• Joel

EU Agrees on Big Fiscal Package, but is It Enough?

Finally, we got there. 

EU Finance Ministers managed to agree on a proposed EUR 500bln EU fiscal response to the economic impact of the Covid-19 outbreak.

The package includes a European Commission programme that would give up to EUR 100bln in loans to countries facing rising unemployment and bailouts from the EU rescue fund (called the European Stability Mechanism or ESM) worth 2% of each Eurozone member country’s GDP.  

The breakthrough came when the Netherlands softened its position on forcing countries to commit to economic reform and outside oversight should they tap the EUR 400bln ESM. 

The Netherlands had been pushing for conditions to be attached to its use; i.e., if you borrow this money from this fund, you will be required to do austerity etc. Southern European nations such as Italy, Spain and France had vehemently opposed this stance. 

As expected, no decision was made on the much more contentious issue of coronabonds. 

Ministers agreed only to "explore" the idea under the direction of EU leaders, who are set to meet later in the month (we now know this meeting will occur on the 23rd of April).

France, Italy, Spain, Ireland and a number of other Southern EU member states are strong proponents of the idea of issuing mutualised joint EU debt.

However, fearful that they will end up paying for the fiscal excess of less frugal governments, more fiscally prudent states such as Germany, Austria and the Netherlands are strongly opposed to this idea. 

However, as the magnitude of the economic crisis caused by the Covid-19 outbreak continues to grow, hard-hit states such as Italy and Spain face immense economic pressures that are out of their control. 

Investors may soon start to panic again about the ability of these hard-hit nations to pay back their debts, meaning we could soon be in for another debt crisis (where Italy, Spain will be forced to borrow at prohibitively expensive rates). The last debt crisis was solved by the ECB (remember, the whatever it takes moment), who took action to suppress interest rates. 

But the ECB has already done all it realistically can. If this crisis surfaces again therefore, it will be largely down to the Eurozone to solve it; this is where joint issued Eurozone debt would come in. Investors would finally feel confident lending to these countries again, as the debt is also guaranteed by Germany and the Netherlands. 

Failing this though, risks of the fragmentation of the Eurozone would mount. 



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