European Council approves Eurogroup’s €540 billion package, agrees to establish recovery fund

Yesterday, the European Council, the heads of state or government of the member states of the EU, met to consider the €540 billion package of assistance for workers, firms, and euro area member states the Eurogroup, the finance ministers of the euro area, approved on April 9. In addition, the leaders discussed the form, size and financing of a possible Recovery Fund to assist the member states in recovering from the pandemic. As expected, they approved the Eurogroup package and directed that it be implemented immediately. And as also expected, they didn’t reach any definitive agreement about the form, size and financing of a Recovery Fund. But they did at least agree “to work toward establishing a recovery fund, which is needed and urgent” and directed the Commission to “analyze the exact needs and to urgently come up with a proposal that is commensurate with the challenge we are facing.”

At the Council’s previous meeting on March 26, a week after the European Central Bank had 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 had 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 of the leaders had endorsed, in a letter to European Council President Charles Michel, creation of a common EU debt instrument to generate the funds needed to ensure that the member states recover from the pandemic, the leaders had debated—at times heatedly—the Eurogroup and nine leaders’ proposals for more than five hours. Unable to reach any agreement, they invited the Eurogroup to continue its discussions and present it with proposals within two weeks.

On April 7, the Eurogroup met to consider what President Mário Centeno, the Portuguese finance minister, said was a “bold response” to the pandemic—“arguably the most sizeable and ambitious package ever prepared by the Eurogroup.” The package consisted of three elements. The first, designed as a safety net for workers, consisted of a new instrument proposed by the Commission—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. The second element, designed as a safety net for firms, 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, designed as a safety net for the euro area countries, consisted of using the European Stability Mechanism’s Enhanced Conditions Credit Line facility to provide precautionary credit lines up to a total of €240 billion to euro area member states needing assistance. 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 issue because such a plan would, of course, have to be financed in some way.

That meeting went on for 16 hours until Centeno suspended it without a decision. The ministers were deeply divided over both the use of the ESM facility and the method of financing a recovery fund. The Dutch minister, Wopke 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 would eventually be repaid. In addition, he and others adamantly rejected any mention in the statement that would be sent to Michel of the possible use of “coronabonds” or, indeed, any type of EU debt instrument to support the recovery from the pandemic. The Italian minister, Roberto Gualtieri, supported by several other ministers, adamantly resisted inclusion in the terms of the ESM credit lines of any conditions involving the performance of the economy, the reform of economic policy, or the oversight of both and urged creation of a common debt instrument to raise the funds needed to support a recovery. In a tweet after the marathon meeting, Centeno 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.”

Despite the stalemate, there was good reason to think an agreement on the package would be reached when the ministers reconvened on April 9. For one thing, although France and Germany had, in recent meetings, been on opposite sides of the ESM and eurobond issues, 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, Scholz and Le Maire continued their bilateral discussions with each other and with other ministers, and French President Emmanuel Macron and German Chancellor Angela Merkel, although far apart on the common debt issue, contacted other leaders to persuade them of the need to reach an agreement on the Eurogroup package. When the finance ministers reconvened on April 9, they quickly reached an agreement on the package—largely by papering over their differences in regard to ESM conditionality with ambiguous language and ducking the question of how the recovery fund would be organized and financed.

In regard to the ESM, the ministers proposed establishing a Pandemic Crisis Support, based on the ESM’s Enhanced Conditions Credit Line (ECCL), as a precautionary credit line 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 using the credit line “to support domestic financing of direct and indirect healthcare, cure and prevention-related costs due to the COVID 19 crisis.” As a benchmark, the credit line could be up to two percent of the member state’s end-of-2019 GDP and 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 and would be available only until the crisis is over. 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 regarded as conditions as the term is generally understood in the wake of the euro area bailouts of 2010-2015—reducing spending and deficits, raising revenues, etc. But taken together, they certainly amount to “soft conditionality.”

In its report to the European Council, the Eurogroup didn’t mention how much assistance would be available to the member states through the Pandemic Crisis Support facility. However, in his remarks following the meeting, Centeno said that, given the benchmark allocation of two percent, the maximum amount available if all of the euro area member states needed assistance would be close to €240 billion. That, combined with the €100 billion to be made available under the 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.

In regard to a recovery fund, the finance ministers agreed 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 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.”

In the run-up to yesterday’s European Council meeting, a variety of proposals were put forward regarding the form, size and financing of the recovery fund. Speaking to the European Parliament last week, Ursula von der Leyen, the President of the European Commission, said, “We need a Marshall Plan for Europe’s recovery and it needs to be put in place immediately. There is only one instrument we have that is trusted by all Member States, which is already in place and can deliver quickly. It is transparent and it is time tested as an instrument for cohesion, convergence and investment. And that instrument is the European budget. The European budget will be the mothership of our recovery…We will use the power of the whole European budget to leverage the huge amount of investment we need to rebuild the Single Market after Corona. We will front-load it, so we can power that investment in those crucial first years of recovery.” One way to do that, she said, would be to increase the “headroom” in the budget between the amount raised through member state contributions and spending, increasing the amount the Commission can borrow in order to fund the recovery.

In an interview that appeared in Corriere della Sera on Sunday, Klaus Regling, the Managing Director of the ESM, suggested, “we will need new instruments and perhaps also new institutions to support the recovery phase” beyond the roughly €500 billion the Eurogroup had proposed. When pressed, he suggested that “for the second phase we need at least another €500 billion from European institutions, but it could be more.” For that, he said, “we need to discuss new instruments with an open mind, but also use the existing institutions, because it is easier.” And implicitly endorsing von der Leyen’s position, he added, “Including in particular the Commission and the EU budget.”

The most ambitious—and most controversial—proposal was one put forward on Sunday by the Spanish government in a three-page “non-paper” on a European recovery strategy. In the paper widely circulated and made public, Spain proposed that operational work on the package agreed by the Eurogroup be finalized as a matter of urgency, with a view to full implementation by June 1. In regard to a recovery fund, Spain proposed creation of a new fund that would make grants, rather than loans, to member states, so as to avoid raising the already-high debt/GDP ratios in the euro area member states that have been hardest-hit by the coronavirus. The grants, it said, should be made through the EU budget, based on a national allocation key related to the impact of the pandemic on the basis of clear and transparent indicators such as the proportion of the population affected by the virus, the magnitude of the drop in GDP, and the rate and extent of increase in unemployment. The government said the minimum size of the fund necessary to have a macroeconomic effect sufficient to offset the negative impact of the crisis would have to be €1- €1.5 trillion. The fund, it said, should be financed through perpetual debt – that is debt, known as Consols, that has no maturity. The interest payments on the debt, it said, should rely as much as possible on new European taxes that would provide the EU with resources independent of member state contributions. The fund, it suggested, could be anchored within the umbrella of the Multiannual Financial Framework (MFF)—i.e., within the EU’s multi-year budget—and agreement on an “adjusted and ambitious” MFF for 2021-2027, which has been stalled for several months, should be reached as soon as possible.

At yesterday’s meeting, the European Council, as expected, approved the Eurogroup’s €540 billion package and agreed the package should be operational by June 1. In regard to the recovery fund, the leaders said in their written Conclusions to yesterday’s meeting, “We also agreed to work towards establishing a recovery fund, which is needed and urgent. This fund shall be of a sufficient magnitude, targeted towards the sectors and geographical parts of Europe most affected, and be dedicated to dealing with this unprecedented crisis. We have therefore tasked the Commission to analyze the exact needs and to urgently come up with a proposal that is commensurate with the challenge we are facing. The Commission proposal should clarify the link with the MFF, which in any event will need to be adjusted to deal with the current crisis and its aftermath.” The leaders didn’t identify a target figure, or even a range, for the recovery fund. But when asked in the press conference after yesterday’s meeting about its size, von der Leyen, sounding more Spanish than German, said, “We are not talking about a billion. We are talking about a trillion.”

There are still, of course, many issues to be worked out in regard to the fund—in particular, resolving the strong disagreement between France, Italy and Spain, which prefer grants rather than loans, and Germany, the Netherlands, and several others, which prefer loans rather than grants. French President Emmanuel Macron, for example, insisted there would have to be “real budgetary transfers”—i.e., grants—while German Chancellor Angela Merkel, while saying Germany would support a fund in the €1 trillion range “because things can only go well for Germany if they go well for Europe,” also said grants “do not belong in the category of what I can agree.” Nevertheless, there’s some reason to think that, facing a contraction that may rival or exceed that of the 1930s, Europe will, as von der Leyen said yesterday, find a “sound balance” between grants and loans, and find its way to an agreement that creates a fund capable of reversing the economic effects of the pandemic.

David R. Cameron is a professor of political science and the director of the European Union Studies Program.