Two weeks ago, the European Council, the heads of state or government of the European Union, met in a video conference for the third time in less than three weeks to discuss the EU’s response to the 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 needing financial assistance, and the day after nine EU leaders endorsed, in a letter to European Council President Charles Michel, the 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 they reached no agreement and invited the Eurogroup to continue its discussions and present it with proposals within two weeks.
Speaking from Lisbon before yesterday’s Eurogroup video conference, 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 consists of the new instrument the Commission proposed last Thursday – 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 is one facet of the Commission’s recently-proposed European Unemployment Reinsurance Scheme and will be financed by the Commission borrowing on the market. The second element consists 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 consists of the European Stability Mechanism’s proposed precautionary credit line of up to €240 billion to provide the countries with adequate resources to respond 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.
The Eurogroup meeting began in the late afternoon yesterday and continued, with occasional breaks, all night until dawn today, when Centeno suspended it. 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 meeting will resume at 5 p.m. tomorrow.
The divisions among the ministers last night and this morning were the same as the ones that existed in the earlier Eurogroup meeting on March 24 and the European Council meeting two days later. In its March 24 video conference, prompted by an earlier invitation by the Council to “continuously and closely monitor economic and financial developments and to adopt without delay a coordinated policy response to the rapidly evolving situation,” the Eurogroup, after taking stock of what had been done by individual member states and the Commission, discussed possible additional forms of support. In a letter to Michel after that meeting, Centeno noted that the ministers had made progress on additional forms of support that could be made available. In particular, they had “broadly agreed” that the resources of the ESM should contribute to the coordinated response. There was, he said, a readiness to use the ESM as needed, given the external, symmetric nature of the COVID-19 shock. Specifically, there was “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. The ministers were, he said, “in broad agreement” that Pandemic Crisis Support is a relevant safeguard for any ESM member affected by the pandemic. There was also “broad agreement” that significant resources should be allocated to Pandemic Crisis Support, with a “benchmark” allocation to a member state of around 2 percent of its GDP, which could be adjusted depending on the development of the pandemic.
But the terms “broad support” and “broad agreement” were, of course, euphemisms for saying there was not complete support and agreement. Indeed, the ministers of certain member states – most notably, those of Germany, the Netherlands, Austria and Finland – vigorously 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 ministers of the states that have been hardest hit by the virus – Italy, Spain and France – 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 discussing the alternatives put forward by the Eurogroup and the nine leaders for more than five hours at its meeting on March 26, with the predictable division between the French, Spanish and Italian leaders and their supporting colleagues, on one hand, and the German, Dutch, Austrian and Finnish leaders and their supporting colleagues, on the other, the European Council issued a joint statement saying only that they “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.”
Based on initial reports, it was the Dutch and Italian finance ministers, Wopke Hoekstra and Roberto Gualtieri, who most vociferously expressed in yesterday’s Eurogroup meeting the contrasting positions in regard to the use of ESM resources and the method of raising the additional funds needed to support the post-Covid recovery. Hoekstra adamantly expressed the view of his government, supported by the Dutch parliament, that there must be conditions attached to the ESM credit line, including economic reforms, to ensure that the funds are repaid. And he adamantly rejected any mention in the draft statement of the Eurogroup’s conclusions of “coronabonds” or, indeed, any type of EU bond and argued that the existing resources are sufficient to support a recovery. Gualtieri, in contrast, 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.
While the Dutch and Italian ministers may have represented the contrasting positions in regard to ESM conditionality and the use of some form of eurobonds to generate the resources needed to support a post-covid recovery, they were not alone and were joined, with varying degrees of fervor, by other ministers. Nevertheless, there is some reason to think that, despite the hardened positions of those and other ministers, an agreement on the package will be reached at Thursday’s meeting. For one thing, although France and Germany have, in recent meetings, been on opposite sides of the ESM and eurobond issues, there is some reason to think that both governments are now persuaded that the EU must act, even if that requires some compromise. Olaf Scholz, the German finance minister, and Bruno Le Maire, the French finance minister, were in frequent conversation over the course of the long meeting, and on Wednesday Scholz called on his colleagues to resolve the difficult financial issues and support a “good compromise for all citizens.” Le Maire said it best: “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.”
Hopefully, that will happen on Thursday.
David R. Cameron is a professor of political science and the director of the European Union Studies Program.