The euro area is preparing to make available credit lines from its bailout fund worth up to 2% of each country’s output, as the region’s finance ministers seek to lay out the next phase of their fiscal response to the coronavirus outbreak.
The tentative progress comes as an array of forecasts and sentiment indicators have pointed to a severe downturn, adding to pressure on euro-area governments for joint action to complement their national stimulus measures. Such efforts now add up to 2% of the bloc’s GDP.
The plan to use the precautionary instrument from the European Stability Mechanism (ESM) had “very broad support” from euro-area finance chiefs, said Portuguese Finance Minister Mario Centeno, who leads the group. It’s now up to EU leaders, who will hold a teleconference on Thursday, to endorse it.
Leaders will endorse the proposal on Thursday and call for work on the necessary technical specifications to be delivered in the coming week.
Under this scenario, the ESM would offer credit lines to all euro-area nations, with each country being able to borrow up to 2% of its output — an amount that could go up in exceptional circumstances, ESM Managing Director Klaus Regling said.
The idea is that the mere existence of such facilities would bring down borrowing costs for euro-area sovereigns. Tapping in to the ESM’s $440 billion war chest would also pave the way for ECB to buy vast amounts of sovereign bonds through its Outright Monetary Transactions program if necessary.
Loans made available through these lines are going to have the “longest possible” maturities, Centeno said Wednesday in an interview with Bloomberg Television.
At the center of the debate is Italy, the most indebted euro nation after Greece and the one hardest hit by the virus. The country’s economic engine in the north has been on lockdown since March 7, and there’s a broad consensus that the government will need financial support to weather the storm. Yet Italian officials are trying to avoid what they say is the stigma of being singled out for aid, and Germany and the Netherlands are wary of giving Rome a blank check.
“I am battling every day with my European finance minister counterparts for us to show solidarity with the countries most affected by this epidemic,” French Finance Minister Bruno Le Maire said in an interview on France Info radio. “I’m thinking of Spain, I’m thinking of Italy. When you are counting deaths, you don’t count the billions.”
Among the key disagreements are the conditions that will be attached to these credit lines. While Centeno said countries need to return to economic and financial stability in the long term, it’s not clear if that would include additional fiscal efforts.
Italy, with support from France and Spain, has been arguing there should be no strings attached. The virus is a form of natural disaster, Italian officials say, and as such the euro area should respond with solidarity. Others, however, have called for stricter economic conditions.
Another sticking point has been over who gets a credit line. Italy wants all countries to apply for a facility so that those who really need it aren’t stigmatized. But for now, the consensus seems to be that while these will be made available to everyone, only countries that want to will apply for one.
Behind all of this lies a broader debate that has dogged the euro area since its birth: how much should member states share their financial liabilities?
Italy says that credit lines are only a temporary solution, and of use only if conditions are extremely limited. The endgame for Rome is so-called coronabonds.
During the discussion European Central Bank President Christine Lagarde made a strong push for this kind of joint debt issuance, though it fell short of garnering sufficient support. Still, EU economy chief Paolo Gentiloni said coronabonds are one of the tools available, adding that there’s no consensus for this solution.
The idea is for a jointly backed bond issue of up to 1.5 trillion euros that would fund government action to contain the virus and reboot euro-area economies. Italian Prime Minister Giuseppe Conte floated the idea on a call with EU leaders last week and won support from President Emmanuel Macron of France and several members of the ECB’s governing council.
In a letter to Michel ahead of Thursday’s summit, the leaders of Spain, Italy, France, Portugal, Greece, Belgium, Luxembourg Slovenia and Ireland said the bloc needed to work on such an instrument of sufficient size and long maturity, in order to ensure “stable long term financing for the policies required to counter the damages caused by this pandemic.”
“The case for such a common instrument is strong, since we are all facing a symmetric external shock, for which no country bears responsibility, but whose negative consequences are endured by all,” they wrote.
Spain’s Pedro Sanchez took the plan a step further over the weekend when he called for an EU Marshall Plan, a massive spending program like the one the U.S. deployed after World War II to get Europe’s decimated economy back on its feet.
But German finance officials insisted there’s no way they’ll sign off on a joint bond issue. Germany and the Netherlands say that any aid should be delivered with the euro area’s existing tools.