Euro area ministers are struggling to forge a compromise on a comprehensive rescue package as southern member states push for the issuance of joint debt to help pay for the post-coronavirus recovery.
Finance ministers are due to hold a call on Tuesday afternoon at which they will attempt to agree an emergency package to cushion sovereigns, businesses and individuals from the pandemic.
The three-pronged plan, focused on the European Stability Mechanism, the European Investment Bank and a new European Commission unemployment reinsurance scheme, totals about half a trillion euros.
But the fate of the package is unclear as Italy, Spain, France and their allies urge additional longer-term measures involving the common issuance of additional public debt to fund post-coronavirus spending. Their move has reawakened a longstanding north-south divide in Europe over mutualising public debt, with Germany and its northern allies resisting.
Mário Centeno, president of the Eurogroup, warned ministers over the weekend not to let the dispute jeopardise the detailed rescue package that was already on the table. But he also sought to win round southern Europe by saying that he would accelerate the debate on future joint tools to pay for post-corona economic rebuilding.
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“We certainly need fresh money after this period to leverage a recovery plan,” he said in an interview with a group of newspapers published on April 4, urging ministers to be “creative”.
The Eurogroup is aiming to back a report containing proposals for EU leaders to consider when they hold their next virtual summit later this month. Here are the key elements that ministers will discuss.
Deploying the European Stability Mechanism
EU and finance ministry officials have been working out how to unlock the lending power of the European Stability Mechanism, the euro area’s sovereign bailout fund. The plan is for an ESM credit line of as much as €240bn, open to all countries.
But the ESM was established in 2012, during the European debt crisis, when Germany and others insisted that Greece and other economically beleaguered countries sign up to tough conditions, such as fiscal targets and economic reform programmes, in exchange for eurozone support.
Klaus Regling, the ESM’s managing director, has been working on proposals to overhaul the terms attached to its Enhanced Conditions Credit Line, a form of precautionary financial support that stops short of a bailout.
The main requirement would be that money is used to cover health-sector expenditure or to counter the economic fallout of the pandemic. And there would be a commitment to respect the EU’s surveillance framework for national budgets — which is an obligation for all EU member states in any case.
But Eurosceptics in Italy have demonised the ESM, saying any lending by the mechanism would inevitably come with harsh reform requirements. Italy and its allies will only want to sign up to a package including the ESM if ministers also open up the prospect of greater joint debt issuance down the road.
Boosting European Investment Bank lending
The Luxembourg-based lender has already proposed a plan to mobilise as much as €40bn of financing, which would be used for bridging loans, credit holidays and other measures aimed at damping the impact of the lockdowns on small and medium-sized enterprises.
Member states are also discussing a pan-European guarantee fund of €25bn that would leverage support of up to €200bn — a big boost to the bank’s firepower.
Introducing EU unemployment reinsurance
The European Commission has proposed an instrument called SURE that would provide loans to economies that face a sudden and severe increase in spending on short-time working schemes, such as those modelled on Germany’s Kurzarbeit programme.
The idea would be for the commission to tap capital markets and raise €100bn of loans, backed in part by guarantees from member states.
Provision of guarantees would require buy-in from a number of member states’ parliaments, which could slow down the process of getting it up and running. Some northern member states remain suspicious of the plan, given their traditional opposition to new European projects aimed at transferring budgetary resources elsewhere.
Planning for economic reconstruction
The three elements of the package are focused on alleviating the current emergency, but EU capitals are increasingly focused on what comes next.
The key question is how governments can kick-start their economies through stimulus measures including large public investment projects, while financing their spending via public borrowing at the lowest possible rates. Part of the answer will be an overhaul of the EU’s upcoming seven-year budget to front-load investment spending, but some states say this alone will not suffice.
This is where the idea of mutual debt issuance comes in. Nine member states including France, Italy and Spain have proposed the issuance of coronabonds, which would be sold by a European institution with the backing of all member states and used to fund spending programmes in individual member states.
Last week, France added some flesh to the idea with a paper arguing in favour of an “exceptional and temporary” joint fund that would help countries kick-start their recoveries.
But the concept of collective debt issuance remains highly contentious in a range of northern European member states, meaning officials have in recent days struggled to find a way of bridging the divide between the two camps ahead of Tuesday’s meeting.
Source: Economy - ft.com
