Spain seeks trillion-size fund in EU recovery feud

The Spanish proposal comes as EU leaders discuss on Thursday to sign off plans put together by the eurozone finance ministers two weeks ago, and discuss long-term recovery plans.

Spain's prime minister, Pedro Sanchez, already discussed his plans with EU council president Charles Michel and EU commission president Ursula von der Leyen over the weekend, and will try to convince his colleagues over videoconference.

Member states have been badly stalemated on the finances of any recovery, with the Netherlands and Germany opposing jointly issuing debt, while Spain and Italy arguing for mutualisation of the crisis costs.

The bitter debate has left the EU bruised politically while markets have remained relatively calm - although borrowing costs for Italy, Spain and Portugal are on the rise.

If Italy, or another large eurozone economy would become unable to finance its debt, the euro will be in danger.

The Spanish government in its proposal wants the fund to give money to EU countries in grants and not loans, to avoid an increase in debt.

It argues that the fund's size should be between €1-1.5 trillion and should be financed through perpetual EU debt backed by the EU's long-term budget.

The allocation criteria, which determines how much money goes to each member state, should be related to Covid-19, Madrid argues, defined by such indicators as percentage of population affected, drop in GDP and increase in unemployment levels.

Funds should be ready to flow through the economy from 1 January next year, and should be focused on the first three years of the seven-year budget.

Traditionally the EU budget payments come at the end of the seven-year budgetary cycle when countries submit their bills.

Budget talk

Spain also argues that the 2021-27 EU budget should be discussed on the basis of 1.114 percent of the bloc's gross national income.

Talks on the long-term budget have stalled for moths as governments have been deeply divided in how to finance the gap left by the UK plus new spending on new priorities such as climate and digitalisation.

Some of the net contributors, such as the Netherlands, Austria and Denmark, had been arguing for a smaller budget, under 1.0 percent of the GNI.

The commission, which is expected to put forward a new budget proposal next week, has also suggested it should leverage trillions of euros through the EU budget.

This could bridge the gap between those who oppose outright mutualisation of debts stemming from the corona crisis, and those already deeply-indebted and not wanting to take on more because of the virus.

A deep divergence between the economic health of member states could destabilise the euro.

The Spanish paper remains mute on how much joint debt there could be raised by the budget, what would be each countries' liability and how exactly to spend the money.

Perpetual debt has no maturity date, with creditors receiving interest payments but the principal would never be repaid.

Repayment of the interest should rely on the budget's controversial 'own resources', i.e. taxes the EU should collect itself, such as for instance carbon or emissions taxes, the Spanish proposal suggests.

The traditional tool to help underdeveloped regions, the cohesion funds, are fiercely protected by some of the eastern European countries which object to new indicators influencing money distribution criteria - further complicating budget discussions.

However, other countries are upset that, in a recent move by the commission to redirect EU funds to national health sectors, Hungary - which often challenges EU rules - received more than Italy, one of the worse-hit countries by the pandemic - because of pre-determined distribution criteria.

On Thursday, EU leaders are expected to sign off the three-pillar rescue package agreed by finance ministers, including a credit line with "light" conditions to the EU's rescue fund, the European Stability Mechanism.

The other pillars include a new €100bn unemployment insurance scheme by the commission, which several member states want only to be temporary, and a European Investment Bank instrument supplying €200bn to businesses and SMEs.