Eurozone states clash over how to deal with economic crisis
Eurozone ministers are having difficulty finding a compromise on a comprehensive rescue package with southern countries pushing for joint debt in order to pay for recovery, post-coronavirus.
Finance minister will hold a call tomorrow where they will attempt to come to an agreement on an emergency package which can offer some protection to nation states, businesses and individuals from the economic effects of the pandemic.
The plan totals around half a trillion euros and takes a three-pronged approach focusing on the European Investment Bank, the European Stability Mechanism and a new unemployment reinsurance scheme from the European Commission.
The package's fat remains uncertain with France, Italy, Spain and their allies pushing for more longer-term measures involving the common issuance of further public debt to pay for post-corona spending. The disagreement has reawakened the longstanding north-south divide in the bloc over the issue of mutual debt, with Germany and its northern allies resisting the move.
Over the weekend, Mário Centeno, president of the Eurogroup and Portugal's Finance Minister, warned Eurozone ministers not to allow the dispute to put the deal at risk, whilst also seeking to console the southern countries saying that he would speed up the debate on future joint mechanisms to pay for the economic fallout of the Covid-19 outbreak.
“We certainly need fresh money after this period to leverage a recovery plan,” he said in an interview with a group of newspapers, call on ministers to be “creative”.
At their next virtual summit later this month, the Eurogroup is looking to back a report containing proposals for EU leaders to consider.
One of the key elements that Eurogroup ministers will discuss is the deployment of the European Stability Mechanism, the Eurozone's bailout fund. The plan calls for an ESM credit line of up to €240-billion that is open to all countries.
However, the ESM was created in 2012, during the debt crisis in Europe. At the time, Germany and other countries insisted that Greece, as well as other countries experiencing economic difficulties, agree to tough conditions including economic reform programmes and fiscal targets, in exchange for support from the Eurozone.
The ESM's managing director, Klaus Regling, has been working on overhauling the terms attached to the Enhanced Conditions Credit Line, one mechanism for economic support that falls short of a bailout. The main change would be that it would require money be used to support healthcare expenditure or to counteract the economic impact of the coronavirus pandemic.
There would also be a commitment to respect the EU's surveillance framework for national budgets - already an obligation for all EU member states in any case.
Eurosceptics in Italy have long regarded the ESM as a negative force however, arguing that any lending would come with strings attached in the form of harsh economic reforms. Italy and other southern nations would only agree to a package which has the ESM as part of it if ministers also open up the prospect of greater joint debt issuance later.
Ministers will also discuss the possibility of boosting European Investment Bank lending. The EIB has already put forward a plan to mobilise up to €40-billion of financing, which could be used for credit holidays, bridging loans and other measures aimed at cushioning the impact of the lockdown on SMEs.
Eurozone members will also discuss a pan-European guarantee fund of €25-billion, that would leverage support of up to €200-billion, a big boost to the bank's firepower.
There will also be discussion around the introduction of EU unemployment insurance. The European Commission has proposed an instrument named SURE which would offer loans to economies dealing with a sudden, severe increase on short-time working schemes, similar to those based on Germany's Kurzarbeit.
Described by some as Germany's most-popular export in 2020, Kurzarbeit is a scheme whereby companies hit by a downturn can send their workers home, or radically reduce their hours, and the state will replace the bulk of their lost income.
The idea behind the scheme is 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.
While those three elements of the package are focused on alleviating the current crisis, the EU and member states are also looking at what comes next.
The big question is how governments can kickstart their economies through the use of fiscal stimulus measures including large public investment projects, whilst paying for that spending via public borrowing at rates that are as low as possible. Part of the answer will be a widespread overhaul of the upcoming seven-year EU budget, though some states are urging to go further.
Some 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, the French government expanded on the idea and published a paper calling for an "exceptional and temporary" joint fund that would help countries begin their economic recoveries.
The concept of collective debt issuance, however, remains contentious in some northern European countries and so officials have been struggling to find ways of bridging the divide ahead of Tuesday's meeting.
Back to Homepage
Back to Politics & Economics