EU approves half a trillion in virus stimulus but no corona bonds

EU approves half a trillion in virus stimulus but no corona bonds

TOPSHOT – French Economy Minister Bruno Le Maire (C) gestures as he and his advisors negociate with European partners on the phone before the Eurogroup meeting at the minister’s office in Paris, on april 9, 2020.

LUDOVIC MARIN

Euro zone finance ministers sealed a new coronavirus stimulus package on Thursday worth around half a trillion euros, but officials delayed a crucial decision on whether to issue joint debt instruments.

After intense negotiations over the last week, ministers clapped via video link on Thursday night as they greenlighted three new programs, which when combined are worth 540 billion euros ($591 billion).

European countries have been at loggerheads over how to fund some of the unprecedented costs associated with the pandemic. Northern European nations, traditionally more fiscally conservative than those in the south, have been unwilling to accept calls for “corona bonds” — a financial instrument that would combine debt securities from the 19 different countries that share the euro (sometimes also called Eurobonds). Member states had also struggled to agree on the terms of a 240 billion euro credit line.

Despite Thursday night’s breakthrough, analysts note that the announcements do not solve every issue on the table.

“(The) signal of mutual support is not as strong as it should have been,” economists at Berenberg bank said in a research note. 

One of the reasons being that “they did not resolve the dispute about joint bonds to finance a joint recovery fund,” they added.

Nine EU countries asked in late March for a common debt instrument which could raise funds in public markets and help with the costs from the virus. The Netherlands, in particular, is fiercely against the idea. There are concerns that taxpayers in northern nations would be financing the massive debt piles of southern countries. Thursday’s meeting culminated with the simple compromise to ask the heads of state to address this subject at a later stage.

“We also agreed to work on a Recovery Fund to prepare and support the recovery … Such a fund would be temporary, targeted and commensurate with the extraordinary costs of the current crisis and help spread them over time through appropriate financing,” the finance ministers said in a statement Thursday night.

The wording suggests that despite the compromise to “work” on another financing instrument, the ministers don’t know how this might be funded in the future.

“There are still clear and expected differing views on how to finance such a fund. Some countries would like to use ‘innovative financial instruments’ — read Eurobonds, while others would like to find other financing sources,” Carsten Brzeski, chief economist at ING, said in a note Thursday night.

 What’s been agreed? 

However, the ministers bridged their differences over the 240 billion euro credit line, which should be available within two weeks, and will be provided by the European Stability Mechanism — a fund established in the wake of the 2011 sovereign debt crisis.

They agreed that every euro country will be able to request up to 2% of their gross domestic product to finance “direct and indirect” costs related with the crisis.

Wopke Hoekstra, the Dutch finance minister, said Thursday that if a member state were to use ESM funds to finance costs not related with the pandemic, then there would be macroeconomic conditionality attached.

The ministers also agreed to increase the lending capacity of the European Investment Bank with a pan-European guarantee fund that could ultimately reach 200 billion euros. In addition, a new 100 billion euro initiative to reduce unemployment will also be made available. These two programs are on offer to all EU member states, whereas the ESM credit line is an initiative to the euro zone only. 

An EU official, who did not want to be named due to the sensitivity of the talks, told CNBC that Chancellor Angela Merkel of Germany and French President Emmanuel Macron were critical in convincing Dutch Prime Minister Mark Rutte to ease some of his opposition. The trio have had various phone calls over the past three days.

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