After all-night meeting with no agreement, Eurogroup meets again, agrees on €540 billion package
On March 26, the European Council, the heads of state or government of the European Union, met in a videoconference for the third time in less than three weeks to discuss the EU’s response to the COVID pandemic. Meeting a week after the European Central Bank announced a new Pandemic Emergency Purchase Programme (PEPP) under which it will purchase up to €750 billion of private and public securities this year, two days after the Eurogroup, the finance ministers of the euro area member states, met and broadly supported using the resources of the European Stability Mechanism to support euro area member states in need of financial assistance, and the day after nine EU leaders endorsed, in a letter to European Council President Charles Michel, creation of a common EU debt instrument to generate the funds required in order to recover from the economic consequences of the pandemic, the Council debated—sometimes heatedly—the Eurogroup and nine leaders’ proposals for more than five hours but reached no agreement and invited the Eurogroup to continue its discussions and present it with proposals within two weeks.
The Eurogroup met last Tuesday. Speaking before the meeting, President Mário Centeno, the Portuguese finance minister, said he was convening the ministers to agree on a “bold response” to the pandemic—“arguably the most sizeable and ambitious package ever prepared by the Eurogroup.” The package consisted, he said, of three elements—a safety net for workers, a safety net for firms, and a safety net for countries. The first element consisted of the new instrument the Commission proposed the previous week—SURE (Support to mitigate Unemployment Risks in an Emergency)—that would provide up to a total of €100 billion of temporary assistance to member states in the form of loans on favorable terms to help cover the costs to firms of national short-time work schemes in which the firms continue to pay workers after their hours have been reduced. SURE, one component of the Commission’s recently-proposed European Unemployment Reinsurance Scheme, will be financed by the Commission borrowing on the market. The second element consisted of the European Investment Bank’s proposed €200 billion loan guarantee program to support ailing firms, especially small and medium enterprises. The third, and most contentious, element consisted of making use of the European Stability Mechanism’s Enhanced Conditions Credit Line to provide precautionary credit lines up to a total of €240 billion to euro area countries to assist their response to the crisis. In addition, Centeno said he would call on the ministers to make a “clear commitment” to a “coordinated and sizeable recovery plan”—also a contentious element because such a plan would, of course, have to be financed in some way.
Last Tuesday’s meeting, which began in the late afternoon, continued, with occasional breaks, for 16 hours until Centeno suspended it the next morning. In a tweet, he said, “After 16h of discussions we came close to a deal but we are not there yet. I suspended the Eurogroup & continue tomorrow, thu. My goal remains: A strong EU safety net against fallout of covid19 (to shield workers, firms & countries) & commit to a sizeable recovery plan.”
The divisions among the ministers were the same as those in the earlier Eurogroup meeting and the European Council meeting two days later. In a letter to Michel after the earlier meeting, Centeno said the ministers “broadly agreed” that the resources of the ESM should contribute to the coordinated response. There was, he said, “broad support” to make a “Pandemic Crisis Support safeguard” available under the provisions of the ESM Treaty, building on the framework of the existing Enhanced Conditions Credit Line. And there was “broad agreement” that Pandemic Crisis Support is a relevant safeguard for any ESM member affected by the pandemic and that significant resources should be allocated for that purpose, with a “benchmark” allocation to a member state of around 2 percent of its GDP. But the terms “broad support” and “broad agreement” were euphemisms for saying there was not complete support and agreement and, indeed, the ministers of several states—most notably, those of Germany, the Netherlands, Austria and Finland—strenuously objected to the proposal and insisted, in opposition to the French, Spanish, and Italian ministers, that the conditionality provisions that normally apply when the ESM provides financial assistance as in a bailout remain in effect. The latter group of ministers also objected to the modest scale of the “benchmark” allocation.
The next day, nine leaders—French President Emmanuel Macron, Italian Prime Minister Giuseppe Conte, Spanish Prime Minister Pedro Sánchez and the leaders of Belgium, Luxembourg, Ireland, Greece, Portugal, and Slovenia—wrote to Michel and called for a “coordinated response at the European level,” one that would involve “the activation of all existing common fiscal instruments to support national efforts and ensure financial solidarity, especially within the eurozone. In particular, we need to work on a common debt instrument [bold fonts in the letter] issued by a European institution to raise funds on the market on the same basis and to the benefits of all Member States.” The case for such a common instrument, they said, is strong because they are all facing a symmetric external shock for which no country bears responsibility but whose negative consequences are endured by all. The funds, they said, “will be targeted to finance in all Member States the necessary investments in the healthcare system and temporary policies to protect our economies and social model.” In addition, they suggested “we could explore other tools like a specific funding for Corona-related spending in the EU budget” for at least 2020 and 2021.
After the European Council discussed the alternatives put forward by the Eurogroup and the nine leaders for more than five hours at its meeting on March 26, with the same divisions among the leaders that had occurred among the finance ministers two days earlier, it issued a statement saying the leaders “fully acknowledge the gravity of the socio-economic consequences of the COVID-19 crisis and will do everything necessary to meet this challenge in a spirit of solidarity.” They went on to say, “We take note of the progress made by the Eurogroup. At this stage, we invite the Eurogroup to present proposals to us within two weeks…Our response will be stepped up, as necessary, with further action in an inclusive way, in light of developments, in order to deliver a comprehensive response.”
At last Tuesday’s marathon videoconference, it was the Dutch and Italian finance ministers, Wopke Hoekstra and Roberto Gualtieri, who most vehemently presented the contrasting positions in regard to the use of ESM resources and the creation of a common debt instrument to raise the substantial additional funds needed to support a post-COVID recovery. Hoekstra, supported by several other ministers, argued there must be conditions attached to the ESM credit line, including economic reforms, to ensure that the funds will eventually be repaid. And he adamantly rejected any mention in the draft statement of the possible use of “coronabonds” or, indeed, any type of EU debt instrument, arguing that the existing resources are sufficient to support a recovery. Gualtieri, also supported by several other ministers, adamantly resisted the inclusion in the terms of the ESM credit lines of any conditions involving the performance of the economy, the reform of economic policy, or oversight of the performance of the economy and of economic policy.
Despite the stalemate, there was some reason to think, as the long meeting broke up, that an agreement on the package might be reached when the ministers reconvened last Thursday afternoon. For one thing, although France and Germany had, in recent meetings, been on opposite sides of the ESM and eurobond issues, it was apparent that both governments were persuaded, by the magnitude of recent estimates of the likely drop in Gross Domestic Product this year, that the EU must act. Olaf Scholz, the German finance minister, called on his colleagues to resolve the difficult financial issues and support a “good compromise for all citizens.” And Bruno Le Maire, the French finance minister, said, “As we are counting deaths by hundreds and thousands, ministers of finance are playing on words and adjectives. That’s a shame for finance ministers, a shame for the Eurogroup and a shame for Europe. We should have a common understanding of the gravity of the crisis and decide on a strong common response.”
After the marathon meeting broke up Wednesday morning, Scholz and Le Maire continued their bilateral discussions with each other and with other ministers, and Macron and Merkel, although far apart on the common debt issue, contacted other leaders to persuade them of the necessity of reaching an agreement on the Eurogroup package. Thursday’s resumption of the Eurogroup meeting was delayed for four hours while various bilateral discussions continued. But once the meeting finally began, the ministers reached an agreement on the package relatively quickly—largely by papering over with ambiguous language their differences in regard to ESM conditionality and ducking altogether the question of how to finance the substantial amount needed to assist the post-COVID recovery.
In regard to the use of the ESM, the ministers proposed establishing a Pandemic Crisis Support, based on the existing Enhanced Conditions Credit Line (ECCL) precautionary credit line and adjusted in light of the specific challenge, that would be available to all euro area member states, with “standardized terms agreed in advance by the ESM Governing Bodies…on the basis of up-front assessments by the European institutions.” The only requirement for accessing the credit line would be that “euro area Member States requesting support would commit to use this credit line to support domestic financing of direct and indirect healthcare, cure and prevention-related costs due to the COVID 19 crisis.” Access granted will be 2% of the member state’s end-of-2019 GDP as a benchmark. The credit line would be available until the crisis is over. “Afterwards, euro area Member States would remain committed to strengthen economic and financial fundamentals, consistent with the EU economic and fiscal coordination and surveillance frameworks.” There would not be explicit conditions attached to a specific credit line. But there would be terms agreed in advance by the ESM on the basis of “up-front assessments” by the European institutions,” the credit line could be used only to finance healthcare, cure and prevention-related costs, the benchmark allocation would be 2% of the 2019 GDP, the credit line would be available only until the crisis is over, and thereafter the state would remain committed to “strengthen economic and financial fundamentals consistent with the EU economic and fiscal coordination and surveillance frameworks.” Those provisions would not be conditions as the term is conventionally understood in the wake of the several bailouts provided several euro area members in 2010-15—reducing spending and deficits, raising revenues, etc. But taken together, they certainly amount to “soft conditionality.”
Moreover, while the agreement was cheered throughout much of Europe (if not by Matteo Salvini and others in Italy), the ESM arrangement exaggerates the amount of funding that will in all likelihood be available to the euro area member states. In its report to the European Council, the Eurogroup didn’t mention how much assistance would be available to those member states through the Pandemic Crisis Support. However, in his remarks following the meeting, Centeno said that, given the benchmark allocation of 2 percent, the maximum amount available if all 19 euro area member states needed assistance would be close to €240 billion. That, combined with the €100 billion to be made available under the proposed SURE instrument to assist firms in covering their costs in national short-time work schemes and the European Investment Bank’s proposed creation of an EU-wide guarantee fund of €25 billion that could support €200 billion of financing for small and medium enterprises, would add up to a package that could amount to €540 billion. But it’s quite unlikely that all 19 of the euro area states, including the one that is, by far, the largest, will need assistance—meaning that the total credit lines under the ESM’s ECCL are likely to add up to less than €240 billion.
In regard to a “Recovery Fund” to support a recovery from the economic consequences of the pandemic, the finance ministers agreed Thursday to work on such a fund to prepare and support the recovery by providing funding through the EU budget to programs designed to kick-start the economy in line with EU priorities and ensuring solidarity with the most affected member states. Such a fund, they said, would be temporary, targeted and commensurate with the extraordinary costs of the crisis and would help spread them over time through “appropriate financing.” But they ducked the question of how to finance the Recovery Fund and, instead, looked to the leaders for guidance in that regard: “Subject to guidance from leaders, discussions on the legal and practical aspects of such a fund, including its relation to the EU budget, its sources of financing and on innovative financial instruments, consistent with EU treaties, will prepare the ground for a decision.”
On April 23, the European Council will meet again. It will no doubt approve the package agreed by the Eurogroup. But Europe needs more than that package if the economy is to recover from the effects of the pandemic. As the coronavirus continues to take its terrible toll on Europeans, so too it is taking a mounting toll on the economy. In its Winter forecast, published in mid-February, the Commission estimated the growth rate in 2020 would be 1.4 percent in the EU and 1.2 percent in the euro area. By mid-March, internal documents in the Commission were estimating a drop in GDP of 2.5 to 4 percent. And even the higher estimates may understate the contractionary effect of the pandemic. For example, last week the five leading economic institutes in Germany estimated GDP will drop by 9.8 percent in the second quarter and by 4.2 percent this year. In France, GDP dropped by 6 percent in the first quarter and the country is now in a recession, having also experienced a drop in GDP in the last quarter of 2019. In Italy, GDP is estimated to drop by 10 percent in the second quarter and in Spain it is expected to drop by 9 percent in the second quarter.
Europe is clearly heading into a deep recession. When it meets next week, the European Council will have to face and answer this question: What can the EU do to generate a recovery and how should the EU pay for it?
David R. Cameron is a professor of political science and the director of the European Union Studies Program.