Views on improving the integrity of global capital markets
22 September 2020

Is Covid-19 Make or Break for the EU?

Political, economic and societal structures around the world are being challenged by the current economic and medical crisis induced by Covid-19. Although vindicated by economic and financial actors as a necessary stabilizing factor, the extraordinary measures taken by governments and central banks in the United States and the EU have wreaked havoc on economic orthodoxy. The notion that checks and balances exist at different levels to maintain a decent amount of accountability and responsibility over major policy choices is being tested and perhaps stretched. The agreed-upon policies by governments and central banks thus far are shaking several equilibriums, from the independence of central banks, to the reasonableness of budgeting decisions and indebtedness, to the ultimate acceptance that aid and relief packages should be limited in time or magnitude and subject to oversight. In the EU in particular, the negotiations that took place challenged the foundational principles of the Union as described first in the Maastricht Treaty (1993) and then the Lisbon Treaty on functioning of the EU (2009). Not all parties agree on how solidarity should be operated or funded and, in some corners, it is feared that the EU could become a transfer union.

How is this crisis different?

This economic crisis is, indeed, unprecedented in modern history, mostly because of its causes.

It was self-inflicted as a societal response to the medical emergency caused by the outbreak of the novel coronavirus. Lockdown measures started first in China toward the end of January 2020, and followed in Italy in early March. The rest of the world then saw a cascade of similar measures that basically resulted in a combined global macroeconomic shock to both aggregate demand and supply. This crisis is unique in the sense that it did not have as a catalyst the bursting of an economic imbalance or a financial crisis suddenly affecting market liquidity, as we had seen in previous crises. This time, traditional playbooks have proven to be of little help to understand the multidimensional dynamics that continue to unfold.

On 19 March, the CFA Institute Systemic Risk Council (SRC) released a letter aimed at global public authorities and institutions. It detailed the SRC’s Proposed Measures to Address Economic Elements of the Current Pandemic Crisis.

Authorities worldwide, including governments and central banks, have been quick to react in a strong manner, indicating they would support the economy and markets to practically unlimited lengths — “Whatever it takes” — precisely to send the clear message that they would not allow this voluntary set of public health policy measures to precipitate an all-out economic depression and market seizure. In other words, the objective was to avoid a repeat of the Great Recession of 2007–2009, which took three to five years to recover from, even if only partially.

CFA Institute is well positioned to delineate the various ways in which this crisis affects the traditional economic and financial orthodoxy.

In this context, CFA Institute has sought to clarify the terms of the debate surrounding the different ways in which this crisis has challenged common wisdom about the free-market economy, classic economics, and the role of capital markets. To that end, we have conducted two surveys of our membership, first in April and then in July 2020.

The April survey was aimed at the global membership and attempted to shed light on how our expert members perceived the effects of the crisis on investment management, addressing issues such as the shape of the recovery, the authorities’ response, the role of free capital markets and the role ethics would play.

Among key messages from this first round of research were the following:

  • Respondents vindicated authorities’ response as a stabilizing or necessary factor.
  • Respondents were divided on whether this aid should continue (because it will not be enough) or stop as soon as possible for free markets to take over.
  • Respondents confirmed that markets are an important part of how the economy operates.

The July survey focused on the newly enacted CARES Act in the United States (March 2020) and questioned CFA Institute members in the United States on the level of disclosure surrounding program distribution, the adequacy of current oversight efforts and the impact of record stimulus on capital market functions.

Among key messages from this second round of research were the following:

  • Respondents demonstrated their increased frustration that securities markets and financial analysis have become unnervingly detached from economics.
  • The majority of members said they approved of the stimulus but also said that it should not be unlimited.
  • A large majority called for oversight and nearly 90% of respondents expected to see details on the recipient, the amount, and the terms of the distribution.

A trend emerged between these two research papers. They both made it apparent that it is increasingly challenging to balance economic emergency relief with free-market capitalism.

Although this situation has the particularity of being eminently global, the crisis has manifested with regional differences depending on the state of local institutions and the nature of the political debates that have animated discussions in each region.

CFA Institute webinars feature key figures on the crisis and the institutional debates around the role of markets versus that of authorities.

Following a series of debates in the United States this spring, we were interested in bringing to light the distinctly European angles to this discussion with several institutional figures directly involved in commenting on or implementing the aid packages and market support measures that have been enacted thus far. This time, an open webinar scheduled for 24 September will focus on the EU and will review the following:

  • the technical complexities of these relief packages in a tense budgeting process;
  • how these measures should be analyzed in light of the development of the Capital Markets Union (CMU) and its inherent difficulties;
  • how these developments inevitably led the Europeans to reopen the Pandora’s box of debt mutualization; and
  • whether systemic risk needs to be considered as a potential consequence of such unprecedented pubic interventionism.


John Berrigan, Director General, Directorate General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA), European Commission

Jan Pieter Krahnen, Member of the SRC, Scientific Director (President), Leibniz-Institute for Financial Research SAFE

Erkki Liikanen, Member of the SRC, Chair, International Financial Reporting Standards Foundation Board of Trustees

Jean-Claude Trichet, Senior Adviser to the SRC, former President, European Central Bank


Gary Baker, CFA, Managing Director, EMEA, CFA Institute

Josina Kamerling, Head of Regulatory Outreach, EMEA, CFA Institute

What are the actual difficulties in discussing mutual economic relief programs in the EU?

This webinar on 24 September will review the issues surrounding the EU’s combined economic relief program and will touch on the following points.

For the first time, the EU has provided a two-pronged institutional answer to the economic crisis. The European Central Bank’s (ECB) monetary response through the Pandemic Emergency Purchase Programme (PEPP) was this time accompanied by an EU response using the fiscal tool — that is, the European recovery package called Next Generation EU (July 2020). Crisis fighting is therefore no longer just for the central bank. The consequences and ramifications of these responses are several-fold as they will affect economics, capital markets and institutions in the EU. We will review these responses as part of this discussion.

We all have observed the difficult coordination of negotiations between EU institutions and member states to reach an agreement at the EU parliament. The elephant in the room has been debt mutualization, which has been perceived as pitting the frugal states against those who most need financial aid (the so-called North–South divide). The beginning of an answer to these discussions may be found in analyzing the origin of the Maastricht Treaty (1993) and the Lisbon Treaty (2009), which set a certain number of principles pertaining to financial transfers between states, the monetization of national debt or the ECB’s capacity to directly fund member states sovereign debt.

The European Recovery Plan agreed to on 21 July continues to animate discussions surrounding long-term funding and the plan’s sustainability. Beyond EU debt, a debate is taking place on the need for the EU to generate its own resources through taxation.

Naturally, this debate plays into the ongoing debate surrounding the development of a strong CMU and even perhaps a fiscal union. A natural balance needs to be achieved between public intervention and the private sector for this to work.

Beyond this institutional debate, a fundamental question has arisen around the role of public and private sectors. By adopting and promulgating a “Whatever it takes” attitude to crisis solving, authorities and central banks have sent a particular message to the private sector that could lead to new forms of moral hazards and systemic risk. Again, we simply may be kicking the can down the road while aggravating the asymmetric nature of risk between the financial industry and the taxpayer.

The effects of the relief packages are not yet clear. Markets have reacted strongly to the monetary stimulus and messaging by recouping the lost market value within five months of the trough in March — as compared with the four- to five-year effort needed following the 2007–2009 Global Recession. The real economy’s recovery indicators are not nearly as optimistic as the markets. In the meantime, inflation has not shown any sign of upward pressure — it actually has been the other way around, with the prospects of deflation showing its ugly nose. Clearly, these are not conventional times. In some corners, commentators are calling for an upending of traditional thinking around public budgeting policy and fiscal rigor.[1] Modern monetary theory is gaining traction and some are using it to conceptualize direct funding of government spending by the central bank.

The ECB is facing a conundrum as the marginal effect of its conventional tools diminishes with time and as the magnitude of crises expands. Should it fear deflation rather than inflation? What new tools or approaches should be considered? At the same time, the EU treaties technically prohibit it from directly intervening in the funding of sovereign states’ deficit spending. We have seen how the ruling of Germany’s Constitutional Court (Karlsruhe; May 2020) related to the ECB’s mass bond-buying program of government debt though the Bundesbank has caused headaches in constitutional corners. Should the treaties be changed to formally allow for some degree of solidarity and mutualization among member states? Or, rather, are they a guarantee against excessive meddling of politics into reasonable policymaking? In the end, is federalism not the only way forward for the EU?

In this context, systemic risk needs to be further analyzed in the face of a changing monetary, economic and financial landscape. In its March 2020 letter, the SRC recognized that the priority was to deal with the medical emergency while also sorting out the immediate economic consequences of the lockdown measures through fiscal and monetary intervention. This thinking, of course, had the natural result of reducing the role of the private finance sector to that of a bystander, at least for some unknown period of time. But are we ever going to be able to exit an expansionary monetary policy? Should we accept that central banks are no longer independent bodies, but rather are a natural funding arm of governments? What role should the private sector and financial sector have to play? Finance firms were supposed to be how the CMU eventually would come to fruition through appropriate regulation favoring the emergence of renewed interest in capital raising for small and medium enterprises. How is the current crisis affecting this plan?

You can find out by registering for this free event.

[1] See Joseph Stigliz in Piotr Skolimowski and Stephanie Flanders, “Stiglitz Urges Capitalism Rethink as Roubini Invokes Stagflation,” Bloomberg (23 June 2020),

Photo Credit @ Getty Images / Romana Krizkova / EyeEm

About the Author(s)
Olivier Fines, CFA

Olivier Fines, CFA, is head of Advocacy and Capital Markets Policy Research for EMEA at CFA Institute. With teams based in London and Brussels, he leads the effort in researching and commenting on the major trends that affect the investment management industry as well as changes to the profession and policy and regulatory developments. The positions taken on these issues and the research pieces that are published are meant to promote the fundamental principles upheld by CFA Institute, that of investor protection, professional ethics, and market integrity. Fines joined CFA Institute in March 2019 after a 15-year career in investment management spanning research, portfolio management, product management, and regulatory compliance work at firms based in Paris and London. Prior to joining CFA Institute, he was head of Risk and Compliance at Rothschild & Co in London for the private equity and private debt division.

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