By Jan Strupczewski
BRUSSELS (Reuters) – With the euro zone economy in need of help from the coronavirus pandemic, officials have until April 9 to design a package that satisfies members with completely opposing views: those calling for joint debt issuance and those fiercely against it.
Mutualising debt has always been a red line for Germany, the Netherlands, Finland and Austria. But France, Italy, Spain and six other European Union countries have called for “a common debt instrument issued by a European institution” to fight the economic effects of the pandemic.
EU leaders failed on March 26 to agree a course of action and gave ministers two more weeks to work it out. Deputy finance ministers were to debate options on Wednesday and again on Monday and the finance ministers themselves are to hold a teleconference on April 7.
A compromise might emerge by early next week that is likely to include the following elements in a package:
1. BORROWING BY THE EURO ZONE BAILOUT FUND ESM
One of the main options. The European Stability Mechanism (ESM) is owned by euro zone governments, which are jointly responsible for the debt it issues to finance a government. The ESM could extend standby credit lines, worth up to 2% of GDP, to any euro zone country that asks for it.
The snag is that it would entail a debt sustainability assessment of the applicant – something highly-indebted Italy is loath to submit to – and carry some conditions, even if focused only on the pandemic. Italy and Spain want no conditions.
2. BORROWING BY THE EUROPEAN INVESTMENT BANK
An option the EU is considering. The EIB, the investment bank of the EU, is owned by EU governments. It finances all kinds of projects supported by the 27-nation bloc and could support companies hit by the epidemic. The EIB raises money by borrowing cheaply on the market thanks to its triple-A rating.
The bank has already offered to immediately deploy close to 40 billion euros of additional funding to soften the blow from the coronavirus. EIB head Werner Hoyer has also suggested that governments give the bank 25 billion euros in additional guarantees, which could then be used as leverage to mobilise 200 billion euros in additional financing to small and medium-sized companies. EU finance ministers – its owners – could also agree to increase the EIB’s capital to further boost lending.
3. BORROWING BY THE EUROPEAN COMMISSION
The European Commission, which also has a triple-A rating, can borrow on the market against the collateral of the EU budget. It did so to raise 60 billion euros for the European Financial Stabilisation Mechanism (EFSM) – an emergency fund created in 2010 when the sovereign debt crisis started.
The Commission could use its borrowing ability again to fund a short-time work scheme, modelled on the German “Kurzarbeit” (short-term work) plan, if it gets the go-ahead from EU governments.
4. SHORT-TERM WORK SCHEME
The European Commission proposed on Wednesday a short-time working scheme to encourage employers to cut workers’ hours rather than their jobs as coronavirus contagion takes its toll on the economy. This could be worth 100 billion euros in borrowing by the European Commission, guaranteed by all EU countries – a form of common debt instrument issued by an EU institution.
The total sum of guarantees needed from governments would be 25 billion euros – a proposal to be discussed by EU finance ministers next week.
(Reporting by Jan Strupczewski Editing by Toby Chopra/Mark Heinrich)