Eurozone locked in north-south divide

27.04.2020
Second online meeting of Eurozone’s finance ministers ended in a stalemate. Although a plan for a COVID-19-related rescue package has already been proposed, a lack of unity among member states has prevented its implementation. There was a need for another meeting to reach an agreement.
EC headquarters Brussels

EC headquarters, Brussels, Belgium (Sébastien Bertrand, CC BY 2.0)

EC headquarters, Brussels, Belgium (Sébastien Bertrand, CC BY 2.0)

The finance ministers of the Eurozone member states started online talks just after midday on April 7th. Although they spent nearly 16 hours in discussions, they failed to find an agreement on the exact parameters of the badly needed financial rescue package for the block.

The pre-agreed agenda for the meeting revolved around the so-called three-pronged plan, focusing on the European Stability Mechanism, the European Investment Bank and a new European Commission (EC) instrument to tackle the problem of temporary unemployment.

This was the second attempt of Eurozone’s leaders to hammer out a deal to prop up the ailing European economy affected by the COVID-19 global pandemic. The first videoconference took place on March 26th, and it resulted in a harsh dispute between the Portuguese Prime Minister António Costa and the Dutch Finance Minister Wopke Hoekstra.

The first meeting’s agenda was centered around talks regarding the possibility of issuing a joint debt instrument which would be guaranteed by all member countries, the s- called corona bonds. Nine countries including Italy, Portugal, France and Spain had thrown their weight behind the proposal. However, the more fiscally conservative countries including Germany, and particularly the Netherlands, had opposed the idea.

Putting it simply, the issuance of the joint debt instrument — corona bonds — could allow poorer states with lower credit ratings, such as Spain and Italy, to borrow money under more favorable conditions, i.e. with lower interest rates. This would be made possible by making all members of the Eurozone, including those with better credit ratings, such as Germany and the Netherlands, guarantee this mutual loan.

The fiscally more prudent, northern states would thus essentially help their southern neighbors reach cheaper loans by agreeing to provide support in case of a failure to pay back the debt on part of any other state. However, the representatives of both Germany and the Netherlands were quick to dismiss this idea.

Alternative plan

Since the failure of the first meeting, EU leaders have been working hard to come up with an alternative proposal that would please both sides. To help bridge the gap between EU members on the rescue package issue, EC has been called upon to help facilitate the negotiation process.

Finally, on April 10th, after a series of bilateral and group videoconferences the Eurozone ministers proposed establishing a Pandemic Crisis Support with EUR240bn of credit lines via the European stability mechanism (ESM). The support is for all Eurozone member states with “standardized terms agreed in advance by the ESM Governing Bodies…on the basis of up-front assessments by the European institutions.”

Under the leadership of the President Ursula von der Leyen, the EC had been busy making sure that EU-side supply chains continue to operate, after individual EU member states opted to re-introduce border checks.

“We want to shape the next EU’s longer-term budget (2021-2027) in such way that is crucial part of our recovery plan,” Ms. von der Leyen said at a press conference on April 2nd. Along with the promise of a new draft proposal for the new EU budget, Ms. von der Leyen presented a set of measures aimed at supporting EU member states in their economic response to the consequences of the Covid-19 pandemic.

The three-pronged plan set out by the Commission consists of the following three steps:

  1. Deploying the European Stability Mechanism;
  2. Boosting European Investment Bank lending;
  3. Introducing EU unemployment reinsurance.

Unlocking the lending power of the European Stability Mechanism (ESM), the Eurozone’s sovereign wealth fund, would free up to EUR240bn that would be open to all countries, according to the Financial Times.

The only requirement attached to lending from the wealth fund would be that money is used only to cover expenses relating to health-sector or to help sectors affected by the pandemic. Additionally, countries hoping to reach this money would also have to respect the EU’s rules regarding surveillance for national budgets.

However, using the ESM has found many opponents particularly in Rome where many politicians worry that relying on the fund would burden the country in long term debt that would be hard to repay, Reuters reported.

The second part of the rescue package consists of an immediate support package of up to EUR40bn from the European Investment Bank. On top of that, there is a possibility of a creation of a EUR25bn guarantee fund which would enable the EIB Group to extend its support even to companies outside of the Eurozone.

The last measure known as SURE (Short Time Employment Scheme) is aimed at preventing European companies from laying out workers on a mass scale. This will be achieved by setting up a EUR100bn financial instrument which member states will be able to loan money from to guarantee that workers receive an income and that companies keep their staff, even if the economic conditions continue to deteriorate.

So, the total rescue package would be worth nearly EUR500bn, making it the biggest fiscal support program in the world.

Lack of unity

According to Reuters , the 16-hour discussion produced, among other things, a “feud between Italy and the Netherlands over what conditions should be attached to euro zone credit for governments fighting the pandemic.” “The Italians want a reference to debt mutualization as a possible recovery instrument to be analyzed more in the future. The Dutch say ‘no’,” Reuters reported, citing a diplomatic source. This seems to suggest that southern states, headed by Italy, are willing to settle for a mere promise of a talk about a common debt in the future. But the Dutch won’t budge an inch from their original position.

On the issue of the coronabonds, under which the EU member states would borrow on the international financial markets on the same terms and share liability, the final agreement only referred to governments working on “innovative financial instruments, consistent with EU treaties” to create a rescue fund.

Filip Brokeš is an analyst and a journalist specializing in international relations.


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