16th May 2021

Eurozone agreed €500bn cushion against virus blow

EU finance ministers on Thursday (9 April) evening agreed a €500bn package to cushion the economic blow caused by the coronavirus pandemic.

The ministers also agreed on the need for a future, temporary recovery plan, with very little detail, after weeks of wrangling that exposed painful divisions as the bloc dives into deep recession.

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EU leaders will have to give guidance, at a videoconference in the next days, on the structure and financing of the fund, and they also need to give their nod to other parts of the package.

The ministers' provisional accord, which came aftera failed attempt at compromise on Tuesday, has for now alleviated fears that deep divisions could put the single currency at risk.

Eurogroup president Mario Centeno, Portugal's finance minister, said member states "buried their differences" and that the package includes "bold and ambitious proposals that would have been unthinkable just a few weeks ago".

Ministers overcame two key sticking points in the marathon talks that Centeno described as building "European solutions in record time".

One is access to the EU's rescue fund, the European Stability Mechanism (ESM) for corona-related costs.

Euro-area member states could draw on an ESM cheap credit line of around €240bn, with the condition that it is spent on "direct and indirect" health care, cure and prevention costs related to the pandemic.

Centeno said it was "not that narrow a definition" for possible costs covered.

He added that it could cover costs of up to two percent of the GDP of member states, and could be operational in two weeks if EU leaders signed off.

Earlier, Italy and the Netherlands clashed over the conditionality attached to the ESM credit lines, which was originally designed to help finance countries that have difficulties accessing the markets and came with tough austerity measures.

German chancellor Angela Merkel was on the phone with Italian premier Giuseppe Conte and Dutch prime minister Mark Rutte on Thursday to hammer out a compromise.

The ministers also agreed to prepare a recovery fund that would be "temporary, targeted and commensurate with the extraordinary costs of the current crisis".

The details will be worked out after leaders give their blessing, but there is no mention of eurobonds or jointly issued debt to finance the recovery in the agreement, for which nine member states had asked before.

The deal mentions "innovative financial instruments" that need to be consistent with EU treaties, which rules out fully fledged eurobonds.

Italy, France and Spain strongly pushed strongly for sharing the financing the debt, which has been a red line for Germany, the Netherlands, Finland, and Austria.

Centeno said he will report to EU leaders on financing the recovery that "some member states have expressed the view that this should be done by common debt instruments, and other member states said alternative ways should be found".

Ministers also backed a commission proposal for a joint employment insurance fund of €100bn, and a European Investment Bank instrument intended to supply €200bn to businesses and SMEs.

Ministers said the EU's seven-year budget needs to play a key role in the recovery, and economy commissioner Paolo Gentiloni promised a new budget proposal by the end of the month.

Breathing space

The agreement, for now, eases pressure not he EU to come up with financial tools to help mitigate the economic fallout from the crisis.

Italian finance minister Roberto Gualtieri tweeted after the meeting that "eurobonds were put on the table, while the ESM conditionalities have been removed".

His Dutch counterpart, Woke Hoekstra tweeted: "The ESM can provide financial help to countries without conditions for medical expenses. It will also available for economic support, but with conditions. That's fair and reasonable".

Markets have so far been relatively calm, but a failure to agree that would have signalled a lack of solidarity among euro area countries.

This could have unnerved markets and drive up costs of financing the crisis for already deeply indebted countries such as Italy, France and Spain.

The most politically sensitive issue - of joint debt issuance - and the details of the recovery plan, had been passed back to EU leaders, who had originally passed the ball to ministers to come up with ideas.

Without a robust recovery plan, the eurozone and the EU risks becoming too fragmented to hold together.

On Thursday night at their press conference, the EU institution chiefs warned of that danger.

"It is imperative that we grow together and not apart and protect the internal market," Centeno said.

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