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Week Ahead (16 March)

Monday, 16th March - ECB inaction heaps pressure on Eurozone finance ministers

After Christine Lagarde announced an underwhelming package of measures at Thursday’s ECB Governing Council meeting, market attention will now turn to Eurozone finance ministers who meet via teleconference today in an attempt to agree a coordinated response to protect the European economy.

Those calling for stimulus will have been encouraged by signs that Germany may finally spend some money after Merkel stated that “We will not ask ourselves every day what this means for our deficit. This is an extraordinary situation. We will do whatever is necessary.”

Given the scale of the crisis, there may be scope to advance the cause of European wide collective debt instruments – an idea which has been promoted since the 2008 financial crisis but opposed at every turn by Germany.

While there are risks, among the many benefits of e-bonds would be to provide banks with an alternative to domestic debt which would fulfil a longstanding Eurozone aim of breaking the “doom-loop” between banks and sovereigns in the Eurozone. Former ECB Vice President Vitor Constâncio supports the proposal which he indicated could raise some €4 trillion in cheap lending and strengthen Eurozone countries’ financial resilience. In ordinary circumstances we would be dismissive of the prospect of the Eurogroup finding agreement on e-bonds but, given the scale of the crisis, we would anticipate that this will be among the options on the table. Either way, Eurozone finance ministers will at the very least be expected to agree on a strengthened role for its bailout fund, the European Stability Mechanism. With markets in freefall and the ECB response thus far inadequate, rarely has there been such pressure on the Eurogroup to deliver.

W/C Monday, 16th March - Coalition talks between Fianna Fáil and Fine Gael to commence

As suggested in our update of 6th March, the Covid-19 outbreak has forced the hand of Irish political parties and led to a breakthrough in government formation talks. While Fine Gael and Fianna Fáil had both promised not to enter coalition with each other during the election campaign, as the pandemic has played out it has become clear that both consider a coalition government to be in the best interests of the country. Talks on Thursday between the two parties focused on the response to the situation, and were preceded by an announcement that schools, universities and creches would be closed and indoor gatherings of 100 people and outdoor gatherings of 500 people would all be cancelled. Over the weekend, the government also asked all pubs to close until at least 29 March.

The make-up of the rest of the potential government is not as clear cut. The Green Party met on Friday and was unable to reach agreement on whether to enter government formation talks. They will meet again today amid comments from FF leader Micheal Martin that coalition between FG and FF is possible without the Greens.

It is not a foregone conclusion that the FG and FF talks will produce a workable programme for government. We have previously noted that the strength of grassroots and backbench opposition make such an arrangement far from inevitable, even if there is little to distinguish the economic policies of the two parties. However, there now seems to be a genuine urgency to the negotiations, and with the country on lockdown, the breakthrough may have been made.

W/C Monday, 16th March - Next round of EU-UK talks to begin; face to face talks cancelled

The next round of face to face EU-UK trade talks, scheduled to begin in London today, have been cancelled. A statement issued by the British side last Thursday said: "Given the latest COVID-19 developments, UK and EU negotiators have today jointly decided not to hold next week's round of negotiations in London, in the form originally scheduled. Both sides are currently exploring alternative ways to continue discussions, including if possible the use of video conferences." The talks were scheduled to follow on from the opening round of negotiations in Brussels two weeks ago, in which the UK took a hard-line approach and reneged on certain aspects of the Withdrawal Agreement made between the two sides a few months ago.

With much of Europe now in lock-down given the Covid-19 outbreak it is no surprise that the face to face talks have been cancelled. Michael Gove, the British minister responsible for preparations for a no-deal Brexit, flagged on Wednesday that concerns about the talks had been raised by his counterparts in Brussels, and that the concerns extended to the proposed first meeting of the EU-UK joint committee, scheduled for 30th March.

Should no alternative to face to face talks be found, the time available for an agreement to be reached between the sides will shrink commensurately. Boris Johnson has said that the UK will walk away from the talks in June if it deems sufficient progress not to have been made by then, and has legislated against the possibility of seeking an extension to the talks. However, if a significant chunk of time is no longer available in which to negotiate an already substantial trade agreement, Johnson may well be forced to think again.

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