The EU is aiming to strike a deal within days on new fiscal weaponry to tackle the fallout from coronavirus, Paolo Gentiloni, the bloc’s economics chief, has said.
As capitals debate joint action to battle the fallout from the pandemic, Mr Gentiloni told the Financial Times that officials were working over the weekend on three options for intervention. He believed a deal on a fiscal support proposal could be struck in time for a video conference call of EU leaders on Thursday.
The first option is for the European Stability Mechanism — the eurozone’s bailout fund — to offer precautionary credit lines to a number of member states, he said. Alternatively it could introduce narrower liquidity facilities aimed at emergency healthcare spending. A third option would centre on the introduction of so-called coronabonds, which could be issued by an existing European institution or mechanism, including the ESM, to raise money to fight the crisis.
“The consensus is growing day by day that we need to face an extraordinary crisis with extraordinary tools,” Mr Gentiloni told the FT in a telephone interview. “The discussion is going on this weekend to adopt a good decision in view of the European Council next Thursday.”
Last week the European Central Bank swept into markets with a €750bn bond-buying package, reducing the financing costs of countries including Greece, Italy and France. But the economic collapse triggered by the coronavirus is still set to place huge strains on euro area governments’ public finances, rekindling calls for greater solidarity between euro members.
France is among the states that have been urging more cautious capitals such as Berlin and The Hague to agree to bring joint fiscal firepower to bear. Bruno Le Maire, French finance minister, last week warned that failure to act in a united manner could mean the eurozone was in danger of disappearing altogether.
Mr Gentiloni said he was well aware of the concerns in some nations that rescues risked “moral hazard”. But he insisted the discussion was not about the mutualisation of debt. “We are discussing how to face what [German] chancellor [Angela] Merkel has rightly defined the worst crisis since the war.”
This was raising awareness across the continent that capitals needed to overcome their previous divisions. “We can’t say it is the most serious crisis since the war and then remain with our traditional Italian or German or French or Dutch point of view,” he said. “Our tools were designed for a different crisis, and gradually and consensually we should use them, but also introduce new tools adapted to a completely different crisis.”
EU officials are hoping to settle on a rescue package at a call of eurogroup finance ministers on Tuesday evening. But they will first need to overcome complex legal and political obstacles.
One option would involve the ESM offering multiple member states so-called enhanced-conditions credit lines. This would entail striking a deal on new conditions attached to the loans that are relevant to the current EU-wide, health-related crisis. The benefit of such a course would be that it potentially unlocks targeted, unlimited bond purchases by the ECB, helping alleviate strains on vulnerable countries’ finances, most obviously in Italy.
The second option, Mr Gentiloni said, would be a special new liquidity facility from the ESM targeted to emergency healthcare intervention, potentially requested and used by all member states. The third would entail the issuance of so-called coronabonds, or European Health Bonds, Mr Gentiloni said, which could be issued by an existing institution such as the ESM and targeted to the “health emergency we are facing”.
Some in Berlin argue that the ESM could offer a credit line to Italy alone that would have to be spent on the country’s struggling healthcare system, with further conditions on addressing the deficit after the crisis.
But the idea of taking a unilateral, conditional credit line from the ESM is politically toxic in capitals including Rome, which is part of the reason why EU policymakers are discussing the idea of multiple credit lines to a range of member states.
This could help reduce the stigma that would afflict a single member state applying for ESM support that came laden with heavy conditions.
The gravity of the economic damage now being wrought in the euro area was difficult to assess, Mr Gentiloni said, arguing it would depend on the duration of the outbreak. But he said scenarios adopted by the commission just 10 days ago were already proving too optimistic.
“This idea of a V-shape [recovery] that you can see in the first semester of 2020 is now completely impossible,” said Mr Gentiloni. “We have no previous analysis of the impact of such a widespread lockdown in major economies.”
He added: “We need not only to reassure and stabilise the financial markets, which was the result of the ECB decision. We also need to give member states and the union as a whole the strength to protect and relaunch our economies.”
