Countries of the euro area are close to an agreement to use the European Stability Mechanism to provide credit lines of up to 2% of their GDP to tackle the consequences of the coronavirus COVID-19.
The Eurogroup discussed on Tuesday (24 March) what instruments Europe could deploy to release the fiscal stimulus and restart the economy, as the bloc is expected to suffer a severe recession.
The package will be presented to the leaders on Thursday and they will decide the shape and size of the European fiscal response, on top of the national packages already adopted.
To date, euro member states adopted stimuli totalling around 2% of the region’s GDP, around €240 billion, doubling the size of the efforts made up until last week against the pandemic.
The Eurogroup teleconference focused on how to use the European Stability Mechanism, the EU’s bailout fund to offer loans to eurozone countries.
In addition, senior EU officials said the issuance of joint debt to address the coronavirus, or ‘coronabonds’, has not been excluded yet, despite the reluctance of a few countries, especially Germany and the Netherlands.
Finally, the European Commission said that it is speeding up the work to present the proposal for the European unemployment reinsurance that would top up national schemes, as thousands of workers risk losing their jobs
“We are committed to exploring all possibilities necessary to help our economies get through these difficult times,” Eurogroup president Mario Centeno said after the teleconference.
“This involves all our institutions. This discussion has just only started and more work is needed to get to the finish line,” he added.
Centeno explained that there was “broad support” to use the ESM and its €410 billion available (around 3.4% of the eurozone’s GDP) to offer loans to countries.
The Mechanism would use one of its existing instruments, the enhanced conditions credit line, to channel the funds.
Some countries including Italy and Spain were sceptical of using such an instrument, given the additional burden of the conditionality and the stigma that comes with requesting assistance in the eyes of the market.
To that end, the conditionality will be adapted taking into account that the coronavirus is an external shock beyond the governments’ control, which affects all economies.
ESM chief Klaus Regling explained that the credit lines would be available for all euro members, but it would be up to each of them, or a group of them if they requested it.
In regard to the conditionality, Regling said it is important that countries return to economic stability after the crisis.
Asked about the risk of being further penalised by the markets if they seek aid, Centeno said that “there is a sense of unity, very very strong, among the member states”. ”We need to stand together in this”.
Each member state will be able to request a credit of up to 2% of its GDP, but it could be even higher for serious situations, said Regling.
Centeno added that “we still need more work” to finalise the instrument ahead of the European Council teleconference on Thursday. Some countries, including The Netherlands, considered that the ESM should not be used yet at this stage.
The most ambitious option continues to be the issuance of temporary eurobonds, or ‘coronabonds’, as requested by Italy, Spain or France.
Both Centeno and the Commissioner for Economy, the Italian Paolo Gentiloni, agreed that this option is still on the cards.
“We will explore all possibilities to tackle the huge challenges we have ahead of us,” said Centeno, who added that no option was ruled out during the debate on Tuesday evening.
Gentiloni acknowledged that “we have to go on with the discussion and we have to build consensus.”
Northern countries, notably Germany and the Netherlands, have been staunch opponents of the eurobonds. But the coronavirus represents an unprecedented crisis in the history of the EU.
Centeno stressed there will always be differences, “but everyone understands that this crisis is not the same as the previous one”.
Gentiloni admitted the “inherited divisions” among euro area members from the past crisis but was nonetheless optimistic that the unity that Europeans are showing in the face of the worst crisis since World War II would help to overcome the longstanding positions.
Gentiloni added that the Commission is “working hard” to put forward the unemployment reinsurance proposal, originally planned for the end of the year. He warned that there are not many resources available, as we are in the final year of the EU’s current seven-year budget but added that they will seek solutions.
French Finance Minister Bruno Le Maire wrote on his Twitter account after the Eurogroup that the discussion was “constructive” and there was “ a convergence of views on the use of the ESM”.
His Dutch colleague, Wopke Hoekstra, however, was wary of using the mechanism at this stage. “As we don’t know what is ahead of us, we deem it wise to keep this in our armoury, and use it as intended,” he said.
Hoekstra also added that the Netherlands asked the Commission to come up with proposals to use more of the existing EU funds to tackle the pandemic, on top of up to €37 billion made available.
On the opposite side, Spain’s Economy Minister Nadia Calviño warned before the teleconference that offering credit lines would not be enough.
“Of course, we would not consider sufficient a mechanism to provide liquidity to those countries that may need it, even as a precautionary measure, since this does not represent a true European response from a fiscal point of view,” Calviño said.
She added that Spain would accept it only as a “transitory” solution, to give “a first signal” to the markets about the will to work on a European solution.
[Edited by Zoran Radosavljevic]