Javier Lendines. Chief Investment Officer, MAPFRE AM

José Luis Jiménez Chief Investment Officer, MAPFRE Group

Recently, a study by the University of Berkeley looked at the most pressing problem we face: should we prioritize health over the economy? It is undoubtedly the million-dollar question that many governments are asking themselves when faced with the inability to manage an issue that, in some cases, far exceeds their capabilities. A priori, the longer production is closed, the larger the bill — hence the urgency to start lifting restrictions. However, if this is done too early, there is a high risk of having to start again and the aforementioned sacrifices will have been for nothing.

The study outlined two options: 1) short-term control of the epidemic that attempts to keep infections within a limit and 2) long-term control that seeks to suppress them. Several paragraphs described the costs involved, the loss of human life, hours worked, healthcare costs and the costs of social distancing. The study concluded that the best option both economically and politically was to prioritize the long-term, implying a longer period of confinement until the virus ceases to be a threat to the system and until recovery is solid.

Although we probably aren’t aware of it, the same dilemma has arisen with the euro at the moment. Should we face the crisis pursuing a national maximum or even a maximum for Europe? Time is again the key factor here, regardless of whether a country is located in northern or southern Europe. If the national option is prioritized, both politically and economically, it’s likely to provide returns in the short-term. It’s difficult for the northern European countries to accept the lack of fiscal effort by southern countries, especially Spain, where the fiscal deficit skyrocketed in 2019 despite much higher than average growth. Likewise, in southern European countries, it’s easy to blame northern countries’ lack of collaboration at a time when the impact of the crisis is most pronounced in those countries. In the long-term, however, the costs of putting the euro at risk are much higher if a global maximum isn’t found. It isn’t necessary to put an end to the euro, thus hurling ourselves into unknown territory. The social and economic costs would be inconceivable if we simply repeat the mistakes and delay in coming up with the solution, as we did in the 2012 crisis.

The question of coronavirus bonds or debt mutualization in Europe reveals the same doubts that emerged in the euro crisis. Is the monetary union, as it is envisioned, a project doomed to fail? Or is the lack of progress in integration (banking, fiscal, and even political union) the cause of its instability? Perhaps at this point, we have to look back and remember the origin of the European project in order to understand its importance. The economic policies designed to impoverish residents after the Great Depression and the two world wars that took place in Europe were sufficient grounds for creating a union of countries that would not make the same mistakes again. Today, when we find ourselves again at a crossroads, it is important to focus on the long-term and to see the dimension of the problem beyond economic terms.

Even if we calculate the cost of financing eurobonds against the alternative of unilateral financing, the result is significant. There is no doubt that any mutualization involves a transfer of wealth between agents by providing above-market financing for countries such as Germany but financing at more favorable levels for the Mediterranean countries. A joint issue of a sum of half a trillion euros over ten years, weighing on the holdings in the ECB on the part of the national central banks would result in the following:

  • a) The resulting average interest rate would be approximately 0.4 percent per year, clearly above Germany’s financing levels but below the levels of the Mediterranean countries.
  • b) This higher cost, measured in terms of national GDP, represents 0.03 percent of Germany’s GDP and a benefit for countries such as Spain or Italy of around 0.05 percent.
  • c) If we measured it per capita, the cost for each German citizen would be around 14 euros, with a gain of around 7 euros for a Spanish citizen and around 20 euros for an Italian citizen.
  • d) The issue rating would be similar to the current European semi-core level, such as that of France or Belgium.
  • e) It could even help relieve pressure on savers, pension plans, and financial institutions in the north who have been buying assets with negative returns for a long time.

    The conclusion is therefore that certain countries’ refusal to increase debt mutualization is not supported primarily in economic terms, but also in political terms in order to avoid a precedent if there is no real commitment to common objectives.

Next year will mark the 60th anniversary of Professor Bela Balassa’s book The Theory of Economic Integration, a must-read manual that was ahead of its time. He not only developed modern literature on economic integration, emphasizing economies of scale, imperfect competition and economic geography, but he was also the first to argue that a monetary union cannot function without a political union. Had we paid attention, this would have saved us from the euro crisis in 2012 and many of the problems we are facing today. The resolution of the dilemma lies in the answer to the following question:

Do our political leaders have the capacity to deal with this problem in the best possible way for Europe?