) at forward inorder theEUlevel to (mandatory achieve greater consistency, Corporate disclosure isafundamental bedrock for sustainablefinance. Establishingstandards for non-financial Corporates, investors &supervisors addition,tradingpractices. venues In refer ESGmetrics. to intracking expanding theircapacity When it comes to ESGratings/scores, investors divergence report across providers andadvocate anoverhaul ofthe attached’ to publicsupport. ofsocial/governancerisk washing mustbeavoided by expanding theEUtaxonomy, especiallyifthere are ‘strings in healthcare, housing, education andentrepreneurship) issmallbutgrowing. Still, muchlikegreenwashing, the This point could aturning for crisis mark socialbonds. The current outstandingamounts (withproceeds invested diversity inownership andcontrol across structures theEU. sustainable corporate governance was announced by theCommission for 2021;thisshouldalsoaccount for the To ensure environmental andsocialinterests are fullyembeddedinto businessstrategies, anewinitiative on www.worldcommercereview.com still at anascent stage(withafew withmany exceptions) identifying andsupervisors, challenges for theindustry approaches,backward- to forward-looking for example through scenario analysis. Climate-related stress testing is areESG risks by characterised deepuncertainty, andendogeneity. non-linearity Pricing themrequires moving from assessments. and double-materiality Development (SDGs).And again,robust Goals data ontheuniverse ofinvestments analysis iskeyfor portfolio-level adoption. For institutionalinvestors, COVID-19 could accelerate interest inmandates aligned withtheSustainable The EUecolabel for criteria should beambitiousenoughbut financialproducts at thetimenotstiflemarket channels.distribution This comes ontop ofalready well-known problems, suchasunbalanced assetallocation, biasedadvice andclosed variation ininvestment preferences willbeneeded, namelystandardisation vs. customisation ofproducts/solutions. More specificallyon retail investors from arising the investment andmanagetherisks ESGfactors. opportunities inthebestinterest to act duty oftheirclients/end-beneficiaries, andthereforefiduciary shouldbeequipped toseize will contribute to mainstreaming sustainability. Financial advisers, assetmanagersandinstitutionalinvestors have a Transparency, proportionality, aligned incentives between corporates andinvestors, andultimately performance assurance –may politicallybea and third-party ‘hard sell’ underthecurrent economic circumstances. Nonetheless, raising thebarfor disclosure for smaller, non-listed companies –withafocus ondoublemateriality to benefitfromor limittheirability private capital green orinnovativefor certain projects. financial information may assuppliers haveto large companies, anegative ontheirbusinessopportunities impact 4 , further analysis on(anddetailedguidance on how to, further cope with)thepotential www.worldcommercereview.com ecolabels for retail financial products. benchmarks, non-financial corporate credit ratings,reporting, andsustainability green bond standards and and non-legislative initiatives related to thetaxonomy, duties, low-carbon disclosure, andfiduciary suitability At theEUlevel, Plan theAction onSustainableFinance (March 2018) putforward anextensive listoflegislative themeinthe(post)COVID-19 andmarket era. willremain policy Sustainability anenduring Concluding remarks framework. policy, andhowon monetary to potentially integrate theseparameters inassetpurchase programmes orcollateral dimension,representatives from ofclimate-related risks theECBalludedto ofthesupervisory Outside theimpact and taxincentives linkedto taxonomy-eligible shouldbemore activities, carefully re-examined. Similarly,great policies, cautionandbeevidence-driven. other sectoral suchasadequate pricing, carbon subsidies The useofprudential regulation (‘green factor’ supporting or shouldbeexercised‘brown with penalisingfactor’) exposures to stranded assetsandany emerging differential. risk provide comprehensive technical advice. isessential to accelerate It on monitoring interconnected theefforts additionto adapting/upgrading AuthoritiesIn reviews, theirsectoral (ESAs) could theEuropean Supervisory channels. related to firm-specific data availability, methodological difficultiesandinsufficient mapping oftransmission www.worldcommercereview.com released in April 2020. released vsExpectations” Europe: inApril Reality ofadedicated series, ispart asafollow-upThis commentary Task to theCEPS–ECMI Force on“Asset Report Allocation in 4. At end-2019,thetotal financialassetsofhouseholdsamounted to €37trillion(EU-28). 3. At end-2019,thetotal assetsofinsurance companies fundsamounted andpension to €14trillion(EU-28). andAIFs2. At end2019,thetotal netassetsofUCITS amounted to €17trillion(EU-28). 1. Price-To-Book Ratio (P/B)andPrice-to-Earnings Ratio (P/E). Endnotes Cosmina Amariei isResearcher at theEuropean Capital Markets Institute (ECMI) explored.initiative ■ shouldalsobefurther recovery andgrowthsupport inEurope. From perspective, synergies apolicy union(CMU) withthecapitalmarkets inaconsistentsustainability mannerat theoperational level, andmobilisingsignificant private capitalflows to threeThe onthe next to fivereal economy, becrucialin oftheimpact terms years will certainly ie. translating societies asawhole. The current hasgiven crisis abrutalreminder abouttheneedto strengthen thepreparedness andresilience ofour implementation ofthetoolbox andsystemic implications. risk These willbecontinued withaRenewed Strategy (December 2020)focusing ontheoverall ecosystem, www.worldcommercereview.com The path to integration European integration. And we are by beingasked to act Christine Lagarde.Christine We have been passedthebaton of This isourgeneration’s crisis moment, Schuman says strengthening Europe www.worldcommercereview.com W prosperity, and peace. stability promised.they hadcreated that Schuman solidarity European thedefacto integration paved theway for Whenever our“concrete achievements” were threatened, we we didnotbacktrack: madethemstronger –because completed. (ESM), theECB’s Monetary Outright Transactions unionthat stillneedsto be andthebanking programme (OMT), institutions were establishedandnewinstruments were developed –suchastheEuropean Mechanism Stability And when theeuro members recognised was vulnerable that to thesinglecurrency self-fulfillingcrises, new competitive devaluations, we launchedtheeuro. not delivering inthe1980s, we launchedtheSingleMarket. When we realised was vulnerable to theSingleMarket andlarge,By thisisthepath that integration hasfollowed. When Europeans saw that thecommon was market reflected thedepthofthoseties. would become self-interest. And, thereafter, itwould become natural to buildstronger common institutionsthat Schuman’s ideawas that Europe neededto become sodeeplyintegrated –andsointerdependent –that solidarity facto solidarity.” e have the75 marked at once, oraccording builtthrough willbe to a singleplan.It concrete achievements whichfirst create ade towards deeperEuropean union. The declaration famouslymaintained that “Europe madeall willnotbe ofEurope’sanniversary response to that cataclysm: declaration theSchuman that setusonthepath th anniversary oftheendSecond anniversary World War inEurope, andthe70 th

www.worldcommercereview.com crises effectively.crises finds that a common shockisamplified byabout30%–meaningall countries haveact together to mitigate to large integration isthree timestighter withintheeuro area than withtherest oftheworld. As aresult, analysis by theECB Trade withintheeuro area accounts for 45%ofGDP. The success meansthat supplychain oftheSingleMarket terms ofhealth,buteconomically too. interdependent we have become. notallcountries are If cured from thiscrisis, theotherswillsuffer –andnotjustin The coronavirus pandemictoday isbothconfirming and testing thisthesis. We are seeingonce more how should be stronger be should common interest and the areas where Europe Europe where areas the and interest common to engage citizens in the process of defining our our defining of process the in citizens engage to The recovery presents a further opportunity, too: too: opportunity, further a presents recovery The www.worldcommercereview.com loan guarantees supporting firms firms could becalled.loan guarantees supporting and–inmore spending may increase, severediscretionary in further scenarios automatic –the stabiliserswillkick But thecosts continue ofthecrisis to and, rise aswe move willlikelychange: forward, theform offiscalsupport the fiscalsupport. GDP to more abouthalfofeuro than40%.In area countries, government guarantees makeupthelargest share of On thefiscalside, themeasures adopted intheeuro area sofarhave beenquite diverse, ranging from around 2%of the recovery andwe remain undeterred objective. indelivering onourprice stability inlinewithitsmandate.The ECBwill play itspart withinourmandateWe to support necessary willdoeverything fromneed to to providing shift enablingtherecovery. backstop support This willpresent anewsetofchallenges. However, whenitissafe to doso, Europe willhave to move response. phaseofitscrisis to thenext The focus will andjobs.capacity Banklendingincreased by almost €120billioninMarch, thelargest monthly flow on record. inastronger sector gapfacingfirms, positionto preventing plugtheliquidity the banking aneven lossof sharper andnational governments parallel, oftheECB,In have the actions European supervision dovetailed banking to put four largest countries are layoffs. work now schemesandgovernment-supported enrolling temporary inshort-time suspended, empowering astrong fiscal response to underpin wages andincomes. About 16%ofemployees inthe We have seensomeencouraging signs ofEuropean cooperation. State aidruleswere relaxed quickly andfiscalrules Europeans didinthepast? unprecedented inpeacetime –inaway that ourfundamental reflects common interest, asthosegenerations of thequestionweSo face today isthis:canwe respond to theeconomic shockwe are facing–whichis www.worldcommercereview.com climate targets. have to fillthegap.It makessense to usethis opening to accelerate thetransition to a green economy andhitour are alsolikelyto face ofweak aperiod private investment asfirms repair theirbalance sheets. Public investment will Let megive justoneexample: we have now experienced theconsequences ofasystemic ecological crisis, andwe theenvironment ofnottaking risks seriously. These are allareas together where isinourcommon interest. acting take aleapforward: to reimagine oursocialcontract, reconsider Europe’s strategic autonomy, andrecognise the Second, itwillhelpguideustowards theEurope we want to thecrisis. buildafter We have beengiven achance to sizeable andsymmetrical.swift, member states andcounter that ofdivergence. risk Given thefiscal needsalready onthehorizon, itneeds to be This underscores why acommon European fiscal response issodesirable. thegap First, itwillhelpbridge for economic divergence. to beable to respond we withgreater andexiting thiscrisis wideningasymmetries asnecessary. risk Otherwise, are responses. noundueconstraints onourpolicy Notallcountries have to inthesameway. react Buteachneeds We need, asaunion,to beprepared for thisfuture. Since nooneisto blamefor thiscrisis, we mustensure that there in2020alone.€1.5 trillion 10% ofeuro area GDP. This would puttheadditionaldebtissuance dueto thepandemicinrange to of€1trillion financing needsintheeuro area this year resulting from the recession andthe required fiscalmeasures may exceed The ECBestimates that –inourmediumscenario ofadrop inGDPofaround 8%–theadditionalgovernment www.worldcommercereview.com European Institute University isbasedonremarks Edition ofThe madeattheOnline State oftheUnionconferenceThis article organised by the Christine Lagarde isPresident oftheEuropean Central Bank I amconfident that we will recogniserise ourhistorical and to thechallenge.responsibility ■ Europe inresponse. allaround us. solidarity seeing ourdefacto And we are asthosebefore beingaskedto act, usdid, by strengthening sum:thisisourgeneration’sIn moment. Schuman We have beenpassedthebaton ofEuropean integration. We are and theareas where Europe shouldbestronger. The opportunity, recovery too: presents to engagecitizens afurther in the process ofdefining our common interest www.worldcommercereview.com consolidated annuitiesto finance economic a€1trillion How should Europe respond to theeconomic crisis? Reconstruction FundReconstruction Towards aEuropean Luis argues that Garicano theCommission issue reconstruction package www.worldcommercereview.com T oriented priorities. European Parliament’s resolution 17April , would seethemoneyspent (andnotlent) alongtheEUbudget’s future- (Garicanoand economica €1trillion reconstruction package Verhofstadt proposal, 2020).Our inlinewiththe Verhofstadt andIrecently proposed that theCommission issueconsolidated annuities(or ‘EU Consols’) to finance The timehas come for genuineEuropean spendingfinanced through European borrowing. To thisend, Guy be usedto generate more debtinmemberstates. three instruments (theESM,theEIB, SURE)intheEurogroup’s deal–namely, that European issuances shouldonly many countries, thiswould threaten to hampergrowth for decadesto come. operates underthesamelogic It asthe member states bondsbackedby shouldissueperpetual theirjoint taxcapacity. Given how highdebtlevels are in theirproposalNevertheless, would entail asubstantial increase to memberstates’ authorssuggest debt. Both environment, eliminate andsendastrong refinancing signalrisk, of European to themarket. unity They first highlighted that issuing at ultra-long maturities orperpetual would takeadvantage ofthelow-yield economic shouldbebasedontheissuance crisis ofcommon bondshasbeenslowly perpetual gainingground. After beingfirstproposed by Francesco Giavazzi andGuido Tabellini (2020),theideathat Europe’s response to the issue consolidated annuities(‘EUConsols’) to finance economic a€1trillion package. reconstruction examines thelegalandfinancialissuesaround thepossibleimplementationIt ofaproposal for the Commission to This column argues that thetimehascome for genuineEuropean spendingfinanced through European borrowing. states’ growth hampering debtrisk for decadesto come. bondshasbeenslowlyperpetual gainingground, butproposals that entail substantial increases to member he ideathat Europe’s response to theeconomic shouldbebasedontheissuance crisis ofcommon www.worldcommercereview.com legal andfinancialimplementational aspects. for Fund theReconstruction debate. inthiscolumn Buildingonourprevious Iexpand ontheproposal’s articles, Since then, thisproposal hasbeentakenupby theSpanishgovernment andisoneofthecontending landingzones (interest) expenses mustbepaidfor withnewrevenue sources at theEUlevel. We propose that to prevent any increases inthefinancial contributions ofmemberstates, theadditionalEU-level carried out by means of Article 122 (1) TFEU (1) 122 Article of means by out carried a swift recovery of the Union’s economy would be be would economy Union’s the of recovery swift a Fund that would secure the financing needed for for needed financing the secure would that Fund The establishment of a European Reconstruction Reconstruction European a of establishment The www.worldcommercereview.com put to usefour that have already beendesigned andproposed by theCommission: have beendiscussed(including theFinancial Transactions Tax andtheCarbon Border Adjustment we Mechanism), These newrevenues would beusedto pay theinterests ontheEUConsols. the potential sources Of ofrevenue that and €38billionayear. reluctance to allow thecreation ofnew, EU-wide modern streams ofrevenues that could between €26billion bring seven-year budget–amatter ofconstant –at bickering current levels. exchange, In we askthemto drop their The grand bargain that to we memberstates putforth isthat theycankeeptheircontributions to theEU’s next The economics (€1.0 per kilo), we canincrease(€1.0 perkilo), revenues by 25%to yield around €9billion ayear. year callrate. from a€0.8perkilo Applying themaximumcallrate allowed for intheproposed Regulation 2. Plastic-based contribution: theEuropean ofAuditors Court estimates thiswould amount to €7billiona growing more would to than150%withrespect 2017.Net, theETS entail €12billioninannualEU revenues. 2020). Fortotal annualrevenues reference, inPhase IVoftheprogram (WWF in2018,itgenerated €15billion, revenuesETS are themostvolatile ofourproposal, butwe can work with existing estimates of€20billionin would flow into theEUBudget. revenues inexcess oftheaverage amount memberstates received (about€8billion) inthe2016-18period ensure that theydonotloseany existing revenues, we follow President Michel’s February proposal: onlyETS 1. The Emissions Trading System today, (ETS): alloftherevenues from are theETS keptby memberstates. To www.worldcommercereview.com ballpark thecouponballpark oftheEUConsols: of fundingallow for? We seethree main precedents ofpubliclysyndicated long-term bondsthat could helpus Taking into account nature theperpetual oftheConsol’s principal, how muchleverage could thesenewsources at a 1% yield. It isthesovereignat a1%yield. It intheEU. bondwiththelongestmaturity 2. Austria in2017:Austria raised €3.5billionby issuinga100-year bond at a2.1%coupon, whichnow trades a 4.5%coupon. crisis. Five timesoversubscribed dueto the unprecedented context andnature oftheissuance, theypriced at 1. Israel in2020:Israel secured $1billionindollarfundingthrough 100-year bondsto combat theCOVID-19 due to taxrates. theharmonised states already have. However, we to would thisreduction beoffset expect by ageneral increase of revenues This would betheonlynew revenue to theEUbudgetthat would reduce existing revenues that member to theEuropean ofAuditors. Court in 2018,andapplyinga3%callrate onmemberstates’ revenues, would generate €12billionayear, according 4. Common Consolidated Corporate Tax Base(CCCTB): approving theCCCTB asproposed by theCommission billion (European Commission 2018). According to theCommission’s assessment, however, impact potential revenues could beasmuch€10 call rate ontherevenue estimates ofthe2018proposal, thedigital taxcould inaround bring €5billion. new revenue we propose that hasnotbeenformally proposed asanew ‘Own Resource’. Assuming a100% 3. Digital tax:the Commission’s 2018proposal for a3%taxonrevenue onlarge tech companies istheonly www.worldcommercereview.com resources andcoupon rates. With allthekeyfinancingfigures inmind, Table1shows theissuance potential ofdifferent combinations ofnew 2020). ECB’s we findit fair estimateto support, conservatively a2.5% coupon ontheannuities (Alogoskoufis andLangfield and notallat once. Putting into thisaside, account andtaking theabove, theCommission’s AAArating, andthe The first conclusion to draw from theseprecedents isthat ourtrillion would have to beissuedprogressively Table 1 New EUrevenues Digital +CCCTB ETS +Plastic ETS ETS +Plastic +DigitalETS ETS +Plastic +DigitalETS +CCCTB coupon, which now trades debtissuedat isthelongest-dated theEuropean at a0.7%yield. It level. 3. European (ESM)in2018:theESMissuedalmost€1billion40-year Mechanism Stability bondsat a1.85% Billion € 17 21 26 38 3,340 4,238 5,178 7,578 0.5% 1,670 2,119 2,589 3,789 1.0% 1,113 1,413 1,726 2,526 1.5% Interest rate 1,060 1,295 1,895 2.0% 835 1,036 1,516 2.5% 668 848 1,263 3.0% 557 706 863 www.worldcommercereview.com proves intergovernmental agreements are notaspeedyoption, asshown by the ESM,whichtook years to finalise. Time: we have eight months before isimperative seven-year fast. thenext Past It to act EUBudgetstarts. experience therefore seemslegallyunwise outsidetheEUBudget. ifleft Fund Resources toestablishing theReconstruction feed permanentlyearmarked Own it onthebasisofcertain would legitimately raise thequestion:isthisnotaparallel budgetto whichnoEUrulesapply? of The possibility Furthermore, thesize oftheinstrument would poseproblems asregards theautonomy oftheUnion’s law, asit the exception ispermitted (seetheFinancial Regulation). ‘assigned revenue’), butitisdifficult tosee Reconstructionhow a Fund couldfall into any ofthe categories forwhich assigned isnotpermitted. revenue:Externally inthe EU Budget, earmarking There are someexceptions (deemed difficulties: –asiswelland burdensome understood by decisionmaking now –butalsohasfour crucialimplementational in suchaway isnotonlyplaguedwithissuesregarding thelackofdemocratic accountability, judicialprotection such astheestablishment ofaSpecialPurpose assomecountries are currentlyVehicle proposing. Acting (SPV), When Fund, designing theReconstruction itisessential that we stay away from intergovernmental solutions EUprogrammesco-financing inlieuofnational authorities. Fund.Reconstruction The spendingofthefundwould bealigned withtheEUbudget’s priorities, alsopotentially long-term EUBudgetbegins in2021. issuing annuitieswhenthenext The proceeds would finance anew European Under ourproposal, theCommission would useitsexisting powers to borrow andwould inthemarkets start oroutsidethebudget? Inside www.worldcommercereview.com decision severely hamperstheEUbudget’s to issuedebtandcounter ability theeconomic effectsofthecrisis. provide creditors that theUnionwould themaximum degree repay ofcertainty itsobligations. However, the mandatorily request from memberstates inany year (today fixed at 1.20% ofGNI). The idea was that this would spending ceiling andits ‘Own Resources ceiling’, whichdetermines themaximumamount ofmoneytheEUcan This means that thetotal loansoutstanding inany given year mustbebelow thedifference between thebudget’s should fitwithinits budgetaryyearly ‘headroom’. Stabilisation (EFSM)was established, Mechanism theCommission decidedthat theentire balance ofitsloans ofthesovereignEuropean debt–alegacy –mustbechanged.2010,whentheEuropean debtcrisis In Financial At thesametime, to maketheFund treatment work withintheEUBudget, thecurrent ofoutstanding budgetary annuities, asisthe caseofsystemically higheryields paidfor by to theEFSFwithrespect theESM(ESM2019). conditions. private-law ordinary would surelyThis translate uncertainty into higherinterest payments for the the execution oftheguarantees andeven for thepossibility shareholders (thememberstates) to withdraw under toopen for unilaterally saidcountry change itsapplicablelaw. This could have onthefund’s animpact governance, the national law ofthememberstate inwhichtheSPVislocated wouldLegal apply, certainty: leaving thedoor ofthefund. purpose the very accounts (Eurostat 2019).Correspondingly, thegross debtofmemberstates would increase substantially, defeating fund, andtheguarantees provided to itby memberstates, would have to beconsolidated into thenational is negotiated, acentral accounting issuewould arise. For accounting purposes, thedebtissuedby theprovisional while theESM Treaty was beingfinalised–andestablishedaprovisional fundwhiletheintergovernmental treaty Accounting: even ifwe followed theexample oftheEuropean Financial Facility Stability (EFSF)–anSPVsetup www.worldcommercereview.com the appropriate way to finance the fromreconstruction Covid-19, an exceptional occurrence for whichnomember This temporality safeguard reinforces 122 (1) isnotonlypoliticallytenable butfurther ofArticle the validity TFEU as Council would beallowed to take, “in aspiritofsolidarity,” the“measures appropriate to theeconomic situation.” of theUnion’s economy 122(1) would outby meansofArticle becarried TFEU. utilisingthislegalbasis, By the The establishment ofa European Fund Reconstruction that would secure thefinancingneeded recovery for aswift How to setitupwithinthe EUlegalframework (assuming a7%GDPdrop from theeconomic IMF2020). crisis; headroom wouldincrease berelatively ofthebudgetary small: €26billiononlyamounts to 0.19%ofEU27GNI The consequences ofsuchachange would befelt immediately. Underourproposal, for instance, therequired debts. of thepayments would besimplyassumedby theUnion,in sameway member states assumetheir respective guaranteed inthebudget ofany given year, withonlythese counting towards Recourses ceiling. theOwn The rest ofthis,Because treatment we propose ofEUloansbeputto that rest, thisbudgetary andthat onlytheinterest be no specificimpediments canbe found intheEU Treaties. year shouldguaranteeparticular isthat whichhasto bepaidinthat year. Neitherdolegalconsiderations apply, as ishard toIt argue infavour ofthisdecisionineconomic terms. After all, theonlymoneythat thebudgetofa member state joint pro rata guarantees. forcing theCommission’s SURE programme to bebackedbeyond Resources theheadroom ceiling) (andtheOwn by ofit, theEFSMalone,Because withits€47billioninloans, consumes theentirety oftheEUbudget’s headroom, www.worldcommercereview.com out isjustified. This would allow theUnion to guarantee by ofthesinglecurrency preventing thefinancial stability Therefore, settingupaFund with whichfinancing operations carried andefficacy are that maximsestheefficiency moment inwhichallover theglobenational governments for are funding. extra looking toshall provide attain itsobjectives”. itselfwiththe meansnecessary As argued by Grundetal.(2020),thisisa obligation that is, however, nuanced by thefollowing 311 provision, Article TFEU, whichstipulates that Union “the 310 Under Article TFEU, theEUBudgetmustbebalanced andexpenditure mustequalrevenues. This isan Compatibility 310 withArticle TFEU cumbersome national procedures (see, for example, theBundesverfassungsgericht’s Lisbondecision ). it doesnotprovide for suchatemporality safeguard. And, third, and clausehingeson unanimity theflexibility First, itistoo broad asitdoesnotrequire anexceptional ‘economic situation’ to justifyitsdeployment. Second, 122(1) Article TFEU. ESM into theEUlegalorder. isnotaspoliticallyattractive Although legallysoundfrom as theoutset, itcertainly asthe better known clause’,‘flexibility asthebasis for the whichserved Commission’s proposed integration ofthe Providing along-term legalbasisfor theEuropean Fund Reconstruction would 352 require theuseofArticle TFEU, settingasidethelogica different of kind ofaction, European borrowing for loans. narrowerIts exclusively conception ofsolidarity entails loans. The gravity ofthecurrent situation, however, callsfor 122(2) Unlike theEFSMandSURE, Article astheEuropeanTFEU would Fund’s notserve Reconstruction legalbasis. promote“to economic, andterritorial social states.” amongmember cohesion, andsolidarity state isto blame. inthisway Acting would attain theUnion’s 3(3) goalsasestablishedinArticle TEU, mostnotably www.worldcommercereview.com perpetual maturity andtheself-imposedlimitscurrently maturity inplaceperpetual for itsvariousquantitative easingprogrammes. haveSome expressed concerns over for thesupposedimpossibility theECB to purchase EUConsols given their Compatibility with123 TFEU to memberstates inlight oftheoutbreak. forbeyond theachievement what isnecessary oftheinstrument’s goal:to provide, ofsolidarity, inaspirit assistance the Union’s priorities. Second, theFund’s establishment doesnotentail themutualisation ofexisting norfuture debt member states. Instead, itwould bemanagedby theCommission, theguardian ofthe Treaties, in accordance with safeguards are inplace to guarantee this isthecase. First, thefundanditsspendingwould notbemanagedby As longastheyare notincentivised isallowed. discipline, to setasideorreduce Unionaction budgetary Several indebt. incurring inthe enshrined ‘no bailoutclause’ meant memberstates to mustremain thelogic when ofthemarkets subject notingthat inPringle, measures. isworth ofJustice ruledthat theobligation theCourt take theseextraordinary It 122(1) Article TFEU is, however, anexception to thefamous ‘no bailoutclause’. musttherefore It bejustified to pandemic that affectstheUnionasawhole. provided. This isjustified given thelackofblameandmoral hazard, unlike inthesovereign debtcrisis, for a , thememberstates would notneedto “in for imposeconditionality aspiritofsolidarity” acting thefunds By Compatibility 125 withArticle TFEU –the ‘no bailoutclause’ temporary,are strictly andexceptional, innature. strain onmemberstates’further 122(1) takenthroughto highlight that Article actions finances.It isimportant TFEU www.worldcommercereview.com in charge ofeconomics andofdigitization Luis of the European is aMember Garicano Parliament, where heis Vice-President of the RenewGroup 282 (2) thegeneral economic policiesoftheUnion.■ TFEU: to support interpretation would change. This iseven more sothecaseinlight oftheECB’s asperArticle objective secondary At atimeinwhichpandemichasravaged ourUnion’s economy, itisdifficult to argue that the Court’s achieve itsgoals. ECB could, therefore, makefulluseofitspowers inaflexible way solongasthisdidnot exceed to what isnecessary by othercentraleconomic putforth situation onwhichdecisionshadto banks). betaken(includingtheactions The wide open,stating that inapotential review ofaprogramme’s legality, itwould takeinto account thecontext and Crucially, safeguards noexact to beputinplace by theECBwereIt deliberately thematter left defined by the Court. recall, to sell, theECBhaspossibility at any time, thebondsitpurchases. policies. At memberstates any from soundbudgetary should notde-incentivise conducting rate, would theCourt government’s to debt;andthat similarly itsactions, thelogic discussedabove asregards the ‘no bailoutclause’, Only two limits, 123(1) inrelation to Article TFEU, that purchase theECB shallnotdirectly the would apply: to accomplish ofmaintaining itsobjective price stability. Gauweiler and Weiss, policy, stated that theCourt theECB, isgranted monetary whenconducting broad discretion financing.monetary The ofJustice’sEuropean Court caselaw onthematter paints adifferent Inboth picture. thisreasoning goes,The risk, isthat by doingso, 123(1) theECBwould breach Article TFEU’s prohibition on www.worldcommercereview.com WWF, 2020. January WWF (2020),“Strategic The Potential The Spending: Untapped EUEmissionsTrading Of System To Fund Climate Action”. FundInternational Monetary (2020),World The Great Economic Lockdown, Outlook: April. for theEU” Grund, (2020), “Sharing S,LGuttenberg thefiscal andCOdendahl burden ofthecrisis:A Instrument Solidarity Pandemic org, 24March. Giavazzi, FandGTabellini (2020),“Covid Perpetual The ECB” By Eurobonds: Guaranteed Jointly Supported And Garicano, LandVerhofstadt, G(2020), “Toward AEuropean Reconstruction Fund” Of ESA 2010”.Eurostat (2019),“ManualDebt —Implementation onGovernment and Deficit August. Mechanism(2019),“InvestorEuropean Stability Presentation”, February. (2020/2616(RSP))”, 15April. European Parliament (2020),“EUcoordinated to combat action theCOVID-19 pandemicanditsconsequences February 2020”, February. European Council (2020),“Multiannual Financial Framework European (2021-2027),Draft Council conclusions of14 C-493/17, ECLI:EU:C:2018:1000,11December. (Grand ofJustice 2018,Weiss (2018),JudgementoftheCourt European of11December Chamber) Court andOthers. Bundestag.v Deutscher C?62/14,ECLI:EU:C:2015:400,16June2015. (Grand ofJustice (2015),JudgementoftheCourt European of16June2015,Peter Chamber) Court Gauweiler andOthers Resources oftheEuropean Union”. Journalofthe European Union, November 2018. Official No5/2018ontheCommission’s ofAuditors Opinion (2018),“ECA European Court proposal onthenewsystem ofOwn relating to thecorporate taxation ofasignificant digitalpresence”. SWD(2018)81final/2,March. European accompanying Commission Assessment (2018),“Impact theProposal foraCouncil Directive layingdown rules Alogoskoufis, Sand Langfield (2020), “Forever Europe: Perpetual Coronabonds to Finance theRecovery”, mimeo, April. References , VoxEU.org, 5April. . Project Syndicate, 15April. , VoxEU. www.worldcommercereview.com This article was firstpublishedonVoxEU.orgThis article www.worldcommercereview.com The European Commission hasbeen askedfor arecovery fund proposal. Massimo Motta and Martin Peitzfund proposal. see and Martin Motta Massimo programme that helpsrestructure theEUeconomy a unique opportunity to develop atrulyEuropeana uniqueopportunity An opportunity for An opportunity change www.worldcommercereview.com T immediate closures, firm especiallyinthose countries hithard andinapoorfiscalposition(see,by the crisis in We to seethisfunding proposal otherproposals painandmassive ascomplementary aimedat reducing short-term theoldeconomic landscape. instead ofpreserving restructuring The recovery fundmay beinstrumental for theeconomy to recover, butthisrequires andbold newdirections We to develop atrulyEuropean seeauniqueopportunity programme that helpsrestructure theEUeconomy. to usethisrecovery fund. well asmostoftheworld –hasentered. The European Commission hasbeenaskedto develop aproposal for how a newfundwiththevolume ofmore to than€1trillion helpovercome thesevere economic that crisis theEU–as However, 2020,theEuropean on23April Council agreed onaRoadmapto inprinciple Recovery andonestablishing through aidprogrammes by theindividualmemberstates. fundinghassofarbeenmostlyprovided term emergency nor instruments to Short dealwithitseconomic impact. The enoughto EUhas beencriticized theCOVID-19 for andfor crisis quickly notreacting providing neitheravision schemesshouldbeoriented towards to thestatus quoante. Support preserve thefutureimportant. andnottry for which(i)thevolume ofcross-border trade withintheEUislarge, across or(ii)externalities memberstates are ofsubsidiarity,Based ontheprinciple thiscolumn formulates two general to criteria those identify thesesectors: identify the ones which are most important to oftheEUeconomies.identify proper theoneswhichare functioning mostimportant neededby inthepresent mostsectors Giventrillion. circumstances, the substantial support itiscrucialto he European Commission hasbeenaskedto develop aproposal for anewrecovery fundofmore than€1 www.worldcommercereview.com et al.2020b). crisis. Here, we focus term oftherecovery (seealsoBénassy-Quéré onthepurpose fundthat goesbeyond theshort etal.(2020)makeaproposalBoot for how theEUcanchannelfunding to indistress firms becauseofthe COVID-19 governments andavoid shouldintervene massive closures firm islaidoutinDidieretal.(2020). particular, andBuendía2020). etal.2020a,Grund . 2020,Lamadrid Bénassy-Quéré The general argument why should not miss it miss not should economy and achieve long-run EU objectives. We We objectives. EU long-run achieve and economy crisis status quo. It is an opportunity to improve our our improve to opportunity an is It quo. status crisis forward-looking, and not aimed at restoring the pre- the restoring at aimed not and forward-looking, make the EU fit for the future. The fund should be be should fund The future. the for fit EU the make The Commission should use aid programmes to help help to programmes aid use should Commission The www.worldcommercereview.com Germany, Austria, , andSwitzerland. available to allcompanies). with thegovernments Lufthansa are anditssubsidiaries intalksaboutstate of support of AirFrance/KLMrecapitalisation insupport measures (whichalready andemployment benefitofliquidity support isacaseinpoint. FranceThe industry airline have andtheNetherlands already announced measures of mitigate thisrisk. schemesfor specific companies (e.g.support a for airlines), European programme for the can sector respective aid requires theapproval by theEuropean Commission. Since somememberstates have already approved national individualcompanies, competition, memberstates even thereIf support thoughsuch ofdistorting exists therisk elaborated onthisreason inour VoxEU andPeitz column (Motta publishedon18April 2020). for whentherespective features theirhomeindustries sector the support cross-border trade withintheEU. We An EU programme islikelyto reduce anddominoeffects by whichmemberstates competition escalate distortions cross-border trade, andenvironmental issueswhich spillover national borders. internalize thebenefits that would arise at theEUlevel. ofsupply, This includessecurity infrastructure relevant for Second, whenthere are across externalities memberstates, sothat anational programme would notfully European. suchasflights.This suchascarswell includesproducts asservices First, whenthere are whose affected sectors volume ofEUtrade issuchthat thescope istruly ofthemarket isat issue, sectors thereaid to are particular two circumstances underwhichresponsibility shouldbeat theEUlevel. Allocation ofcompetences between theEUand member states isdefined ofsubsidiarity.by theprinciple When Why anEUprogramme instead ofaidby forsectors states? individualmember certain www.worldcommercereview.com only firms fromonly firms somememberstates may receive aidwithin thesector. sector would beeligible inthatfor aid,all firms particular which would eliminate namely, asource ofdistortion, that Whatever are for sectors selected aid, anadvantage ofanEU-wide system compared to national programmes isthat fulfilling EU-wide suchasclimate objectives policy, as we argue below. would contingent hopefullyprevent on shouldalsomakesupport andanescalation ofaid. national go-it-alones It European solutionhere Arule-based (butalsosmallercountries andSlovakia). suchastheCzech Republic industry isanothercaseinpoint.The Germany, automotive industry Spain,France, have andItaly asignificant automotive hand withacommitment to introduce akerosene taxat theEUlevel. meetings andthusreduce thevolume shouldgohand-in- ofbusinesstravels. industry oftheairline Arestructuring tourism may taketimeto pickup, butabove allbecausephysical meetingsare likelyto bereplaced by virtual This planwould needto outlookwilllikelybedifferent account for that thecrisis, theindustry after as thefact objectives, avoids competition concerns, programme goals. andthusaligns withotherpolicy thesupport that iscompatible withtheEU’s planfor industry theairline andsupport forward arestructuring climate policy shouldbegiven any toIf thisindustry, support thenitwould bedesirable for theEuropean Commission to put before theCOVID-19 crisis, to that provide private could airlines offer aservice more efficiently? For example, governments why Alitalia, whichwas doItalian losingupto continue €2millionaday to well support support. liquidity that goesbeyond short-term industry national airlines. to support We finditdifficult tounderstand what isthe rationale for state into this intervention competition toSuch measures thedetriment ofotherEUairlines, willdistort andmay pushothermemberstates www.worldcommercereview.com good idea. or according to the strongest lobbying power, turnover not bea would certainly to thepre-crisis orproportionally basis, should bewellCriteria thought for out:assigning onafirst-come-first-serve itto andindustries support firms ofcompetition, andwould,distortions therefore, beinterested inavoiding them. intheconsultations since theymight intherespective to alsosuffer takepart sector fromdomestic industry preferences ofindividualmemberstates are for voiced. thecountries withoutasignificant isalsoimportant It Under theEUumbrella, several programmes sector consultations canbelaunchedafter to ensure different of theeconomy. many in somany firms industries, nor schemeswould itbedesirable for allthesectors to develop specificsupport While the recovery fund’s isalarge €1trillion sum,neitherwould itbesufficient to cover alltheclaimedneeds byso make Europe abetter place inthefuture? What guiding principles andwhat shouldbe pitfalls are to avoided? be And how usedto thisfundingbe can states etal.2020b). (seealsoBénassy-Quéré suchasclimateobjectives anddigital ones, orresilience intimesofcrisis, whichgenerate benefitsinothermember the resources or, externalities, may notbewillingto provide becauseofcross-country sufficient resources topursue andmay justifyaleadershiproleof society by theEuropean Commission. memberstates Individual may nothave that reasons from objectives are we competition linkedto policy EU-wide canalsothinkofotherpolicy Apart goals aid control andto includeexceptions to competition (eg. inmerger control) for many sectors. that overthe fact theyears theCommission has(ingeneral) beenableto resist therecurrent pressure to relax state would between memberstates. reduce horse-trading To someextent, ourtrustintheCommission alsocomes from One oftheadvantages oftheCommission playing acentral role indesigning aEuropean aidprogramme isthat it www.worldcommercereview.com whereby the party signing such aprocurementwhereby contract hasto theparty regularly prove that itisableto deliver asagreed in This may taketheform ofagovernment paying for theoptionto at procure products specified terms, certain formarkets capacities(asisalready reserve doneinenergy markets). to buildupcapacitiesthat willonlybeusedinunlikelyevents, there may beaneedfor government-sponsored global supplychainoutsidetheEUanddemandshockswithin theEU. Since private companies have littleincentives Another dimensionfor fundingprogrammes would beresilience regarding supplychaindisruptionsinthe certain proposal becauseofcross-border externalities. competition.countries Physical would distort ofafunding anddigital infrastructure build-upcould alsobepart Funding programmes should gobeyond fundingby inwhichselective funding only thoseindustries some programme. on climate objectives. For example, transfers for R&Dinemission-free ofthefunding vehicles could bepart Concretely, if, for programmes instance, are envisioned, for support thecarindustry theyshouldbebased achieve long-run EUobjectives. We shouldnotmissit. to improve status quo. isanopportunity oureconomy andnotaimedatlooking, restoring It and thepre-crisis The Commission shoulduse aidprogrammes to helpmaketheEUfit for thefuture. The fundshouldbe forward- transfer programmes islimited. specific societalgoalsandidentifying relevant sectors, willensure insuch that thepossibilities for horse-trading should beimproved that inthisrespect.Focusing andidentify are sectors ofEU-wide importance programmes on schemes, theCommissionWhen shouldidentify settingupsupport core competences andinfrastructures that www.worldcommercereview.com for theEU” (2020).“SharingGrund S,LGuttenberg thefiscal andCOdendahl instrument burden of thecrisis:Apandemicsolidarity VoxEU.org, 24April. T,Didier FHuneeus, MLarrain Keeping (2020), “Hibernation: afloat duringthe firms crisis” andSSchmukler COVID-19 Implementing aEuropean Pandemic Fund” Equity A,ECarlettiBoot E, E-HKotz, JPKrahnen, LPelizzon andMSubrahmanyam (2020),“Corona andFinancial 4.0: Stability reconstruct: Arecovery initiative” JPisani-Ferry, A,RMarimon,PMartin, Bénassy-Quéré LReichlin,DSchoenmaker, BWeder diMauro (2020b),“Repairand Europe needsmore thanoneinstrument” L Reichlin,HRey, JSüdekum,PTeles, MSchularick, NVéron andBWeder diMauro (2020a),“COVID-19 economic crisis: A,GCorsetti, AFatás,Bénassy-Quéré GFelbermayr, MFratzscher, CFuest, JPisani-Ferry, FGiavazzi, RMarimon,PMartin, References Peitz ofEconomics,School isProfessor andMartin ofEconomics at theUniversity ofMannheim isResearch Motta ProfessorMassimo at ICREA-Universitat Pompeu Fabra andat theBarcelona Graduate andculture. Suchcultural inthearts offersfirms canbe considered essential of forthesocialfabric Europe. ■ needsmayInfrastructure beinterpreted broadly. Thus, itisconceivable to have anEUprogramme that supports health. Such aEU-wide programme isessential to beableto respond whentheEUat large or faces ashockto security arises. case anemergency This appliesinparticular, ofthepharmaceutical andmedicalequipment sectors. to parts , VoxEU.org, 5April. , VoxEU.org, 20April. , VoxEU.org, 5April. , VoxEU.org, 25April. , www.worldcommercereview.com This article was originallypublishedonVoxEU.orgThis article Motta, MandPeitz (2020),“EUstate inthetimeofCOVID-19” aidpolicies ChillingCompetition.com, 31March. Lamadrid dePablo AandJLBuendía(2020),“A Fund”, Solidarity momentoftruthfortheEU:Aproposal foraState Aid , VoxEU.org, 18April. www.worldcommercereview.com Zachmann propose avaccines strategy for Europe to A long-term solutionto COVID-19 includesvaccine development. Reinhilde Veugelers andGeorg meet thechallenge offuture pandemics Racing against Racing COVID-19 www.worldcommercereview.com T herd to managethedisease. immunity vaccines. Given how difficultand costlyitis toengineer natural immunity, vaccines criticalare forhelping tobuild To stop theCOVID-19 pandemic, reopen theeconomy andprevent thepandemicfrom restarting, theworld needs The COVID-19 vaccine challenge economic costs. vaccines. Although substantial, thebudgetrepresents abargain compared to theavoided health,socialand meet thechallengeoffuture pandemics. We calculate thepublicbudgetneededto ensure supplyofCOVID-19 We theCOVID-19 vaccine schemeto tackle challengeandamoonshotprogramme propose astagedsupport to need to bemultipliedupseveralthese efforts times over. so that at leastonevaccine, andpreferably more, become available at large scaleandlow cost. Public budgets for The public fundingbeingputinto identifying COVID-19 through enoughprojects vaccines istoo limited to carry licensing and/orpriceand alsoto regulations balance compulsory withincentives for private firms. or price regulations are imposed. Public fundingisneededto reduce ofinvesting the risks invaccine development, Private life sciences companies under-invest invaccine licensing development, and/ especiallywhencompulsory need themat low cost. through thedevelopment pipelineinparallel. Vaccines shouldultimately bewidelyavailable to allwho pipelineto intheclinicaltrial guaranteeprojects at least onevaccine soon.More needto projects pass development ofhighfailure therisk hashighcosts rates. andcarries There are currently too few promising he fastdevelopment ofthelong-term solutionto COVID-19, ofvaccines butvaccine isanessential part www.worldcommercereview.com frequent is18months prediction hope that aCOVID-19 vaccine willbeavailable sixmonths, soon–mostoptimisticallyinthenext thoughthemost National andinternational have public authorities pledgedfundingfor treatments andvaccines. There ismuch stepped forward withplansto develop vaccines ortreatments for COVID-19. weeks ableto identify several promising vaccine drugmakersandresearch candidates. legacy labshave Start-ups, andputinthepublicdomain,meaningthat researchers quickly virus was were sequenced very withinamatter of But sofar, novaccines (ortherapies made available very early on early very available made week, helped by the genetic code of the virus being being virus the of code genetic the by helped week, The list of COVID-19 vaccine projects grows by the the by grows projects vaccine COVID-19 of list The 2 . 1 ) for COVID-19 have beenapproved by agencies. regulatory The genomeofthe www.worldcommercereview.com which efficacy needs tobe proved.which efficacy COVID-19, are more likelyto andexpensive pass thecritical phase3becausethere are not yet against benchmarks canrangeclinical trials from 20percent to 40 percent (Figure particular, 2).In vaccines for newdiseases, suchas For vaccines, the success rates are higherthanfor medicaldrugsingeneral intheend.getting asuitableproduct rates needsmany implythat society candidate substances at to theoutsetofclinicaltrials besufficiently sure of Figure 1shows that theaverage success rate for drugdevelopment isabout10percent to 15percent. The high-risk bycharacterised different probabilities ofsuccess, costs anddurations. andstrongly varying development ofadrugmight bestopped for technical, medicaloreconomic reasons. The different stagesare Drug development (for bothtreatments andvaccines) follows typically aclearpath (Figure 1).At eachstage, the The longroad to vaccine development scheme. successful development ofCOVID-19 vaccines intheEuropean Union,we propose anEUpubliclyfundedsupport this, andfunding, interms ofnumbersprojects withwhat iscurrently inthepipelinefor COVID-19. To ensure the We address thesequestionsby examining success rates andmatching projects from previous vaccine-development costs?production access andfairprices beensured withoutdiscouraging private developers? Who shouldfundthedevelopment and developed, onalarge scale? canavaccine quickly bemanufactured Will itbeavailable at afairprice? Can open But many questionsremain. Are there inthepipelineto enoughprojects ensure avaccine soon?Once successfully 3 . Success rates for vaccines that entered www.worldcommercereview.com ences. alsohttps://en.wikipedia.org/wiki/COVID-19_drug_development See successSource: Bruegel. rates Note: Reported are averages from sixreview studies, withtheminimum andmaximum values eliminated. For alistofthereview studies, seetheRefer Figure ofdrug development trajectory 1.Atypical 4 - www.worldcommercereview.com Source: Bruegelbasedonreview studies(seethe References). Figure 2.Success rates for trialsofdevelopment clinical for vaccines www.worldcommercereview.com marketing) approvalregulatory procedures, andtheyhave thecommercialisation and distribution (manufacturing, capability They have thefinancial resources for thesemore expensive stages, experience ofmanaging large and clinicaltrials typically take over. firms institutes orsmallfirms. At later stages, however, phase3and commercialisation, large particularly life sciences canbedoneby stagesofclinicaltrials researchers andearly research inresearchExploratory andthepre-clinical Who develops vaccines? much faster through clinicaltrials, withlower costs andhighersuccess rates substances –substancesRepurposed already approved for otherdiseases–canreuse pastresults go andtypically personnel, andnever onalarge scale. be madeavailable to somepatients. This ishowever onlyfor exceptional restricted cases, suchasfor medical Also, use, emergency allowing agenciescanauthorise vaccines that are stillintheprocess to ofclinicaltrials prove against. efficiency becausetheyare developed typically inresponsetracking to emergencies, withnoavailable often to benchmarks development addition,thetimespanforIn vaccine thantheaverage development to canalsobeexpected beshorter for drug large life onthemarket. sciences active firms The largest life sciences companies for vaccine (in production terms thelastfew hasbeen throughIn decades, amajor consolidation, thevaccine leaving industry only ahandfulof 7 . 5 . All regulatory authorities for authorities . All regulatory medicineshave fast-track procedures. Vaccines gothrough suchfast 6 . www.worldcommercereview.com more expensive stages, clinicaltrial publicfundingifprovided at all, isthrough with private co-funding developers. funding forExternal development isavailable mostlythrough for Particularly public-private thelater partnerships. development process. original applicants, butdevelopers canalsoacquire patent rightsby buyingorlicensing from the othersduring are patented onintheprocess. early The owners ofthepatents for successful drugs/vaccines might bethe Typically, platform substance) (how technologies to illnesswithacertain andmechanismsofaction treat acertain heavily inthisindustry. exclusive andensuring protecting property ownership theintellectual thepatent during lifetime. Patents are used As andclaimscanbeidentified indrugdevelopment, ownership clearly ofknowledge patents effective are in very exclusive ownership theycanobtainoftheright to usetheultimately approved substance ortechnology. themselves orthrough company partnerships. Their returns from investing invaccine development dependon the The vaccine development phases, doneby private typically companies, are fundedeitherby large life sciences firms are prominent funders. Also, biglife sciences companies provide somefundingfor vaccine research. Union through itsmulti-annual research programmes by university labsorresearch organisations. Funders includetheUSNationalofHealth,andEuropean Institutes National andinternational public research research fundstheinitialexploratory moneytypically phase, done often How isvaccine development financed? Janssen Pharmaceutica, currently hasthelargest numberofvaccine inpreclinical projects (Statista, trials 2020). of vaccine revenues) andPfizer Sanofi (Statista, Merck, 2020).Johnson&Johnson,through are itssubsidiary GSK, 8 . Philanthropists, Gates Foundation, suchastheBill&Melinda www.worldcommercereview.com for potential coronavirus vaccines Gates challengesby Foundation fundingnewfactories manufacturing to address isalready theselarge-scale trying throughout theworld to provide herd immunity. Avaccine madefor theworld hasnever beendonebefore. The Another challengeisthescaleat whichthevaccine, whenavailable, needsto beproduced andmadeavailable unfortunate, asa SARSvaccine could have helpedto accelerate thedevelopment ofaCOVID-19 vaccine. a coronavirus, was controlled four after months, impedingthedevelopment ofavaccine. hindsight, thiswas In forrepurposed COVID-19. quickly The 2003outbreak ofSARS(severe acute respiratory syndrome), alsocausedby First, there isnocurrent closesubstitute vaccine available from othercorona- orotherviruses, whichcould be Economist, 2020). On top ofthehighoverall failure rate ofvaccines, ofclinicaltrials COVID-19 posesspecificchallenges(The challenges Specific for COVID-19 vaccine projects number ofcountries. The EU, (https://cepi.net). through IMI,isalsoapartner Gates includethe (CEPI), setupin2017withatargeted financingpartners $1billionfund.Foundation anda Its Another recent majorfunderofvaccine development istheglobalCoalition for EpidemicPreparedness Innovations Investment Bank’s InnovFin DiseasesFinance Infectious Facility (IDFF). Associations fundingfor (EFPIA). andequity Debt vaccines andotherinitiatives isalsoprovided viatheEuropean between theEUandEuropean Federation(IMI), apublic-private partnership and ofPharmaceutical Industries Development (BARDA Authority ischannelledthrough theBiomedical Advanced ofthesepartnerships Research and theUS,publicpart In ). At theEUlevel thisischannelledthrough theInnovative Initiative Medicines 9 . www.worldcommercereview.com the market yetthe market large scale. However, theyface offailure ahigherrisk inclinicaltrials. There are nohumanDNAorRNAmedicineson for COVID-19. quickly Suchsynthetic vaccines befastervery shouldinprinciple andcheaperto at manufacture These developed, vaccines canbequickly asscientists onlyneedthevirus’s geneticcode, which was madeavailable forinstructions buildingproteins), ortheproteins/spikes that letthevirusenter into humancells. body’s immuneresponse. The ingredient active inthesevaccines canbethevirus’s DNAorRNA(thegenetic usenewer projects approachesOther focusing ongeneticallyengineered synthetic vaccines that activate the However,manufacturing. asitinvolves cultivating scaledup. live cells, cannotbequickly manufacturing forms ofthevirus. The advantage ofthisapproach isthat itiswell tested, includingfor withastock ofexpertise, vaccine. COVID-19 Some vaccine are projects basedonproven approaches to vaccines, whichusemodified existingNevertheless, technologies to develop vaccines andmanufacture canbeusedasaplatform for aCOVID-19 The World HealthOrganisation by March 2020hadidentified more than40promising vaccine projects COVID-19 The ofCOVID-19 pipeline vaccine projects specific population subtypes. COVID-19 through development. Vaccines developed through different approaches might alsobebetter suited to risks, eachapproach ofapproaches specific Because a carries willbeneeded variety to getasuccessful vaccine for current vaccine development projects. by theAppendix for on.See thegeneticcode early ofthevirusbeingmadeavailable more very information on (Thanh Le etal,2020). CEPI by theendofMarch hadidentified projects 78active The listgrows by helped the week, 10 . 11 . www.worldcommercereview.com developers for COVID-19. While research institutes stay mostlyconfined to theearly research stages, smallbiotech typicallead firms are the engagementNevertheless, invaccine development by companies large cannotbetakenfor life-science granted. providing itsadjuvant ‘booster’ technology to otherdevelopers, including Pfizer. eachwithsubstantial experience invaccineand Merck, development, are notyet involved, directly althoughGSKis developing aCOVID-19 withsmallbiotech vaccine, orresearch inpartnership organisations. GlaxoSmithKline (GSK) Among thelarge life sciences companies, andPfizer onlyJohnson&Johnson,Sanofi actively are involved in engineering technologies have never successfully beentrialled onhumans. but come at agreater ofnotgettingavaccine risk successfully through clinicaltrials, asDNAandmRNAsynthetic DNAtechnologyand Inovio inclinicaltrials. These approaches have aclearadvantage inspeedofdevelopment, technologies are for andCureVac themoment inthelead:Moderna are RNA) usingmRNA(Messenger technology The cover projects varioustechnological trajectories. Projects geneticengineering usingthenewer butriskier clinicaltrials. closest to starting or preclinical stages, at inclinical trials timeofwriting. butnoprojects CureVac project The German isprobably the which iswhenthemajordropouts occur (Figures 1and2).Europe has several research at projects theexploratory inMarch clinicaltrials 2020andhaveAll ofthesestarted thusnotyet produced results from patients, tests onactual Biologics inHongKong. Two have clinicaltrials mainlandChineseprojects alsostarted (asrecorded clinicaltrials started ontheClinicalTrials.gov website) intheUSandCanSino areandInovio Moderna Almost are, alloftheprojects at timeofwriting, orat thepreclinical stillexploratory stage. The to onlyprojects have 12 . www.worldcommercereview.com Based onfailure rates ofpastvaccine development (Figure projects 2),we how canpredict many projects Are for there andfundinginthepipeline aCOVID-19 enoughprojects vaccine soon? funding for COVID-19 vaccines. Development providing Authority halfoftheirfunding. Box 1provides ofwhat theEUiscurrently anoverview Johnson hasalsosecured enoughfundingfor the wholepipeline, withtheUS Biomedical Advanced Research and European publicfunding from theEuropean Investment Fund to cover itstotal development costs. Johnson& CureVacThe German to isanotableexception. project secure hadthegoodfortune asubstantial amount of It philanthropic funders. stages,the early if at all. All would have withlarge life to sciences seek partnerships companies, orwithpublicand capacity.manufacturing For thepreclinical research andexploratory fundinghasbeensecured projects onlyfor However, neitherhasyet secured fundingfor themostexpensive later stages, norsecured large-scale (fromthe USNational ofHealthandCEPI)Inovio Institutes CEPIandtheGates Foundation). theCOVID-19 underway, projects clinicaltrial Of fundingfor external phase1hasbeensecured (from by Moderna to besecured. companies donothave deeppockets, fundingfor external themore expensive later development stagesstillneeds capability. vaccine manufacturing addition,assmallbiotech andthat phase 3clinicaltrials lacklarge-scale In The few at are outby trials thetimeofwriting companies beingcarried that are smalland/orinexperienced in at leastonesuccessful vaccine. oftheCOVID-19 pipeline, clinicaltrial inorderneeded at thestart to have chance (say closeto 99percent) certain of 14 are www.worldcommercereview.com programmes. line for healthresearch emergency oftheHorizon 2020annualwork that theCommission maintains aspart diagnostics, therapeutics andvaccines. Arapid hasbeenmadepossibleby reaction thestandingbudget To respond to research COVID-19, theEUhasprovided fundsto anddevelopment support emergency of vaccines 2)andtheEuropean through IMI(seesection Investment Bank. through theHorizon 2020research thedevelopment programme hasalsoco-funded of (2014-2020).It Prior to theCOVID-19 pandemic, theEUalready provided €500millionfor vaccine and vaccination research • • enters-next-phase). tohumans expected begin in2021(https://news.ki.se/vaccine-development-against-coronavirus- - €3Mfor Sweden’s animaltesting on soon,withfirsttrials willstart project Its Institutet. Karolinska two were for apotential vaccine: respond to theCOVID-19 the18 research for pandemic. Of short-listed fundinginMarch projects 2020, €10million,subsequently increasedInitially to €47.5million,was provided for research to projects this call, withthesameamount to expected beprovided inIMI. by theprivate partners diagnostics. Preventive vaccines were explicitly excluded from thiscall. The EUprovided €45millionfor afast-track callforIMI inMarch 2020started ondevelopment projects ofcoronavirus therapeutics and Box 1.EUCOVID-19 vaccine funding www.worldcommercereview.com programmes to develop COVID-19 vaccines. On6March, CEPIcalledfor $2billioninadditional fundingthese 2020,CEPI(Coalition for January In EpidemicPreparedness ofprogrammes Innovations) announced thestart CEPI fundingandtheEUcontribution to CEPI contributed to CEPIviaHorizon 2020. • • our-activities/opportunities/apply-now-eit-health-covid-19-support €600,000. Vaccine anddrugdevelopment underthiscall. https://eit.europa.eu/ are See notsupported proposals for COVID-19 withrapid projects implementation. withupto EITHealthwillfundeachproject The European of Institute Technology to send 2020acallto HealthopenedinApril EITpartners mar-13_en startups-and-smes-innovative-solutions-welcome-2020- million, includesafast-track for coronavirus relevant proposals; seehttps://ec.europa.eu/info/news/ The March 2020round oftheEuropean Innovation Council Accelerator call, withabudgetof€164 months (https://www.adaptvac.com/news). vaccine. The company saiditaimsfor thevaccine to complete initialhumanclinicaltesting within12 ledby- €2.7Mfor Denmark’s aconsortium AdaptVac, for thedevelopment andclinicaltesting ofanovel 13 . CEPI’s total investment inCOVID-19 vaccine R&D, at timeofwriting, is$29.2million. The EUhas www.worldcommercereview.com cases will beonaverage four successful projects. To be99 percent sure ofgettingat leastthree different success enoughsubstances areIf brought forward to enablesuccess withaprobability of99percent, statistically there differences ineffectiveness inviewofdifferences or tolerance inimmunity for different groupsofthepopulation. pipeline, availability at low whichwould prices. impedelarge-scale vaccines Multiple would alsobebetter address challengeandwillprevent production address thelarge-scale monopolybargaining positionsat theendof pathwaysMultiple to avaccine asthiswillhelpto reduce are important, therisks. vaccines Multiple might also However, itisnotawinner-takes-all race inasearch for onesuccessful vaccine. Different vaccines might beneeded. preclinical phases. trial Costs andsupplyof thevaccine ofproduction are alsoexcluded. These amounts would cover onlyclinicaldevelopment approval, andregulatory research andnotthe early and arescenario inwhich21projects needed. to clinicaltrials around €2billioninthepessimistic starting the optimisticscenario ofneedingonlynineprojects full development ofavaccine associated witha99percent probability ofsuccess willbefrom €500millionin If thecost ofthevarious clinicalstagesareIf similarto thecosts for drugsingeneral be at leastonevaccine at theend, even inanoptimisticscenario intheUSsofar–five clinicaltrials –itisnot whenincludingtheChineseprojects havingyet sure started there will (optimistic scenario) (pessimisticscenario) and21projects are needed. With onlytwo COVID-19 vaccine projects willreach clinicaltrials COVID-19 thefinalstage(Figure vaccine that projects start 1),between nineprojects thereIf isaprobability ofbetween 20percent (pessimisticscenario) and40percent (optimisticscenario) that 17 , about 20 projects should start clinical trials in an optimistic scenario (taking theupperboundofsuccess inanoptimisticscenario (taking clinicaltrials shouldstart , about20projects 15 . 16 , thenthecosts covering the www.worldcommercereview.com small straightforward, explaining why theshare ofprivate R&Dexpenditure onvaccines compared to otherdrugsis andincentivesintervention for private firms. Yet, theprivate businesscase for vaccine development isnot Fully andattention focusing onCOVID-19 theirexpertise requires aproper balancingbetween government projects. not at allonthedevelopment ofavaccine for COVID-19, preferring to focus onothermore profitable development for avaccine, inorder to recover thecosts ofdevelopment, andrisk theywillonlywork withlimited resources or versa. private If life sciences companies donotbelieve governments willallow themto charge highenoughprices Companies developers candecide to from shift other, commercially more promising, work to COVID-19 orvice alternative possibleprojects. projects, willbalance comparisons thedevelopment to costs making againstthereturns andrisks theyexpect, development ofaCOVID-19 vaccine. Private companies andtheirinvestors, whendecidingto engageinCOVID-19 Compared to what issociallydesirable, private companies are likelyto underinvest orinvest too slowly inthe trillion. considered ofagloballossGDP6percent in2020(IMF, 2020)from COVID-19, thecost would beabout$5 COVID-19, whichwould beavoided ifthere was avaccine, isdifficult toappreciate. estimatesEven ifonlyearly are The socialvalue ofauniversally accessible COVID-19 vaccine ishuge. The health,humanandeconomic cost of The needfor publicsupport probabilities). This would increase thecost range to around €725million(optimistic)to €3billion(pessimistic). in apessimisticscenario (takenthelower clinicaltrials boundofsuccessprobabilities), shouldstart and 40projects 18 . www.worldcommercereview.com below the vaccine’s socialvalue: There are several reasons why theprivate profits to bemadefrom developing a vaccine willbedrasticallyCOVID-19 interesting for private drugcompanies, compared andcompared to thehighcost to andrisk, alternative projects. world aCOVID-19 vaccine itsodesperately needs, butthesereturns onaCOVID-19 vaccine might notbesufficiently This makesthepotential for market thesevaccines huge, andwould generate thereputational gainfrom giving the all inneed. communicable negative diseaseswithserious healtheffects, suchas need to bemadewidely COVID-19, available to case ofsuccess, butvaccines, compared greater to otherdrugs, might commercial carry risks. Vaccines for highly Private developers andprivate funderswillwant to becompensated by returns theexpected onvaccine salesin • • increasing thecommercial risks. prices. Commercial that theycannotnegotiate developers prices freely mustworry withgovernments, For thesereasons, COVID-19 vaccines are more likelyto bepurchased by government agenciesandat low vaccines for andpoor countries allsocialclassesinrich and thiswould require low fairly prices. towillingness pay. andcapacity Generating herd to eradicate immunity thepandemic requires access to be soldto thehighestbidders. These vaccines shouldbeavailable onthebasisofsocialneeds, notindividual implythatThese vaccines externalities for highlycommunicable diseasessuchasCOVID-19 cannotsimply andwhichhavein caseofanoutbreak, positive effectsagainstothers. immunity Patients willbemuchmore willingto pay for drugsthat helpthemdirectly, thanfor vaccines that helpthem www.worldcommercereview.com collaborate, witha commitment to supplythesuccessful vaccines to allcountries inneed. their own financial, medicaland research resources. The countries that are able to provide finance should countries mightIndividual betonacquiring foreign solutionswhen theybecome available, instead ofspending for aCOVID-19 vaccinein publicsupport compared to what isgloballysociallyoptimal. An additional concern isthat with publicintervention individualcountries might have anincentive to under-invest ofvaccine development andfairaccess shouldgohand-in-hand. public de-risking isthatthese interventions theyneedto bebalanced againsttheincentives for private developers. For thisreason, Some countriesSome have already licences saidtheywilllookinto for compulsory COVID-19 vaccines licensing, and/orcontrols ontheprices ofthevaccines. facilities, conditions technology onaccess ofthesuccessful to vaccines theproprietary through compulsory This cantaketheform public intervention ofpublicfundingdevelopment, fundingorprovision ofmanufacturing (Blanchard, 2020). isalsoneededtointervention have vaccines anddistributed to beingmanufactured allthat needthemandsoon that asocially-sufficient numberof vaccine are underdevelopmentprojects atasocially-sufficient speed. Public With private returns drastically below theCOVID-19 vaccine’s socialvalue, isneededto publicintervention ensure • other developers. It implies a significant uncertainty overother developers. impliesasignificant thesize uncertainty ofthemarket. It Finally, theexistence offront-runners inCOVID-19 vaccine development represents acommercial to risk 19 . The problem with www.worldcommercereview.com to increase fundingfor thedevelopment ofCOVID-19 vaccines successfully restrictions, even developed thoughtheEUanditsmembers are intheUSorChinaface export willing citizens cannot besure theywill belikelyto have affordable accessif vaccines to a vaccine soon,particularly assured yet ofpublicfundingfor thelater, more expensive stagesofdevelopment. As itstandscurrently, European Although Europe inthepipeline, hasprojects yet ithasnoprojects inclinicaltrials. European Most are projects not the later stagesofdevelopment, shouldtheysucceed phases. intheirearly backedbyChinese projects, theChinesestate, typically noneofthepreclinical have projects secured fundingfor With afew exceptions (includingCureVac, anddisregarding for now Johnson&andSanofi-GSK), the to through publicfundingofprojects theirlater, stagesofdevelopment. more-expensive projects, inorder to besufficiently sure that vaccines isa canbe commitment available quickly. Missing inparticular The current publicfundingwe have beenableto identify istoo limited to enableasufficient numberof competing areprojects neededto ensure multiplevaccines. (to have a99percent probability ofat leastonevaccine, usingtheupperboundofsuccess rates). Ideally, more successBased onpastclinicaltrial rates, are we clinicaltrials needed calculated that at starting leastnineprojects into gettingthem through clinicaltrials. there are publicfundinginitiatives, more are projects neededandmore publicmoneythancurrently shouldbeput Although thepipelineofCOVID-19 vaccine andpreclinical at projects theexploratory stagesissubstantial, and proposalOur 20 . www.worldcommercereview.com large-scale investments.large-scale bonds, whichcould usetheEUbudgetasafinancial vehicle to borrow andleverage fundsonthemarket them for One way to raise theamount ofmoneyto finance thescheme would be to buildontheideaof corona or recovery bedonewithintheEUbudget. typically of theschemewould helpreduce therisks, therequired substantial budgets are andabove nevertheless what could budget inthepessimisticscenario, orsomewhat more thanhalfintheoptimisticscenario. Even thoughthestaging billion inapessimisticscenario. The total isdriven upby inphase3,representing theprojects 80percent ofthetotal The total budgetrequired for theschemewould range from €725millioninanoptimisticscenario to about€3 in development ofaCOVID-19 vaccine. full publicfundingofthedevelopment costs, thusnotjeopardising theincentives for private applicants to engage technology willbemadefreely available for manufacturing. licensing wouldThis bebalanced compulsory by the Project proposers at eachstagewould have to agree whenreceiving anaward that onfinalsuccess, thepatented phase. Table 1setsouttheschemeofawards. probability. Public fundingwould cover the thecosts ofeachphaseandwould beconditional starting onprojects The aimwould beto identify at leastthree suitablevaccines at theendofpipeline, withmore than99percent organised asanopencontinuous isreached. calluntil numberofprojects the critical toof projects getaCOVID-19 vaccine through clinicaltrials. The schemewould involve ofawards aseries orgrants, To anEUfundingschemeshouldbeputinplace address to increase thepossibleshortfall, thenumberandspeed www.worldcommercereview.com Source: Bruegel(seeFigure 2) Table 1.COVID-19 vaccines publicfundingscheme phases, underoptimisticandpessimisticassumptions Numbers andamounts ofawards neededfor eachstageto ensure that at leastthree vaccines complete allclinical Approval phase Phase 3 Phase 2 Phase 1 Phase 3 Phase 2 Approval phase Phase 1 Pessimistic scenario (low success probabilites, highcost estimates) Optimistic scenarioOptimistic (highsuccess probabilites, low cost estimates) success rate Assumed 100% 90% 63% 32% 40% 85% 51% 20% €250 million €2.5 million €2.5 million €10 million €20 million €65 million €20 million €10 million Size ofthe award No. awards at this stage 10 18 40 25 13 5 6 3 €2,500 million €100 million €500 million €260 million €390 million Total cost of €50 million €45 million €30 million awards www.worldcommercereview.com Why would suchaschemebeneeded, compared to what theEUisalready doing? closely withtheEuropean Investment Fund withCEPI,inwhichitisalready apartner. andparticularly record inorganising fundingschemesfor vaccine development. ifitcancollaborate IMIcomes to mind, particularly only spelledouttomorrow. To save time, theorganisation withatrack oftheschemeshouldbedoneby anagency would beavaluable signalIt iftheEUwould already today commit to providing funds, even ifthedetailedrulesare pledging asubstantial share ofthetotal amount required. and philanthropic donors. to taketheleadinsettingupfinancing, ButtheEUshoulduseitscapacity by The EUwould nothave to bethesolefunder. With apledging event, apoolofmoneyfrom itcould collect public • • • order to generate multiple successful vaccines. funding from private sources cannot beassured for in that alltheprojects are at neededby thestart, society to secure fullfundingfrom private sources, butonlythosewithahighenough probability ofbeingfirst. Full stages incaseofsuccess, includingthemore expensive later stages. might projects have Some beenable Under ourproposal, contenders would that besure there fromisaschemeavailable the start for fundingall upfront. thatprojects reach the more expensive later phases. Staging would avoid theneedto commit large funds The division into different phases would meanthebiggeramounts onlyneed to beactivated for those requires publicfunding. biggerthannormal rather thanresearch isneeded, andnotonlyontheinitialstages, butthrough to theendofpipeline. This Compared fundedby to pipelineofprojects thenormal theEuropean Commission, afocus ondevelopment www.worldcommercereview.com addressing challenge. thiscritical ofthesuccessful anddistribution for vaccines. themanufacturing public support However, itdoescontribute to For COVID-19, that itiscritical vaccines shouldbeavailable at large scaleandlow cost. schemedoesnotinclude Our • • • • market power.market of vaccines at no/low licensing cost, avoiding prices from and marked-up with supplyrestrictions firms multiplevaccinesEnsuring at licensing, theend, combined withcompulsory willleadto acompetitive supply COVID-19 vaccine. by at leastsome countries, whichmight deter private companies from engaging inthedevelopment ofa licensing for surrounding theuseexlessens thecommercial postofcompulsory COVID-19 uncertainty shouldthereforeIt notreduce theincentives for applicants to engageinaCOVID-19 also vaccine project. It funding ofthedevelopment costs. competitive rates. market licensing isaclearconditionThis ex ante compulsory inreturn for thefullpublic licensing conditionThe willmeanvaccines compulsory become available for at anddistribution production failures ofclinicaltrial high risk andensure at leastthree vaccines. would reduceensure at multipleprojects multiple successful thestart the at projects theend. Supporting proposalOur doesnotbackonewinnerinitially, iscalibrated nordoesitbetononewinnerat theend. to It applicants canalsoapplysimultaneouslyto at thevarious callswithmultipleprojects different phases. out inparallel rather thanserially. the Offering awards inparallel would reduce the overall timeline. The same The schemewould berunasanopen,continuous call, notwithfixed calldeadlines, andwith awards given www.worldcommercereview.com COVID-19 vaccines, theinitiative shouldnotbecome a Europe’.‘fortress Although theschemewould beanEUinitiative EUfundsto activating ensure that EUcitizens have quickaccess to • • • the partners hasalready found avaccine.the partners each programme, reducing thefinancial burden. Suchnegotiations are easier to do ex ante oneof thanafter An agreement to cross-license final vaccine technologies would reduce neededunder thenumberofprojects cross-licensing agreements (withtheUSorChina). Having asignificant European instrument might provide leverage in ex-ante negotiations ofinternational runningtheschemeshouldseekoutinternational collaborationThe agency withothersimilarinitiatives. the EU. could ofthevaccines alsoplantheoptimaldistribution The to agency where theyare neededmostwithin time, even whenitisnotyet willbesuccessful clearwhichprojects at large scaleformanufacturing thesuccessful oftheschemeto save candidates. candothisfrom thestart It cansetupataskforce addition,theorganising agency In dedicated andfunding to findingthecapacity for the hopeofbeingfirst insearchto winthemarket ofmonopoly rents. shouldalsoremove It parallel theincentives imports. for private bigpharmaceuticals firms to goitalone, in scheme, to match willingness to pay withneeds, andto dealwithproblems ofsegmenting and markets alsoavoidsby allwhoneedit. It having to dealwiththecomplexity ofdesigning asociallyoptimalsubsidy The schemethusavoids theneedfor publicfundingex postto provide subsidiessovaccines canbebought 21 . www.worldcommercereview.com projects. Onecould easilyimagine abudgetofdoublethat for anEUmoonshotat ‘vaccines for thefuture’. ■ Foundation, Page) whichinsummer2018(together launcheda$12millionfundfor withLarry universal vaccine programme, butwould bebestdonewithinternational coordination, for example withCEPIortheGates This programme caninvolve grant anormal could bedonewithintheregular competition. It EUframework development, universal vaccines andbroad platforms for vaccine development. better prepared for pandemic. thenext researchThis would into support newandfaster approaches to vaccine additionto ofawards thisseries In to address COVID-19, we callfor amoonshotprogramme inorder to be apply to treatments forCOVID-19. Vaccines andtreatments are (seeEichenbaumetal, anyway complementary 2020). 1. This contribution ontheeconomics focuses ofthedevelopment ofvaccines, oftheanalysiswould also butmany parts Endnotes Reinhilde Veugelers andGeorg Zachmannare Fellows Senior at Bruegel • • coordination anddealwiththeCOVID-19 pandemic. would thusshow neededto theEUasabeacon timeswhenleadershipiscritically organise indark global vaccines itgenerates, notonlywithintheEUbutalsoto allthosearound theworld whoneedit. The initiative The EUwould have withthisschemeatool to licensing provide terms for thecompulsory thesuccessful to allocate thevaccines worldwide to where theyare neededmost. could alsocoordinateThis agency withtheappropriate organisations, suchasthe World HealthOrganisation, www.worldcommercereview.com coronavirus-2020-4/ Insider, 2020, available 3April athttps://www.businessinsider.nl/bill-gates-factories-7-different-vaccines-to-fight- is fundingnewfactories for7potential coronavirus vaccines, even though itwillwaste billions ofdollars’, Business 9. This donethough isbeing themoneycould wasted be ifvaccines are notdeveloped. BriannaMoné, See ‘BillGates magazine/frontier-research-service-coronavirus-epidemic-response 8. For alistofEU-fundedresearch projects onvaccines, relevant forCOVID-19, seehttps://erc.europa.eu/news-events/ with international coordination. Inserm. This example shows thateven phase3can donewithoutbigpharmaceutical be companies, andcan done be countries with severe COVID-19 inMarch infections, was 2020by theFrench started nationalhealth research agency anexception,7. As aclinical trialfortreatments forCOVID-19, plannedto involve 3,200patientsineightEuropean fullytrialledasaCOVID-19not been treatment. 6. Hydroxychloroquine, usedto treat malaria,isanexample seenby many asapotential treatment forCOVID-19. has It 5. For instance, Economist, ittook justten monthsforthevaccine 2020). to forEbola gofrom phase1to phase3trials(The costs andcommercialisation oftheproduction widely. stages vary phase maytake many years andinvolve many deadends. Alsonot includedare andcommercialisation. production The 4. The research andclinical phasebefore thepre-clinical development phaseisnotconsidered here. This exploratory studies, withthelowest eliminated. andhighestextremes years to complete, andhasanaverage 94%chance offailure.” The success rates we have usedare basedonalarge setof “Ingeneral,who reported: vaccine development from discovery to licensure can cost billionsofdollars, can take over 10 at thedifferent clinical example trialstages.An extreme isastudy by Pronker etal(2013),quoted Gouglasby etal(2018), 3. Fewer atthesuccess studieslook rates andphase, by leadingto type less-robust estimates ofsuccess rates forvac- cines coronavirus-vaccine-timetable-concerns-experts-invs/index.html Trump’s estimate, sayingitwould more be like ayear to ayear andahalf.” https://edition.cnn.com/2020/03/31/us/ See 2. “Dr. Fauci, Anthony theheadofNationalInstitute (NIAID),poured cold ofAllergy Diseases andInfectious water on www.worldcommercereview.com cepi/2-billion-required-to-develop-a-vaccine-against-the-covid-19-virus-2/ 17. CEPI’s ideal scenario isto have fundingforthree successful projects https://cepi.net/ attheendofpipeline: news_ €10 millionforapproval. inFiguredrug development reported 1:€2.5millionforphase1;€202,€65-2503and we16. As don’t have reliable estimates ofthecosts projects, ofvaccine-development we usethenumbers from general case cannot ofCOVID-19,possible thatisnotasclose as to society afford aprobability certainty. required fora99percent success rate. Five projects would already give a93percent success rate. We believe thatinthe optimistic scenario to an80percent success would probability require onlythree projects compared to thenineprojects 15. The number ofprojects neededincreases non-linearlywithrequired success rates. Inotherwords, gettinginthe available, we are aligningonthemostfrequent 18months. prediction ofabout onthelikelihood isfocusing 14. This ofsecuringvaccines. section Interms ofhow longitwilltake forvaccines to be https://cepi.net/news_cepi/2-billion-required-to-develop-a-vaccine-against-the-covid-19-virus-2/ 13. See andtheotherisfrom theWuhanAppendix), Institute ofBiological ofstate Products, owned SinoPharm. asubsidiary vaccine onClinicalTrials.gov clinical trialsinChina,butneitherisreported site, norontheInstitute’s more oftwo COVID-19 Englishwebsite. 2020,thestart on14April Inaddition,Xinhua reported funded by theShenzhengovernment. There isnoinformationavailable ontheirCOVID-19 vaccine projects on theWHO 12. The Chineseprojects two Medical are from ShenzhenGeno-Immune Institute, recently avery established institute, therapies andvaccines. information, developing andsharingcommon blueprints, andinternational cooperation to accelerate diagnostics, PDF?ua=1. The WHOisnotdirectly fundingprojects, butisinvolved ascoordinating international exchange of https://www.who.int/blueprint/priority-diseases/key-action/Novel_Coronavirus_Landscape_nCoV_Mar26.11. See The Economist (2020). 10. For amore detaileddescriptionofthevarious approaches, see, forexample, Cohen (2020),Thanh Le etal(2020)and . One ofthesetrialsisfrom. One Sinovac (seethe www.worldcommercereview.com study’, The Lancet GlobalHealth,6(12):Pe1386-e1396 Røttingen (2018)‘Estimatingthe cost ofvaccine development diseases:acost against epidemicinfectious minimisation Gouglas, D, TThanh Le, NHammersland, KHenderson, AKaloudis, TDanielsen, JMRobinson,PMHeaton andJ-A National Bureau ofEconomic Research Eichenbaum, MS,SRebelo, andMTrabant Macroeconomics ofEpidemics’, (2020)‘The NBERWorking Paper No. 26882, Science, 31March record-setting speed,Cohen, J(2020) ‘With vaccinemakers take theirfirstshotsatthenew coronavirus’, youtube.com/watch?v=9jSyhtYq_ME itwilltake to saveBlanchard, theeconomy from O(2020)‘What COVID-19?’ webinar, 6April, available athttps://www. References Foundation theGates 21. As isdoing;seefootnote 9. https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_20_664on 4May2020.See 20 European Commission president Ursulavon derLeyen shewould saidon15 April hostan“online pledgingconference” 41bea055720b treatment’, Financial Times, 23March 2020,available athttps://www.ft.com/content/5a7a9658-6d1f-11ea-89df- patent holder’s Paolo Donato consent. See ManciniandHannahKuchler, ‘AbbVie drops patent rightsforKaletra antiviral treatment, Israel licence after to issuedacompulsory useitagainstcoronavirus thatenablesthecountry withoutthe more easily. rightsforKaletra, AbbVie anHIVdrug assessedasaCOVID-19 being gave upitsglobalintellectual property 19. Germany, Canada, Australia andChilehave alltaken steps orare weighing upmoves licences to issuecompulsory (1993). 18. Establishedpharmacompanies onlydevote 5 percent about oftheirtotal R&Dexpenditures onvaccines. CCVI See www.worldcommercereview.com COVID-19: avaccines strategy forEurope’ isbasedonBruegelPolicy Contribution 07/2020,Veugelers,This article RandGZachmann (2020)‘Racing against 20(2):273-286 Wong, SiahandAW CH,KW Lo (2019)‘Estimationofclinical trialsuccess rates andrelated parameters’, Biostatistics 80 MSiatkowski andMMøller(2016)‘TrendsSmietana, K, inclinical success rates’, Nature 15(6):379- Discovery ReviewsDrug investigational drugs’, Nature Biotechnology 32: 40–51 Hay, M,DWThomas, JLCraighead, CEconomides andJRosenthal(2014)‘Clinical development success rates for thepharmaceutical industry’sproductivity: grand challenge’, Nature 9:203-214 Discovery ReviewsDrug Paul, SM,DSMytelka, CTDunwiddie, CC Persinger, BHMunos, (2010)‘How SRLindborg to andALSchacht improve R&D rates forinvestigational drugs’, Clinical Pharmacology &Therapeutics 87(3):272–277 JA, LFeldman,DiMasi, andAWilson, A(2010) ‘Trends ASeckler inrisksassociated withnewdrug development: success costs’, ofHealthEconomics Journal 47:20-33(2010) JA, HGGrabowskiDiMasi, Hansen(2016)‘Innovation and RW Newestimates ofR&D inthepharmaceutical industry: Sources usedfor clinical trialsuccess rates: canAnd itmass-produce itfairly Briefing, ifitdoes?’ April 16 The Economist many (2020)‘So candidates, solittletime:Can theworld findagood COVID-19 vaccine enough? quickly development landscape’, Nature Reviews, 9April Thanh Le, T, ZAndreadakis, AKumar, RRomán,STollefsen, COVID-19 vaccine andSMayhew(2020)‘The MSaville https://www.statista.com/statistics/314562/leading-global-pharmaceutical-companies-by-vaccine-revenue/ Statista (2020)‘Top 10pharmaceutical companies basedon globalvaccine revenues in2017and2024’, available at quantified’, PLoS ONE8(3): e57755 Pronker ES,TC Weenen, HCommandeur, invaccine (2013)‘Risk EHClaassenandADOsterhaus research anddevelopment . www.worldcommercereview.com Massimo Motta and Martin Peitz suggestimposingstrict and Martin Motta Massimo conditions onthestate aid that isneededto reduce the EU state aidpoliciesin the timeofCOVID-19 impact oftheCOVID-19 pandemic impact www.worldcommercereview.com S control state aid. withintheinternal andfor market, distortions thisreason theEuropean Commission hasbeengiven powers to for theEUcontext, national thereIn companies that creates isalsotherisk publicsupport trade andcompetition to theaimsitintendsproportional to achieve. believe that would themarket notresult inefficient and/orequitableoutcomes. Itshouldalsobe effective, and State aidto shouldbe used onlywhenthere firms are failures. market That is, whenthere are good reasons to member states. We created focus risks here by onthe severe state aidpolicieswhichare distortionary heterogeneous across EU The crucial issueishow to usesuchfunds–however theyare raised to –to European provide businesses. support response to (eg. thecrisis 2020). Galí thosemostaffected by the statescoronavirus –andinparticular outbreak – to raise funds for theeconomic policy recentIn days, alotofmediaattention hasbeendevoted to thedifferent instruments that may allow EUmember a level playing field for EU companies. EU-wide programme for sectors. critical Suchaprogramme would andmaintain prevent distortions market harmful conditionsThis onstate column aidfor suggestsimposingstrict recapitalisation andargues offirms infavour ofan particularly if they go beyond short-term liquidity provision liquidity iftheygobeyond oremployment short-term support. particularly programmesnon-harmonised across EUmemberstates generate ofmarkets, to risks thefunctioning serious tate aidisessential to reduce to long-runharm theEUeconomy asaresult oftheCOVID-19 crisis. However, www.worldcommercereview.com interventions, andto favour theireffectiveness andtheirincentivising nature. This framework already provides nature somelimitingprinciples, establishingthetemporary ofsuchpublic firms’ensuring access andfinance, employmentto liquidity and at (Europeanpreserving Commission2020a,2020b). linewiththis,In theEuropean Commission adopted a ‘Temporary Framework’ to state aidschemesaimedat to avoidnecessary long-runconsequences for European firms, workers, andtheirhumancapital. todepleting, obtainfunding. theirability undermining thereby further Thus, there are nodoubtsthat state aidis thecurrentIn situation, have markets disappeared onadailybasis, firms’ andinmostsectors assetsare rapidly principles should apply should principles equity was the chosen form of state support, similar similar support, state of form chosen the was equity a hybrid instrument allowing converting debt into into debt converting allowing instrument hybrid a should be the dilution for current shareholders. If If shareholders. current for dilution the be should The longer the participation of the state, the bigger bigger the state, the of participation the longer The www.worldcommercereview.com effect’. particular, In maintain theirhumancapitalintact. there are oftiltingthelevel therisks playing fieldandofa ‘domino There are several ifpublicmoney isusedwell risks beyond providing andhelpingthem to withliquidity firms instance inenergy transition anddigital agenda– aid whichallows to roll themoutmay exceptionally beallowed. postpone investment andinnovation plans. To –for objectives EUpolicy theextentthat suchplansmeetimportant consequences. For example, whichjustaboutkeepsupwithitspayment afirm obligations may have to abandonor may notbeenough,andlackoffinance may have support somecircumstances, liquidity In long-run short-run Commission 2020c). andemployment soasto includetherecapitalisation preservation, support ofbusinesses(Europeanliquidity The European Commission isnow framework ofthestate considering theextension well aidtemporary beyond offered by anEU-wide fund, soas to maintain thelevel playing fieldamongEU companies. this optionisnotfeasible at themoment, itwould have hadbeen interventions beenmuchbetter ifsuchliquidity provide to theirfirms, creating thesamelevelAlthough distortions. risk ofmarket ofsupport we understand the justified, iscertainly we note that ofliquidity notallmemberstatesWhile willbeable suchstateto aidinsupport not exceed 80%ofthemonthly gross salary. bill). Lastly, wage subsidiesgiven to workers should whichwould beenlaidoffbecauseofthecrisis have otherwise amounts (25%ofyearly notgobeyond turnover, shouldnormally the loanprincipal certain theyearly ortwice wage access to mostmeasures. Credit guarantees for loansbeyond €800,000cannotapplyto more than90%oftheloan; For instance, which firms were already by31 indifficulty December 2019,andhence before crisis, the cannot have www.worldcommercereview.com distribute dividends, andshouldnotengageinmergers andacquisitions. ourview,In which firms receive state aidmusthave constraints on theirmanagerial remuneration, mustnot conditions onto them. asmuchpossible andimposestringent state aidschemeswhichgobeyond andemployment liquidity support Absent aprogramme at theEUlevel, are hard distortions to avoid. The European Commission shouldthenlimit mayconditions thecrisis bedifferent after thanbefore it. goeswithoutsaying that anEUprogrammeIt shouldalsobewell targeted andtakeinto account that market a programme could theyoriginate bebeneficiaries, independently from. ofthe country European level, basedoncommonly agreed goals. addition,allcompanies operating covered In inasector by such programme wouldA trulyEUpublicsupport notsuffer fromrisks, these since fundingdecisions would be made at a states may betriggered, withsignificant waste ofpublicmoney. of theserivals come whichcanafford from ahomecountry offering state aidas well, asubsidy race amongmember As aresult, thelatter may berelegated to nichemarkets, oreven forced outofbusiness. Or, to theextentthat some more efficient rival companies. more generouslycompetitive, becomes artificially funded by itshomecountry to thedetriment ofotherequallyor or becausedifferent different states – support firm industries) competitionwillbenecessarily Athatis distorted. provided by somecountries andnotby others(for instance becauseonlysomememberstates canafford suchaid, are ina eligible onlysomefirms given If industry for aid, whileothersare not–somethinginevitablewhenaidis www.worldcommercereview.com disrupt theinternal withdramatic market long-runconsequences. thesedevelopmentsIf are notdiscouraged, we shallsee anunprecedented volume ofstate aidwhichislikelyto of EUantitrust andstate aidrulessoasto foster national champions. we shouldnotforget that even before thecoronavirus several outbreak, memberstates hadcalledfor arelaxation othercountries,In governments are alsoenvisaging publicrecapitalisationAnd ofairlines). (eg. offirms insupport support. programme. The government press that hundreds theGerman hasreported expects ofcompanies to seeksuch ParliamentOn 27March, theGerman ofitsstate alaw state aid enacted that ownership allows aspart partial tourism. crisis, conditions market willnotreturn to theex-ante status quoinmany and industries, includingtransportation to avoid that publicmoneygoesinto whichare andindustries firms unlikely to beviableinthelongrun. the After Further, andimportantly, acredible planshouldbeapproved restructuring before any suchrecapitalisation, also apply. instrument allowing converting should debtinto was similarprinciples thechosenform equity of state support, ofthestate,The longertheparticipation thebiggershouldbedilutionfor current shareholders. ahybrid If hasspread.rumour ofstate aidsupport of at most, say, two years. Shares hashitbutbefore shouldbeassessedat valuation thecrisis themarket after the state recapitalisation ownership,If takestheform ofpartial thisshould be temporary, andfullyrepaid aperiod after www.worldcommercereview.com COVID-19 outbreak”, Communication of19March 2020,C(2020)1863,OJC091Iof20.3.2020, p.1. European Commission (2020a),“Temporary Framework theeconomy forState inthecurrent aid measures to support Needs aCatastrophe Relief”, VoxEU.org, 11March. A,RMarimon,JPisani-Ferry,Benassy-Quere, LReichlin,DSchoenmaker andBWeder diMauro (2020),“COVID-19: Europe References Peitz ofEconomics,School isProfessor andMartin ofEconomics at theUniversity ofMannheim isResearch Motta ProfessorMassimo at ICREA-Universitat Pompeu Fabra andat theBarcelona Graduate therefore receive amongmemberstates. ■ widersupport Eurobonds isthat theformer would avoid themoral hazard problems somefear inthelatter case, andmay etal.2020).Akeyadvantage(Benassy-Quere ofanEUprogramme over national onesbackedby so-called thelegalconstraintsNotwithstanding to raise European debt, thisistherighttime to push for suchaproposal changeseven structural before andfaced important thecurrentimportance crisis. Such aprogramme attention that suchasenergy to shouldpay are sectors andmobility particular ofEuropean As believers intheEuropean project, we argue infavour ofawell-funded EUaidprogramme backedby EUmoney. that are thoseprinciples fully respected. Commission thetaskofstate aidcontrol. Now itisthetimefor theCommission to raise itsguard, andmakesure states favouring theirown companies. The Treaty introduced provisions to thiseffect, and awarded the European The founders that clearly theinternal shouldbeprotected market oftheEUunderstood from very member www.worldcommercereview.com This article was originallypublishedonVoxEU.orgThis article J(2020),“Helicopter The timeisnow” Galí, money: expandState aidTemporaryfurther Framework to recapitalisation measures”, Brussels, Statement/20/610, 9April. European Commission (2020c),“Coronavirus: Commission Statement onconsulting States Member onproposal to economy inthecurrent COVID-19 outbreak”, Communication of3.4.2020C(2020) 2215final. European Commission (2020b),“Amendment to theTemporary Framework the forState aidmeasures to support , VoxEU.org, 17March. www.worldcommercereview.com Dirk Schoenmaker argues Schoenmaker thatDirk governments can attach green conditions to aidto mitigate theCOVID-19 crisis A green recovery and accelerate thegreen economy www.worldcommercereview.com G form ofwage subsidies, taxandsocialcontributions relief, andloansguarantees viabanks. financialsupport, caused by theCOVID-19 ofcompanies. theeconomic pandemicdonotundermine viability State aidcantakethe The European control Commission (2020a)hastemporarily state-aid rulesto lifted ensure that thedisruptions andcircularcarbon technologies isover, thecrisis after andthusaimfor agreen recovery. and guarantees theCOVID-19 during crisis, governments could pushcompanies to accelerate theadoptionoflow- on theenergy andcircular transition attaching inthemedium term. By green conditions whengranting state aid But itdoesn’t have to bethisway. inEurope Governments, withtheGreen inparticular Deal, have beenworking environmental degradation are likelyto return whenthe lockdowns are and economic lifted growth resumes. levels of theCOVID-19 during lockdowns.because ofreduced thepre-crisis and transport Nevertheless, production contrast,By environmental isironically improving, performance emissionsandmaterials ascarbon usedecline (deteriorating health,reduced income andjoblosses). (Schoenmaker, 2020). The COVID-19 negative ontheeconomic pandemichashadasharp andsocialfronts impact Governments have multiplegoalsincludingeconomic growth, socialinclusionandenvironmental preservation to state aid. that way, In we canaimfor agreen recovery. losses usingpublicmoney. This column suggestscombining thesepoliciesby attaching green conditions rulesallowing governments state-aid lifted to steer companies through andto thecrisis minimisejob ambitious targets to reduce emissions. carbon Now inthemidstofpandemic, theEUhastemporarily facesovernment various challenges. Before policy theCOVID-19 the European outbreak, Unionset www.worldcommercereview.com (European Commission, 2020a). framework for oftheirtemporary green state conditions aidmeasures aspart theCOVID-19 during pandemic oftheinternal we market, the smoothfunctioning suggesttherefore that theCommission designs andmonitors for companies that receive state outcomes. willalsoaffect market aidwillchangetheirbusinessmodels. It To allow economicBoth andenvironmental for are companies’ viability important inthelongrun.Green conditions survival Green state aid companies through theCOVID-19 crisis. theCOVID-19after pandemicisended. Meanwhile, several to countries steer have packages pledgedlarge state-aid company limitingunnecessary failuresBy andjoblosses, theCommission aimsrightlyfor economic recovery aswift not viable in the medium term medium the in viable not sectors that are economically or environmentally environmentally or economically are that sectors should not provide state aid or guarantees to to guarantees or aid state provide not should To avoid repeating [past] mistakes, governments governments mistakes, [past] repeating avoid To www.worldcommercereview.com The following have sectors relatively andmaterial highcarbon footprints andSchramade, (Schoenmaker 2019): material-intensive to to keepbureaucracy aminimum. fully repaid, ofthe breach. dependingontheseverity We alsopropose to target that are keysectors and carbon- green test acompany ex post. If breaches theagreed green conditions, thestate aidwould have or to bepartly burden, governments canchooseto applyalight green test whengranting thestate aid, combined withatougher Companies are andneedto receive strugglingfor survival thestate aidquickly. To reduce theupfront administrative andcircular technologies.adoption oflow-carbon only promote ofcompanies, theeconomic viability butalsotheir environmental viability. This willaccelerate the thisway,emissions andmaterials thecrisis. usageintheirbusinessmodelsafter In state aidexpenditures willnot When granting state aid, governments shouldrequire companies to implement targets thesereduction for carbon materials inthenewCircular Economy Plan Action (European Commission, 2020b). targets are setfor thedesign andcircular ofsustainableproducts processes production to reduce theuseofvirgin and in2050by 100%(ie. compared neutrality), carbon with1990(European Commission, addition,new 2019).In The green conditions canbebasedontheGreen targets Deal to reduce emissionsin2030by carbon at least50% • • • Construction: manyConstruction: buildersstillusenon-recyclable andenergy-intensive materials, such ascement; many stillemploy manufacturers energy-Manufacturing: and material-intensive technologies; Transportation: road, are airandwater predominantly transport fossil-fuel driven; www.worldcommercereview.com Some high-carbon companies and sectors might companies finditdifficult and andsectors toadaptcircular tothenew high-carbon low-carbon Some From oldto new sectors green andSchramade, (Schoenmaker lendingcriteria 2019). environmentally alower Leading credit viablecompanies banksalready risk. carry have experience withapplying public guarantee) theCOVID-19 during crisis. The arguments underlying are thesame:economically and Banks cansetsimilargreen conditions loansto whenextending theirborrowers (withorwithout inthesesectors air travel andgreater usageoftrain travel. footprintscarbon by 50%by 2030. They canachieve by suchreductions offering theirclients more carbon-efficient Travel companies, suchas TUI, whichreceived €1.8billion instate aidfrom Germany, could beaskedto reduce their andcarbon-neutral aircraft.speed upthedevelopment ofsuchcarbon-efficient to speedupinvestmentaftercrisis, the aircraft manufacturers couldbe whileairline requested incarbon-efficient to Current examples includestate aidto theseverely affected andtravel airline industries. Airlines could be requested range. that thecompany accelerated car. thedevelopment ofanelectric GeneralMotorsnow carsinits hasseveral electric Global Financial Crisis. President Obama(2009)granted large sumsofstate aidto GeneralMotorsonthecondition the exampleAn during ofstate earlier aidwithgreen for carindustry theAmerican conditions was thesupport Examples • Energy: the shift from fossil-fuels theshift toEnergy: renewable gradual. energy isvery www.worldcommercereview.com large buildingandinfrastructure projects. Accordingly, governments canspeeduptheplanning andexecution of To speeduprecovery the GlobalFinancial after Crisis, several planningprocedures countries shortened to advance directed to theseareas.be (partly) and stimulating circular practices, construction whichalsorequire newlytrained workers. canalso Retraining efforts would beto expand public transit opportunities systems,Other includingaEuropean ofhigh-speedtrains, network energy transition ofstimuluspackages. by puttingcleanenergy jobsat theheart planning procedures, includingtheenergy, andbuildingsectors. Birol (2020)proposed transport to speedupthe There role isalsoadirect for governments themselves that rely insectors heavily onpublicinvestment and/or Model’ etal,2008). (Jespersen employmentand active policies. Together, thesethree components constitute asthe what isknown ‘Flexicurity The for Danish labourmarket, example, for isknown itshighlevel whenhiring, offlexibility social welfare system on helpingthepeople–retraining and findingnewemployment –andchanging thesystem. governments to isoften helpthe business that isintrouble and/orto protect thejobsinvolved, itisbetter to focus thesecases,In governments must usetheirresources to retrain theworkers. of reaction While thekneejerk economically orenvironmentally notviableinthemediumterm. To avoid repeating thesemistakes, governments shouldnotprovide state aidorguarantees that to are sectors inthe1990s.shipping sectors These received sectors state aid, whichonlydelayed theirdisappearance. environment. These (suchasthefossil-fuel companies are orsectors sector) reminiscent oftheEuropean and textile www.worldcommercereview.com March. Birol, F(2020),‘How to make theeconomic recovery from coronavirus an environmentally sustainableone’, Prospect, 24 References Schoenmaker isaNon-ResidentDirk Fellow at Bruegel ended. four Our recommendations to foster agreen recovery are: Governments are to rightlycompiling promote state recovery theCOVID-19 aidpackages after pandemicis aswift air travel) andcircular buildingprojects. (bothpower (replacing projects projects road generation and publictransport anddistribution), • • • • infrastructures. Speed upplanningprocedures for renewable energy, publictransit andcircular and buildingprojects technologies, andretrain theirworkers for newemployment; stateRefuse aidfor that companies are andsectors andcircular notableorwillingto adoptlow-carbon sectors; Apply similargreen conditions to bankloans (withorwithoutpublicguarantees) newandextended to these Apply green conditions to state aidfor and/ormaterial withhighcarbon companies footprints; insectors www.worldcommercereview.com This article was originallypublishedbyThis Bruegel article ssrn.com/sol3/papers.cfm?abstract_id=3567026 Schoenmaker, Caring Economy: BalancingProfit D(2020),‘The andImpact’, Working Paper. Available at:https://papers. Schoenmaker, DandWSchramade (2019),Principles ofSustainableFinance, Oxford Press, University Oxford. . american-automotive-industry-33009 30 March, Washington DC.Available at:https://obamawhitehouse.archives.gov/the-press-office/remarks-president- B(2009),‘RemarksbyObama, thePresident on theAmerican Automotive Industry’, Transcript ofPress Conference, Economics, 15(5):859-884. (2008),‘Costs marketDanish active labour S,JMunch,andLSkipper of Jespersen, programmes’, andbenefits Labour Communication from theCommission, COM(2020) 98final, Brussels. European Commission (2020b),‘A newCircular Economy Action Plan For acleanerandmore competitive Europe’, COVID-19 outbreak’, Communication from theCommission, COM(2020) 1863final, Brussels. European Commission (2020a),‘Temporary Framework theeconomy forState inthecurrent aidmeasures to support Parliament andtheEuropean Council, COM(2019) 640final, Brussels. European GreenEuropean Deal’, Commission (2019),‘The Communication from theCommission to theEuropean www.worldcommercereview.com to provide way thefunds neededisaworkable forward Pascual argue that Marimon using theESM andRamon EU memberstates are debating how to finance the fight against Aitor Erce,COVID-19. AntonioGarcia the COVID fight now The ESMcanfinance www.worldcommercereview.com M changes ingrowth orinterest rates debt unsustainable. could makeItalian area Greece. after Italy’s stabilising at levels debtdynamicswere suchthat even already small onaknife-edge, publicdebt.1. High As COVID-19 hitItaly, publicdebt, d, stood at 136%ofGDP, thesecond highestintheeuro of theeconomic suddenstop. case ofItaly, vulnerabilities, whichlimitfiscalspace thefundamental andmagnify reason theimpact ispre-existing Why willsomeEuropean countries beableto confront ontheirown thecrisis whileotherswillnot?Focusing onthe would bet. beinefficient, risky butasocial financial member states.resources allthenecessary from Gathering Europeto fight itwithoutthesupport notonly The COVID-19 pandemicoutbreak iscreating severe healthandeconomic emergencies andotherEU for Italy measures are notasupplement, butacomplement, to thealready feasible ESMfinancingdiscussed. The announced EIBguarantees andtheSUREunemployment willalsohelpcountries. re-insurance However, these ESM fundswould deliver amore resilient euro area, better placed to engageinapost-virus economic recovery. Financingannounced ESMRapid asanexample. with showing Instrument, Combing thecaseofItaly ECBsupport This column shows thestabilisation power usingexisting intervention, instruments ofanESM-ECB andthejust andinterestmaturity rates would strengthen debtsustainability. using theESMaccess to AAAfunding to reinforce theirdebtdynamics:acombination ofloansize, wayneeded isareasonable andworkable forward. Italy, Spainandotherstates would benefitfrom andreadilypractical implementable solutionsare needednow. Using theESMto provide thefunds ember states are currently debating how to finance thefight against Astimeis COVID-19. pressing, www.worldcommercereview.com costs amount to 3.6%ofGDPanditsannualgross financingneeds (GFNs) are over 25%ofGDP and low growth, g. implication Adirect isthat Italy’sItaly’s financing high. costs andneedsare very annualfinancing medium andlarge euroItaly isBBB-rated area largely countries, that asa thefact reflecting result ofitshighdebt, d, financing 3. High costs andneeds. 2019,Italy’s In ‘effective’ interest rate, r, was 2.7%,thehighestamong consultation). to bethe lowest intheEUover five thenext years, withestimated potential growth IV at just0.5%(IMF2020: Art 2. Low growth. 2019,Italy’s In growth rate, g, growth was to theIMFprojected 1.2%andprior Italian theoutbreak, or region or coronavirus overburdening any European country country European any overburdening coronavirus instruments, with a common goal: to avoid that that avoid to goal: common a with instruments, Support will take different forms and use different different use and forms different take will Support 1 . www.worldcommercereview.com following: shouldalsobeaccounted factors for,Other economy, orstrengths aseitherweaknesses oftheItalian suchasthe before interest d* equation: pb*≈(r-g) payments) satisfying thepublic-debt (r-g oftheeuro area was theonlycountry with(r-g Italy These three elements –highdandr,low g–are thekeyto Italy’s economic weaknesses. Before theCOVID crisis, )<0, butmustbereduced to arrive to astabledebt/GDPratio, balance pb*(thefiscalbalance d*,andaprimary • • • more limited thaninotherregions. profitability, excess capacity, andhighNPLs. theeconomic mayrecovery ofbanks be to support The ability Vulnerable banks. While bankshave buffers, builtsizeable capitaland liquidity many stillsuffer from low whilepresent, capitulation may risk, be lower thanin2010-13. so-called debt, itwillincrease overItalian time, anditwillbereinvested for theforeseeable future. This meansthat the investors. Nonresident addition,theECBholdsabout28% of investors under)30%.In now account for (just a large extent domestic. The goodsideofthis isthat domestic investors are lessfootloose thaninternational More committed investors now compared to thesovereign debtcrisis. The ownership ofdebtremains to Cautiously, balance of0.9%GDP. over theIMFprojects themedium term aprimary mayin thefuture consensus). bekeyto (itshouldbenoted maintain thehistorical that Italian EUsupport 2019). However, politicalfragmentation balance above may beanobstacle to 1%ofGDP maintain aprimary balances (1.7%ofGDPin balance hashistorically hadhighprimary isastrength.A highprimary Italy )>0. Hence, itsdebtwillnotdecrease withtime, asitwould with www.worldcommercereview.com sustainability underthebaseline,sustainability COVID-19 stress, andalternative ESMfundingscenarios). years amounted to roughly €1.83trillion, thesize ofItaly’s GDP(Table statistics from 2shows adebt keysummary additionto thelargeIn publicdebt, debtrollover was risk high,since debtmaturitiesaloneover four thenext shocks. Undertheseassumptions, Italy’sshock. publicdebtwas sustainablebutvulnerable to macroeconomic and market rate path, we medium-term interest project rates basedonthebenign conditions market prevailing pre-COVID the IMF(March 2020,IMFArt.IV ourbaselinescenario thereIn isnoCOVID-19 crisis. We adoptthesamemedium-term macroeconomic scenario as scenario:Baseline debtsustainablewithrisks Table 1.Macroeconomic andfinancialscenarios BASELINE COVID-19 Real GDPgrowth,Real % Inflation, y/y,Inflation, in% Primary balance,Primary %GDP Real GDPgrowth,Real % Inflation, y/y,Inflation, in% Primary balance,Primary %GDP ). As in described Table from theIMF’s 1,we onlydepart assumptionsontheinterest 2020 2020 -7.6 -0.2 -7.5 0.4 1.0 0.9 Macroeconomic variables 2021 2021 -4.0 0.7 1.0 0.9 5.2 0.7 2022 2022 0.7 1.2 0.9 0.5 1.0 1.0 2023 2023 0.6 1.4 0.9 0.6 1.2 0.9 2024 2024 0.6 1.5 0.9 0.6 1.4 0.9 2025-30 2025-30 0.6 1.5 0.9 0.6 1.5 0.9 www.worldcommercereview.com Source: ESM, Bloomberg and author'scalculations BASELINE Italy 1y Italy Italy 3y Italy Italy 5y Italy Italy 10y Italy COVID-19 Italy 1y Italy Italy 3y Italy Italy 5y Italy Italy 10y Italy COVID-19 +ESMOMT Italy 1y Italy Italy 3y Italy Italy 5y Italy Italy 10y Italy COVID-19 +ESMOMT aggressive Italy 5y Italy 3y Italy 1y Italy Italy 10y Italy ESM rates Italy 10y Italy 5y Italy 3y Italy 1y Italy 2025 2020 2020 2020 2020 -0.6 -0.7 -0.3 -0.5 -0.6 -0.7 0.0 0.2 0.6 1.0 1.0 1.5 2.0 3.0 0.0 0.2 0.6 1.0 0.4 1.0 Interest rates 2026 2021 2021 2021 2021 -0.6 -0.7 -0.3 -0.5 -0.6 -0.7 0.0 0.2 0.6 1.0 1.0 1.5 2.0 3.0 0.0 0.2 0.6 1.0 0.4 1.0 2027 2022 2022 2022 2022 -0.6 -0.7 -0.3 -0.5 -0.6 -0.7 0.0 0.2 0.6 1.0 1.0 1.5 2.0 3.0 0.0 0.2 0.6 1.0 0.4 1.0 2028 2023 2023 2023 2023 0.6 0.7 1.1 1.9 1.3 1.7 2.2 3.1 0.6 0.7 1.1 1.9 0.7 0.6 1.1 1.9 0.7 0.4 0.2 0.0 2029 2024 2024 2024 2024 1.1 1.3 1.8 2.7 1.6 1.9 2.3 3.2 1.1 1.3 1.8 2.7 1.3 1.1 1.8 2.7 1.5 1.1 0.9 0.7 2030 2025 2025 2025 2025 1.4 1.8 2.3 3.2 1.9 2.3 2.8 3.7 1.4 1.8 2.3 3.2 1.8 1.4 2.3 3.2 2.1 1.6 1.3 1.1 www.worldcommercereview.com show in Table 2. oftheeuroWhich area form take? should thefinancialsupport could manageablepath putitsdebtinaclearly inthemediumrun,asweInstead, Italy usingeuro area support oftheCOVIDin theaftermath andpossiblyendangerthe recovery. crisis balances above 1.5% ofGDP. hadsustainedprimary Italy However, costly canbesocially very fiscaleffort suchextra could balance, stabiliseitsdebtwitharelativelyOn itsown, Italy asithashadinitsrecent — high primary history additional €670billionofdebtover four thenext years. percentage points ofGDPperyear to 36%ofGDP. theItalian After theshock, Treasury would needto rollover an The annual gross financingneeds(debt maturities, interest balance) increase paymentsby andprimary over 10 large increase0.1% ofGDPinthebaseline—avery intherequired toensure ofdebt. fiscaleffort thesustainability ten years.the next We balance at 1.3%ofGDPover estimate thedebt-stabilising thecoming primary years, upfrom Table 2shows publicdebtjumpsto 162%andincreases theCOVD-19 that after shock, gradually towards 165%over of GDP. 7% ofGDPand, once recovered from theCOVID gradually improves shock, 1% ofnearly surplus towards aprimary bounces back in2021to +5%,andconverges towards amedium-term growth of0.6%. rises deficit to The primary Table 1shows ourmacroeconomic GDPcontracts to Real almost-8%in2020, scenario undertheCOVID-19 shock. for thedetailsofmeasures). guarantees of€25billionto amounting to beapproved €65billion,andasecond aidpackage (seeAppendix in April measures governmentThe amounting to Italian announced €24.7billionand inMarch ofsupport aseries COVID-19 scenario: path risky avery www.worldcommercereview.com Source: Author's calculations Table 2.DSAscenarios: mainresults + OMT COVID +ESM_120 + OMT aggressive COVID +ESM_120 03 April Euro group + OMT aggressive COVID +ESM_35 pre-COVID Baseline, + OMT COVID +ESM_35 COVID Scenarios ESM loan size (bn) 120 120 45 35 35 - - Debt 2020 Debt (% GDP) 162 162 162 162 162 162 137 Debt 2030 Debt (% GDP) 153 152 153 152 153 164 129 Cum. market 2020-24 (bn) funding 2.970 2.903 2.767 2.745 2.927 3.476 2.466 Avg. GFNs (% GDP) 30 29 29 29 29 36 25 Avg. PB*(% GDP) 0.1 0.0 0.1 0.0 0.1 1.3 0.1 Cum. interest 2020-30 (bn) payments 670 640 666 639 669 898 565 www.worldcommercereview.com is activated. On the back of ESM support andECB’sis activated. OnthebackofESMsupport assetpurchases, yieldsare we brought assumethat Italian back addition,weIn alsoassumethat theECB’s assetpurchase programmes continue asplannedand that the ECB’s OMT the ESMfunds, we consider thefollowing alternatives: We evaluate variousscenarios (Table 2)whichcombine different by theESMandECB. intensities On ofsupport activity. ECB support. We seethisasthefastest way to provide low interest fundingwhilethepandemicfreezes economic another euro debtcrisis. To address this, here we evaluate alternatives that combine COVID-related ESMloansand to fight, and making recover from, the doesnotbecome an excessiveCOVID-19 debtburden or, even worst, However, there isacrucialneedthat mustbeconfronted: to makesure that memberstates that theeffort are different and needs(firms indistress, workers healthsecurity, etc.) fortunately, seemsto bethecase. AEuropean Programme Recovery willrequire different instruments to address that iscritical theeuro areaIt shows itsdetermination, beyond by thealready theECB, expressed as, support reinforcesESM andECBsupport: debtsustainability • • basis point spread charged onitsstandard loans(Table 1shows theassumptionson ESMfundingrates). that theESMmaintains afundingstrategy withandaverage between 2and3years. maturity We assumea10 Loan interest rate and maturity. We assumea12-year witha5-year maturity grace period. We alsoassume . are Both well withintheexisting ESMfundsof€410billion. €120 billion(6.5%ofGDP),respectively. The smallerloanisinlinewiththemaximumsize proposed by the Loan size. We consider two alternatives: asmallerandlarger ESMloanof€35billion(2%GDP)and www.worldcommercereview.com particular, that ofgross thereduction financialneedsandinterest payments plays acrucial role. The upshot ofthesescenarios isthat Italy’s debtdynamicsimprove andbecome markedly sustainableand, in analysis evensustainability more favourable toward thebiggersize programme. ratesterm market inthescenario withbiggerESMloan.Needlessto say, thiswould maketheoutcome ofthedebt rates.a smallESMloan;inbothcaseswe usetheno-stress, pre-COVID-19 We could have assumedlower medium- A note assumptionregarding of caution.Our theprevailing rates market doesnotchangeinascenario withabigor programme, where 1-to 3-year bondyieldsare compressed towards thoseofFrance. aseparate In to scenario, levels similarto thebaseline(pre-COVID-19). we alsoconsider amore aggressive OMT • • • relative to ascenario without European support. GFNs considerably lower. Annual gross financingneeds drop by over 7percentage points ofGDPper year, points ofGDPrelative to thestress scenario withoutsupport. balance (PB*)drops by 1.4percentage thedebt-stabilisinglevel primary shock: similarto thepre-COVID19 Fiscal back to normal. effort neededThe tostabilisepublicdebtis annual fiscaleffort brought back toa inItaly’s reduction show debt/GDP. afurther ourmedium-term2020 to macroeconomic 152%in2030.Extending assumptionsinto thelongerterm would Public debtondecreasing path. fallsby Debt/GDP 10percentage points ofGDPfrom itspeakof162% in www.worldcommercereview.com What shapecould euro area coordinated take? fiscalsupport While following the last Eurogroup meeting, theuseof What are thedifferencesbetween Coronabonds, ESMloans andECBpurchases ofsovereignbonds? year and5-year assumed inourscenarios. maturity grace-period over considered €200billion(12%ofGDP) astheloanmaturity intheEurogroup proposal isonly5-year versus 12- However, thecumulative financingneeds market by the over Treasury thenext years (2020-24) would increase by broadly similarto the€35billionscenario analysed here. would entail a€45billionloanat 5-year maturity. The upshot ofthat scenario isthat the results would bevery regarding3 April thelatest Eurogroup proposal (negotiations are ongoing). The proposal by themedia reported additionto theseresults,In we alsoanalysed anESMscenario basedontheinformation leakedby thepress on • • • relative to ascenario withoutEuropean support. cumulative interest payments 2020-30fallby about€260billion,over 14percentage points of(2019)GDP Interest payments drop. Underthemostfavourable scenario, the withstrong ESMandECBsupport, fundingneedsthanthelatter.market (€35billionloanandlessaggressivesupportive ECB’s theformer delivers €182billion(10%ofGDP)less OMT), scenario (€120billionloanandaggressive Comparing themostsupportive support. ECB’s to theleast OMT) ispreferable.Stronger ESMandECBsupport There are differences amongthelevel ofESMandECB support. This massive improvement substantially reduces thecosts ofthe Treasury monthly issuance. the nearterm (2020-25)would drop by €730billion(about40%ofGDP)relative to ascenario withoutESM Debt issuance at manageablelevels for theItalian Treasury. The cumulative financingneeds market over www.worldcommercereview.com lending capacity, would dependon theagreed guarantee structure. ESM, where includescommitted thecapitalstructure capitalfrom covering highrating stockholders themaximum An alternative common issuance instrument islikelyto have astrong rating. Whether itwould reach thelevel ofthe average debtmaturity). PEPP program, there isa150basispoint spread between a7-year BTP Bund(7-year anda German isroughly Italy’s funding rates at analmostzero spread anditismore legallysecure (Pröbstl 2020).Currently, even undertheECB’s addition,fundingthroughIn theESMpresents somefinancialadvantages. The ESMcanpassonitslow (AAA-rating) area countries, whileSUREormeasures involving theEIBwould beat theEU level. –andratificationaspects that could last It shouldbenotedfor months. that theESMalternative involves onlyeuro contrast,In Coronabonds, even ifthere would bepolitical will, would require aprocess ofdesign –includinglegal will) could betappedwithoutdelays. could beavailable rapidly. The ESMisalready fullyoperational andhas€410ofavailable funds, which(withpolitical To facilitate thecomparison, Table ofeachfundingalternative. themainaspects 3summarises First, ESMfunding isobtainedusingsovereignwhich support markets. bondissuance andECBpurchases insecondary of common issuance (ie. theEuropean Fund) Recovery from anESMloanandfrom maintaining thestatus quo, in we explain thissection what differentiatesIn (andwhat doesnotdifferentiate) Coronabonds andsimilar forms currently onthe table. ESM resources appearsto bethepreferred alternative European for countries, ofalternatives northern avariety are www.worldcommercereview.com Eurogroup isready to agree onaccess to attached ESMwithoutstrings ifthefundingisfor theCOVID emergency if,particularly as inthecaseofItaly, theyare underpoliticalpressure. Against thisargument, itseemsthat the On thenegative side, accompanying theconditionality anESMloancanbeadeterrent for governments, lighter debtissuance heavy) ofItalian by the(alreadymarkets making very Treasury. Last, butnotleast, by replacing issuance by domesticDMOs, ESMloansreduce oftensions therisk onprimary by proposing oftheESMloansnothigherthanfive amaturity years. states (upto 35years). The proposal currently underdiscussionby theEuro group foregoes benefit thisimportant between two andthree years (at negative yieldsfor anAAA-rated issuer)andprovides long-term loans to member transformation maturity for apowerful memberstates.Second, ESMloansperform The ESMfundsitselfonaverage terms. ESM bonds. This comparatively lower islikelyto translate liquidity into more expensive andlesseffective financing A newcommon instrument, even ifdesigned of market to beAAA,would ofawell-established lacktheliquidity borrowing. according to theECBcapitalkeycould implyalower credit oftheguarantee, quality andthusmore expensive Under ajoint guarantee structure, therating ofthenewinstrument would besimilarto AAA.Instead, guarantees dilutes/defers any (Ghezzi concern market 2012a). about seniority could bewaived,seniority aswiththeESMprogramme to Spain in2012. Third, ofESMloans thelongmaturity the three following reasons. First, thesize oftheESM loanwould besmallrelative to thestock ofdebt. Second, ofESMloansis also seenbyThe someasa potential seniority problem. We believe to thisrisk bemanageablefor 2 . www.worldcommercereview.com can be used to support Italy,can beusedto oneofthemostCOVID-stressed support euro area countries. here. thiscolumn we In have exemplified how ESMloansandECBinterventions combinations of COVID-conditional However, thesemeasures are notasupplement, butacomplement, to thealready feasible ESMfinancingdiscussed help countries. ofthisprogramme.central part The announced EIBguarantees andtheSUREunemployment willalso re-insurance Preventing that theCOVID-generated sovereign –burden –crisis-ridden mustbea debtbecomes anunnecessary instruments, withacommon goal:to avoid that coronavirus overburdening any European orregion. country Centeno, President oftheEurogroup, willtakedifferent said(ElPaís 2020).Support , 4April andusedifferentforms the ESMandEIB–are now to reacting thecall, whichhopefullywillbecome “our Marshall Plan” asMário After theECBtook thelead, theEuropean Commission andtheotherEuropean institutions–inparticular, individual initiatives and first, isneeded. butthevirus hasnonationality European action that how isresolved thiscrisis theevolution willmark oftheEUandeuro area. countries Member have taken COVID-19 haschangedthelives ofEuropean citizens, at leasttemporarily, andthere iswidespread consensus Conclusions hit thecapitalkeylimitfor theborrowing country the euro area asawhole. Financing euro area countries through ESMbondsreduces thelikelihoodthat theECBwill the purchase of more ESMbondsandlessnational government bondscould bebeneficial for memberstates and Closely related issueare to thelimitssetby theseniority theECBfor itsassetpurchase programmes. particular, In 3 . www.worldcommercereview.com d/ Alternatives thatrely onjointandseveral guarantees (asinGiavazzi and Tabelliniaffectedbe less bythe of et al2020)will 2020orBofinger credit weakerquality guarantors approvalc/ Requires theparliamentary ofthree countries member Bini Smaghi(2020),Giavazzib/ See andTabellini etal(2020) (2020)orBofinger etal(2020)orErce Benassy-Quere etal(2020) a/ See Table 3.Principal features ofdifferent fundingstrategies Guarantee structure Beneficiary Cost Volume Payer Maturities Fiscal transfers Time to deploy Issuer Seniority Liquidity Availability Pari-passu, butECBpurchases Dependent on country rating Dependent oncountry Varies by memberstate. OMT can blockCAC recourse only upto three years depending onrating Established market, Established market, Sovereign bonds Readily availableReadily Issuing country Issuing country Issuing country National DMO Fiscal space None Yes No €700 billionincompromised waived and2)longmaturity Lending upto 35years Senior, but1)itcanbe Borrowing 1-10 years Established market Borrowing country Borrowing country defers seniority ESM bondsa/ €410 billion capital Yes c/ AAA ESM Yes No No (Giavazzi and Tabellini 2020), proportional to ECBcapitalkey proportional structure (almostAAAforstructure joint proportional to costs) crisis proportional All (in Bofinger etal2020 All (inBofinger All (in Bofinger etal2020 All (inBofinger Yes et al2020) (Bofinger Multiple alternativesMultiple d/ Depends onguaranteeDepends Corona/Euro bondsb/ Low (newinstrument) Euro area institution Several months Undetermined and several) Crisis costsCrisis Senior No www.worldcommercereview.com distress. forwhichpurchasesdiluting thebonds are relatively smaller. markets attimesof This onprimary could disruptliquidity 3. Euro area sovereign aggregation contain clauses. bonds two-limb ECBpurchases can reduce theireffectiveness by et al.2. Benassy-Quere (2020)andErce etal(2020)discusshow to designCOVID-related light conditionality. reduces rollover needs, thispositive effect was mitigated by higherinterest payments. 1. Inrecent years, Treasury theItalian increased theaverage duration ofpublicdebtto nearly7.5years. Although this Endnotes Institute (EUI) isProfessor Marimon and Ramon ofEconomics andPierre Werner Chair at theEuropean University a Visiting Fellow at LUISS, Antonio Garcia Pascual isa Visiting University, at Scholar SAIS,JohnsHopkins Aitor Erce works as an independent research advisor for the European Investment and is currently Bank alleviate fundingneedsover themarket years thenext oftheItalian Treasury. ■ would reinforceESM andECBsupport Italy’s publicdebtsustainability, confidence, support andfundamentally their preventive testing, preventive economic measures shouldberesolute. thesamewayIn that countries that have notbeenheavily hitwithby thecoronavirus shouldnotprocrastinate over not beusedasaneffective prevention crisis mechanism,whenit can. However, that theESMwas originally designed resolution thefact ascrisis mechanism,cannotmean that itshould There istheviewthat shouldbesaved theESMintervention for alater day, incasethatreally adebtcrisis emerges. www.worldcommercereview.com enact measuresenact forthecontainment andmanagementofthe emergency. (iv). Additionally, various ofthePresident Decrees of theCouncil and CivilProtection ofMinisters ordinances were usedto n.18/2020of17th March(iii). Law Decree (“Cura Italia” decree). n.14/2020of9thMarch(ii). Law Decree (strengthening thehealthcare system andcivilprotection). n.9/2020of2ndMarch,(i). Law Decree containing measures for families, workers andbusiness. Here are government plan: thedetailsofItalian fiscal support fiscal Italian packageAppendix. Pröbstl, J(2020),ESMloansandCoronabonds: Alegalanalysisfrom perspective”, theGerman VoxEU.org, 4April. 24 March. Giavazzi, FandGTabellini (2020),“Covid Perpetual Eurobonds: by guaranteed Jointly theECB”, andsupported VoxEU.org, Ghezzi, P(2012b),“ECBlimited ittakes’”, andconditional lendingisnot‘what VoxEU.org, 19August. andtheSpanishbailout”, seniority Ghezzi, P(2012a),“Debt VoxEU.org, 23June2012. 25 March. Erce, Pascual A,AGarcía andTRoldan(2020),” The ESMmust helpagainstthepandemic:The case ofSpain”, VoxEU.org, disaster, Europe must demonstrate financialsolidarity”, 21March. Bofinger, Dulline,P, S G Felbermayr, MHuther, JSudekum andC Schularick, M “ToTrebesh (2020), avoid economic Bini Smaghi,L(2020),“Corona –great bonds ideabutcomplicated inreality”, VoxEU.org, 28March. Schoenmaker, PTeles andB Weder diMauro (2020),“COVID-19: Aproposal fora Covid Credit Line”, VoxEU.org, 11March. AFatás, A,ABoot, Bénassy-Quéré, MFratzscher, CFuest, JPisani-Ferry, FGiavazzi, RMarimon,PMartin, LReichlin,D References www.worldcommercereview.com This article was originallypublishedonVoxEU.orgThis article announcedbeen by PMConte 2020,amounting to €25billion. forApril This adds to around €24.7billion direct measures andabove €60billioninguarantees. Inaddition,newmeasures have amounts offundingorguaranteeing involved, are thefollowing: ofFinanceFrom presented by theMinistry thesummary ontheirwebpage, themeasures taken, presented alongwiththe • • • • • €45.5 billion. Additional central measures andlocalpublicadministrations, to support includingmunicipalities, are worth Suspending taxpayments andproviding taxincentives for workers andbusinesses(1.6billion) Pumping to helpbusinessesandhouseholds(5.1billion+60.5inguarantees). liquidity Preserving employment levels andincomes (10.3billion) Strengthening theNational HealthCare System (3.2billion) andtheCivil Protection Department www.worldcommercereview.com big data, andwhat policiescanmitigate any limitations on COVID-19. JScott Marcus asksto what extentcan digital technology help, whatare risks there inusing All available resources needto be brought to bear Big data versus that impose? theserisks COVID-19 www.worldcommercereview.com recognition asahumanright. ofindividualprivacy Union implements theGeneral Data Protection Regulation(GDPR) (European Union, 2016),whichisbasedonthe However, useofpersonallyidentifiable data inmostdemocratic, is restricted developed countries. The European Privacy challenges for helpintheevent ofemergencies (seeMarcus, 2010;Marcus, 2014). improve thislocation information, asameansofimproving primarily withwhichmobileuserscancall theaccuracy Many countries have worked withtheproviders andinfrastructure to progressively ofcommunication services your knows mobile network location, whetheryou are orroaming inyour internationally. homecountry Location data from mobiledevices hasbeenanarea ofintense interest for governments inthepastfew weeks. The A great dealofCOVID-19-relevant information ispotentially available inthedigital world: Information that could madeavailable be • • • Consumers who seek healthinformation might voluntarily provide additionalinformation. provide location information; Users provide ofmobile networks to information receiving necessary andpaying for and also theservice, (age, sex) andlocation; Users voluntarily ofsocial networks provide extensive personalinformation, usuallyincludingdemographics www.worldcommercereview.com data, how longdata willberetained, andmore. user mustbetold how the data willbe used, itwillbeprovided to whichthird andhow parties theywillusethe For commercial useofpersonallyidentifiable data, theGDPRputsanumberof common-sense rulesinplace. The promoting(European economic Union,2018and2019). efficiency level available encourage actively information ofnon-personaldata andpublicsector themaking asameansof The useofdata that isnotpersonallyidentifiable isingeneral unrestricted, andseveral legalinstruments at EU a deepthreat to thelives andsafety ofEuropeans. framework isrelatively inflexible. becomesThis lackofflexibility obvious now, whenanimble responseisneeded to That theEUhasadopted acoherent overall horizontal framework isgenerally for positive; however, privacy the COVID-19 crisis COVID-19 different ways in helping the EU address the the address EU the helping in ways different Big data can play a constructive role in many many in role constructive a play can data Big www.worldcommercereview.com (possibly infected) individuals;and(3)theprovision ofadvice to concerned andpossiblyinfected individuals. There are three mainforms ofusethat have beenprominent to date: (1)strategic of planning;(2)thetracking Ways inwhichbigdata usedto hasbeen date useful to onsomeoftheusecasesinwhichbigdata reflect hasbeenapplied. orderIn to understandhow thesebroad interact withlikelyneedsinterms principles ofcombatting COVID-19, itis Common inmostdeveloped practice democratic countries involves somecombination oftheseelements: enforcement, whichisamember-state competence. The GDPR’s scope doesnotcover useofpersonallyidentifiable data collected by governments oflawfor purposes • • • that there are valid grounds theindividual, to for suspect instance ofapastorlikelyfuture crime. of proof ofneedmustbemet. Typically, suchasamagistrate anindependent mustbeconvinced third party order dataIn to that collect ispersonallyidentifiable andthat content,contains actual highstandard afairly to whohasbeencalledfrom atelephone orinternet device) andfor userlocation data. modeststandardmeet afairly ofproof ofneed. This tends to bethecasefor calldata records (anindication as order dataIn to that collect ispersonallyidentifiable butthat contains no content, must publicauthorities any restrictions. Data that isnotpersonallyidentifiable (includinganonymised data),to ornon-personaldata, issubject few if www.worldcommercereview.com This serves to demonstrateThis serves that bigdata canplay acrucialrole invaluable analyses. researchers extrapolated from 1.7billionrecords of2018travel records recorded merchant by e-commerce TenCent. To estimate between Chinesecitiesaround mobility ChineseNew Year in2020),the (whichwas 25January all Chinesecasesnationwide were from infected 10–23January by were peoplewhose infections undocumented. Nonetheless, becausesome 86%ofcasesprobably went unreported, theyestimated that between 82%and90%of documented cases. authors found that undocumented cases(ie. were casesthat hadnotbeenreported) onlyhalfascontagious as degree to whichindividualswhowere to beinfected notknown contributed to thespread ofthedisease. The As anotherexample, ananalysis oftheevolution to the clarify ofthediseaseinChina(Li etal2020)may serve 2020a). [the doctors, nurses, inthefield] withintelligence andpublichealthpeople to anticipate themove (Waltz, oftheenemy” According to theleadresearcher, we doascomputer scientistsandcomputational isprovide epidemiologists “What that additionaldata from canalsobeintegrated. socialnetworks provided by national authorities, andonintegration withairtraffic data provided bythe OAG database. Thehopeis ofairtravelfunction and commuting patterns. draws casesanddeaths It onstatistics onthenumberofknown for example,Epi-risk, is apredictive modelthat looksat how thediseasemoves from to anotherasa onecity analysis,prediction, andstrategic planningfor national governments andnational healthauthorities. One ofthemostimmediate andmostpromising usesofbigdata incombatting COVID-19 hasbeenasameansof Strategic planning www.worldcommercereview.com respiratory syndrome (SARS)epidemicin2003,andbenefitted from ahighlevel ofpreparedness. among thecountries initiallythought to bemostat risk. They valuable hadlearned lessonsfrom thesevere acute Taiwan is generally credited ashaving implemented effective measures to contain despite being COVID-19, Tracking ofindividuals anonymized, thisisclearlylegal.” (Reuters, 2020). advocate that, Austrian “As Schrems privacy observed Indeed Max longasthe[mobilelocation data]dataisproperly quarantine orders.” (Reuters, 2020). locationKorea, readings to trace whichusesmartphone thecontacts ofindividuals whohave tested positive orto enforce This approach canbesaidto bemuch“less invasive thantheapproach taken by countries like China,Taiwan andSouth data, oruseanonymised data. This avoids concerns. mostifnotallprivacy A common feature ofallthesestrategic usesofbigdata isthat theygenerally donotrely onpersonallyidentifiable can beusedto estimate theeffectiveness ofsocialdistancing(Reuters, 2020). tool that ismore usedtointo estimate typically athird-party how crowded area willbecome, aski butinthiscase on whichthefirstcasein region was identified. In A1 Austria, Telekom Austria Group is data feeding mobility movements exceeding 300-500metres intheLombardy region are down by some60%since 21February, thedate Italy,In data provided by operators mobilenetwork Telecom Italia, Vodafone and WindTre demonstrates that complying withrequests ororders to stay at home. operators. data from Deutsche Mobility Telekom isusedto estimate thedegree population to is whichtheGerman Strategic andGermany hasusedmobilelocation planninginAustria, data provided Italy by mobilenetwork www.worldcommercereview.com website to enablediagnosis ofCOVID-19 at scale. address possibleproblems inperception. apress In conference, Trump would saidthat incorrectly Google provide a for thevirus” by President Trump on13March showed clearly theneedto properly andto manageexpectations contrastIn to theserelatively successful stories, thebungledannouncement ofawebsite to “sharply expandtesting Advice to possiblyinfected individuals the movements individuals ofinfected Korea” fullypublic, doneinSouth ashasbeen 2020). (Valentino-DeVries, would thusbevoluntary, unlikeinChina,andtheUKgovernment hassaiditwilldelete thedate andwill“not make individuals to download an appthat would provide theirlocation to theUKNational HealthSystem. The project This hasbeen acentral concern for anexperimental system implemented by Oxford University. The planisfor for collected normally different andunrelated purposes. because theindividualsmustbeindividuallyidentified, andbecausethemeasures involve combining data measuresIf likethesewere attempted inEurope, theymight raise fargreater concerns thanthestrategic measures etal2020; patients (Wang and actual Waltz, 2020b). mobile phones. All hospitals, clinics, in andpharmacies Taiwan were given access to thetravel histories ofpotential at becauseofrecent highrisk Individuals travel to affected areas were monitored through electronically their cards. individuals thought beat becauseoftheirtravel risk history, withinformation linkedto theirhealthidentification as27January,early the responsible government agenciesintegrated travel data aboutthepast14-day histories of One ofthemosteffective setsofmeasures was asystem to track individualsthought to possiblybeinfected. As www.worldcommercereview.com The useof big data infighting isunlikely to beheldup by legalobstacles: COVID-19 Legal considerations andSinger,(Wakabayashi 2020). concerns aboutpossibleuseofpersonaldata andfor for otherunwanted advertising commercial purposes was that usershadto account logonusingaGoogle inorder to access thesite at all. This immediately raised Verily was immediately delugedwithrequests, whichgenerated awave Akeyconcern, ofcriticism. oneofmany, under intense fire for allegedlyhaving failed for too long to takethe seriously. crisis COVID-19 The announcement needsto beunderstood asapoliticalresponse to ofaUSadministration criticism that has been Wakabayashi, 2020). announcementGoogle was that sofaroff themark felt obliged to issueaprompt (Shearand correction/retraction ofGoogle’sa life sciences subsidiary parent company Alphabet. stage.The early work isat avery The Trump Trump seemedto bereferring to for asmallpilotproject Francisco theSan area beingworked onby Verily, • • rules to takeabackseat for alimited oftime. period states. rules, there If isatension onemight reasonably privacy between EUpublichealthandprivacy expect Under theEUtreaties, healthisashared competence orcomplements themember where theEUsupports unproblematic. Strategic useofbigdata places littleornorelianceIt isin consequence onpersonallyidentifiable data. www.worldcommercereview.com helping theEUaddress theCOVID-19 crisis. The are implications for clear. fairly EUpublicpolicy Bigdata canplay aconstructive role inmany different ways in Implications for public policy unrelated purposes, oriftherationale for theuseofdata communicated. ispoorly personally identifiable data over-reaches, ifpersonallyidentifiable data isallowedre-purposed forother to be measures putinplace; theyhave instead farmore to ofalosspublicconfidence dowiththerisk ifuseof The real impediments to theuseofdata to combat COVID-19 probably have ofthe littleto dowith thelegality to appropriatesubject safeguards. however, theuseofpersonallyidentifiable mobilelocation data shouldbe avoided ifpossible, andifusedmustbe measures andconfidentiality policiesneed to beinplace. Anonymous useofmobilelocation data ispermissible; informed about themainfeatures oftheprocessing that are out. Adequate activities beingcarried security measuresEmergency are permissible, butonlyfor theduration oftheemergency. needto be Data subjects anepidemic.public health,asisthecaseduring and employers to process for reasons personaldata whennecessary ofsubstantial publicinterest inthearea of (EDPB,with theseprinciples 2020). They note that theGDPRalready competent permits publichealthauthorities Indeed, theEuropean Data Protection Board (EDPB)madeapublicstatement on19March 2020that isfullyinline • to bypass legalprotections for normal theduration ofthenational emergency. Many EUcountries are already operating underconditions ofnational emergency, governments permitting www.worldcommercereview.com confidence inthemeasures undertaken. shared, how itwill besecured, there andhow longitwillberetained. is asignificantrisk oflosspublic Otherwise, from government aboutwhat data isbeingcollected, why itisbeingcollected, withwhom (ifanyone) itwillbe For that there personallyidentifiable beaclearandaccurate data, itisespecially important publicstatement are fullyinline with theGDPR)are fulfilled: national shouldtakegreat publicauthorities care to ensure that anumberofkeycommon senseconditions (which To theextent that personallyidentifiable data isemployed informed (withoutprior consent oftheindividual), unproblematic, buttherationale thought shouldnonethelessbeclearly through communicated. andclearly The useofnon-personallyidentifiable data (includingaggregated and/oranonymous data) willtend to be • • • • deletion period isnotnecessarily approach themostappropriatedeletion period for policy alldata ofthistype. data might Some alsobeusefulinfighting future epidemics, ofre-infection. understand therisk soashort Retention shouldbecarefully periods considered. thecurrent to During epidemic, itwillbeimportant Needlessly broad shouldbeavoided, data collection since itcreates (eg. risks theft). ofidentity technology.cybersecurity Any personallyidentifiable data shouldbecarefully protected againstintrusion by hackersusinggood use ofdata for unrelated (taxenforcement, publicpurposes for example) shouldlikewisebeeschewed. bepermitted withoutinformed prohibited. that consentpurposes would shouldbestrictly nototherwise The Data may beusedonlyfor intended. thejustifiedpurposes Use ofpersonallyidentifiable data for commercial www.worldcommercereview.com “The needforPPDRBroadband Spectrum”Marcus, JS(2013),“The CoV2)”, Science, 10.1126/science.abb3221. Li, Retal(2020),“Substantial facilitates undocumented infection therapid disseminationofnovel coronavirus (SARS- fraction ofthat.” MJ;andDenyer,Kim, Korea S(2020),“South isdoing10,000coronavirus tests aday. The U.S.isstruggling foreven asmall European information(Directive ofpublicsector (EU) 2019/1024). dataandthere-use Union(2019), Directive onopen European the(Regulation(EU)2018/1807) Union(2018), On free movement ofsuchdata,(Regulation (EU)2016/679). European theprotection ofnatural Union(2016), On with regard persons to theprocessing dataandonthe ofpersonal COVID-19 outbreak”, 19March 2020. ProtectionEuropean Data Board (EDPB)(2020),“Statement ontheprocessing datainthe context ofpersonal the References J Scott Fellow Marcus isaSenior at Bruegel needed at themoment. ■ At theEUlevel, thepublicstatement justissuedby theEDPB(EDPB, 2020)possiblyprovides that is alloftheclarity thatprojects constitute valid andvaluable research. reassure researchers theywillnotbeprosecuted for good-faith useofpersonallyidentifiable data inthe context of to enable asensibleandflexible response. For example, amemberstate might promptly issue letters’‘comfort to EUresearchersIf data for are afraid legitimate necessary to collect purposes, memberstates shouldbeprepared , Washington Post , study on behalf ofTCCA., studyonbehalf www.worldcommercereview.com This article was originallypublishedonBruegel This article Testing” Wang, CJ;Ng, CY; to RH(2020),“Response COVID-19 Brook, inTaiwan: Analytics,NewTechnology, BigData andProactive handed government to control thespread ofthecoronavirus" Waltz, HelpsTaiwan Emily(2020b),“BigData Fight Coronavirus: How Taiwan usedbigdata,newtechnologies andheavy Vespignani thecomputational describes fightagainstthe epidemic” COVID-19 Waltz, Emily(2020a),“How Computer Trying Are Scientists to Predict theCoronavirus’s Moves: Next Alessandro virus testing” Google’s sister company, Verily, California was counties to ofguidingpeople local inhopes rolled outto Northern two Wakabayashi, andSinger, D; N(2020),“Coronavirus Testing Website The site from HitsCapacity: Live Goes andQuickly Valentino-DeVries, J(2020),“Translating Tool aSurveillance into aVirus Tracker forDemocracies” Shear, M;andWakabayashi, D(2020),“Trump Site to Fight aGoogle Oversold Coronavirus” Reuters (2020),“European MobileOperators forCoronavirus Share Data Fight.” Germany, Europe andGlobally.” Marcus, V; JS;Burns, J;Jervis, Wählen, R;Carter, I;andVary, K;Philbeck, Harmonisationin P(2010):“PPDRSpectrum , JAMA online. , NewYork Times. , IEEESpectrum. , IEEESpectrum. , NewYork Times. , NewYork Times.