The Hague and Vienna are insisting on including stricter conditionality attached to loans for coronavirus-hit countries, toughening up the formula proposed by the eurozone’s bailout fund (ESM) and seen by EURACTIV.com.
EU finance ministers will discuss next Tuesday (7 April) a set of instruments to mitigate the economic fallout of the coronavirus COVID-19
The inclusive Eurogroup is expected to report next week to the EU leaders on options to address the consequences of the pandemic, which could trigger a deeper recession than in 2009.
In a preparatory meeting on 1 April, national envoys discussed European Stability Mechanism’s instruments and the European Investment Bank’s plan for a €25 billion Guarantee Fund, according to the draft proposals seen by EURACTIV.
The capitals have also received a French proposal to issue joint debt, and a Dutch initiative to set up a €20 billion fund to cover health-related costs.
A package including the ESM’s enhanced conditions credit line, the EIB’s additional guarantees and the European Commission’s new instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE) are seen as the most feasible option at this stage to provide a European response to the pandemic, officials said.
But member states continue to disagree on the conditionality attached to the ESM credit line.
According to the ESM timesheet, seen by this website, member states using the ECCL [enhanced conditions credit line] commit to dedicating the funds to cover their healthcare needs and “economic costs incurred to respond to corona crisis”.
As a longer-term conditionality, “respect of EU fiscal rules and European Semester would need to be ensured, including any flexibility applied by the competent EU institutions,” the document added.
The ESM reference to the flexibility could be a small concession to win over the sceptical countries, especially Italy.
In addition, the terms would be the same for all countries, so no member state would be stigmatised, and it would not specify any reform or adjustment to balance the public accounts.
However, officials said the Netherlands and Austria continue to find this conditionality too vague and want to include more country-specific conditions, for example, adjustments or reforms that may be needed in those countries after the pandemic. Germany distanced itself from this group, an EU source said.
Another EU diplomat added Finland to this group against the loose conditionality but admitted that The Hague and Viena were the strongest opponents.
Austria argued that the European Court of Justice had ruled that ESM disbursements have to be made under fiscal conditionality, but added that member states could be “smart” about how to apply it.
The Netherlands said that the reference to the respect of the EU fiscal rules is “not enough”, and the conditionality needs to look at the specificities of each country. Moreover, for its government, the ESM should be considered only as a lender of last resort.
In the opposite camp, Italy continues to oppose any conditionality attached to the financial aid, given the nature and the magnitude of the external shock, which has no relation with the economic policy of affected countries.
In addition, Italy and Spain consider that the ESM loans are only a partial solution, and should be completed with more ambitious instruments such as the joint issuance of debt, known as ‘coronabonds’.
Another bone of contention would be inspections by the ‘men in black’ to monitor the ‘memorandum of understanding’ that would contain the conditionality.
As part of the ECCL monitoring, the ESM stipulates that the beneficiary country will be subject to enhanced surveillance, including visits to their capitals of European Commission officials, in liaison with the European Central Bank.
However, the enhanced surveillance could be restricted to periodic reporting without any visits, EU officials explained, although this issue remains part of the discussion.
As for the loans, the ESM proposed maturity of between five and 10 years and a price near zero (50 bps up-front and 35 bps annually).
Euro area countries could access up to 2% of their GDP from the ESM’s €410 billion available.
EU Officials were cautiously hopeful that Rome could give a half-hearted approval if the terms are set to the minimum, the visits are excluded and the ESM instrument is part of a broader package, together with the European Commission’s SURE programme to support workers and the EIB’s new €25 billion Guarantee Fund for the pandemic.
But an EU diplomat said that Italy kept insisting on the ‘coronabonds’ in order to accept the ESM instrument.
As regards the European Investment Bank’s new scheme, member states will contribute with an amount equal to their EIB capital share applied to the €25 bn. These guarantees could help to mobilise €200 billion, according to the bank’s estimates.
According to EIB’s explanatory note, also seen by EURACTIV, the Guarantee Fund will back primarily sustainable private sector firms that are struggling due to the pandemic. In addition, it could also support “high-risk operations” of regions, municipalities and healthcare authorities affected by the virus.
In addition to the guarantees, the EIB could also intervene by buying equity for entities that may need immediate rescue.
The EIB’s new scheme will be available once member states representing at least 60% of the bank’s capital made their commitments.
Dutch’s health fund
France and the Netherlands also shared with their European partners details of their own proposals unveiled this week to set up new funds for tackling the coronavirus crisis.
The Netherlands proposed a more focused instrument of up to €20 billion to cover part of the health-related costs fuelled by the pandemic.
This would include medicines, intensive care unit equipment, and other medical supplies. It would also contemplate bolstering permanent national health capacities and EU initiatives to better respond to the health crisis.
An important difference is that it would provide subsidies and grants, not loans, but the amount and the narrow scope would limit its impact.
The Fund would be financed by bilateral contributions in direct payments by EU27 member states, based on their GNI, and will be available for three years, with the possibility of an extension.
Meanwhile, France agreed with the package including the ESM’s ECCL formula, the EIB’s Guarantee Fund and the Commission’s SURE instrument.
But on top of it, Paris insists that the coronavirus is an exceptional crisis that requires “exceptional solidarity” to restart the European economy once the health crisis is over.
In that context, its proposal calls for a dedicated fund that would issue bonds with the joint guarantee of EU member states.
The fund “would finance programmes designed to kick-start the economy in a way that would be coherent with the Green Deal and the industrial strategy put forward by the Commission on 10 March (especially to contribute to the relocation in Europe of strategic value-chains),” the French paper says.
French President Emmanuel Macron insisted over the past weeks that the pandemic should be seen as a ‘wake-up call’ for Europe to reduce its dependency on foreign suppliers in the medical field.
The fund could also finance health expenditure but only if it increases the capacity of member states to cope with external shocks such as COVID-19.
As the goal would be “first and foremost be to ensure solidarity among the EU27”, the costs would be reimbursed through a “new and exceptional” solidarity tax.
EU officials agreed that, on top of the ESM-EIB-Commission trio package, an additional instrument would be needed to finance the recovery. But they pointed out that the ‘coronabonds’ option, as defended by France and eight member states, remains “overstretched”, given the staunch opposition from Germany and the Netherlands.
The Commission insisted that the multi-annual financial framework, the EU’s long-term budget, should play the “key” role in the recovery of the European economy.
[Edited by Zoran Radosavljevic]