Eurozone struggles to reach economic crisis deal

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Eurozone ministers are struggling to forge a compromise on a global bailout as southern member states push for joint debt to help pay for the post-coronavirus recovery.

Finance ministers are expected to hold a call Tuesday afternoon to try to agree on an emergency package to protect sovereigns, businesses and individuals from the pandemic.

The three-part plan, focusing on the European Stability Mechanism, the European Investment Bank and a new unemployment reinsurance scheme from the European Commission, totals around half a trillion euros.

But the fate of the package is unclear because Italy, Spain, France and their allies are calling for additional longer-term measures involving the joint issuance of additional public debt to finance post- coronavirus. Their decision has rekindled a long-standing North-South divide in Europe over the pooling of public debt, Germany and its resistant northern allies.

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Mário Centeno, president of the Eurogroup, warned the ministers this weekend not to let the dispute jeopardize the detailed rescue plan which was already on the table. But he also sought to assert himself in southern Europe by saying that he would speed up the debate on future common tools to finance post-corona economic reconstruction.

“We certainly need new money after this period to take advantage of a stimulus package,” he said in an interview with a newspaper group published on April 4, urging the ministers to be “creative”. .

The Eurogroup aims to support a report containing proposals that EU leaders should consider at their next virtual summit later this month. Here are the key elements that the ministers will discuss.

Deploy the European Stability Mechanism

EU and finance officials have sought to release the lending power of the European Stability Mechanism, the sovereign rescue fund for the euro area. The plan involves an ESM line of credit of up to € 240 billion, open to all countries.

But the MES was created in 2012, during the European debt crisis, when Germany and others insisted that Greece and other countries in economic difficulty adhere to difficult conditions, such as targets budgetary and economic reform programs, in exchange for support from the euro area.

Klaus Regling, the director general of the ESM, has worked on proposals to revise the conditions attached to his line of credit for improved conditions, a form of precautionary financial support that does not stop at a rescue plan.

The main requirement would be that the money be used to cover health sector expenses or to offset the economic fallout from the pandemic. And there would be a commitment to respect the EU surveillance framework for national budgets – which is in any case an obligation for all EU member states.

But Eurosceptics in Italy demonized the MES, saying that any loan by the mechanism would inevitably entail severe reform demands. Italy and its allies will only want to subscribe to a package including the ESM if the ministers also open the prospect of an increase in joint debt issues along the way.

Boost European Investment Bank loans

The Luxembourg lender has already proposed a plan to mobilize up to 40 billion euros of financing, which would be used for bridging loans, credit vacations and other measures to mitigate the impact of the blockages on small and medium-sized enterprises.

Member states are also discussing a € 25 billion pan-European guarantee fund that would mobilize support of up to € 200 billion, which would greatly increase the bank’s firepower.

Presentation of European unemployment reinsurance

The European Commission has proposed an instrument called SURE that would provide loans to economies facing sudden and severe increases in spending on short-time working schemes, such as those modeled on the German Kurzarbeit program.

The idea is for the commission to exploit the capital markets and raise 100 billion euros in loans, partly supported by guarantees from member states.

Providing guarantees would require the accession of a number of member state parliaments, which could slow down the process of establishment and operation. Some northern member states remain wary of the plan, given their traditional opposition to new European plans to transfer budgetary resources elsewhere.

Planning economic reconstruction

The three elements of the package aim to alleviate the current emergency, but EU capitals are increasingly focusing on the following.

The key question is how governments can revive their economies through stimulus measures, including large public investment projects, while financing their spending through public borrowing at the lowest possible rates. Part of the answer will be a redesign of the next seven-year EU budget to pre-load capital spending, but some states say it will not be enough on its own.

This is where the idea of ​​issuing mutual debt came in. Nine member states, including France, Italy and Spain, proposed the issue of coronabonds, which would be sold by a European institution with the support of all member states and used to finance spending programs in individual member states.

Last week, France added flesh to the idea with an article arguing for an “exceptional and temporary” common fund that would help countries kick-start their recovery.

But the concept of collective debt issuance remains highly controversial in a range of northern European member states, which means officials have struggled in recent days to find a way to bridge the gap between the two. camps before Tuesday’s meeting.

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