EU leaders clashed last night over the extent to which they should share the financial burden in the fight against the economic fallout from coronavirus. Germany and the Netherlands led the charge in rejecting calls for the introduction of ‘coronabonds’ i.e. joint debt issued to member states of the EU.
Nine EU countries – Belgium, France, Greece, Ireland, Italy, Luxembourg, Portugal, Slovenia and Spain – called for the immediate rollout of the coronabonds. The more fiscally conservative countries argue that the best instrument to deal with the fallout is the European Stability Mechanism (ESM), a bailout fund set up during the debt crisis a decade ago with lending assets of 410 billion euros. They argue that the hardest-hit countries can borrow from the ESM at sustainably low interest rates. However, under ESM rules certain conditions would be imposed on the countries seeking assistance. These conditions will be left up to Finance Ministers to agree on when they convene next week.
The insistence on this ESM conditionality and the outright rejection of coronabonds escalated tensions, with Italy threatening to reject the draft conclusions, saying any reference to ESM conditionality was unacceptable.
French President Emmanuel Macron, Italian Prime Minister Giuseppe Conte, Spanish Prime Minister Pedro Sánchez and others have argued that the fight against Covid-19 is a special case, constituting an external, symmetric shock that affects all countries.
This same argument has been made by European Central Bank President Christine Lagarde, who urged finance ministers during Tuesday’s videoconference to go further than the ESM proposal and embrace the use of coronabonds.
The summit concluded with EU officials being tasked to work on an “exit strategy” and recovery plan to help rebuild the economy. Eurogroup President Mario Centeno said that he would convene the euro zone’s Finance Ministers next week in order to advance “swiftly” with the leaders’ mandate.
The Eurogroup met on Tuesday to discuss further policy response to the coronavirus fallout, following the meeting of EU leaders on 17 March, in which they invited the Eurogroup to continuously and closely monitor economic and financial developments. The discussion on 24 March progressed to making additional resources available at the European level to complement national measures, with accelerated legislative work underway to make the Corona Response Investment Initiative operational.
There was no joint statement made following Tuesday’s informal meeting, and no unanimous agreement on the use of the European Stability Mechanism (ESM), with Centeno saying there is “broad support” among the Eurogroup to harness the ESM to counter the economic disruption caused by the coronavirus. Centeno said that ESM would be the first line of defence for countries in need of a cash injection to deal with the unprecedented effects of the coronavirus.
The ECB announced a €750 billion Pandemic Emergency Purchase Programme last week, which is bigger than any programme launched during the euro crisis. This will allow countries to borrow at acceptable levels in the near term, with the ECB waiving the usual limits that apply to purchases from any one country.