Meeting in an expanded format with 27 Member States, the Eurogroup has been invited to present to the European Council a comprehensive overview of budgetary and socio-economic measures which could complement the arsenal already in place to respond to the COVID-19 pandemic affecting the Twenty-Seven (see EUROPE 12455/1).
We need to use “all” existing instruments and institutions and “be prepared to do more” to protect citizens and businesses, said European Council President Charles Michel on Monday 6 April.
Unprecedented measures have already been enacted that disrupt principles that were thought to be entrenched. For the first time in the history of the single currency, the Stability and Growth Pact has been frozen to allow Member States to spend lavishly to support their national health systems (see EUROPE 12452/1). As the European rules regulating state aid have been considerably relaxed, the Commission is approving national measures to support the economic fabric on a daily basis (see EUROPE 12450/6). The European Central Bank (ECB), despite a false start in terms of communication, rectified the situation within a week and announced a new PEPP operation for the massive buyback of sovereign securities (see EUROPE 12450/7). In addition, it is noted that the proposal for the EU’s Multiannual Financial Framework (MFF) for 2021-2027 will be redirected in the light of the lessons learned from the Union’s capacity to respond to the crisis.
In the following document transmitted to the national delegations before the Eurogroup, the European Commission has compiled all the measures it has already adopted since the beginning of the health crisis. See: https://bit.ly/3aNPCEH
In the opinion of economists and several Finance Ministers, the nascent economic crisis, self-inflicted by global containment measures, will be the most serious since the Great Depression of 1929. Figures predict a recession of up to 10% of GDP in the euro area. On Monday, French Finance Minister Bruno Le Maire indicated that the contraction of GDP in France will be “far beyond” the -2.9% figure observed in 2009.
There are therefore many calls for the scale of the European response to be commensurate with the incipient socio-economic crisis and to demonstrate the solidarity that Member States should show towards each other.
ESM. The Eurogroup is exploring several options. The one that wins the most support is the activation of the European Stability Mechanism (ESM), the intergovernmental rescue fund for the euro-area countries with a current firepower of €410 billion.
Two lines of credit are envisaged: ECCL or Rapid Financing Instrument (RFI) (see EUROPE 12461/3). The RFI credit line would not be put in place immediately, while the ECCL credit line is already active. According to the President of the Eurogroup, Mário Centeno, an envelope of €240 billion could be mobilised in this way.
As with any activation of the fund, recourse to the ESM will require monitoring by euro-area creditors, who will activate one or both credit lines. However, unlike the previous macroeconomic rescue packages that targeted Greece, Portugal and Ireland after the 2008 financial crisis, the conditions attached will be eased, as the pandemic is an unprecedented symmetric shock affecting all Member States, as underlined by the Twenty-Seven.
It should be sufficient for a recipient country to direct aid exclusively towards the fight against the coronavirus and immediate support to the economy while committing itself to pursuit of a sound fiscal policy. And there is reportedly no question of creditors’ representatives (‘troika’) regularly monitoring the implementation of the credit lines. Germany has taken a clear stance in this respect.
Such arrangements have been validated by the Legal Service of the Council of the EU. In an opinion delivered on Saturday 4 April, of which EUROPE has been copied, the legal experts base themselves on the case law of the Court (Pringle case C-370/12, see EUROPE 10379/6). They conclude that an activation of ESM credit lines, which would only be conditional on a commitment by the beneficiary euro-area country to cover the health and economic costs inflicted by COVID-19, is compatible with the European Treaty, which prohibits budgetary transfers from the EU to the Member States (Article 125(1) of the TFEU). They note that all euro-area countries remain solvent and that none of them is currently subject to the excessive deficit procedure.
Nevertheless, according to our information, the Netherlands is still asking for the imposition of conditions in two stages: after a first phase as described above, structural reforms could be imposed once the health crisis phase is over. According to this Member State, the issue will not be decided on Tuesday, as delegations are so ideologically driven.
“Discussions on conditionality are making real progress. [...] The key point is to bring together very different points of view on how to activate credit lines once and for all. [...] If we can reach a good agreement on this issue, this is one of the instruments we should use”, however, said Economics Commissioner Paolo Gentiloni on Monday 6 April in a debate organised by Bruegel.
Highly controversial in Italy, the activation of the ESM is described as a capitulation of the country to Europe by the far-right leader Matteo Salvini, now in opposition.
“Public opinion cares very little about the technicalities of the ESM” or the temporary suspension of EU fiscal rules, a freeze which, moreover, makes the financial bailouts of the ESM superfluous, said Ezio Perillo, a former judge at the European Court of Justice, on the blog free-group.eu. He has advocated bringing the euro-area rescue fund within the scope of EU legislation.
EIB. The increased mobilisation of the European Investment Bank (EIB) is a second element of the response to the economic crisis. This seems to be the least controversial element.
The EU Bank proposes that a pan-European fund be set up that provides guarantees to economic actors to the tune of €200 billion.
“There is a fairly broad agreement on increasing loan volumes. It remains to be seen what the volume will be”, said Mr Le Maire when he presented the Eurogroup’s challenges to some journalists on Monday afternoon.
However, although it is mentioned by some countries, a capital increase of the EIB does not seem to be on the table at this stage, even though it was proposed by Mr Michel in the negotiation box on the 2021-2027 MFF.
“In part, the creation of a guarantee fund serves the same function”, said one diplomat.
SURE. The introduction of the temporary unemployment reinsurance instrument SURE, recently tabled by the European Commission, is the third instrument on which agreement is beginning to emerge (see EUROPE 12460/3, 12462/9).
It remains to be seen how it will work, which will ultimately be decided by majority vote in the EU Council. Several Member States are asking for clarification on the financing of an instrument that would only become active once 27 guarantee agreements have been signed with the Commission.
However, the most proactive States in terms of European integration, including the countries most affected by the pandemic, want to go further by adding a fourth stage to the rocket, namely the introduction of an ambitious mechanism for mutualising public debt.
A fourth stage for the rocket? Since Mrs Merkel says that “Europe is facing the greatest test in its history”, we must show that we have noted the seriousness and duration of the socio-economic crisis and, to do so, we must “get out of our comfort zone”, said Mr Le Maire.
France proposes the establishment of a European Solidarity Fund which would be addressed to the Twenty-Seven, unlike the ESM. Active for 5 years, this temporary fund would issue debt at a lower cost to enable the European economy to recover through strategic investments in key sectors: health, “the most threatened industrial sectors” (aeronautics, tourism, automobile), new technologies (see EUROPE 12460/6).
This fund would be temporary and would only cover debt issued in the future, with each country remaining responsible for the public debt already issued. It would mainly help the most affected countries, which would reimburse only up to the amount of their contribution. For France, it should be financed by joint and solidarity emissions or, if the issue is too sensitive, by the GDP of each Member State, or even by new European taxes.
The creation of such an instrument would be the sine qua non for Italy to agree to use the ESM lines of credit. And, according to France, in the absence of such an instrument, the ECB will have to continue to mop up sovereign debt on the markets.
But six countries – the Nordic and Baltic states, the Netherlands and Austria – are making the mutualisation of public debt an impassable red line and consider that efforts should be concentrated on the immediate response to the crisis.
“We refuse to add debt to debt”, said one diplomat. (Original version in French by Mathieu Bion with Damien Genicot, Hermine Donceel and Pascal Hansens)