- Eurozone finance ministers to meet today

- Aim to agree unified fiscal response to coronavirus

- Success could boost EUR

- But opposition from Germany, Netherlands could create disappointment

Image © European Commission Audiovisual Services

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The Euro could be set for fresh volatility over the course of the next 24 hours as the attention of the foreign exchange market turns to the meeting of European finance ministers, who have been tasked with finding a united fiscal solution to the economic crisis caused by the coronavirus pandemic.

A number of countries such as France, Portugal and Spain want to see the Eurozone create a new bond - widely referred to as the coronabond - that will be issued in order to raise fresh funding for those nations hardest hit by the crisis.

Success would signal that the Eurozone's nations have achieved a new level of unity that will in turn boost the credibility of the region's ability to handle the economic crisis, which would likely be net positive for global financial markets and the Euro in particular.

"The Eurogroup will work further on the coordinated response to the economic fallout of the COVID-19 pandemic, following the invitation by EU leaders on 26 March 2020," reads a statement from the Eurogroup, which is body consisting of the finance ministers of the Eurozone.

A press conference is due to take place at 20:00 CET.

This coronabond would be guaranteed by all nations, thereby making it more attractive for investors to buy, which will in turn ultimately keep the repayments on that bond as low as possible.

Standing in the way of this pro-EUR outcome are a number of countries, lead by the Netherlands, Germany and Austria that see the pooling of debt in such a manner as being a bad deal for their citizens, as it spreads their financial liabilities to countries that are perceived to be more profligate in spending.

It also sets a precedent that debt can in future be issued at the Eurozone level and demands for further bond issuances not related to the coronavirus pandemic will likely grow.

Eurogroup meeting today: Finance ministers from Netherlands, Germany and Austria should acknowledge that Italy has recorded a primary budget SURPLUS (excluding interest payments) in 24 out of 25 years since 1995. It is high time for European fiscal solidarity to fight the crisis. pic.twitter.com/rHoj6ZA17u

— Philipp Heimberger (@heimbergecon) April 7, 2020The Euro has underperformed its peers over the course of the past week, with many analysts suggesting the underperformance is linked to the region's inability to agree a joined-up fiscal approach to fighting the economic impact of the coronavirus pandemic.

"We all know that the strength of a relationship can be severely tested during times of crisis. This is currently very obvious in the EU, and the euro is not taking it well," says

Thu Lan Nguyen, FX & EM Analyst at Commerzbank.

The single currency is down 0.8% against the Pound, 1.44% down against the U.S. Dollar and has lost ground against all the other major currencies apart from the Swedish Krona.

"The game-changer news in Europe would be a move towards some version of ‘Coronabonds' at [today's] Eurogroup meeting, which is really shorthand for a more-joined-up approach. Absent that, I'm not sure the euro has much home-grown potential to bounce," says Kit Juckes, Head of FX Strategy at Société Générale in London.

The European Council - which is the meeting of Europe's leaders - on March 26 failed to agree amongst themselves a united approach to financing the response to the coronavirus, instead tasking their finance ministers to come up with a solution.

The Netherlands and Germany were amongst those states who would prefer to see the adoption of other measures to fund the response, namely the European Stability Mechanism (ESM). The ESM is an EU agency that provides financial assistance, in the form of loans totalling up to €500BN, to eurozone countries when further funding is needed.

Current EU rules also state that a country cannot exceed borrowing beyond 2% of GDP which places substantial constraints on EU member states when it comes to securing funds to overcome the pandemic.

"A mere use of an existing ESM facility with cheap credits to the tune of 2% of a country’s GDP, as Eurogroup finance ministers discussed on Tuesday last week, looks unimpressive, so far," says Florian Hense, Economist at Berenberg Bank.

By way of contrast the U.S. has announced a support package that amounts to extra spending up to 11% of GDP. The UK has pledge around 8% of GDP in extra spending. This suggests the UK and U.S. would stand a better chance of minimising the economic damage of the virus and will enjoy a stronger recovery once it is passed.

This in turn would suggest Sterling and the Dollar would be preferred to the Euro on a relative basis as the economic recoveries of the various regions are compared.

Therefore for countries such as Italy and Spain, which have been particularly hard hit by the coronavirus, a coronabond makes sense as it allows for the raising of fresh capital that they would ultimately be significant beneficiaries of, while at the same time avoiding a breach of EU rules and increasing their own debt burden.

Above: The Euro's performance over the course of the past week

The scale of the divide between EU countries on the matter is however large and there are a number of preferred positions on how to handle the cost of the virus.

France wants to see the introduction of a EU fund to finance economic recovery programmes.

The Netherlands favour a fund aimed exclusively at dampening the economic effects of the corona virus but do not support any widespread measures.

"In view of the number of proposals there is a risk that a rapid agreement will not be reached. That does not set a positive sign that the EU is unable to work together during such a difficult crisis which cannot even be blamed on an individual country," says Juckes.

They will Agree, Eventually says HSBC Currency Analyst

"I think the Euro goes down before it goes up," says Bloom on the currency's outlook, but "ultimately they will sort it out, they will come to something but it doesn't mean it will not be a painful process."

"The break up risk in Europe is at its lows, nobody is worried at the moment," says Bloom. But what will be a concern for markets is that the rule book that binds the Eurozone is being torn up, leaving questions as to what glue will bind the area once the crisis is over.

While the overall debt levels of the Eurozone as a whole are sustainable, Bloom notes that at a granular level the picture is more mess, on a country by country basis the surge in debt in relation to GDP is "all over the place".

"The family looks a bit unhappy at the moment, and once we come out of this what are the common rules, debt and fiscal policy were one of the anchors of the Eurozone and now this has completely gone out of the window, so how do they solve that problem," says Bloom.

The analyst adds the Euro is no substitute for the Dollar as there are still issues European leaders and officials need to deal with, something that could keep the common currency under pressure.

"I think there will be pressure on the Euro and that is why the Dollar is absolute king," says Bloom.