Europe Struggles to Agree on a Plan to Stem Virus Recession

Viktoria Dendrinou

(Bloomberg) -- Divisions among the European Union’s finance ministers threatened to derail, or at least delay, the bloc’s attempt to put forward a bold strategy aimed at mitigating the economic impact of the global pandemic.

An emergency teleconference that started Tuesday dragged on until Wednesday morning, as the region’s finance chiefs struggled to reconcile their contrasting visions, forcing negotiations to continue through the night. A press conference was tentatively scheduled for 10 a.m. Brussels time.

France and Europe’s hardest-hit southern countries are pushing for a firm commitment to a recovery fund financed by jointly issued bonds, a proposal that’s anathema to nations like Germany and the Netherlands that have strict red lines regarding the mutualization of debt. Ministers are also at loggerheads over the wording of a joint statement on the conditions for using the firepower of credit lines from the euro area’s bailout fund.

The ministers had been tasked by EU leaders to come up with a toolkit of measures to address the economic impact of the outbreak by the end of this week. But even as the virus continued to engulf their economies and medical systems, governments have struggled to move past traditional dividing lines.

And the stakes couldn’t be higher. Last week, IHS Markit said its monthly measure of services and manufacturing in the euro area points to an annualized economic contraction of about 10%. And that’s on top of job losses that are mounting across Europe, with Spain showing a record jobless-claims surge.

Emergency Fund

With the euro area facing an economic slump of unprecedented scale, countries have instituted fiscal measures worth 3% of EU gross domestic product as well as liquidity guarantees worth up to 18% of the bloc’s output. The European Central Bank has also launched massive bond purchases in what could end up becoming the biggest economic rescue package the continent has seen in peacetime. But few believe that’s sufficient given the scope of the downturn.

The finance ministers were discussing three main proposals to weather the crisis: employing the European Stability Mechanism, the euro-area’s bailout fund, to offer credit lines worth up to 2% of output of the bloc’s members; the creation of a pan-European Guarantee Fund to be managed by the European Investment Bank that could mobilize more than 200 billion euros in liquidity for companies; as well as an employment reinsurance scheme worth 100 billion euros.

But some leaders saw this package as insufficient, and demanded the inclusion of a recovery fund that would issue joint debt. “I say yes to euro bonds, no to ESM,” Italian Prime Minister Giuseppe Conte told reporters on Monday night.

The French government put forward a plan that would create a temporary reserve worth 3% of EU GDP, have a lifetime of as long as 10 years, and would be funded by the joint issuance of debt to mutualize the cost of the crisis.

The plan is controversial as it resembles an idea backed by several euro-area countries for so-called coronabonds -- joint debt instruments that would ease pressure on highly indebted countries like Italy and, to a lesser extent, Spain and France, and would reduce the risk of a backlash from bond investors.

While Germany has said that it supports measures to bolster an economic recovery, it has balked at any proposals that would see member states sharing debt. Other countries such as the Netherlands and Austria also oppose joint issuance, wary that they could end up on the hook for spending in the poorer south.

(Updates with talks dragging through the night)

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