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24th Feb 2024

EU leaders at odds on virus-hit economy

  • EU leaders had already held two videoconferences on the virus - personal meetings might be needed for deeper discussions (Photo: Council of the European Union)

EU leaders will hold their third discussion by videoconference on Thursday (26 March) afternoon on how to tackle the spread of coronavirus and its devastating economic fallout.

EU leaders are expected to back efforts by the European Commission to redirect money from the EU budget, loosen state aid a fiscal rules, and to help purchase more medical equipment for the countries of bloc.

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The leaders might also back the idea of creating a European Crisis Management Centre, but details are vague.

The big sticking point for EU leaders will be on how to manage the economic shock caused by the outbreak.

The EU is heading into a deep recession, as its economy has come to a standstill amid efforts to mitigate the spread of the virus.

One issue is to what extent the EU's bailout fund, the European Stability Mechanism with a firepower of €410bn, should be used to help countries withstand the economic shock.

The Netherlands, leading a "handful of countries" as one EU diplomat put it, thinks it is too early to use up all the money stored in the bloc's financial backup.

Diplomats argue that it is difficult to see how long the outbreak will last, what exactly its economic impact will be, and are worried to burn all the cash already now.

"You cannot judge when you are in the crisis, we do agree we should make use of all our instruments. But we should not use up all our instruments this week, because we don't know how long the crisis will be," said one EU diplomat.

The Netherlands and Nordic backers are also not willing to loosen conditionality on the loans and guarantees that the ESM can provide for countries.

At the meeting of eurozone finance ministers on Tuesday there was no breakthrough and leaders are not expected to solve the conundrum, but allow finance minsters to work on the details next week.

In the meantime, nine EU governments sent a letter to EU Council president Charles Michel on Wednesday to push for the creation of so-called "corona bonds" to help the European economy.

Belgium, France, Greece, Italy, Ireland, Portugal, Luxembourg, Spain, Slovenia support the idea of jointly issuing debt, which is backed by European Central bank chief Christine Lagarde.

The "corona bonds" bear similarity to eurobonds, a joint borrowing scheme by the 19 members of the euro and an idea that came up during the euro crisis.

But fiscally more conservative counties such as Germany and the Netherlands dismissed it, worried about the already large debt pile and the budgetary discipline of its southern neighbours.

Timing

Italy, which is currently the most severely hit by the coronavirus outbreak, with the backing of France and Spain, where the situation is also deteriorating, wants a massive financial response from EU partners.

Spain's prime minster Pedro Sanchez called for a new "Marshall Plan", the recovery plan financed by the US after the Second World War to rebuild its western European allies.

However, countries like the Netherlands and Germany first want to see how big the economic damage will be and allow the stimuli announced by the European Central Bank and national governments to make their mark.

"Some countries feel that already tomorrow we should decide how we do the recovery. Another group says we don't even know yet what cycle of the virus we are in, we don't know how long this will take, and when recovery time comes, and what needs to get done," said the EU diplomat.

"It's a timing issue," the diplomat said, adding that all 27 countries are fully aware that Italy needed all the help and solidarity it can get.

EU leaders could agree to task the commission to come up with an "exit strategy", a comprehensive recovery and investment plan to rebuild the economy.

Discussions on easing the outbreak's economic fallout have circled back to debates waged during the debt crisis over joint borrowing and assuming more risk at EU level.

Disputes back then were politically toxic and drove a wedge between fiscally disciplined Nordic countries and their more indebted southern neighbours, prompting the rise of eurosceptic political forces on both sides.

Video-format

Thursday's discussions are replacing the traditional March summit of EU leaders in Brussels.

Diplomats are expected to finalise a joint statement before the online meeting starts, if the 27 can find common language on the sticking points.

The couple of hours of videoconferencing does to allow for detailed and long negotiations between the 27 leaders as usually happens in the all-nighter EU summits where personal charisma can weigh heavily.

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